Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
þ
No
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨
Yes
þ
No
Indicate by a check mark if 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.
þ
Yes
¨
No
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þ
Yes
¨
No
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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:
If an emerging growth company, indicate by check mark 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 Act.)
¨
Yes
þ
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrants most recently completed second fiscal quarter: $15,699,925
Number of shares outstanding of the registrants common stock as of April 4, 2019: 14,394,562
Portions of the Registrants definitive proxy statement for its 2019 annual meeting of shareholders, which proxy statement will be filed no later than 120 days after the close of the Registrants fiscal year ended December 31, 2018, are hereby incorporated by reference in Part III of this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Dolphin Entertainment, Inc. and subsidiaries
Coral Gables, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Dolphin Entertainment, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in stockholders equity (deficit), and cash flows for each of the two years then ended and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the two years then ended December 31, 2018
,
in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations from prior years, has an accumulated deficit, and a working capital deficit that raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Certified Public Accountants
We have served as the Company's auditor since 2014.
Miami, Florida
April 15, 2019
F-2
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,542,272
|
|
|
$
|
5,296,873
|
|
Restricted cash
|
|
|
732,368
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $283,022 and $366,280, respectively
|
|
|
3,173,107
|
|
|
|
3,700,618
|
|
Other current assets
|
|
|
620,970
|
|
|
|
422,118
|
|
Total current assets
|
|
|
10,068,717
|
|
|
|
9,419,609
|
|
|
|
|
|
|
|
|
|
|
Capitalized production costs, net
|
|
|
724,585
|
|
|
|
1,075,645
|
|
Intangible assets, net of amortization of $2,714,785 and 1,043,255, respectively
|
|
|
9,395,215
|
|
|
|
8,506,745
|
|
Goodwill
|
|
|
15,922,601
|
|
|
|
12,778,860
|
|
Property, equipment and leasehold improvements, net
|
|
|
1,182,520
|
|
|
|
1,110,776
|
|
Investments
|
|
|
220,000
|
|
|
|
220,000
|
|
Deposits
|
|
|
475,956
|
|
|
|
485,508
|
|
Total Assets
|
|
$
|
37,989,594
|
|
|
$
|
33,597,143
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
944,232
|
|
|
$
|
1,097,006
|
|
Other current liabilities
|
|
|
7,238,507
|
|
|
|
6,487,819
|
|
Line of credit
|
|
|
1,700,390
|
|
|
|
750,000
|
|
Put Rights
|
|
|
4,281,595
|
|
|
|
2,446,216
|
|
Accrued compensation
|
|
|
2,625,000
|
|
|
|
2,500,000
|
|
Debt
|
|
|
2,411,828
|
|
|
|
3,987,220
|
|
Loan from related party
|
|
|
1,107,873
|
|
|
|
1,708,874
|
|
Contract liabilities
|
|
|
522,620
|
|
|
|
48,449
|
|
Convertible notes payable
|
|
|
625,000
|
|
|
|
800,000
|
|
Note payable
|
|
|
479,874
|
|
|
|
300,000
|
|
Total current liabilities
|
|
|
21,936,919
|
|
|
|
20,125,584
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
|
|
|
|
1,441,831
|
|
Put Rights
|
|
|
1,702,472
|
|
|
|
3,779,794
|
|
Convertible notes payable
|
|
|
1,376,924
|
|
|
|
75,000
|
|
Note payable
|
|
|
612,359
|
|
|
|
600,000
|
|
Contingent consideration
|
|
|
550,000
|
|
|
|
|
|
Deferred tax
|
|
|
|
|
|
|
187,537
|
|
Other noncurrent liabilities
|
|
|
1,034,393
|
|
|
|
1,311,040
|
|
Total noncurrent liabilities
|
|
|
5,276,148
|
|
|
|
7,395,202
|
|
Total Liabilities
|
|
|
27,213,067
|
|
|
|
27,520,786
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $0.015 par value, 200,000,000 shares authorized, 14,123,157 and, 10,565,789, respectively, issued and outstanding at December 31, 2018 and 2017
|
|
|
211,849
|
|
|
|
158,487
|
|
Preferred Stock, Series C, $0.001 par value, 50,000 shares authorized, 50,000 shares issued and outstanding at December 31, 2018 and 2017
|
|
|
1,000
|
|
|
|
1,000
|
|
Additional paid in capital
|
|
|
105,092,852
|
|
|
|
98,816,550
|
|
Accumulated deficit
|
|
|
(94,529,174
|
)
|
|
|
(92,899,680
|
)
|
Total Stockholders' Equity
|
|
$
|
10,776,527
|
|
|
$
|
6,076,357
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
37,989,594
|
|
|
$
|
33,597,143
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Entertainment publicity and marketing
|
|
$
|
21,916,727
|
|
|
$
|
16,458,929
|
|
Content production
|
|
|
634,612
|
|
|
|
5,954,115
|
|
Total revenues
|
|
|
22,551,339
|
|
|
|
22,413,044
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
2,176,968
|
|
|
|
4,638,710
|
|
Distribution and marketing
|
|
|
|
|
|
|
1,111,994
|
|
Selling, general and administrative
|
|
|
4,486,023
|
|
|
|
3,156,097
|
|
Depreciation and amortization
|
|
|
1,978,804
|
|
|
|
1,254,643
|
|
Legal and professional
|
|
|
2,119,107
|
|
|
|
1,806,448
|
|
Payroll
|
|
|
14,082,014
|
|
|
|
11,408,731
|
|
Goodwill impairment
|
|
|
1,857,000
|
|
|
|
|
|
Total expenses
|
|
|
26,699,916
|
|
|
|
23,376,623
|
|
Loss before other expenses
|
|
|
(4,148,577
|
)
|
|
|
(963,579
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (expenses):
|
|
|
|
|
|
|
|
|
Gain (loss) on extinguishment of debt
|
|
|
(53,271
|
)
|
|
|
4,012,277
|
|
Acquisition costs
|
|
|
(438,552
|
)
|
|
|
(749,440
|
)
|
Loss on disposal of furniture, office equipment and leasehold improvements
|
|
|
|
|
|
|
(28,025
|
)
|
Change in fair value of warrant liability
|
|
|
|
|
|
|
9,018,359
|
|
Change in fair value of put rights
|
|
|
616,943
|
|
|
|
(2,426,010
|
)
|
Change in fair value of contingent consideration
|
|
|
1,070,000
|
|
|
|
(17,251
|
)
|
Interest expense
|
|
|
(1,050,478
|
)
|
|
|
(1,594,940
|
)
|
Total other income
|
|
|
144,642
|
|
|
|
8,214,970
|
|
(Loss) income before income taxes
|
|
$
|
(4,003,935
|
)
|
|
$
|
7,251,391
|
|
Income tax benefit (expense)
|
|
|
1,090,614
|
|
|
|
(338,867
|
)
|
Net (loss) income
|
|
$
|
(2,913,321
|
)
|
|
$
|
6,912,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income per Share - Basic
|
|
$
|
(0.22
|
)
|
|
$
|
0.72
|
|
(Loss) per share - Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
(0.20
|
)
|
Weighted average number of shares used in per share calculation
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,773,395
|
|
|
|
9,586,986
|
|
Diluted
|
|
|
16,159,486
|
|
|
|
10,608,828
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DOLPHIN ENTERTAINMENT, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,913,321
|
)
|
|
$
|
6,912,524
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,978,804
|
|
|
|
1,254,643
|
|
Amortization of capitalized production costs
|
|
|
203,560
|
|
|
|
3,356,785
|
|
Amortization of beneficial conversion on debt
|
|
|
61,538
|
|
|
|
|
|
Impairment of goodwill
|
|
|
1,857,000
|
|
|
|
|
|
Impairment of capitalized production costs
|
|
|
200,000
|
|
|
|
269,444
|
|
Bad debt
|
|
|
641,876
|
|
|
|
330,714
|
|
Loss on disposal of fixed assets
|
|
|
|
|
|
|
28,025
|
|
Change in fair value of warrant liability
|
|
|
|
|
|
|
(9,018,359
|
)
|
Change in fair value of put rights
|
|
|
(616,943
|
)
|
|
|
2,426,010
|
|
Change in fair value of contingent consideration
|
|
|
(1,070,000
|
)
|
|
|
17,251
|
|
Stock based compensation (2017 Plan)
|
|
|
20,422
|
|
|
|
330,065
|
|
Loss on extinguishment of debt
|
|
|
53,271
|
|
|
|
2,723
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(4,500,000
|
)
|
Deferred tax
|
|
|
(1,050,375
|
)
|
|
|
187,537
|
|
Change in deferred rent
|
|
|
71,266
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
858,883
|
|
|
|
1,343,958
|
|
Other current assets
|
|
|
(32,516
|
)
|
|
|
2,243,667
|
|
Capitalized production costs
|
|
|
(52,500
|
)
|
|
|
(47,861
|
)
|
Deposits
|
|
|
40,219
|
|
|
|
821,122
|
|
Deferred revenue
|
|
|
267,817
|
|
|
|
1,768
|
|
Accrued compensation
|
|
|
125,000
|
|
|
|
250,000
|
|
Accounts payable
|
|
|
(231,242
|
)
|
|
|
381,521
|
|
Other current liabilities
|
|
|
(437,648
|
)
|
|
|
1,260,641
|
|
Other noncurrent liabilities
|
|
|
(599,826
|
)
|
|
|
507,371
|
|
Net Cash (Used in) Provided by Operating Activities
|
|
|
(624,715
|
)
|
|
|
8,359,549
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment of working capital adjustment (42West)
|
|
|
|
|
|
|
(185,031
|
)
|
Purchase of fixed assets
|
|
|
(89,653
|
)
|
|
|
(227,040
|
)
|
Acquisition of The Door, net of cash acquired
|
|
|
(910,713
|
)
|
|
|
|
|
Acquisition of Viewpoint, net of cash acquired
|
|
|
(595,632
|
)
|
|
|
|
|
Acquisition of 42West, net of cash acquired
|
|
|
(20,000
|
)
|
|
|
13,626
|
|
Net Cash (Used in) Investing Activities
|
|
|
(1,615,998
|
)
|
|
|
(398,445
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of common stock
|
|
|
6,749,204
|
|
|
|
500,000
|
|
Proceeds from the sale of common stock and warrants (unit) in Offering
|
|
|
81,044
|
|
|
|
3,945,284
|
|
Proceeds from line of credit
|
|
|
1,700,390
|
|
|
|
750,000
|
|
Repayment of the line of credit
|
|
|
(750,000
|
)
|
|
|
|
|
Proceeds from notes payable
|
|
|
1,500,000
|
|
|
|
2,175,000
|
|
Repayment of notes payable
|
|
|
|
|
|
|
(700,000
|
)
|
Repayment of debt
|
|
|
(1,514,786
|
)
|
|
|
(10,255,849
|
)
|
Employee shares withheld for taxes
|
|
|
(56,091
|
)
|
|
|
(481,546
|
)
|
Proceeds from the exercise of warrants
|
|
|
|
|
|
|
35,100
|
|
Exercise of put rights
|
|
|
(3,890,280
|
)
|
|
|
(1,225,000
|
)
|
Advances from related party
|
|
|
|
|
|
|
1,388,000
|
|
Repayment to related party
|
|
|
(601,001
|
)
|
|
|
(707,766
|
)
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
3,218,480
|
|
|
|
(4,576,777
|
)
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
977,767
|
|
|
|
3,384,327
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
5,296,873
|
|
|
|
1,912,546
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
6,274,640
|
|
|
$
|
5,296,873
|
|
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DOLPHIN ENTERTAINMENT, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the years ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
185,307
|
|
|
$
|
77,263
|
|
Income taxes
|
|
$
|
135,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Conversion of accrued interest and a note payable into a new note payable
|
|
$
|
192,233
|
|
|
$
|
|
|
Conversion of debt into shares of common stock
|
|
$
|
273,425
|
|
|
$
|
|
|
Liability for contingent consideration related to the acquisition of The Door
|
|
$
|
550,000
|
|
|
$
|
|
|
Liability for put rights to sellers of 42West
|
|
$
|
5,984,067
|
|
|
$
|
|
|
Payment of certain accounts payable with shares of common stock
|
|
$
|
|
|
|
$
|
58,885
|
|
Issuance of shares of Common Stock pursuant to 2017 Plan
|
|
$
|
|
|
|
$
|
330,065
|
|
Issuance of shares of Common Stock related to the acquisitions
|
|
$
|
2,673,664
|
|
|
$
|
14,320,351
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
5,542,272
|
|
|
$
|
5,296,873
|
|
Restricted cash
|
|
|
732,368
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows
|
|
$
|
6,274,640
|
|
|
$
|
5,296,873
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
DOLPHIN ENTERTAINMENT INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
For the years ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance December 31, 2016
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
7,197,761
|
|
|
$
|
107,967
|
|
|
$
|
67,835,440
|
|
|
|
|
$
|
(99,812,204
|
)
|
|
$
|
(31,867,797
|
)
|
Net income for the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,912,524
|
|
|
|
6,912,524
|
|
Sale of common stock during the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
750
|
|
|
|
499,250
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Sale of common stock and warrants (unit) through an offering pursuant to a Registration Statement on Form S-1
|
|
|
|
|
|
|
|
|
|
|
1,215,000
|
|
|
|
18,225
|
|
|
|
3,927,059
|
|
|
|
|
|
|
|
|
|
3,945,284
|
|
Issuance of shares from partial exercise of Warrant E and exercise of Warrants J and K
|
|
|
|
|
|
|
|
|
|
|
1,332,885
|
|
|
|
19,993
|
|
|
|
9,960,107
|
|
|
|
|
|
|
|
|
|
9,980,100
|
|
Issuance of shares for payment of services
|
|
|
|
|
|
|
|
|
|
|
6,140
|
|
|
|
92
|
|
|
|
61,487
|
|
|
|
|
|
|
|
|
|
61,579
|
|
Issuance of shares related to acquisition of 42West
|
|
|
|
|
|
|
|
|
|
|
837,415
|
|
|
|
12,562
|
|
|
|
14,307,789
|
|
|
|
|
|
|
|
|
|
14,320,351
|
|
Shares issuable for contingent consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,644,251
|
|
|
|
|
|
|
|
|
|
3,644,251
|
|
Shares issued per equity compensation plan
|
|
|
|
|
|
|
|
|
|
|
59,320
|
|
|
|
890
|
|
|
|
329,175
|
|
|
|
|
|
|
|
|
|
330,065
|
|
Shares retired from exercise of puts
|
|
|
|
|
|
|
|
|
|
|
(132,859
|
)
|
|
|
(1,993
|
)
|
|
|
(1,748,007
|
)
|
|
|
|
|
|
|
|
|
(1,750,000
|
)
|
Effect of reverse stock split on cumulative amount of par value
|
|
|
|
|
|
|
|
|
|
|
127
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2017
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
10,565,789
|
|
|
$
|
158,487
|
|
|
$
|
98,816,550
|
|
|
|
|
$
|
(92,899,680
|
)
|
|
$
|
6,076,357
|
|
Net loss for the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,913,321
|
)
|
|
|
(2,913,321)
|
|
Cumulative effect of adoption of ASU 2017-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,441,831
|
|
|
|
1,441,831
|
|
Deemed dividend from change in fair value of instruments with down round feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,004
|
|
|
|
|
|
(158,004
|
)
|
|
|
|
|
Deferred tax on beneficial conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,605
|
)
|
|
|
|
|
|
|
|
|
(47,605
|
)
|
Sale of common stock and warrants through an offering pursuant to a Registration Statement on Form S-1
|
|
|
|
|
|
|
|
|
|
|
20,750
|
|
|
|
312
|
|
|
|
80,732
|
|
|
|
|
|
|
|
|
|
81,044
|
|
Sale of common stock and warrants through an offering pursuant to a Registration Statement on Form S-3
|
|
|
|
|
|
|
|
|
|
|
2,515,000
|
|
|
|
37,725
|
|
|
|
6,711,479
|
|
|
|
|
|
|
|
|
|
6,749,204
|
|
Issuance of shares related to acquisition of 42West
|
|
|
|
|
|
|
|
|
|
|
898,626
|
|
|
|
13,479
|
|
|
|
(33,479
|
)
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
Issuance of shares related to acquisition of The Door
|
|
|
|
|
|
|
|
|
|
|
307,692
|
|
|
|
4,615
|
|
|
|
2,241,539
|
|
|
|
|
|
|
|
|
|
2,246,154
|
|
Issuance of shares related to acquisition of Viewpoint
|
|
|
|
|
|
|
|
|
|
|
218,088
|
|
|
|
3,273
|
|
|
|
424,237
|
|
|
|
|
|
|
|
|
|
427,510
|
|
Shares retired for payroll taxes per equity compensation plan
|
|
|
|
|
|
|
|
|
|
|
(17,585
|
)
|
|
|
(264
|
)
|
|
|
(35,410
|
)
|
|
|
|
|
|
|
|
|
(35,674
|
)
|
Beneficial conversion of convertible promissory note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,614
|
|
|
|
|
|
|
|
|
|
184,614
|
|
Issuance of shares related to conversion of note payable
|
|
|
|
|
|
|
|
|
|
|
85,299
|
|
|
|
1,279
|
|
|
|
325,416
|
|
|
|
|
|
|
|
|
|
326,695
|
|
Shares retired from exercise of puts
|
|
|
|
|
|
|
|
|
|
|
(470,502)
|
|
|
|
(7,057)
|
|
|
|
(3,733,225
|
)
|
|
|
|
|
|
|
|
|
(3,740,282
|
)
|
Balance December 31, 2018
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
14,123,157
|
|
|
$
|
211,849
|
|
|
$
|
105,092,852
|
|
|
|
|
$
|
(94,529,174
|
)
|
|
$
|
10,776,527
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 1 BASIS OF PRESENTATION AND ORGANIZATION
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, The Door and Viewpoint, the Company provides expert strategic marketing and publicity services to all of the major film studios, and many of the leading independent and digital content providers, A-list celebrity talent, including actors, directors, producers, celebrity chefs and recording artists. The Company also provides strategic marketing publicity services and creative brand strategies for prime hotel and restaurant groups. The strategic acquisitions of 42West, The Door and Viewpoint bring together premium marketing services with premium content production, creating significant opportunities to serve respective constituents more strategically and to grow and diversify the Companys business. Dolphins 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.
The accompanying consolidated financial statements include the accounts of Dolphin, and all of its wholly-owned and controlled subsidiaries, including Dolphin Films, Dolphin Kids Clubs, LLC, Cybergeddon Productions, LLC, Dolphin SB Productions LLC, Dolphin Max Steel Holdings LLC, Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The Door and Viewpoint.
The Company enters into relationships or investments with other entities, and in certain instances, the entity in which the Company has a relationship or investment may qualify as a variable interest entity (VIE). A VIE is consolidated in the 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 activities 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 Max Steel Productions, LLC formed on July 8, 2013 in the State of Florida and JB Believe, LLC formed on December 4, 2012 in the State of Florida in its consolidated financial statements as VIEs.
On March 30, 2017, the Company entered into a Membership Interest Purchase Agreement (the 42West Purchase Agreement), by and among the Company and Leslee Dart, Amanda Lundberg, Allan Mayer and the Beatrice B. Trust (the Sellers). Pursuant to the 42West Purchase Agreement, the Company acquired from the Sellers 100% of the membership interests of 42West, and 42West became a wholly owned subsidiary of the Company (the 42West Acquisition). The consideration paid by the Company in connection with the 42West Acquisition was approximately $18.7 million in shares of common stock of the Company, par value $0.015 (the
Common Stock
), based on the Common Stocks 30-trading-day average stock price prior to the closing date of $9.22 per share (less certain working capital and closing adjustments, transaction expenses and payments of indebtedness), plus the potential for the sellers to earn up to approximately 1.0 million additional shares of Common Stock based on achieving certain financial targets that were achieved during the year ended December 31, 2017. See Note 4 for additional information regarding the acquisition.
On June 29, 2017, the Companys shareholders approved a change in the name of the Company to Dolphin Entertainment, Inc. Effective July 6, 2017, the Company amended its Articles of Incorporation to (i) change the Companys name to Dolphin Entertainment, Inc.; (ii) cancel previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock; (iii) reduce the number of Series C Convertible Preferred Stock outstanding in light of the 1-to-20 reverse stock split from 1,000,000 to 50,000 shares; and (iv) clarify the voting rights of the Series C Convertible Preferred Stock that, except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred.
F-8
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On September 13, 2017, the Company filed with the Florida Department of State Articles of Amendment to the Companys Amended and Restated Articles of Incorporation to effectuate a reverse stock split of the Companys Common Stock, on a two (2) old for one (1) new basis (the Reverse Stock Split), providing that the Reverse Stock Split would become effective under Florida law on September 14, 2017. Immediately after the Reverse Stock Split the number of authorized shares of Common Stock was reduced from 400,000,000 shares to 200,000,000. As a result, each shareholders percentage ownership interest in the Company and proportional voting power remained unchanged. Any fractional shares resulting from the Reverse Stock Split were rounded up to the nearest whole share of Common Stock. Shareholder approval of the Reverse Stock Split was not required. All consolidated financial statements and per share amounts have been retroactively adjusted for the above amendment to authorized shares and the reverse stock split.
On December 20, 2017, the Companys Registration Statement on Form S-1 was declared effective by the SEC for the underwritten registered offering (the 2017 Public Offering) of Common Stock and warrants. The Common Stock started trading on the Nasdaq Capital Market on December 21, 2017, and the transaction formally closed on December 26, 2017. In connection with the 2017 Public Offering, the Company sold an aggregate of 1,215,000 units each consisting of one share of Common Stock and one warrant to purchase one share of Common Stock at a purchase price of $4.74 per share. Each warrant expires three years following the date of issuance. The aggregate net proceeds received by the Company from the 2017 Public Offering, net of underwriting discounts and commissions and offering expenses, were $4.2 million. Pursuant to the related underwriting agreement, the Company issued 86,503 underwriter warrants and granted an over-allotment option to the underwriters, which they exercised on January 24, 2018 and purchased an additional 20,750 shares of Common Stock and 175,750 warrants, providing the Company with proceeds of $81,044. Warrants were also issued to the underwriter of the Offering to purchase 1,453 shares of Common Stock at a purchase price of $4.74 per share.
On July 5, 2018, the Company entered into an Agreement and Plan of Merger (the Merger Agreement), together with Lois ONeill and Charles Dougiello (collectively, the Members), The Door Marketing Group, LLC, a New York limited liability company, and Window Merger Sub, LLC, a New York limited liability company and wholly owned subsidiary of the Company (Merger Sub). Pursuant to the Merger Agreement, The Door Marketing Group, LLC merged into Merger Sub, with Merger Sub surviving the merger and continuing as a wholly owned subsidiary of the Company (the Merger). Subsequent to the Merger, Merger Sub changed its name to The Door Marketing Group LLC (The Door). The total consideration payable to the Members in respect of the Merger is composed of the following: (i) $2.0 million in shares of Common Stock based on a price of $3.25 per share, (ii) $2.0 million in cash (as adjusted for certain working capital and closing adjustments and transaction expenses) and (iii) up to an additional $7.0 million of contingent consideration in a combination of cash and shares of Common Stock upon the achievement of specified financial performance targets over a four-year period as set forth in the Merger Agreement. Each of the Members has entered into a four-year employment agreement with The Door, pursuant to which each Member has agreed not to transfer any shares of Common Stock received as consideration for the Merger (the Share Consideration) in the first year following the closing date of the Merger, no more than 1/3 of such Share Consideration in the second year and no more than an additional 1/3 of such Share Consideration in the third year. See Note 4 for additional information regarding the Merger.
On July 24, 2018, in an underwritten registered public offering, the Company issued and sold 2,000,000 shares of Common Stock at a public offering price of $3.00 per share (the 2018 Offering). The net proceeds of the 2018 Offering were approximately $5.3 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. Pursuant to the related underwriting agreement, the Company granted an over-allotment option to the underwriter, which it exercised on August 22, 2018 and purchased an additional 265,000 shares of Common Stock providing the Company with proceeds of approximately $707,000 after deducting the underwriter discount and related offering expenses.
On September 19, 2018, the Company issued and sold to a single investor in a registered direct offering an aggregate of 250,000 shares of the Common Stock at a price of $3.00 per share. The offering of the Shares was made pursuant to the Companys effective shelf registration statement on Form S-3 previously filed with the Securities and Exchange Commission. The Company received proceeds of approximately $730,000 from the issuance and sale of the Common Stock after deducting related offering expenses.
F-9
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On October 31, 2018, (the Viewpoint Closing Date) the Company entered into a Stock Purchase Agreement, with Carlo DiPersio, David Shilale, Michael Middeleer and Glenn Robbins (collectively, the Viewpoint Shareholders) to acquire 100% of the outstanding shares of Viewpoint from the Viewpoint Shareholders. The consideration paid to the Viewpoint Shareholders is $2 million as follows: (i) $750,000 in cash on the Closing Date (adjusted for Viewpoints indebtedness, working capital and cash targets, and transaction expenses); (ii) $500,000 in shares of Common Stock at a price of $2.29 per share (218,088 shares) issued to the Viewpoint Shareholders on the Closing Date and (iii) an additional $750,000 in cash in three equal payments of $250,000 each to paid to the Viewpoint Shareholders on the six, twelve and eighteen-month anniversaries of the Closing Date (subject to a right of setoff for certain adjustments and indemnification obligations). See Note 4 for additional information regarding the acquisition.
NOTE 2 GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity U.S generally accepted accounting principles (U.S. GAAP) and contemplate the continuation of the Company as a going concern. For the years ended December 31, 2018 and 2017, the Company had a net loss of $2,913,321 and net income of $6,912,524, respectively. The Company has recorded an accumulated deficit of $94,529,174 and $92,899,680, respectively and a working capital deficit of $11,868,202 and $10,705,975, respectively, as of December 31, 2018 and 2017 and therefore does not have adequate capital to fund its obligations as they come due or to maintain or grow its operations. The Company is dependent upon funds from private investors, proceeds from debt securities, securities convertible into shares of its Common Stock, sales of shares of Common Stock and financial support of certain shareholders. If the Company is unable to obtain funding from these sources within the next 12 months, it could be forced to liquidate.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise any necessary additional funds through additional issuance of Common Stock, securities convertible into Common Stock, debt securities, as well as available bank and non-bank financing, or a combination of such financing alternatives. There is no assurance that the Company will be successful in raising additional capital. Any issuance of shares of Common Stock or securities convertible into Common Stock would dilute the equity interests of our existing shareholders, perhaps substantially. The Company currently has the rights to several scripts, and one that is being developed which it intends to obtain financing to produce and release and 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. With the acquisition of 42West, The Door, and Viewpoint, the Company is currently exploring opportunities to expand the services currently being offered by these companies while reducing expenses through synergies with the Company. There can be no assurance that the Company will be successful in selling these services to clients or reducing expenses. Under the Companys currently effective shelf registration statement on Form S-3, the Company may sell up to $30,000,000 of equity securities. However, pursuant to applicable SEC rules, the Companys ability to sell securities registered under this shelf registration statement, during any 12-month period, is limited to an amount less than or equal to one-third of the aggregate market value of the Common Stock held by non-affiliates; therefore, there is no assurance that the Company will be able to raise capital through the issuance and sale of equity securities under this registration statement, irrespective of whether there is market demand for such securities.
F-10
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 expected revenue and costs for investment in digital and feature film projects; estimates of sales returns and other allowances and provisions for doubtful accounts and impairment assessments for investment in digital and feature film projects, goodwill and intangible assets. Actual results could differ from such estimates.
Statement of Comprehensive Income
In accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 220,
Comprehensive Income
, a statement of comprehensive income has not been included as the Company has no items of other comprehensive income. Comprehensive loss is the same as net loss for all periods presented.
Cash and cash equivalents
Cash and cash equivalents consist of cash deposits at financial institutions. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash represents amounts held by banking institutions as collateral for security deposits under leases for office space in New York City and Newton, Massachusetts. As of December 31, 2018, the Company had a balance of $732,368 in restricted cash. The Company did not have any restricted cash as of December 31, 2017.
Contracts in the Companys Equity
From time to time, the Company issues contracts related to its own equity securities, such as warrants and convertible notes. The Company evaluates whether a standalone contract (such as a warrant), or an embedded feature of a contract (such as the conversion feature of a convertible note) should be classified in stockholders deficit or as a liability in the Companys consolidated balance sheet. The determination is made in accordance with the requirements of ASC Topic 480,
Distinguishing Liabilities from Equity
(ASC 480), and ASC Topic 815,
Derivatives and Hedging
(ASC 815).
A warrant is classified as equity so long as it is indexed to the Companys equity and several specific conditions for equity classification are met.
Prior to adoption of Accounting Standards Update (ASU) 2017-11, and in accordance with ASC 815, certain warrants with anti-dilutive provisions were deemed to be derivatives because they were not considered indexed to the Companys equity. The value of the warrants would fluctuate with the price of the Common Stock and was recorded as a current liability on the Companys consolidated balance sheet. The change in the value of the liability was recorded as change in fair value of warrant liability on the consolidated statements of operations.
Effective July 1, 2018, the Company adopted ASU 2017-11, Earnings Per Share (Topic 260), distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this ASU changed the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.
When determining whether certain financial instruments should be classified as liabilities or as equity instruments, a down round feature (i.e. a financial anti-dilution provision) no longer precludes equity classification when assessing whether the instrument is indexed to an entitys own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
F-11
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
The Company adopted ASU 2017-11 by electing the modified retrospective method to the outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year ended December 31, 2018. Accordingly, the Company reclassified the fair value of the warrants with down round protection provisions from liability to equity (accumulated deficit) and resulted in a cumulative effect adjustment to beginning retained earnings in the aggregate amount of $1,441,831.
Revenue Recognition
Entertainment publicity and marketing
Entertainment publicity and marketing revenue consists of fees from the performance of professional services, billings for direct costs reimbursed by clients and revenue from producing video content for marketing. The revenues derived from fees and reimbursed expenses are directly dependent upon the publicity and corporate communications requirements of the Companys existing clients and its ability to win new clients. As is customary in the industry, the agreements with the fee-based clients generally provide for termination by either party on relatively short notice, usually 30 days. Some of the contracts may include incentive compensation for our clients nominations of certain Academy Awards. Fees are generally recognized on a straight-line or monthly basis which approximates the proportional performance on such contracts. Direct costs reimbursed by clients are billed as pass-through revenue with no mark-up. The entertainment publicity and marketing segment also recognizes revenue from the production of video content for marketing purposes which is recognized at a point in time when the project is delivered to and available for use by the client. Cash payments received as deposits for these videos are recorded as deferred revenue until the project is completed.
Content production
Revenue from motion pictures and web series is recorded when a distribution contract, domestic or international, exists, the movie or web series is complete in accordance with the terms of the contract, the customer can begin exhibiting or selling the movie or web series, the fee is determinable and collection of the fee is reasonable. On occasion, the Company may enter into agreements with third parties for the co-production or distribution of a movie or web series. Revenue from these agreements will be recognized when the movie is complete and ready to be exploited. Cash received and amounts billed in advance of meeting the criteria for revenue recognition is classified as deferred revenue.
Gross versus Net Revenue
The Companys motion pictures are primarily distributed and marketed by third party distributors. The Company evaluates its arrangements with third parties to determine whether revenue should be reported under each individual arrangement on a gross or net basis by determining whether the Company acts as the principal or agent under the terms of each arrangement. To the extent that the Company acts as the principal in an arrangement, revenues are reported on a gross basis, resulting in revenues and expenses being classified in their respective financial statement line items. Conversely, to the extent that the Company acts as the agent in an arrangement, revenues are reported on a net basis, resulting in revenues being presented net of any related expenses. Determining whether the Company acts as principal or agent is based on an evaluation of which party has substantial risks and rewards of ownership under the terms of an arrangement. The most significant factors that the Company considers include identification of the primary obligor, as well as which party has general and physical inventory risk, credit risk and discretion in the supplier selection. The Companys primary distribution arrangements, which are those for its theatrical release, are recorded on a gross basis as a result of the evaluation previously described.
F-12
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Additionally, because third parties are the principal distributors of the Companys movies, the amount of revenue that is recognized from films in any given period is dependent on the timing, accuracy and sufficiency of the information received from its distributors. As is typical in the film industry, the Companys distributors may make adjustments in future periods to information previously provided to the Company that could have a material impact on the Companys operating results in later periods. Furthermore, management may, in its judgment, make material adjustments to the information reported by its distributors in future periods to ensure that revenues are accurately reflected in the Companys financial statements. To date, the distributors have not made, nor has the Company made, subsequent material adjustments to information provided by the distributors and used in the preparation of the Companys historical financial statements.
In general, the Company records revenue when it can identify the contract, identify the performance obligation, determine the transaction price, allocate the transaction price and collectability is reasonably assured.
Capitalized Production Costs
Capitalized production costs represent the costs incurred to develop and produce a motion picture or a web series. These costs primarily consist of salaries, equipment and overhead costs, capitalized interest as well as the cost to acquire rights to scripts. Production costs are stated at the lower of cost, less accumulated amortization and tax credits, if applicable, or fair value. These costs are capitalized in accordance with FASB ASC Topic 926-20-50-2 Other Assets Film Costs.
Unamortized capitalized production costs are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the capitalized production costs is below their 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. The Company is responsible for certain contingent compensation, known as participations, paid to certain creative participants such as writers, directors and actors. Generally, these payments are dependent on the performance of the motion picture or web series and are based on factors such as total revenue as defined per each of the participation agreements.
The Company is also responsible for residuals, which are payments based on revenue generated from secondary markets and are generally paid to third parties pursuant to a collective bargaining, union or guild agreement. The Company has entered into a fifteen-year distribution agreement for its motion picture,
Max Steel
. As provided in the agreement, the distributor has entered into a distribution assumption agreement with the guilds to pay the residuals from gross revenues. Upon expiration of the term of the agreement, and nonrenewal, the Company will be responsible for making the payments directly. These costs are accrued to direct operating expenses as the revenues, as defined in the participation agreements are achieved and as sales to the secondary markets are made triggering the residual payment.
Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates are likely to differ to some extent in the future from actual results. Management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized deferred production costs to its estimated fair value. Management estimates the ultimate revenue based on existing contract negotiations with domestic distributors and international buyers as well as managements experience with similar productions in the past. Amortization of film costs, participation and residuals and/or write downs of all or a portion of the unamortized deferred production costs to its estimated fair value is recorded in direct costs.
An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, less amortization expense of deferred productions costs, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher amortization expense of deferred production costs, and also periodically results in an impairment requiring a write-down of the deferred production costs to fair value. These write-downs are included in direct costs within the consolidated statements of operations. For the year ended December 31, 2017, the Company amortized $3,356,785 of capitalized production costs related to
Max Steel
and impaired $269,444 of capitalized production costs to present the capitalized production costs at fair value. During the year ended December 31, 2018, the Company amortized $203,560 of capitalized production costs related to the revenues earned for
Max Steel
.
The Company periodically reviews capitalized production costs to determine whether they will ultimately be used in the production of a film or web series. Per ASC 926-20-40-1, it is presumed that an entity will dispose of a property if it has not been set for production within three years from the time it was first capitalized. Based on this guidance, during the year ended December 31, 2018, the Company impaired a script that it had purchased in the amount of $200,000. The impairment is recorded in direct costs on the consolidated statement of operations.
F-13
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Investment
Investment represents an investment in equity securities of The Virtual Reality Company (VRC), a privately held company. The Companys $220,000 investment in VRC represents less than a 1% noncontrolling ownership interest in VRC and there is no market for VRCs common stock. Accordingly, the Company accounts for its investment under the cost method. Under the cost method, the investors share of earnings or losses is not included in the balance sheet or statement of operations. The net accumulated earnings of the investee subsequent to the date of investment are recognized by the investor only to the extent distributed by the investee as dividends. However, impairment charges are recognized in the statement of operations, if factors come to our attention that indicate that a decrease in value of the investment has occurred that is other than temporary.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value. Except for those described above in Capitalized Production Costs and those in Goodwill below, there were no impairment charges for long lived assets during the years ended December 31, 2018 and 2017.
Property, Equipment and Leasehold Improvements
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. The Company recorded depreciation expense of $307,274 and $211,138, respectively for the years ended December 31, 2018 and 2017. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. The range of estimated useful lives to be used to calculate depreciation and amortization for principal items of property and equipment are as follow:
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Asset Category
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Depreciation/
Amortization Period
(Years)
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Furniture and fixtures
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5 - 7
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Computer and office equipment
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3 - 5
|
Leasehold improvements
|
|
5 - 8, not to exceed the lease terms
|
Intangible assets
In connection with the acquisitions of 42West on March 30, 2017, The Door on July 5, 2018 and Viewpoint on October 31, 2018, the Company acquired in aggregate an estimated $12,110,000 of intangible assets with finite useful lives initially estimated to range from 3 to 14 years. Intangible assets are initially recorded at fair value and are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company amortized $1,671,530 and $1,043,255, respectively, of identifiable intangible assets during the years ended December 31, 2018 and 2017. There were no impairments of identifiable intangible assets for the years ended December 31, 2018 and 2017. Balances for The Door and Viewpoint are provisional as the final purchase price allocation has not been completed.
F-14
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Goodwill
For the year ended December 31, 2017, in connection with the acquisition of 42West (see Note 4), the Company recorded $12,778,860 of goodwill, which management has assigned to the entertainment publicity and marketing segment. For the year ended December 31, 2018 in connection with the acquisitions of The Door and Viewpoint (see Note 4), the Company recorded goodwill in the provisional amount of $5,000,741 in the aggregate which has also been assigned to the entertainment publicity and marketing segment. The Company accounts for goodwill in accordance with FASB ASC No. 350, IntangiblesGoodwill 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.
In connection with the updating of estimates and assumptions with the annual impairment tests for goodwill, the Company determined that the goodwill associated with 42West was impaired. In connection with the departures of the 42West employees in 2018, the Company adjusted operating margins and future cash flows used to estimate the fair value of the reporting unit which resulted in an impairment adjustment of $1,857,000 of goodwill. The Company did not identify any impairment for the other reporting units within the entertainment publicity and marketing segment.
Warrants
When the Company issues warrants, it evaluates the proper balance sheet classification of the warrant to determine whether the warrant should be classified as equity or as a derivative liability on the consolidated balance sheets. In accordance with ASC 815-40, Derivatives and Hedging-Contracts in the Entitys Own Equity (ASC 815-40), the Company classifies a warrant as equity so long as it is indexed to the Companys equity and several specific conditions for equity classification are met. A warrant is not considered indexed to the Companys equity, in general, when it contains certain types of exercise contingencies. If a warrant is not indexed to the Companys equity, it is classified as a derivative liability which is carried on the consolidated balance sheet at fair value with any changes in its fair value recognized currently in the statement of operations. Following adoption of ASU 2017-11, all of the Companys outstanding warrants have been considered indexed to the Companys equity and classified as equity. See Note 3 Summary of Significant Accounting Policies.
Convertible Debt and Convertible Preferred Stock
When the Company issues convertible debt or convertible preferred stock, it evaluates the balance sheet classification to determine whether the instrument should be classified either as debt or equity, and whether the conversion feature should be accounted for separately from the host instrument. A conversion feature of a convertible debt instrument or certain convertible preferred stock would be separated from the convertible instrument and classified as a derivative liability if the conversion feature, were it a standalone instrument, meets the definition of an embedded derivative in ASC 815, Derivatives and Hedging. Generally, characteristics that require derivative treatment include, among others, when the conversion feature is not indexed to the Companys equity, as defined in ASC 815-40, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When a conversion feature meets the definition of an embedded derivative, it would be separated from the host instrument and classified as a derivative liability carried on the consolidated balance sheet at fair value, with any changes in its fair value recognized currently in the consolidated statements of operations.
F-15
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
If a conversion feature does not meet the conditions to be accounted for as a derivative liability, the Company then determines whether the conversion feature is beneficial. A conversion feature would be considered beneficial if the conversion feature is in the money when the host instrument is issued or, under certain circumstances, later. If convertible debt contains a beneficial conversion feature (BCF), the amount of proceeds allocated to the BCF reduces the balance of the convertible debt, creating a discount which is amortized over the debts term to interest expense in the consolidated statements of operations. When a convertible preferred stock contains a BCF, after allocating the proceeds to the BCF, the resulting discount is either amortized over the period beginning when the convertible preferred stock is issued up to the earliest date the conversion feature may be exercised, or if the convertible preferred stock is immediately exercisable, the discount is fully amortized at the date of issuance. The amortization is recorded similar to a dividend.
For the year ended December 31, 2018, the Company had outstanding convertible debt which contained a conversion feature that is accounted for as a beneficial conversion feature. As of December 31, 2018, the balance of the conversion feature was $123,076, and the Company recorded interest expense of $61,538 related to the beneficial conversion feature for the year ended December 31, 2018. The Company did not have any outstanding convertible debt containing a conversion feature accounted for as a beneficial conversion feature as of and for the year ended December 31, 2017.
Stock based compensation
In connection with the 42West Acquisition, the Company issued 59,320 shares of restricted Common Stock to certain employees. The shares were issued pursuant to the Companys 2017 Plan. The shares of restricted stock were issued on August 21, 2017 and vested six months after issuance on February 21, 2018. The Company recognized compensation expense related to the restricted stock based on the number of employees who received the shares and were still employed by the Company at December 31, 2017 at the market price of the shares on grant date (August 21, 2017). For the year ended December 31, 2017, the Company recorded $330,065 in its consolidated statement of operations related to stock-based compensation. Upon vesting on February 21, 2018, the Company recorded $20,422 related to stock-based compensation. The Company did not have any other stock-based compensation for the years ended December 31, 2018 and 2017.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Observable inputs are based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Companys own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, defined as follows:
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Level 1
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Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.
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Level 2
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Inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
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Level 3
|
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Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. Unobservable inputs for the asset or liability that reflect managements own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.
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To account for the acquisitions of 42West, The Door and Viewpoint, the Company made a number of fair value measurements related to the different forms of consideration paid and of the identified assets acquired and liabilities assumed. In addition, the Company makes fair value measurements of its Put Rights and Contingent Consideration. See Notes 4 and 11 for further discussion and disclosures.
F-16
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using tax rates in effect for the years in which the differences are expected to reverse. The effects of changes in tax laws on deferred tax balances are recognized in the period the new legislation in enacted. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income. We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.
Earnings (Loss) Per Share
Basic earnings (loss) per share available to the Companys common stock shareholders equals net income or loss available to common stock shareholders divided by the weighted-average number of common shares outstanding for the applicable period.
Diluted earnings per share equals net income available common stock stockholders divided by the weighted-average number of common shares outstanding, plus any additional common shares that would have been outstanding if potentially dilutive shares had been issued. Diluted earnings per share reflects the potential dilution that would occur if certain potentially dilutive instruments were exercised. The potential issuance of common stock is assumed to occur at the beginning of the year (or at the time of issuance of the potentially dilutive instrument, if later) and the incremental shares are included using the treasury stock method. The proceeds utilized in applying the treasury stock method consist of the amount, if any, to be paid upon exercise. These proceeds are then assumed to be used to purchase common stock at the average market price of the Companys common stock during the period. The incremental shares (difference between the shares assumed to be issued and the shares assumed to be purchased), to the extent they would have been dilutive, are included in the denominator of the diluted earnings per share calculation. Potentially dilutive instruments are not included in the computation of loss per share because their inclusion is anti-dilutive.
Going Concern
In accordance with ASC Subtopic 205-40, Going Concern, management evaluates whether relevant conditions and events that, when considered in the aggregate, indicate that it is probable the Company will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. When relevant conditions or events, considered in the aggregate, initially indicate that it is probable that the Company will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (and therefore they raise substantial doubt about the Companys ability to continue as a going concern), management evaluates whether its plans that are intended to mitigate those conditions and events, when implemented, will alleviate substantial doubt about the Companys ability to continue as a going concern. Managements plans are considered only to the extent that 1) it is probable that the plans will be effectively implemented and 2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the Companys ability to continue as a going concern. See Note 2 related to going concern.
Concentration of Risk
The Company maintains its cash and cash equivalents with financial institutions and, at times, balances may exceed federally insured limits of $250,000. Additionally, substantially all of the production revenue for the years ended December 31, 2018 and 2017 were derived from one production.
F-17
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentation. These changes did not affect the equity or previously reported net losses.
Business Segments
The Company operates the following business segments:
1)
Entertainment Publicity and Marketing Segment This segment primarily provides clients with diversified marketing services, including public relations, entertainment and hospitality content marketing, strategic marketing consulting and content production of marketing materials through 42West, The Door and Viewpoint. For the years ended December 31, 2018 and 2017, the Company derived a majority of its revenues from this segment.
2)
Content Production Segment This segment produces original motion picture and digital content. Revenues from this segment for the years ended December 31, 2018 and 2017 were related to the domestic and international distribution of the Companys motion picture,
Max Steel
. For the year ended December 31, 2018, the Company also had revenues from domestic distribution of
Believe
, a film released in 2013. Revenues from this segment declined significantly for 2018 as compared to 2017 due to reduced revenues from
Max Steel
.
See Note 19 for Segment Reporting for the years ended December 31, 2018 and 2017.
Recent Accounting Pronouncements
Accounting guidance adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which provides guidance for revenue recognition. This ASU will supersede the revenue recognition requirements in ASC Topic 605, and most industry specific guidance, and replace it with a new Accounting Standards Codification (ASC) Topic 606. The FASB has also issued several subsequent ASUs which amend ASU 2014-09. The amendments do not change the core principle of the guidance in ASC 606.
The core principle of ASC 606 is that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The guidance in ASU 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer. ASC 606 will require the Company to make significant judgments and estimates. ASC 606 also requires more extensive disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Public business entities are required to apply the guidance of ASC 606 to annual reporting periods beginning after December 15, 2017 (2018 for the Company), including interim reporting periods within that reporting period. Accordingly, the Company adopted ASC 606 in the first quarter of 2018.
F-18
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
ASC 606 requires an entity to apply ASC 606 using one of the following two transition methods:
1.
Retrospective approach: Retrospectively to each prior reporting period presented and the entity may elect certain practical expedients.
2.
Modified retrospective approach: Retrospectively with the cumulative effect of initially applying ASC 606 recognized at the date of initial application. If an entity elects this transition method it also is required to provide the additional disclosures in reporting periods that include the date of initial application of (a) the amount by which each financial statement line item is affected in the current reporting period by the application ASC 606 as compared to the guidance that was in effect before the change, and (b) an explanation of the reasons for significant changes.
The Company completed its assessment of the impact of ASC 606 and adopted ASC 606, using the modified retrospective approach, as of January 1, 2018. The Companys assessment included examination of the following areas of the new standard:
Variable Consideration:
The Company is entitled to royalties from certain international distributors based on the sales made by these distributors after recoupment of a minimum guarantee. The Company is also entitled to certain bonus payments if certain of their clients receive awards as specified in the engagement contracts. Under ASC 606, revenues will be recorded based on best estimates available in the period of sales or usage. The Company determined that royalties from the international distributors would be subject to the sales-based royalty exception, that allows the revenue to be recognized only when the later of the following events occurs; (i) the subsequent sale occurs; and (ii) the performance obligation to which the sales-based royalty has been allocated has been satisfied. For the bonus payments available to the Company if its clients are either nominated or receive awards, the Company determined that the revenue should not be recognized prior to the time the nomination or award is announced since this type of revenue is highly susceptible to factors outside of the Companys influence.
Principal vs. Agent:
ASC 606 includes new guidance as to how to determine whether the Company is acting as a principal, in which case revenue would be recognized on a gross basis, or whether the Company is acting as an agent, in which case revenues would be recognized on a net basis. The Company evaluated the principal vs. agent in both its entertainment publicity and marketing business and its content production business and determined that for the existing contracts, the Company acted as the principal. The Company had previously recorded these contracts as principal; therefore, no adjustment was necessary.
Functional vs Symbolic Intellectual Property:
ASC 606 includes guidance on how to recognize revenue depending on whether the intellectual property is functional or symbolic. The Company licenses its completed motion picture to distributors. This type of intellectual property is considered functional intellectual property because it has significant standalone functionality, that is the consumer can begin using the intellectual property without additional support or changes. Revenues from the licensing of functional intellectual property are to be recognized once the intellectual property is available to the customer and license period has begun.
Performance obligation satisfied over time:
The Companys entertainment publicity and marketing business renders services to clients for a fixed monthly fee. These services provided by the Company are simultaneously consumed by its clients as they are being rendered by the Company, and the Company considers that its performance obligation is completed as the clients simultaneously receive and consume the benefits. Because the Companys agreements with its clients provide for monthly services at a fixed fee, and each contract may be terminated with 30-day notice by either party with no termination penalty, the Company recognizes revenue over time as the monthly services are performed.
Based on the Companys evaluation of ASC 606, the Company believes that revenues from prior periods were recognized in a manner consistent with the new standards and that a cumulative adjustment was not necessary upon implementation of ASC 606 for the year ended December 31, 2018.
F-19
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective on a retrospective or modified retrospective basis for annual reporting periods beginning after December 15, 2017 (2018 for the Company), and interim periods within those years, with early adoption permitted. The Company adopted this new guidance effective January 1, 2018 without a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 provides guidance on the classification of restricted cash and cash equivalents in the statement of cash flows. Although it does not provide a definition of restricted cash or restricted cash equivalents, it states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 was adopted by the Company on January 1, 2018 without a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 guidance to simplify the accounting for goodwill impairment. The guidance removes the second step of the goodwill impairment test, which requires that a hypothetical purchase price allocation be performed to determine the amount of impairment, if any. Under this new guidance, a goodwill impairment charge will be based on the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for the Companys fiscal year beginning April 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the new guidance effective January 1, 2017, with no material impact on the Companys consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). This update mandates that entities will apply the modification accounting guidance if the value, vesting conditions or classification of a stock-based award changes. Entities will have to make all of the disclosures about modifications that are required today, in addition to disclosing that compensation expense has not changed. Additionally, the new guidance also clarifies that a modification to an award could be significant and therefore requires disclosure, even if the modification accounting is not required. The Company adopted the guidance on a prospective basis effective January 1, 2018.
Accounting Guidance not yet adopted
In March 2019, the FASB issued new guidance on film production costs ASU 2019-02, (
Entertainment Films- Other Assets Film Costs (Subtopic 926-20)).
The new guidance is effective for fiscal years beginning after December 15, 2019 (for the year ended December 31, 2020 for the Company) and interim periods within those fiscal years and may be early adopted. The new guidance aligns the accounting for the production costs of an episodic series with those of a film by removing the content distinction for capitalization. It also addresses presentation, requires new disclosures for produced and licensed content and addresses cash flow classification for license agreements to better reflect the economics of an episodic series. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In October 2018, the FASB issued new guidance on consolidation ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities). The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and should be applied retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The new guidance provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decisionmakers and service providers are variable interests. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
F-20
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
In August 2018, the FASB issued new guidance on fair value measurement (ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement)
. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The guidance modifies the disclosure requirements on fair value by removing some requirements, modifying others, adding changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements, and providing the option to disclose certain other quantitative information with respect to significant unobservable inputs in lieu of a weighted average. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. ASU 2016-02 will require that lessees recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAPwhich requires that only capital (i.e. financing) leases be recognized on the balance sheet ASU 2016-02 will require both types of leases to be recognized on the balance sheet. Additionally, ASU 2016-02 will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 (2019 for the Company). The Company will adopt ASU 2016-02 during the first quarter of 2019 using the modified retrospective method. The new guidance will be applied to leases that exist or are entered into on or after January 1, 2019, without adjusting comparative periods in the financial statements. The Company elected to utilize the package of practical expedients that allows entities to (1) not reassess whether any expired or existing contracts are or contain leases; (2) retain the existing classification of lease contracts as of the date of adoption; and (3) not reassess initial direct costs for any existing leases.
The Company is in the final stages of evaluating its existing lease portfolio and is continuing to assess and quantify the value of right-of-use assets and lease liabilities that will be included on its balance sheet as of January 1, 2019. The Company is finalizing its implementation of a new lease accounting and administration software solution to manage and account for leases under the new guidance and is updating certain of its business processes and internal controls to meet the reporting and disclosure requirements of the new standard. The new guidance is not expected to materially affect the amount of expense recognized under the Companys current leasing arrangements, however, based on its review to date of existing lease contracts, the Company expects the amount of incremental lease assets will be approximately $9.8 million and the amount of incremental lease liabilities will be approximately $10.5 million to be recognized on its consolidated balance sheets. The adoption of Topic 842 is not expected to have a material effect on the Company's results of operations or cash flows. For information about the Companys future lease commitments as of December 31, 2018, see Note 21 Leases.
NOTE 4 MERGERS AND ACQUISITIONS
Viewpoint Computer Animation, Incorporated
On the Viewpoint Closing Date, the Company acquired all of the issued and outstanding capital stock of Viewpoint, a Massachusetts corporation (the Viewpoint Purchase), pursuant to a share purchase agreement dated the Viewpoint Closing Date (the Viewpoint Purchase Agreement), among the Company and the Viewpoint Shareholders. Viewpoint is a full-service creative branding and production house that has earned a reputation as one of the
top producers of promotional and brand-support videos for a wide variety of leading cable networks, media companies and consumer-product brands.
F-21
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The total consideration payable to the Viewpoint Shareholders in respect of the Viewpoint Purchase comprises the following: (i) $500,000 in shares of Common Stock, based on a price per share of Common Stock of $2.29, (ii) $1.5 million in cash (as adjusted for certain working capital and closing adjustments and transaction expenses). On the Viewpoint Closing Date, the Company issued to the Viewpoint Shareholders $500,000 in shares of Common Stock (218,088 shares) and paid the Viewpoint Shareholders an aggregate of $750,000 in cash (the Initial Consideration), adjusted for working capital, indebtedness and certain transaction expenses. Pursuant to the Purchase Agreement, the Company has agreed to pay to the Viewpoint Shareholders an additional $250,000 cash on each of April 30, 2019, October 31, 2019 and April 30, 2020 for a total of $750,000 (the Post Closing Consideration and, together with the Initial Consideration, the Viewpoint Purchase Consideration). The Viewpoint Purchase Agreement contains customary representations, warranties and covenants of the parties thereto. The Common Stock issued as part of the Initial Consideration has not been registered under the Securities Act of 1933, as amended (the Securities Act).
As a condition to the Viewpoint Purchase, two of the Viewpoint Shareholders, Carlo DiPersio and David Shilale have entered into employment agreements with the Company to continue as employees after the closing of the Viewpoint Purchase. Mr. DiPersios employment agreement is through December 31, 2020 and the contract defines base compensation and a bonus structure based on Viewpoint achieving certain financial targets. Mr. Shilales employment agreement is for a period of three years from the Viewpoint Closing Date and the contract defines the base compensation and a commission structure based on Viewpoint achieving certain financial targets. The bonus for Mr. Shilale is determined at the sole discretion of the Companys board of directors and management. Neither agreement provides for guaranteed increases to the base salary. The employment agreements contain provisions for termination and as a result of death or disability and entitles the employee to vacations and to participate in all employee benefit plans offered by the Company.
The provisional acquisition-date fair value of the consideration transferred totaled $1,980,089, which consisted of the following:
|
|
|
|
|
Common Stock issued at closing (218,088 shares)
|
|
$
|
427,452
|
|
Cash Consideration paid at closing
|
|
|
750,000
|
|
Working capital adjustment
|
|
|
52,637
|
|
Cash Installment to be paid on April 30, 2019 (included in other current liabilities)
|
|
|
250,000
|
|
Cash Installment to be paid on October 31, 2019 (included in other current liabilities)
|
|
|
250,000
|
|
Cash Installment to be paid on April 30, 2020 (included in other noncurrent liabilities)
|
|
|
250,000
|
|
|
|
$
|
1,980,089
|
|
The Company has engaged an independent third-party valuation expert to determine the fair values of the various forms of consideration transferred, which is not yet complete. The final amount of consideration may potentially change due to any working capital or other closing adjustments, which have not yet been determined.
The fair value of the 218,088 shares of Common Stock issued on the Viewpoint Closing Date was determined based on the closing market price of the Companys Common Stock on the Viewpoint Closing Date of $1.96 per share.
F-22
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the Viewpoint Closing Date. Amounts in the table are provisional estimates that may change, as described below.
|
|
|
|
|
Cash
|
|
$
|
206,950
|
|
Accounts receivable
|
|
|
503,906
|
|
Other current assets
|
|
|
102,411
|
|
Property, plant & equipment
|
|
|
183,877
|
|
Prepaid expenses
|
|
|
32,067
|
|
Intangible assets
|
|
|
450,000
|
|
Total identifiable assets acquired
|
|
|
1,479,211
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(165,284
|
)
|
Accounts payable
|
|
|
(77,394
|
)
|
Deferred tax liability
|
|
|
(206,636
|
)
|
Deferred revenue
|
|
|
(190,854
|
)
|
Total liabilities assumed
|
|
|
(640,168
|
)
|
Net identifiable assets acquired
|
|
|
839,043
|
|
Goodwill
|
|
|
1,141,046
|
|
Net assets acquired
|
|
$
|
1,980,089
|
|
Of the provisional fair value of the $450,000 of acquired identifiable intangible assets, $220,000 was assigned to customer relationships (5 years useful life) and $100,000 was assigned to the trade name (5 year useful life), that were recognized at fair value on the acquisition date. The customer relationships will be amortized using an accelerated method, and the trade name will be amortized using the straight-line method. In addition, the Company recognized a favorable lease intangible asset from the Companys Massachusetts office lease in the amount of $130,000. The favorable lease intangible asset will be amortized using the straight-line method over the remaining lease term of 26 months. The provisional fair value of accounts receivable acquired is $503,906, with the gross contractual amount being $509,406. The Company expects $5,500 to be uncollectible.
The provisional fair values of property and equipment and leasehold improvements of $183,877, and other assets of $102,411, are based on Viewpoints carrying values prior to the acquisition, which approximate their provisional fair values.
The provisional amount of $1,141,046 of goodwill was assigned to the entertainment publicity and marketing segment. The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of Viewpoint.
The Company expensed $152,308 of acquisition related costs in the year ended December 31, 2018. These costs are included in the consolidated statements of operations in the line item entitled acquisition costs.
The revenue and net income of Viewpoint included in the consolidated amounts reported in the consolidated statements of operations for the year ended December 31, 2018 are as follows:
|
|
|
|
|
Revenue
|
|
$
|
(494,860
|
)
|
Net loss
|
|
$
|
(267,909
|
)
|
F-23
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Unaudited Pro Forma Consolidated Statements of Operations
The following represents the unaudited pro forma consolidated operations for the years ended December 31, 2018 and 2017 as if Viewpoint had been acquired on January 1, 2017 and its results had been included in the consolidated results of the Company beginning on that date:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
23,639,720
|
|
|
$
|
27,313,331
|
|
Net (loss) income
|
|
|
(4,052,759)
|
|
|
|
6,595,564
|
|
The pro forma amounts have been calculated after applying the Companys accounting policies to the financial statements of Viewpoint and adjusting the combined results of the Company and Viewpoint (a) to reflect the amortization that would have been charged assuming the intangible assets had been recorded on January 1, 2017 and (b) to exclude $152,308 of acquisition related costs that were expensed for the year ended December 31, 2018 by the Company.
The impact of the Viewpoint Acquisition on the Companys 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 companys financial condition or results of operations would have been had the acquisition been completed on January 1, 2017, as provided in this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition and results of operations of the combined company.
The Door
On July 5, 2018 (the Door Closing Date), the Company entered into the Merger Agreement in respect of its acquisition of The Door. On the Door Closing Date, The Door merged with and into Merger Sub, with Merger Sub surviving the merger and continuing as a wholly owned subsidiary of the Company. Upon consummation of the Merger, Merger Sub changed its name to The Door Marketing Group, LLC. The Door is an entertainment public relations agency, offering talent publicity, strategic communications and entertainment content marketing primarily in the hospitality sector.
The total consideration payable to the Members in respect of the Merger comprises the following: (i) $2.0 million in shares of Common Stock based on a price per share of Common Stock of $3.25, (ii) $2.0 million in cash (as adjusted for certain working capital and closing adjustments and transaction expenses) and (iii) up to an additional $7.0 million of contingent consideration in a combination of cash and shares of Common Stock upon the achievement of specified financial performance targets over a four-year period as set forth in the Merger Agreement (the Contingent Consideration). On the Door Closing Date, the Company issued to the Members $1.0 million in shares of Common Stock and paid the Members an aggregate of $1.0 million in cash (the Initial Consideration). Pursuant to the Merger Agreement, the Company agreed to issue to the Members an additional $1.0 million in shares of Common Stock and pay to the Member $1.0 million in cash on January 2, 2019 (the Post Closing Consideration and, together with the Initial Consideration and the Contingent Consideration, the Merger Consideration). The Merger Agreement contains customary representations, warranties and covenants of the parties thereto. The Share Consideration has not been registered under the Securities Act.
Each of the Members has entered into a four-year employment agreement with The Door, pursuant to which each Member has agreed not to transfer any 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.
On the Door Closing Date, the Company entered into a registration rights agreement with the Members (the Registration Rights Agreement), pursuant to which the Members are entitled to rights with respect to the registration of the Share Consideration under the Securities Act. All fees, costs and expenses of underwritten registrations under the Registration Rights Agreement will be borne by the Company, other than underwriting discounts and commissions. At any time after July 5, 2019, the Company will be required, upon the request of such Members holding at least a majority of the Share Consideration received by the Members, to file up to two registration statements on Form S-3 covering up to 25% of the Share Consideration.
F-24
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The provisional acquisition-date fair value of the consideration transferred totaled $5,866,154, which consisted of the following:
|
|
|
|
|
Common Stock issued at closing (307,692 shares)
|
|
$
|
1,123,077
|
|
Common Stock issuable on January 2, 2019 (307,692 shares)
|
|
|
1,123,077
|
|
Cash paid to Members at closing
|
|
|
882,695
|
|
Members transaction costs paid at closing
|
|
|
117,305
|
|
Cash payable on January 2, 2019 (included in other current liabilities)
|
|
|
1,000,000
|
|
Contingent consideration
|
|
|
1,620,000
|
|
|
|
$
|
5,866,154
|
|
The Company has engaged an independent third-party valuation expert to determine the fair values of the various forms of consideration transferred, which is not yet complete. The fair value of the Contingent Consideration is assumed to be provisional pending receipt of the final valuations for these items. The final amount of consideration may also potentially change due to any working capital or other closing adjustments, which have not yet been determined.
The fair values of the 307,692 shares of Common Stock issued on the Door Closing Date and the 307,692 shares of Common Stock issued on January 2, 2019 were determined based on the closing market price of the Companys Common Stock on the Closing Date of $3.65 per share.
The Contingent Consideration arrangement requires that the Company issue up to 1,538,462 shares of Common Stock and up to $2 million in cash to the Members on achievement of adjusted net income targets, (as set forth in the Merger Agreement), based on the operations of The Door over the four-year period beginning January 1, 2018. The provisional fair value of the Contingent Consideration at the Door Closing Date was $1,620,000. The fair value of the Contingent Consideration was estimated using a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Contingent Consideration reflect managements own assumptions about the assumptions that market participants would use in valuing the Contingent Consideration as of the Door Closing Date. The key assumptions in applying the Monte Carlo Simulation model are as follows: a risk-free discount rate of between 2.11% and 2.67% based on the U.S government treasury obligation with a term similar to that of the contingent consideration, a discount rate of between 20.0% and 20.5%, and an annual asset volatility estimate of 62.5%.
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the Door Closing Date. The Companys independent third-party valuation expert is in the process of determining the fair values of the consideration transferred for the Merger and certain intangible assets acquired; thus, the provisional measurements of intangible assets, goodwill and deferred tax liabilities in the table below are subject to change.
|
|
|
|
|
Cash
|
|
$
|
89,287
|
|
Accounts receivable
|
|
|
469,344
|
|
Property, equipment and leasehold improvements
|
|
|
105,488
|
|
Prepaid expense
|
|
|
31,858
|
|
Other assets
|
|
|
30,667
|
|
Intangible assets
|
|
|
2,110,000
|
|
Total identifiable assets acquired
|
|
|
2,836,644
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(203,110
|
)
|
Accounts payable
|
|
|
(1,064
|
)
|
Unearned income
|
|
|
(15,500
|
)
|
Other liabilities
|
|
|
(1,913
|
)
|
Deferred tax liabilities
|
|
|
(608,598
|
)
|
Total liabilities assumed
|
|
|
(830,185
|
)
|
Net identifiable assets acquired
|
|
|
2,006,459
|
|
Goodwill
|
|
|
3,859,695
|
|
Net assets acquired
|
|
$
|
5,866,154
|
|
F-25
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Of the provisional calculation of $2,110,000 of acquired intangible assets, $1,010,000 was assigned to customer relationships (10-year useful life), $670,000 was assigned to the trade name (10-year useful life), $260,000 was assigned to non-competition agreements (2-year useful life) and $170,000 was assigned to a favorable lease from the New York City location (26 months useful life), that were recognized at fair value on the acquisition date. The fair value of the acquired identifiable intangible assets is provisional pending receipt of the final valuations for these assets.
The provisional fair value of accounts receivable acquired is $469,344.
The provisional fair values of property and equipment and leasehold improvements of $105,488, and other assets of $62,525, are based on The Doors carrying values prior to the Merger, which approximate their fair values.
The provisional amount of $3,859,695 of goodwill was assigned to the Entertainment Publicity and Marketing segment. The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of The Door.
The Company recognized $276,735 of acquisition related costs that were expensed in the year ended December 31, 2018. These costs are included in the consolidated statements of operations in the line item entitled acquisition costs.
Unaudited Pro Forma Consolidated Statements of Operations
The following presents the pro forma consolidated operations for years ended December 31, 2018 and 2017 as if The Door had been acquired on January 1, 2017 and its results had been included in the consolidated results of the Company:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
25,206,947
|
|
|
$
|
27,916,653
|
|
Net (loss) income
|
|
|
(2,648,900
|
)
|
|
|
6,157,888
|
|
These amounts have been calculated after applying the Companys accounting policies and adjusting the results of The Door to reflect the amortization that would have been charged, assuming the intangible assets had been recorded on January 1, 2017 and excluding acquisition related costs of $276,735 expensed by the Company for the year ended December 31, 2018.
The impact of the acquisition of The Door on the Companys 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 companys financial condition or results of operations would have been had the acquisition been completed on January 1, 2017, 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.
F-26
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The following table summarizes the original and revised estimated fair values of the assets acquired and liabilities assumed at the acquisition date of July 5, 2018 and the related measurement period adjustments to the fair values recorded during the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 5, 2018
(As initially reported)
|
|
|
Measurement Period Adjustments
|
|
|
December 31, 2018
(As adjusted)
|
|
Cash
|
|
$
|
89,287
|
|
|
$
|
|
|
|
$
|
89,287
|
|
Accounts receivable
|
|
|
469,344
|
|
|
|
|
|
|
|
469,344
|
|
Property, equipment and leasehold improvements
|
|
|
105,488
|
|
|
|
|
|
|
|
105,488
|
|
Prepaid expenses
|
|
|
31,858
|
|
|
|
|
|
|
|
31,858
|
|
Other assets
|
|
|
30,667
|
|
|
|
|
|
|
|
30,667
|
|
Intangible assets
|
|
|
2,110,000
|
|
|
|
|
|
|
|
2,110,000
|
|
Total identifiable assets acquired
|
|
|
2,836,644
|
|
|
|
|
|
|
|
2,836,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(203,110
|
)
|
|
|
|
|
|
|
(203,110
|
)
|
Accounts payable
|
|
|
(1,064
|
)
|
|
|
|
|
|
|
(1,064
|
)
|
Unearned income
|
|
|
(15,500
|
)
|
|
|
|
|
|
|
(15,500
|
)
|
Other liabilities
|
|
|
(1,913
|
)
|
|
|
|
|
|
|
(1,913
|
)
|
Deferred tax liability
|
|
|
(584,378
|
)
|
|
|
(24,220
|
)
|
|
|
(608,598
|
)
|
Total liabilities assumed
|
|
|
(805,965
|
)
|
|
|
(24,220
|
)
|
|
|
(830,185
|
)
|
Net identifiable assets acquired
|
|
|
2,030,679
|
|
|
|
(24,220
|
)
|
|
|
2,006,459
|
|
Goodwill
|
|
|
3,835,475
|
|
|
|
24,220
|
|
|
|
3,859,695
|
|
Net assets acquired
|
|
$
|
5,866,154
|
|
|
$
|
|
|
|
$
|
5,866,154
|
|
The above 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 July 5, 2018, the Company recorded the identifiable net assets acquired of $2,030,679 as shown in the table above in its consolidated balance sheet. During the year ended December 31, 2018, the Companys measurement period adjustments of $(24,220) were made and, accordingly, the Company recognized these adjustments in its December 31, 2018 consolidated balance sheet to reflect the adjusted identifiable net assets acquired of $2,006,459 as shown in the table above.
The following is a reconciliation of the initially reported fair value to the adjusted fair value of goodwill:
|
|
|
|
|
Goodwill originally reported at July 5, 2018
|
|
$
|
3,835,475
|
|
Changes to estimated fair values:
|
|
|
|
|
Deferred tax liability
|
|
|
24,220
|
|
Adjusted goodwill at December 31, 2018
|
|
$
|
3,859,695
|
|
The estimated fair value of the deferred tax liability increased by $24,220 primarily due to the estimated expected future tax rate applied.
42West
On March 30, 2017, the Company entered into the 42West Purchase Agreement in respect of the 42West Acquisition pursuant to which the Company acquired 100% of the membership interests of 42West and 42West became a wholly owned subsidiary of the Company. 42West is an entertainment public relations agency offering talent entertainment and targeted marketing, strategic communication services.
F-27
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Pursuant to the 42West Purchase Agreement, the Company agreed to pay a purchase price at closing equal to $18,666,666 (less, the amount of 42Wests transaction expenses paid by the Company and payments by the Company of certain of 42Wests indebtedness) in shares of Common Stock determined based on the Common Stocks 30-trading-day average stock price immediately prior to the closing date, which was $9.22 per share, plus a contingent earn out of up to an additional 1,012,292 shares of Common Stock (the Earn Out Consideration). The Purchase Agreement included a customary working capital adjustment, which resulted in a post-closing adjustment of $646,031 in favor of the Sellers. The Company has calculated the total number of shares to be issued for the transaction, not including the Earn Out Consideration, to be approximately 1,818,000 shares of Common Stock.
The following shares have been issued through December 31, 2017; (i) on March 30, 2017, the Company issued 615,140 shares of Common Stock to the Sellers on the closing date; (ii) on April 13, 2017, the Company issued 172,275 shares of Common Stock to certain 42West employees and a former 42West employee with change in control provisions in their pre-existing employment and termination agreements (the Change of Control Provisions); (iii) on April 13, 2017, the Company issued 50,000 shares of Common Stock as a provisional working capital adjustment to the Sellers and certain 42West employees and a previous employee with Change of Control Provisions; and (iv) on August 21, 2017, upon the effectiveness of a registration statement on Form S-8 promulgated under the Securities Act the Company issued 59,320 shares of Common Stock as 42West employee bonuses (the Employee Stock Bonuses). On August 30, 2017, the Company agreed to make a cash payment of $185,031 to the Principal Sellers to satisfy the remaining amount of the working capital adjustment. The only shares of Common Stock issued that have been registered under the Securities Act are those pertaining to the Employee Stock Bonuses.
During the year ended December 31, 2017, the Company agreed to settle certain of the Change of Control Provisions with certain 42West employees by offering a cash payment in lieu of the shares of Common Stock that were issued on April 13, 2017. As a result, the Company made payments in the aggregate amount of $292,112 on March 30, 2018 and will make payments in the aggregate of $361,760 on March 29, 2019 to these 42West employees. These amounts have been accrued as of December 31, 2018 and 2017. The difference between the value of the shares issued on April 13, 2017 at a price of $9.22 per share and the cash payments made to the 42West employees will be paid to the Sellers in shares of Commons Stock at a price of $9.22 per share.
On January 2, 2018, in accordance with the 42West Purchase Agreement, the Company issued 762,654 shares of Common Stock to the Sellers and on July 30, 2018, it issued 137,932 shares of Common Stock to certain 42West employees that chose to receive shares of Common Stock to satisfy the Change of Control Provisions and to the Sellers.
The issuance of 59,320 shares of Common Stock in respect of the Employee Stock Bonuses and the potential issuance of 40,492 shares a part of the Earn Out Consideration to 42West employees with Change of Control Provisions, (the Employee Earn Out Shares), are conditioned on the employee remaining employed by the Company up to the date shares become issuable. If an employee does not remain employed for the requisite service period, the shares they forfeit will be allocated among and issued to the Sellers of 42West. The Employee Stock Bonuses and the Employee Earn Out Shares are not considered part of the accounting consideration transferred to acquire 42West. The Employee Stock Bonus Shares and the Employee Earn Out Shares will be accounted for under ASC 718
Compensation Stock Compensation,
which will result in compensation expense in the Companys consolidated statements of operations (see Stock-Based Compensation in Note 3).
The 42West Purchase Agreement contains customary representations, warranties, covenants and indemnifications.
Also in connection with the 42West Acquisition, on March 30, 2017, the Company entered into put agreements (the Put Agreements) with each of the Sellers. Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Company has granted the Sellers the right, but not obligation, to cause the Company to purchase up to an aggregate of 1,187,087 of their shares of Common Stock received as Stock Consideration 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). This amount includes the put rights allowable after earning the Earn Out Consideration achieved during the year ended December 31, 2017. During the year ended December 31, 2017, the sellers exercised their Put Rights, in accordance with the Put Agreements, and caused the Company to purchase 189,799 shares of Common Stock for an aggregate amount of $1,750,000, including $525,000 that was paid on January 5, 2018. During the year ended December 31, 2018, the sellers exercised their Put Rights, in accordance with the Put Agreements, and caused the Company to purchase 339,206 shares of Common Stock for an aggregate amount of $3,127,500, including $375,000 paid in January of 2019.
F-28
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Each of Leslee Dart, Amanda Lundberg and Allan Mayer (the Principal Sellers) has entered into employment agreements with the Company to continue as employees of the Company for a three-year term after the closing of the 42West Acquisition. Each of the employment agreements of the Principal Sellers contains lock-up provisions pursuant to which each Principal Seller has agreed not to transfer any shares of Common Stock in the first year, except pursuant to an effective registration statement on Form S-1 or Form S-3 promulgated under the Securities Act (an Effective Registration Statement) or upon exercise of the Put Rights pursuant to the Put Agreement, and, except pursuant to an Effective Registration Statement, no more than 1/3 of the Initial Consideration and Post-Closing Consideration received by such Principal Seller in the second year and no more than an additional 1/3 of the Initial Consideration and Post-Closing Consideration received by such Principal Seller in the third year, following the closing date. The non-executive employees of 42West were retained as well.
In addition, in connection with the 42West Acquisition, on March 30, 2017, the Company entered into a registration rights agreement with the Sellers (the Registration Rights Agreement) pursuant to which the Sellers are entitled to rights with respect to the registration of their shares of Common Stock under the Securities Act. All fees, costs and expenses of underwritten registrations under the Registration Rights Agreement will be borne by the Company. At any time after the one-year anniversary of the Registration Rights Agreement, the Company will be required, upon the request of such Sellers holding at least a majority of the Stock Consideration received by the Sellers, to file a registration statement on Form S-1 and use its reasonable efforts to affect a registration covering up to 25% of the Stock Consideration received by the Sellers. In addition, if the Company is eligible to file a registration statement on Form S-3, upon the request of Sellers holding at least a majority of the Stock Consideration received by the Sellers, the Company will be required to use its reasonable efforts to affect a registration of such shares on Form S-3 covering up to an additional 25% of the Stock Consideration received by the Sellers. The Company is required to effect only one registration on Form S-1 and one registration statement on Form S-3, if eligible. The right to have the Stock Consideration received by the Sellers registered on Form S-1 or Form S-3 is subject to other specified conditions and limitations.
The acquisition-date fair value of the consideration transferred totaled $23,327,799, which consisted of the following:
|
|
|
|
|
Common Stock issued at closing and in April 2017 (787,415 shares)
|
|
$
|
6,693,028
|
|
Common Stock issuable in 2018 (980,911 shares)
|
|
|
8,337,740
|
|
Contingent Consideration
|
|
|
3,627,000
|
|
Put Rights
|
|
|
3,800,000
|
|
Sellers transaction costs paid at closing
|
|
|
260,000
|
|
Working capital adjustment (50,000 shares issued in April 2017 plus paid $185,031 cash in August 2017)
|
|
|
610,031
|
|
|
|
$
|
23,327,799
|
|
The fair values of the 787,415 shares of Common Stock issued at closing and in April 2017 and the 980,911 shares of Common Stock to be issued in 2018 were determined based on the closing market price of the Companys Common Stock on the acquisition date of $8.50 per share.
The Earn-Out Consideration arrangement required the Company to pay up to 863,776 shares of Common Stock to the Sellers and one former employee of 42West to settle a Change in Control Provision (the Contingent Consideration), on achievement of adjusted EBITDA targets (as defined in the Purchase Agreement) based on the operations of 42West over the three-year period beginning January 1, 2017. The fair value of the Contingent Consideration was estimated using a Monte Carlo Simulation model, which incorporated 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 managements own assumptions about the assumptions that market participants would use in valuing the Contingent Consideration as of the acquisition date. The key assumptions as of the acquisition date used in applying the Monte Carlo Simulation model are as follows: estimated risk-adjusted EBITDA figures ranging between $3,750,000 and $3,900,000; discount rates ranging between 11.75% and 12.25% applied to the risk-adjusted EBITDA estimates to derive risk-neutral EBITDA estimates; risk-free discount rates ranging from 1.03% to 1.55%, based on U.S. government treasury obligations with terms similar to those of the Contingent Consideration arrangement, applied to the risk-neutral EBITDA estimates; and an annual asset volatility estimate of 72.5%.
F-29
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
During the year ended December 31, 2017, the Sellers achieved the financial target to earn an additional 1,012,292 shares of Common Stock of additional consideration, as stated in the Purchase Agreement. Per the terms of the Purchase Agreement, the additional consideration will be paid in equal installments of 337,431 shares of Common Stock over a period of three years. Per the Purchase Agreement, based on the purchase price of $9.22 per share, the Earn Out Consideration is $9.3 million. The market value of these shares was $3,644,251 at December 31, 2017, the date the target was achieved. The fair value of the Put Rights at the acquisition date was estimated using 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 managements own assumptions about the assumptions that market participants would use in valuing the Put Rights as of the acquisition date. The key assumptions in applying the Black Scholes Option Pricing Model are as follows: a discount rate range of 0.12% to 1.70% based on U.S Treasury obligations with a term similar to the exercise period for each of the rights to put shares to the Company as set forth in the Put Option agreements, and an equity volatility estimate of 75% based on the stock price volatility of the Company and certain publicly traded companies operating in the advertising services industry.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, March 30, 2017. Amounts in the table are provisional estimates that may change, as described below.
|
|
|
|
|
Cash
|
|
$
|
273,625
|
|
Accounts receivable
|
|
|
1,706,644
|
|
Property, equipment and leasehold improvements
|
|
|
1,087,962
|
|
Other assets
|
|
|
265,563
|
|
Indemnification asset
|
|
|
300,000
|
|
Favorable lease intangible asset
|
|
|
440,000
|
|
Intangible assets
|
|
|
9,110,000
|
|
Total identifiable assets acquired
|
|
|
13,183,794
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(731,475
|
)
|
Line of credit and note payable
|
|
|
(1,025,000
|
)
|
Settlement liability
|
|
|
(300,000
|
)
|
Other liabilities
|
|
|
(556,380
|
)
|
Tax liabilities
|
|
|
(22,000
|
)
|
Total liabilities assumed
|
|
|
(2,634,855
|
)
|
Net identifiable assets acquired
|
|
|
10,548,939
|
|
Goodwill
|
|
|
12,778,860
|
|
Net assets acquired
|
|
$
|
23,327,799
|
|
Of the fair value of the $9,110,000 of acquired identifiable intangible assets, $5,980,000 was assigned to customer relationships (10-14 years useful life), $2,760,000 was assigned to the trade name (10-year useful life), and $370,000 was assigned to non-competition agreements (3-year useful life), that were recognized at fair value on the acquisition date. The intangible assets will be amortized using the straight-line method with the exception of the customer relationship intangible that uses a modified straight-line method. The Company determined that historically the attrition rate for 75% of its customers was relatively low and amortized 75% of the customer relationship intangible using the straight-line method. The other 25% is amortized using an accelerated method based on the expected future revenues of the customers. In addition, the Company recognized a favorable lease intangible asset from the Companys Los Angeles office lease in the amount of $440,000. The favorable lease intangible asset will be amortized using the straight-line method over the remaining lease term of 57 months. The fair value of accounts receivable acquired is $1,706,644, with the gross contractual amount being $1,941,644. The Company expects $235,000 to be uncollectible.
The fair values of property and equipment and leasehold improvements of $1,087,962, and other assets of $265,563, are based on 42Wests carrying values prior to the acquisition, which approximate their fair values.
F-30
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The fair value of the settlement liability of $300,000 relates to 42Wests contingent liability to the Motion Picture Industry Pension Individual Account and Health Plans (collectively the Plans), two multiemployer pension funds and one multiemployer welfare fund, respectively, that are governed by the Employee Retirement Income Security Act of 1974, as amended (the Guild Dispute). The Plans intend to conduct an audit of 42Wests books and records for the period June 7, 2011 through August 20, 2016 in connection with the alleged contribution obligations of 42West to the Plans. Based on a recent audit for periods prior to June 7, 2011, the Company estimates that the probable amount the Plan may seek to collect from 42West is approximately $300,000, as of the acquisition date, in pension plan contributions, health and welfare plan contributions and union dues once the audit is completed. Accordingly, the Company has recorded a $300,000 settlement accrual liability for the probable amount of the liability it may incur due to the Motion Picture Industry Pension audit of the period from March 25, 2012 through August 20, 2016 (see Note 22). In accordance with the terms of the Purchase Agreement, the Sellers indemnified the Company with respect to the Guild Dispute for losses incurred related the Companys alleged contribution obligations to the Plans for the period between March 25, 2012 through March 26, 2016. The Company has recorded an indemnification asset related to the recorded settlement liability, measured at fair value on the same basis as the settlement liability. The indemnification asset represents the estimated fair value of the indemnification payment expected to be received from Sellers, related to the indemnification by the Sellers of the estimated settlement liability.
Based on the fair values related to certain assets acquired and liabilities assumed discussed above the goodwill amount of $12,778,860 was assigned to the entertainment publicity and marketing segment (see Note [19]). The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of 42West. The goodwill is expected to be deductible for income tax purposes.
The Company expensed $749,440 of acquisition related costs in the year ended December 31, 2017, respectively. These costs are included in the consolidated statements of operations in the line item entitled acquisition costs.
The revenue and net income of 42West included in the consolidated amounts reported in the consolidated statements of operations for the year ended December 31, 2017 are as follows:
|
|
|
|
|
Revenue
|
|
$
|
16,458,929
|
|
Net income
|
|
$
|
2,155,665
|
|
The amounts of 42Wests revenue and earnings for the one day between the acquisition date (March 30, 2017) and March 31, 2017 were de minimis.
The following represents the pro forma consolidated operations for the year ended December 31, 2017 as if 42West had been acquired on January 1, 2017 and its results had been included in the consolidated results of the Company beginning on that date:
Unaudited Pro Forma Consolidated Statements of Operations
The following represents the pro forma consolidated operations for the year ended December 31, 2017 as if 42West had been acquired on January 1, 2017 and its results had been included in the consolidated results of the Company beginning on that date:
|
|
|
|
|
|
|
2017
|
|
Revenues
|
|
$
|
27,102,600
|
|
Net income
|
|
|
8,622,281
|
|
The pro forma amounts have been calculated after applying the Companys accounting policies to the financial statements of 42West and adjusting the combined results of the Company and 42West (a) to reflect the amortization that would have been charged assuming the intangible assets had been recorded on January 1, 2017, (b) to reflect the reversal of 42Wests income taxes as if 42West had filed a consolidated income tax return with the Company beginning January 1, 2017, and (c) to exclude $749,440 of acquisition related costs that were expensed by the Company for the year ended December 31, 2017 by the Company and 42West on a combined basis.
F-31
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 5 CAPITALIZED PRODUCTION COSTS, ACCOUNTS RECEIVABLES AND OTHER CURRENT ASSETS
Capitalized Production Costs
Capitalized production costs include the unamortized costs of completed motion pictures and digital projects that have been produced by the Company, costs of scripts for projects that have not been developed or produced and costs for projects that are in production. These costs include direct production costs and production overhead and are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in the proportion that current years revenue bears to managements estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the motion picture or web series.
Motion Pictures
Revenues earned from motion pictures were $634,612 and $5,954,115 for the years ended December 31, 2018 and 2017, respectively. These revenues were mainly attributable to
Max Steel
, the motion picture released on October 14, 2016. The Company amortized capitalized production costs (included as direct costs) in the consolidated statements of operations using the individual film forecast computation method in the amounts of $203,560 and $3,356,785 for the years ended December 31, 2018 and 2017, respectively, related to
Max Steel.
As of December 31, 2018 and 2017, the Company had balances of $629,585 and $833,145, respectively, recorded as capitalized production costs related to
Max Steel
.
The Company has purchased scripts for other motion picture productions and has capitalized $95,000 and $242,500 in production costs associated with these scripts as of December 31, 2018 and 2017, respectively. The Company currently intends to produce the projects, but they were not yet in production as of December 31, 2018. During the year ended December 31, 2018, the Company impaired the cost of a script that it had previously purchased in the amount of $200,000.
As of December 31, 2018 and 2017, the Company had total capitalized production costs of $724,585 and $1,075,645, respectively, net of accumulated amortization, tax incentives and impairment charges, recorded on its consolidated balance sheets related to motion pictures.
Digital Productions
During 2016, the Company produced a new digital project showcasing favorite restaurants of NFL players throughout the country. The Company entered into a co-production agreement and was responsible for financing 50% of the projects budget. Per the terms of the agreement, the Company is entitled to 50% of the profits of the project, net of any distribution fees. The show was produced throughout several cities in the United States and was released on Destination America, a digital cable and satellite television channel, on September 9, 2017. The Company does not expect to derive any revenues from this initial release.
During 2017, the Company determined that the fair value of the capitalized production costs of the digital productions was below the carrying value and impaired $269,444 of capitalized production costs related to the NFL digital production described above. As of both December 31, 2018 and 2017, the Company had no capitalized production costs related to digital productions.
The Company has assessed events and changes in circumstances that would indicate that the Company should assess whether the fair value of the productions is less than the unamortized costs capitalized and did not identify indicators of impairment, other than those noted above related to a script.
F-32
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Accounts Receivables
The Company entered into various agreements with foreign distributors for the licensing rights of our motion picture,
Max Steel
, in certain international territories. The Company delivered the motion picture to the distributors and satisfied the other requirements of these agreements. In addition, the domestic distributor of
Max Steel
reports to the Company on a monthly basis the sales of the motion picture in the United States. As of December 31, 2017, the Company had accounts receivables of $1,821,970, net of allowance for doubtful accounts of $227,280, related to the revenues of
Max Steel
,
of which $727,674, net of an allowance for doubtful accounts of $227,280, were from foreign distributors. As of December 31, 2018, the Company did not have any accounts receivable related to
Max Steel
. On September 4, 2018, the Companys domestic distributor Open Road Films (Open Road) filed for bankruptcy protection under Chapter 11. The assets of Open Road were sold to Raven Capital Management, which now has the rights to distribute
Max Steel
under the same arrangements as Open Road.
The Companys trade accounts receivables related to its entertainment publicity and marketing business 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 December 31, 2018 and 2017, the Company had accounts receivable balances of $3,173,107 and $1,878,648, respectively, net of allowance for doubtful accounts of $283,022 and $139,000, respectively, related to its entertainment publicity and marketing segment.
Other Current Assets
The Company had balances of $620,970 and $422,118 in other current assets on its consolidated balance sheets as of December 31, 2018 and 2017, respectively. As of December 31, 2017, these amounts were primarily composed of an indemnification asset related to the 42West acquisition and prepaid expenses. As of December 31, 2018, the balance also included capitalized costs for brand-support video production, a tax incentive from Massachusetts related to the production of marketing video content and a tax receivable of $62,776.
Indemnification asset
The Company recorded in other current assets on its consolidated balance sheet $300,000 related to certain indemnification obligations associated with the 42West Acquisition.
Prepaid expenses
The Company records in other assets on its 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 December 31, 2018, the Company had a balance of $60,000 from these tax incentives.
Capitalized costs
The Company capitalizes certain third-party costs used in the production of its marketing video content. As of December 31, 2018, the Company had a balance of $76,313 related to these third-party costs.
NOTE 6 PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvement consists of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Furniture and fixtures
|
|
$
|
713,075
|
|
|
$
|
483,306
|
|
Computers and equipment
|
|
|
1,636,391
|
|
|
|
432,586
|
|
Leasehold improvements
|
|
|
732,870
|
|
|
|
448,661
|
|
|
|
|
3,082,336
|
|
|
|
1,364,553
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,899,816
|
)
|
|
|
(253,777
|
)
|
|
|
$
|
1,182,520
|
|
|
$
|
1,110,776
|
|
F-33
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 amortizes leasehold improvements over the remaining term of the related leases. The Company recorded depreciation expense of $307,274 and $211,138, respectively for the years ended December 31, 2018 and 2017.
NOTE 7 INVESTMENT
As of December 31, 2018, investments, at cost, consisted of 344,980 shares of common stock of VRC. 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 Companys investment in VRC represents less than 1% noncontrolling ownership interest in VRC. The Company had a balance of $220,000 on its consolidated balance sheet as of December 31, 2018, and 2017 related to this investment.
NOTE 8 DEBT
Loan and Security Agreements
Prints and Advertising Loan
During 2016, Dolphin Max Steel Holding, LLC, a Florida limited liability company (Max Steel Holding) and a wholly owned subsidiary of Dolphin Films, entered into a loan and security agreement (the P&A Loan) providing for a non-revolving credit facility in an aggregate principal amount of up to $14,500,000 that matured on August 25, 2017. Proceeds of the credit facility in the aggregate amount of $12,500,000 were used to pay a portion of the print and advertising expenses (P&A) of the domestic distribution of
Max Steel
. To secure Max Steel Holdings obligations under the Loan and Security Agreement, the Company granted to the lender a security interest in bank account funds totaling $1,250,000 pledged as collateral and rights to the assets of Max Steel Holdings. Repayment of the loan was intended to be made from revenues generated by
Max Steel
in the United States.
Max Steel
did not generate sufficient funds to repay the loan prior to the maturity date. As a result, if the lender forecloses on the collateral securing the loan, Max Steel Holding will lose the copyright for
Max Steel
and, consequently, will no longer receive any revenues from the domestic distribution of
Max Steel
. In addition, the Company would impair the entire capitalized production costs of
Max Steel
included as an asset on its balance sheet, which as of December 31, 2018 was $629,585. The loan is also partially secured by a $4,500,000 corporate guaranty from an unaffiliated third-party associated with the film, of which Dolphin provided a backstop guaranty of $620,000. The lender had retained a reserve of $1,531,871 for loan fees and interest. Amounts borrowed under the credit facility accrue interest at either (i) a fluctuating per annum rate equal to the 5.5% plus a base rate or (ii) a per annum rate equal to 6.5% plus the LIBOR determined for the applicable interest period, as determined by the borrower.
During 2017, the Company agreed to allow the lender to apply the $1,250,000 balance held in the bank account as collateral to the loan balance and the party associated with the film paid the lender the guaranty of $4,500,000. During 2017, the Company recorded a gain on extinguishment of debt of $3,880,000, related to the payment of the guaranty. The Company recorded its $620,000 backstop guaranty in other current liabilities. As of December 31, 2018 and 2017, the Company had outstanding balances of $682,842 and $1,900,970, respectively, related to this agreement recorded on the consolidated balance sheets in the caption debt. On its consolidated statement of operations for the years ended December 31, 2018 and 2017, the Company recorded interest expense of $120,608 and $716,796, respectively related to the P&A Loan. For the year ended December 31, 2017, the Company recorded $500,000 in direct costs from loan proceeds that were not used by the distributor for the marketing of the film and returned to the lender.
F-34
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Production Service Agreement
During 2014, Dolphin Films entered into a financing agreement to produce
Max Steel
(the Production Service Agreement). The Production Service Agreement was for a total amount of $10,419,009 with the lender taking a $892,619 producer fee. The Production Service Agreement contained repayment milestones to be made during 2015, which, if not met, accrued interest at a default rate of 8.5% per annum above the published base rate of HSBC Private Bank (UK) Limited until maturity on January 31, 2016 or the release of the movie. Due to a delay in the release of Max Steel, the Company did not make the repayments as prescribed in the Production Service Agreement. As a result, the Company recorded accrued interest of $1,624,754 and $1,455,745, respectively, as of December 31, 2018 and 2017 in other current liabilities on the Companys consolidated balance sheets. The loan was partially secured by international distribution agreements entered into by the Company prior to the commencement of principal photography and the receipt of tax incentives. As a condition to the Production Service Agreement, the Company acquired a completion guarantee from a bond company for the production of the motion picture. The funds for the loan were held by the bond company and disbursed as needed to complete the production in accordance with the approved production budget. The Company recorded debt as funds were transferred from the bond company for the production.
As of December 31, 2018, and 2017 the Company had outstanding balances of $1,728,986 and $2,086,249, respectively, related to this debt on its consolidated balance sheets, not including the $1,624,754 and $1,455,745 of accrued interest included in other current liabilities.
Line of Credit
The Companys subsidiary, 42West had a $1,750,000 revolving credit line agreement with City National Bank, which matured on November 1, 2017. Borrowings bore interest at the banks prime lending rate plus 0.875%. The debt, including letters of credit outstanding, was collateralized by substantially all of the assets of 42West and guaranteed by the Principal Sellers. The outstanding loan balance as of December 31, 2017 was $750,000. The line of credit was not renewed and, on January 29, 2018, the Company paid the outstanding balance of $750,000.
On March 15, 2018, 42West entered into a business loan agreement with BankUnited, N.A. for a revolving line of credit (the Loan Agreement). The Loan Agreement matures on March 15, 2020 and bears interest on the outstanding balance at the banks prime rate plus 0.25% per annum. The maximum amount that can be drawn on the revolving line of credit is $2,300,000 with a sublimit of $750,000 for standby letters of credit. Amounts outstanding under the Loan Agreement are secured by 42Wests 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 June 29, 2018, the Company issued a standby letter of credit, in the amount of $50,000, to secure the lease of 42Wests Los Angeles office. The borrowing capacity under the Loan Agreement was reduced by the same amount. As of December 31, 2018, the outstanding balance on the line of credit was $1,700,390.
The Loan Agreement contains customary affirmative covenants, including covenants regarding maintenance of a maximum debt to total net worth ratio of at least 4.0:1.0 and a minimum debt service coverage of 1.40x based on fiscal year-end audit to be calculated as provided in the Loan Agreement. Further, the Loan Agreement contains customary negative covenants, including those that, subject to certain exceptions, restrict the ability of 42West to incur additional indebtedness, grant liens, make loans, investments or certain acquisitions, or enter into certain types of agreements. Upon the occurrence of an event of default, the bank may accelerate the maturity of the loan and declare the unpaid principal balance and accrued but unpaid interest immediately due and payable. In the event of 42Wests insolvency, such outstanding amounts will automatically become due and payable. 42West may prepay any amounts outstanding under the Loan Agreement without penalty. As of December 31, 2018, the Company was in compliance with all covenants under the Loan Agreement.
Payable to Former Member of 42West
During 2011, 42West entered into an agreement to purchase one of its members equity interests in 42West. Pursuant to the agreement, the outstanding purchase price for such interests became payable in connection with the Companys acquisition of 42West (See Note 4). The Company paid $300,000 in April 2017 and $225,000 on January 5, 2018 in respect of this purchase obligation. The outstanding balance at December 31, 2017 of $225,000 was included in other current liabilities on the accompanying consolidated balance sheet.
F-35
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 9 NOTES PAYABLE
Convertible Notes
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 Note) to Pinnacle Family Office Investments, L.P. (Pinnacle) pursuant to a Securities Purchase Agreement, dated the same date, between the Company and Pinnacle. The Company used the proceeds of the convertible promissory note to finance the Companys acquisition of The Door. The Companys obligations under the Note are secured primarily by a lien on the assets of The Door and Viewpoint.
The Company must pay interest on the principal amount of the convertible promissory note at the rate of 8% per annum in cash on a quarterly basis. The Note matures on January 5, 2020. The Company may prepay the convertible promissory note in whole, but not in part, at any time prior to maturity; however, if the Company voluntarily prepays the convertible promissory note, it must (i) pay Pinnacle a prepayment penalty equal to 10% of the prepaid amount and (ii) issue to Pinnacle warrants to purchase 100,000 shares of Common Stock with an exercise price equal to $3.25 per share. The convertible promissory note also contains certain customary events of default. The holder may convert the outstanding principal amount of the convertible promissory note into shares of Common Stock at any time at a price per share equal to $3.25, subject to adjustment for stock dividends, stock splits, dilutive issuances and subsequent rights offerings. At the Companys election, upon a conversion of the convertible promissory note, the Company may issue Common Stock in respect of accrued and unpaid interest with respect to the principal amount of the convertible promissory note converted by Pinnacle.
On the date of the Note, the Companys Common Stock had a market value of $3.65. The Company determined that the Note contained a beneficial conversion feature or debt discount by calculating the number of shares using the conversion rate of the 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 Companys Common Stock on the date of the Note. The Company recorded a debt discount on the Note of $184,614 that will be amortized and recorded as interest expense over the life of the Note.
For the year ended December 31, 2018, the Company paid interest and recorded interest expense in its consolidated statement of operations in the amount of $58,333 in respect of the Note. For the year ended December 31, 2018, the Company recorded interest expense of $61,538 from the amortization of the beneficial conversion of the Note. As of December 31, 2018, the Company had a balance of $1,376,924, net of $123,076 of debt discount, recorded in noncurrent liabilities on its consolidated balance sheet, related to this Note.
2017 Convertible Debt
In July, August and September 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 matures one year from the date of issuance, with the exception of one note in the amount of $75,000, which matures two years from the date of issuance, and bears interest at a rate of 10% per annum. During 2018, the respective maturity dates of the promissory notes were extended for a period of one year from the original maturity dates. 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 25, 2018, one of the holders of a convertible promissory note notified the Company that they would convert $250,000 of principal and $23,425 of accrued interest into 85,299 shares of Common Stock at a price of $3.21 per share using the 90-day trading average price per share of Common Stock as of June 22, 2018. On the date of the conversion (June 25, 2018), the market price of the Common Stock was $3.83 per share and the Company recorded a loss on extinguishment of debt in the amount of $53,271 on its consolidated statements of operation for the year ended December 31, 2018.
F-36
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
For the year ended December 31, 2018, the Company paid interest on these notes in the aggregate amount of $66,140, and recorded interest expense in the amount of $74,189 relating to these notes. As of December 31, 2018, and 2017, the Company recorded accrued interest of $4,861 and $20,237, respectively, relating to the convertible notes payable. As of December 31, 2018, the Company had balances of $625,000 in current liabilities and $1,376,924 in noncurrent liabilities on its consolidated balance sheets relating to the 2018 and 2017 Convertible Debt. As of December 31, 2017, the Company had balances of 800,000 in current liabilities and $75,000 in noncurrent liabilities on its consolidated balance sheets relating to the 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), an entity controlled by Mr. Stephen L Perrone, an affiliate of the Company. On December 10, 2018, the Company agreed to exchange this note, including accrued interest of $192,233 for a new unsecured promissory note in the amount of $492,233 that matures on December 10, 2023. This promissory note bears interest of 10% per annum and can be prepaid without a penalty at any time prior to its maturity. The note requires monthly repayments of principal and interest in the amount of $10,459 throughout the life of the note.
On November 30, 2017, the Company entered into an unsecured promissory note in the amount of $200,000 that matures on January 15, 2020. The promissory note bears interest of 10% per annum and can be prepaid without a penalty at any time prior to its maturity.
On September 20, 2017, the Company signed a promissory note in the amount of $150,000 with a maturity date of September 20, 2018. The promissory note bears interest at 10% per annum and may be repaid at any time without a penalty. The promissory note is held by an entity of which Allan Mayer, a director and employee of the Company, is the trustee. On December 18, 2017, the Company repaid the principal balance and accrued interest on the promissory note in the aggregate amount of $151,875.
On June 14, 2017, the Company entered into an unsecured promissory note in the amount of $400,000, maturing on June 14, 2019. The promissory note bears interest of 10% per annum and can be prepaid without a penalty after the initial six months.
On April 10, 2017, the Company entered into two unsecured promissory notes with an aggregate principal amount of $300,000 on substantially identical terms. Both promissory notes are held by one noteholder, expire on October 10, 2017, can be prepaid without a penalty at any time and bear interest at 10% per annum. The maturity date of this promissory notes was extended to December 15, 2017 and the promissory notes were paid upon maturity.
On April 18, 2017, the Company entered into a promissory note in the amount of $250,000 that expires on October 18, 2017, can be prepaid without a penalty at any time and bears interest at 10% per annum. The maturity date of this promissory note was extended to December 15, 2017 and the promissory note was paid upon maturity.
During the year ended December 31, 2018, the Company made interest payments on its nonconvertible promissory notes in the aggregate amount of $60,834. The Company had a balance of $6,315 and $189,309 as of December 31, 2018 and 2017, respectively, of accrued interest recorded in other current liabilities in its consolidated balance sheets, related to these promissory notes. The Company recorded interest expense for the years ended December 31, 2018 and 2017 of $90,310 and $131,778, respectively, related to these promissory notes As of December 31, 2018, the Company had a balance of $479,874 in current liabilities and $612,359 in noncurrent liabilities on its consolidated balance sheets relating to these nonconvertible notes payable. As of December 31, 2017, the Company had balances of $300,000 in current liabilities and $600,000 in noncurrent liabilities on its consolidated balance sheets relating to these nonconvertible promissory notes.
F-37
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 10 LOANS FROM RELATED PARTY
Dolphin Entertainment, LLC (DE LLC), an entity wholly owned by the Companys CEO, William ODowd, 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.
During the years ended December 31, 2018, and 2017, the Company repaid $601,001 and $707,766, respectively, of the principal balance and recorded interest expense of $129,384, and $155,852, respectively, relating to the DE LLC Note. As of December 31, 2018, and 2017 the Company had a principal balance of $1,107,873 and $1,708,874, respectively and accrued interest of $304,888 and $175,504, respectively relating to the DE LLC Note on its consolidated balance sheet.
As discussed in Note 9, the Company signed a promissory note and received $150,000 from an entity, of which Allan Mayer, director and employee of the Company, is the trustee. The promissory note and accrued interest were repaid on December 18, 2017.
NOTE 11 FAIR VALUE MEASUREMENTS
Warrants
During the year ended December 31, 2016 the Company issued series G, H and I warrants. The Company recorded the fair value of the liability in the consolidated balance sheets under the caption Warrant liability and recorded changes to the liability against earnings or loss under the caption Changes in fair value of warrant liability in the consolidated statements of operations. The carrying amount at fair value of the aggregate liability for the Warrants recorded on the consolidated balance sheet as of December 31, 2017 was $1,441,831. Due to the change in the fair value of the Warrant Liability for the period in which the Warrants were outstanding during the year ended December 31, 2017, the Company recorded gains on the change in fair value of the warrant liability on its statements of operations of $9,018,359.
Warrants outstanding at December 31, 2017 had the following terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
Date
|
|
|
Number of
Common
Shares
|
|
|
Per
Share Exercise
Price
|
|
|
Initial Term
(years)
|
|
|
Expiration
Date
|
|
Series G Warrants
|
|
November 4, 2016
|
|
|
|
750,000
|
|
|
$
|
4.12
|
|
|
|
1.08
|
|
|
January 31, 2019
|
|
Series H Warrants
|
|
November 4, 2016
|
|
|
|
250,000
|
|
|
$
|
4.12
|
|
|
|
1.08
|
|
|
January 31, 2019
|
|
Series I Warrants
|
|
November 4, 2016
|
|
|
|
250,000
|
|
|
$
|
4.12
|
|
|
|
2.08
|
|
|
January 31, 2020
|
|
On February 27, 2018, the Company signed an amended and restated Series G Warrant that (i) eliminated the provision that permitted the warrant to be extended beyond its original expiration date of January 31, 2018 if the warrant holder was not able to fully exercise the warrant and remain below a 9.9% ownership threshold and (ii) provided for a definitive expiration date of the warrant of January 31, 2019.
The Warrants have a down round feature, which provides for a downward adjustment to the exercise price in the event the Company issues Common Stock for a price per share less than the applicable exercise price of the Warrants in effect immediately prior to such issuance. Because of the Warrants down round feature, which creates a path-dependent nature of the exercise prices of the Warrants, the Company concluded it was necessary to measure the fair value of the Warrants using a Monte Carlo Simulation model, which incorporates inputs classified as level 3 according to the fair value hierarchy in ASC 820, Fair Value. In general, level 3 assumptions utilize unobservable inputs that are supported by little or no market activity in the subject instrument and that are significant to the fair value of the liabilities. The unobservable inputs the Company utilizes for measuring the fair value of the Warrant liability reflects managements own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.
F-38
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Company determined the fair values of the Warrants by using the following key inputs to the Monte Carlo Simulation model at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inputs
|
|
Series G
|
|
|
Series H
|
|
|
Series I
|
|
Volatility
(1)
|
|
|
68.3
|
%
|
|
|
68.3
|
%
|
|
|
67.1
|
%
|
Expected term (years)
|
|
|
1.08
|
|
|
|
1.08
|
|
|
|
2.08
|
|
Risk free interest rate
|
|
|
1.771
|
%
|
|
|
1.771
|
%
|
|
|
1.898
|
%
|
Common stock price
|
|
$
|
3.60
|
|
|
$
|
3.60
|
|
|
$
|
3.60
|
|
Exercise price
|
|
$
|
4.12
|
|
|
$
|
4.12
|
|
|
$
|
4.12
|
|
(1)
Level 3 input.
The stock volatility assumption represents the range of the volatility curves used in the valuation analysis that the Company has determined market participants would use based on comparison with similar entities. The risk-free interest rate is interpolated where appropriate, and is based on treasury yields. The valuation model also included a level 3 assumption as to dates of potential future financings by the Company that may cause a reset of the exercise price.
Because derivative financial instruments are initially and subsequently carried at fair values, the Companys income or loss will reflect the volatility in changes to these estimates and assumptions. The fair value is most sensitive to changes at each valuation date in the Companys Common Stock price, the volatility rate assumption, and the exercise price, which could change if the Company were to do a dilutive future financing.
On July 1, 2018, the Company adopted ASU 2017-11 that states that a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entitys own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. Instead, for freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
ASU 2017-11 was adopted by the Company by electing the modified retrospective method by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the year ended December 31, 2018. Accordingly, the Company reclassified the fair value of warrants from liability to equity (accumulated deficit) in aggregate of $1,441,831.
On December 26, 2017, the Company issued 1,300,050 warrants as part of the 2017 Offering. On January 24, 2018, an additional 177,203 warrants were issued pursuant to the over-allotment option granted to the underwriters of the 2017 Offering. The warrants, which measured at fair value categorized within Level 1 of the fair value hierarchy, were valued using the closing market price for the warrants of $0.40 per warrant on December 26, 2017 and $0.41 per warrant on January 24, 2018. The warrants are classified as equity and subsequent fair value measurements are not required.
Put Rights
In connection with the 42West Acquisition (see Note 4) on March 30, 2017, the Company entered into the Put Agreements, pursuant to which it granted the Put Rights to the sellers. The Put Rights include the shares issuable as Earn Out Consideration all of which was earned during the year ended December 31, 2017. For the year ended December 31, 2018, the sellers exercised their Put Rights, in accordance with the Put Agreements, for an aggregate amount of 339,206 shares of Common Stock for $3,127,500.
F-39
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On March 20, 2018, the Company entered into put agreements with three 42West employees with change of control provisions in their employment agreements. The Company agreed to purchase up to 50% of the shares of Common Stock to be received by the employees in satisfaction of the change of control provision in their employment agreements. During the year ended December 31, 2018, the Company purchased a total of 120,451 shares of Common Stock for an aggregate purchase price of $1,110,551. The employees have the right, but not the obligation, to cause the Company to purchase an additional 20,246 shares of Common Stock, including shares issuable in respect of the Earn Out Consideration.
The Company records the fair value of the liability in the 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 fair value of the Put Rights on the date of acquisition was $3,800,000. The carrying amount at fair value of the aggregate liability for the Put Rights recorded on the consolidated balance sheets at December 31, 2018 and 2017 is $5,984,067 and $6,226,010, respectively, including $375,000 that was exercised but not paid until January 2019. Due to the change in the fair value of the Put Rights for the period in which the Put Rights were outstanding during the year ended December 31, 2018, the Company recorded a gain of $616,943, on the change in fair value of the put rights in the consolidated statement of operations. During the year ended December 31, 2017, the Company recorded a loss of $2,426,010 on the change in fair value of the put rights in the consolidated statement of operations.
The Company utilized the Black-Scholes Option Pricing Model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Put Rights reflect managements own assumptions about the assumptions that market participants would use in valuing the Put Rights as of the December 31, 2018 and 2017.
The Company determined the fair value by using the following key inputs to the Black-Scholes Option Pricing Model:
|
|
|
|
|
|
|
|
|
Inputs
|
|
As of
December 31, 2018
|
|
|
As of
December 31,
2017
|
|
Equity volatility estimate
|
|
|
35 59.4
|
%
|
|
|
105.0
|
%
|
Discount rate based on US Treasury obligations
|
|
|
2.45% - 2.63
|
%
|
|
|
1.50% - 1.99
|
%
|
For the Put Rights, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from acquisition date (March 30, 2017) to December 31, 2018:
|
|
|
|
|
Beginning fair value on acquisition date (March 30, 2017)
|
|
$
|
3,800,000
|
|
Change in fair value (loss) in the statement of operations for the year ended December 31, 2017
|
|
|
2,426,010
|
|
Ending fair value balance reported in the consolidated balance sheet at December 31, 2017
|
|
$
|
6,226,010
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(616,943
|
)
|
Ending fair value at December 31, 2018
|
|
$
|
5,609,067
|
|
Put rights exercised December 2018 and payable January 2019
|
|
|
375,000
|
|
Ending fair value of put rights reported in the consolidated balance sheet at December 31, 2018
|
|
$
|
5,984,067
|
|
Contingent Consideration
In connection with the Companys acquisition of The Door (See Note 4), the Members have the potential to earn the Contingent Consideration, comprising up to 1,538,462 shares of Common Stock, based on a price per share 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.
F-40
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Company records the fair value of the liability in the 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 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 consolidated balance sheet at December 31, 2018 is $550,000. Due to the change in the fair value of the Contingent Consideration for the period in which the Contingent Consideration was outstanding during year ended December 31, 2018, the Company recorded a gain on the Contingent Consideration of $1,070,000 in the 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 managements own assumptions about the assumptions that market participants would use in valuing the Contingent Consideration as of the acquisition date.
The Company determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:
|
|
|
|
|
|
|
|
|
Inputs
|
|
On the date
of merger
(July 5,
2018)
|
|
|
As of
December 31, 2018
|
|
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration)
|
|
|
2.11% -2.67
|
%
|
|
|
2.47% - 2.59
|
%
|
Annual Asset Volatility Estimate
|
|
|
62.5
|
%
|
|
|
65
|
%
|
For the Contingent Consideration, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from the date of 42West Acquisition (March 30, 2017) to December 31, 2018:
|
|
|
|
|
Beginning fair value on date of 42West acquisition (March 30, 2017)
|
|
$
|
3,627,000
|
|
Change in fair value (loss) reported in the statements of operations
|
|
|
17,251
|
|
Reclassified to additional paid in capital
|
|
|
(3,644,251
|
)
|
Ending fair value balance reported in the consolidated balance sheet at December 31, 2017
|
|
$
|
|
|
|
|
|
|
|
Beginning fair value balance on the date of The Door merger (July 5, 2018)
|
|
|
1,620,000
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(1,070,000
|
)
|
Ending fair value balance reported in the consolidated balance sheet at December 31, 2018
|
|
$
|
550,000
|
|
In connection with the 42West acquisition (see Note 4), the sellers had the potential to earn up to $9,333,333 (1,012,292 shares of Common Stock) upon the achievement of certain adjusted EBITDA targets (as defined in the 42West Purchase Agreement) based on the operations of 42West over the three-year period beginning January 1, 2017 (the 42West Contingent Consideration).
The fair value of the 42West Contingent Consideration on the date of the 42West acquisition was $3,627,000. The sellers of 42West achieved the adjusted EBITDA target during 2017 and earned the 42West Contingent Consideration. The number of shares to be issued for the 42West Contingent Consideration is determined by dividing the $9,333,333 by $9.22, which was the per share price of the Common Stock used for determining the consideration payable in connection with the 42West acquisition. The Company will issue a total of 1,012,292 shares of Common Stock over a period of three years. Based on the closing market price of the Common Stock on December 29, 2017 (the date the 42West Contingent Consideration was deemed earned) of $3.60, the Company recorded $3,644,251 in equity and eliminated its liability for the same amount to account for the contingent consideration being earned. For its initial measurement of fair value, 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 42West Contingent Consideration reflect managements own assumptions about the assumptions that market participants would use in valuing the 42West Contingent Consideration as of the acquisition date.
F-41
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Company determined the fair value on the date of acquisition by using the following key inputs to the Monte Carlo Simulation Model:
|
|
|
|
|
Inputs
|
|
On the date
of Acquisition
(March 30,
2017)
|
|
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration)
|
|
|
1.03% -1.55
|
%
|
Annual Asset Volatility Estimate
|
|
|
72.5
|
%
|
Estimated EBITDA
|
|
$3,600,000 - $3,900,000
|
|
During the years ended December 31, 2018 and 2017, the Company recorded a gain in the change in fair value of contingent consideration in the amount of $1,070,000 and a loss in the change in fair value of contingent consideration of $17,251, respectively, on its consolidated statements of operations.
NOTE 12 LICENSING AGREEMENT - RELATED PARTY
In 2008, the Company entered into a ten-year licensing agreement with DE LLC, a related party. Under the license, the Company is authorized to use DE LLCs brand properties in connection with the creation, promotion and operation of subscription-based internet social networking websites for children and young adults. The license requires that the Company pays to DE LLC royalties at the rate of fifteen percent of net sales from performance of the licensed activities. The Company did not use any of the brand properties related to this agreement and as such, there was no royalty expense for the years ended December 31, 2018 and 2017. As of December 31, 2018, the agreement expired.
NOTE 13 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 deferred revenue is deemed earned and recorded as revenue. As of December 31, 2018 and 2017, the Company had balances of $522,620 and $48,449, respectively, in contract liabilities.
NOTE 14 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 entitys 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 SPEs investors and other parties that have rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPEs, 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 VIEs 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 VIEs 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.
F-42
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 Companys involvement with a VIE cause the Companys 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 historical cost. A gain or loss may be recognized upon deconsolidation of a VIE depending on the carrying amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
The Company evaluated certain entities in which it did not have a majority voting interest and determined that it had (1) the power to direct the activities of the entities that most significantly impact their economic performance and (2) had the obligation to absorb losses or the right to receive benefits from these entities. As such the financial statements of Max Steel Productions, LLC and JB Believe, LLC are consolidated in the balance sheets as of December 31, 2018 and 2017, and in the statements of operations and statements of cash flows presented herein for the years ended December 31, 2018 and 2017. These entities were previously under common control and have been accounted for at historical costs for all periods presented.
|
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|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
Max Steel Productions LLC
As of and for the years ended December 31,
|
|
|
JB Believe LLC
As of and for the years ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
$
|
7,978,887
|
|
|
$
|
8,716,184
|
|
|
$
|
205,725
|
|
|
$
|
|
|
Liabilities
|
|
|
$
|
(11,887,911
|
)
|
|
$
|
(12,011,149
|
)
|
|
$
|
(6,741,834
|
)
|
|
$
|
(6,743,278
|
)
|
Revenues
|
|
|
$
|
427,153
|
|
|
$
|
5,889,003
|
|
|
$
|
207,459
|
|
|
$
|
65,112
|
|
Expenses
|
|
|
$
|
(1,041,013
|
)
|
|
$
|
(5,589,303
|
)
|
|
$
|
(290
|
)
|
|
$
|
(34,561
|
)
|
Max Steel Productions LLC was initially formed for the purpose of recording the production costs of the motion picture
Max Steel.
Prior to the commencement of the production, the Company entered into a Production Service Agreement to finance the production of the film. As described in Note 8, the Production Service Agreement was for a total amount of $10,419,009 with the lender taking an $892,619 producer fee. Pursuant to the financing agreements, the lender acquired 100% of the membership interest of Max Steel Productions LLC with the Company controlling the production of the motion picture and having the rights to sell the motion picture.
As of December 31, 2018 and 2017, the Company had a balance in capitalized production costs of $629,585 and $833,145, respectively. As of December 31, 2017, the Company had a balance of $1,821,970, net of allowance for doubtful accounts of $227,280 in accounts receivable related to
Max Steel.
For the year ended December 31, 2018, the Company wrote off accounts receivable of $618,165 and allowance for doubtful accounts of $227,280, related to the international licensing rights of
Max Steel
and as a result did not have a balance in accounts receivable as of December 31, 2018. All proceeds from the sale of international licensing rights to the motion picture
Max Steel
and certain tax credits
are used to repay the amounts due under the Production Service Agreement. As such, the Company will not receive any cash proceeds from the sale of the international licensing rights until the proceeds received from the Production Service Agreement are repaid. During the years ended December 31, 2018 and 2017, the proceeds from the international sales agreements and certain tax credits that were used to repay amounts due under the Production Service Agreement amounted to $357,264 and $4,157,360, respectively. If the amounts due under the Production Service Agreement are not repaid from the proceeds of the international sales, the Company may lose the international distribution rights, in which case it would no longer report the revenues from these territories and would impair the capitalized production costs and accounts receivable. The Company believes that the only recourse to the lender under the Production Service Agreement is to foreclose on the collateral securing the loans, which consists of the foreign distribution rights for
Max Steel
. However, if the lender were to successfully assert that the Company is liable to the lender for the payment of this debt despite the lack of contractual obligation, we do not have sufficient funds to repay this loan, which would have a material adverse effect on our liquidity and financial condition.
As of December 31, 2018 and 2017, there were outstanding balances of $1,728,986 and $2,086,249, respectively, related to this debt.
F-43
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 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 US. The Company has not been repaid these amounts and as such is still in control of the distribution of the film. For the year ended December 31, 2018, the Company recorded revenues of $207,459 related to domestic distribution of
Believe
. The capitalized production costs related to
Believe
were either amortized or impaired in previous years. JB Believe LLCs primary liability is to the Company which it owes $6,491,834.
NOTE 15 STOCKHOLDERS EQUITY
A.
Preferred Stock
The Companys 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 the amendment of the Companys 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 Companys 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. 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), 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 such date. An Eligible Class C Preferred Stock Holder means any of (i) DE LLC for so long as Mr. ODowd continues to beneficially own at least 90% and serves on the board of directors or other governing entity, (ii) any other entity in which Mr. ODowd beneficially owns more than 90%, or a trust for the benefit of others, for which Mr. ODowd serves as trustee and (iii) Mr. ODowd individually. Series C Convertible Preferred Stock will only be convertible by the Eligible Class C Preferred Stock Holder 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 only have voting rights once 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 Conversion Shares (as defined in the Certificate of Designation) into which such Holders shares of the Series C Convertible Preferred Stock could 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 Companys Common Stock.
Effective July 6, 2017, the Company amended its Articles of Incorporation to among other things cancel previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
F-44
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
B.
Common Stock
The Companys Articles of Incorporation previously authorized the issuance of 200,000,000 shares of Common Stock. On June 29, 2017, the shareholders of the Company approved the 2017 Plan that replaced the 2012 Plan.
On August 7, 2017, the Company filed a registration statement on Form S-8 to register 1,000,000 shares of Common Stock issuable under the Plan. As of December 31, 2018 and 2017, a total of 59,320 shares of restricted stock were issued under the 2017 Plan. The shares of restricted stock were issued on August 21, 2017 and have a vesting period of six months (February 21, 2018) in which the employees were to remain employed by the Company or risk forfeiture of the restricted stock. On February 21, 2018, the vesting period ended and no other stock was issued under the 2017 Plan.
Effective February 23, 2016, the Company amended its Amended Articles of Incorporation to increase the number of authorized shares of its Common Stock from 200,000,000 to 400,000,000. Effective September 14, 2017, the Company amended its Amended and Restated Articles of Incorporation to effectuate a 1:2 reverse stock split. As a result, the number of authorized shares of Common Stock was reduced from 400,000,000 to 200,000,000 shares.
On February 16, 2017, the Company entered into a subscription agreement pursuant to which the Company issued and sold to an investor 50,000 shares of Common Stock at a price of $10.00 per share. This transaction provided $500,000 in proceeds for the Company.
On March 30, 2017, the Company entered into a Membership Interest Purchase Agreement to acquire a 100% membership interest in 42West. The Company issued 615,140 shares of Common Stock at a price of $9.22 per share related to this transaction. See note 4 for further details on the acquisition.
On March 30, 2017, KCF Investments LLC and BBCF 2011 LLC exercised Warrants J and K to purchase 1,085,000 and 85,000, respectively, of shares of Common Stock at a purchase price of $0.03 per share. This transaction provided $35,100 in proceeds for the Company. See note 17 for further discussion.
On April 13, 2017, the Company issued the following shares of Common Stock as per the 42West Acquisition agreement; (i) 172,275 to certain designated employees and (ii) 50,000 shares as an estimate for the Purchase Consideration withheld on the date of closing related to the working capital.
On April 13, 2017, the Company issued 3,254 shares of Common Stock to a consultant for services rendered during the month ended March 31, 2017. The shares were issued at a purchase price of $9.22 per share.
On April 13, 2017, T Squared partially exercised Class E Warrants and acquired 162,885 shares of our common stock pursuant to the cashless exercise provision in the related warrant agreement. T Squared had previously paid down $1,675,000 for these shares.
On April 14, 2017, the Principal Sellers of 42West exercised put options in the aggregate amount of 43,382 shares of Common Stock and were paid an aggregate total of $400,000.
On May 13, 2017, the Principal Sellers of 42West exercised put options in the aggregate amount of 32,538 shares of Common Stock and were paid an aggregate total of $300,000 on June 2, 2017.
On June 22, 2017, one of the Principal Sellers of 42West exercised a put option for 8,134 shares of Common Stock and was paid $75,000 on July 10, 2017.
On August 2, 2017, the Company issued 2,886 shares of Common Stock to a consultant for services rendered during the second quarter of 2017. The shares were issued at a purchase price of $10.00 per share.
On August 12 and August 15, 2017 each of the Principal Sellers of 42West exercised put options in the aggregate amount of 32,538 shares of Common Stock and were paid an aggregate total of $300,000 on September 1, 2017.
On August 21, 2017, the Company issued 59,320 shares of restricted stock to certain employees pursuant to the 2017 Plan.
On September 19 and September 20, 2017, two of the Principal Sellers of 42West exercised put options in the aggregate amount of 16,268 shares of Common Stock and were paid an aggregate of $150,000 on October 10, 2017.
F-45
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On December 26, 2017, the Company sold 1,215,000 shares of common stock as part of unit with 1,215,000 warrants to purchase shares of common stock. The unit was sold for a purchase price of $4.13 per unit and the Company received net proceeds (net after transaction costs and underwriter discount) of $4,511,044.
On December 10, December 13 and December 19, 2017 each of the Principal Sellers of 42West exercised put option in the aggregate amount of 18,980 shares of Common Stock and were paid an aggregate of $525,000 on January 5, 2018.
On January 22, 2018, the underwriters in the 2017 Offering exercised their over-allotment option with respect to 20,750 shares of Common Stock and 175,750 warrants to purchase Common Stock. Warrants were also issued to the underwriters of the 2017 Offering to purchase 1,453 shares of Common Stock at a purchase price of $4.74 per share. The closing date of the over-allotment option was January 24, 2018, and the Company received $81,044 of proceeds from the sale.
On February 21, 2018, employees of 42West who had been issued shares of Common Stock under the 2017 Plan returned 17,585 shares of Common Stock in respect of payroll and withholding taxes. The value of the shares returned to the Company was calculated using the market price of the Common Stock on February 21, 2018 of $3.19 per share.
On March 11, 14 and 21, 2018, the sellers of 42West exercised Put Rights for 183,296 shares of Common Stock and were paid an aggregate amount of $1,390,000 on April 2, 2018 and $300,000 on April 10, 2018.
On March 20, 2018, three 42West employees exercised Put Rights for 51,485 shares of Common Stock and were paid an aggregate amount of $474,680.
On May 8, 12 and 14, 2018, three of the sellers of 42West exercised Put Rights for 32,538 shares of Common Stock and were paid an aggregate amount of $300,000 on June 1, 2018.
On June 22, 2018, two of the sellers of 42West exercised Put Rights for 16,268 shares of Common Stock and were paid an aggregate amount of $150,000 on July 10, 2018.
On June 25, 2018, one of the holders of a convertible promissory note notified the Company that it would convert $273,425 of principal and accrued interest into 85,299 shares of Common Stock, pursuant to the terms of the convertible promissory note.
On July 5, 2018, the Company issued 300,012 shares of Common Stock to the Members of The Door and on August 29, 2018, issued 7,680 shares of Common Stock to one of the advisors to the Merger. The aggregate amount of 307,692 shares of Common Stock is the stock consideration issuable on the Closing Date. See Note 4 for further details on the Merger.
On July 25, 2018, the Company sold 2,000,000 shares of Common Stock in the 2018 Offering. The shares of Common Stock were sold at an offering price of $3.00 per share. The Company received net proceeds (net after transaction costs and underwriter discount) of approximately $5.3 million.
On August 1, 2018, the Company issued to employees of 42West with change of control provisions in their employment agreements, an aggregate of 68,966 shares of Common Stock, the net amount, after the allowable puts to pay the federal, state and city employment taxes for their respective share of the second installment to the 42West Acquisition.
On August 10 and 20, 2018, three of the sellers of 42West exercised Put Rights for 32,538 shares of Common Stock and were paid an aggregate amount of $300,000 on September 4, 2018.
On August 22, 2018, the underwriters in the 2018 Offering exercised their over-allotment option with respect to 265,000 shares of Common Stock and the Company received proceeds, net of the underwriter discount and expenses, of $0.7 million.
On September 25, 2018, the Company sold 250,000 shares of Common Stock through a direct registration offering and received $0.7 million, net of expenses.
F-46
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On September 21, 24 and 25, 2018, some of the sellers of 42West exercised Put Rights for 21,692 shares of Common Stock and were paid an aggregate amount of $200,000 on October 10, 2018.
On October 2, 2018, one of the sellers of 42West exercised Put Rights for 6,779 shares of Common Stock and was paid $62,500 on October 5, 2018.
On October 31, 2018, the Company issued 218,088 shares of Common Stock to the Viewpoint Shareholders as partial consideration to acquire 100% of the shares of Viewpoint. See Note 4 for further details on the acquisition.
On December 5,11,13,15 and 21, 2018, some of the sellers of 42West exercised Put Rights for 46,095 shares of Common Stock and were paid an aggregate amount of $50,000 on December 13, 2018, $300,000 on January 4, 2019 and $75,000 on January 11, 2019.
As of December 31, 2018 and 2017, the Company had 14,123,157 and 10,565,789 shares of Common Stock issued and outstanding, respectively.
NOTE 16 EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
12/31/2018
|
|
|
12/31/2017
|
|
Numerator
|
|
|
|
|
|
|
Net (loss) income attributable to Dolphin Entertainment stockholders
|
|
$
|
(2,913,321
|
)
|
|
$
|
6,912,524
|
|
Deemed dividend
|
|
|
(158,004
|
)
|
|
|
|
|
Net (loss) income attributable to Dolphin Entertainment common share stockholders and numerator for basic earnings per share
|
|
$
|
(3,071,325
|
)
|
|
$
|
6,912,524
|
|
Change in fair value of put rights
|
|
|
(616,943
|
)
|
|
|
|
|
Change in fair value of G, H and I warrants
|
|
|
|
|
|
|
(9,018,359
|
)
|
Numerator for diluted loss per share
|
|
$
|
(3,688,268
|
)
|
|
$
|
(2,105,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic EPS - weighted-average shares
|
|
|
13,773,395
|
|
|
|
9,586,986
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Put rights
|
|
|
2,386,091
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
1,021,842
|
|
Denominator for diluted EPS - adjusted weighted-average shares assuming exercise of warrants
|
|
|
16,159,486
|
|
|
|
10,608,828
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.22
|
)
|
|
$
|
0.72
|
|
Diluted (loss) per share
|
|
$
|
(0.23
|
)
|
|
$
|
(0.20
|
)
|
Basic (loss) income per share is computed by dividing income or 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 earnings per share assume that any dilutive warrants were exercised and any dilutive convertible securities outstanding were converted, with related preferred stock dilution requirements and outstanding Common Stock adjusted accordingly. For warrants that are carried as liabilities at fair value, when exercise is assumed in the denominator for diluted earnings per share, the related change in the fair value of the warrants recognized in the consolidated statements of operations for the period, is added back or subtracted from net income during the period.
F-47
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
For the year ended December 31, 2018, the Company included the Common Stock that is issuable in January 2019 in connection with The Door merger as if the shares had been issued on July 5, 2018 since the only contingency to receiving the shares is the passage of time. The Company excluded certain common stock equivalents such as warrants and shares to be issued for convertible debt in the aggregate of 888,251 as inclusion would be anti-dilutive.
For the year ended December 31, 2017, the Common Stock that is issuable in January 2018 in connection with the 42West Acquisition was assumed to have been issued on March 30, 2017 at arriving at the denominator for basic earnings per share, since the only contingency for receiving the shares was the passage of time. The Company excluded certain common stock equivalents such as shares issuable for contingent consideration, put rights, convertible promissory notes and employee non-vested share awards in the aggregate amount of 1,169,602, as inclusion would be anti-dilutive. If the convertible promissory notes had been included in the denominator, the numerator would have increased by $34,625 to add back income tax expense related to these convertible promissory notes.
During the year ended December 31, 2018, the Company adopted ASU 2017-11 that states that when determining whether certain financial instruments should be classified as equity or liabilities, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entitys own stock. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. During the year ended December 31, 2018, the Company issued shares of Common Stock as part of the consideration for (i) the acquisition of The Door for a price of $3.25 per share, (ii) 2018 Offering for a price of $3.00 per share and (iii) the acquisition of Viewpoint for a price of $2.29 per share. As a result, the exercise price of the warrants and the conversion price of the convertible note payable were reset to these purchase prices per share resulting in a deemed dividend of $158,004.
NOTE 17 WARRANTS
A summary of warrants outstanding at December 31, 2016 and issued exercised and expired during the years ended December 31, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
Shares
|
|
|
|
Weighted Avg.
Exercise Price
|
|
Balance at December 31, 2016
|
|
|
2,945,000
|
|
|
|
$
|
5.98
|
|
Issued
|
|
|
1,300,050
|
|
|
|
|
4.74
|
|
Exercised
|
|
|
(1,332,885
|
)
|
|
|
|
1.28
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
2,912,165
|
|
|
|
$
|
4.80
|
|
Issued
|
|
|
177,203
|
|
|
|
|
4.74
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(362,115
|
)
|
|
|
|
9.87
|
|
Balance at December 31, 2018
|
|
|
2,727,253
|
|
|
|
$
|
3.62
|
|
As of December 31, 2016, the Company had outstanding warrants E & F that were issued to T Squared Investments LLC (T Squared) in 2010 and 2012. Each of warrants E and F are exercisable into 175,000 shares of Common Stock, at an exercise price of $10.00 per share. Pursuant to the terms of warrants E and F, T Squared could continually pay the Company to reduce the exercise price of each of the warrants until such time as the exercise price was $.004 per share. During 2010 and 2011, T Squared made payments to the Company in the aggregate amount of $1,625,000 to reduce the exercise price of warrant E. On April 13, 2017, T Squared exercised 162,885 warrants using the cashless exercise provision in the warrant agreement and received 162,885 shares of the Common Stock. Since T Squared applied the $1,625,000 that it had previously paid the Company to pay down the exercise price of the warrants to acquire the 162,885 shares of Common Stock, the exercise price for the remaining 12,115 warrants was recalculated to $6.20 per share of Common Stock. During the year ended December 31, 2018, T Squared did not exercise warrants E and F and they expired on December 31, 2018.
F-48
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On November 4, 2016, the Company issued a Warrant G, a Warrant H and a Warrant I to T Squared (Warrants G, H and I). A summary of Warrants G, H and I issued to T Squared is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
:
|
|
Number of
Shares
|
|
|
Exercise
price at
December 31,
2018
|
|
|
Exercise
price at
December 31,
2017
|
|
|
|
Original
Exercise
Price
|
|
|
Fair Value
as of
December 31,
2017
|
|
|
|
Expiration
Date
|
Warrant G
|
|
|
750,000
|
|
|
$
|
2.29
|
|
|
$
|
4.12
|
|
|
|
$
|
10.00
|
|
|
$
|
800,750
|
|
|
|
January 31, 2019
|
Warrant H
|
|
|
250,000
|
|
|
$
|
2.29
|
|
|
$
|
4.12
|
|
|
|
$
|
12.00
|
|
|
|
267,133
|
|
|
|
January 31, 2019
|
Warrant I
|
|
|
250,000
|
|
|
$
|
2.29
|
|
|
$
|
4.12
|
|
|
|
$
|
14.00
|
|
|
|
373,948
|
|
|
|
January 31, 2020
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,441,831
|
|
|
|
|
The Warrants G, H and I contain a down round provision providing that, in the event the Company sells grants or issues any Common Stock or options, warrants, or any instrument convertible into shares of Common Stock or equity in any other form at a deemed per share price below the then current exercise price per share of the Warrants G, H and I, then the then current exercise price per share for the warrants that are outstanding will be reduced to such lower price per share. Under the terms of the Warrants G, H and I, T Squared has the option to continually pay the Company an amount of money to reduce the exercise price of any of Warrants G, H and I until such time as the exercise price of Warrant G, H and/or I is effectively $0.02 per share. At such time when T Squared has paid down the warrants to an exercise price of $0.02 per share or less, T Squared will have the right to exercise the Warrants G, H and I via a cashless provision. Due to the existence of the round down provision, the Warrants G, H and I were carried in the consolidated financial statements as derivative liabilities at fair value. However, on July 1, 2018, the Company adopted ASU 2017-11 that states down round provisions no longer preclude equity classification when assessing whether the instrument is indexed to an entitys own stock. As a result, the Company used the modified retrospective approach and recorded a cumulative effect adjustment of $1,441,831 to retained earnings to classify the instruments as equity. See Note 11 for further details.
The exercise price of Warrants G, H and I has been reduced by the following transactions: (i) on March 30, 2017, the Company issued shares of Common Stock at a purchase price of $9.22 per share related to the acquisition of 42West (Note 4); (ii) on December 21, 2017, the Company sold shares of Common Stock at a purchase price of $4.12 per share as part of the 2017 Offering; (iii) on July 5, 2018, the Company issued shares as partial consideration for the merger with The Door at a purchase price of $3.25 per share of Common Stock (Note 4); (iv) on July 24, 2018, the Company sold shares of Common Stock at $3.00 per share as part of the 2018 Offering and (v) on October 31, 2018, the Company issued shares of Common Stock at a purchase price of $2.29 per share as partial consideration for the acquisition of the Viewpoint shares.
In the 2017 Offering, the Company issued units, each comprising one share of Common Stock, and one warrant exercisable for one share of common stock for $4.74 per share, for a purchase price of $4.13 per unit. In addition to the units issued and sold in the 2017 Offering, the Company also issued warrants to the underwriters to purchase up to an aggregate of 85,050 shares of Common Stock at a purchase price of $4.74 per share. On January 22, 2018, the underwriters exercised their over-allotment option with respect to 175,750 warrants to purchase Common Stock at a purchase price of $4.74 per share. In connection with the exercise of the over-allotment option, the Company issued to the underwriters warrants to purchase an aggregate of 1,453 shares of Common Stock at a purchase price of $4.74 per share. The Company determined that each of these warrants should be classified as equity and valued the warrants on the date of issuance using the closing market price for the warrants on December 21, 2017 of $0.40 per warrant and $0.41 per warrant on January 22, 2018. The fair value of the warrants was recorded in additional paid in capital.
Due to the existence of the antidilution provision prior to the adoption of ASU 2017-11, the Warrants G, H and I are carried in the consolidated financial statements as of December 31, 2017 as derivative liabilities at fair value (see note 11).
F-49
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 18 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 Companys 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 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 December 31, 2018 and 2017, the Company has balances of $2,625,000 and $2,500,000, respectively, of accrued compensation and $1,230,719 and $971,809, respectively, of accrued interest in other current liabilities on its consolidated balance sheets related to Mr. ODowds employment. The Company recorded interest expense related to the accrued compensation of $258,910 and $236,598, respectively, for the years ended December 31, 2018 and 2017 on the consolidated statements of operations.
On March 30, 2017, in connection with the 42West Acquisition, the Company and Mr. ODowd, as personal guarantor, entered into four separate Put Agreements with each of the Sellers of 42West, pursuant to which the Company has granted each of the Sellers the right to cause the Company to purchase up to an aggregate of 1,187,094 of their shares of Common Stock received as Consideration for a purchase price equal to $9.22 per share during certain specified exercise periods up until December 2020, including the put rights allowable for the Earn Out Consideration achieved during the year ended December 31, 2017. Pursuant to the terms of one such Put Agreement between Mr. Allan Mayer, a member of the board of directors of the Company, and the Company, Mr. Mayer exercised Put Rights and caused the Company to purchase 51,518 shares of Common Stock at a purchase price of $9.22 for an aggregate amount of $475,000, during the period between March 30, 2017 (42West Acquisition date) and December 31, 2017, of which $175,000 was paid on January 5, 2018. During the year ended December 31, 2018, Mr. Mayer exercised Put Rights and caused the Company to purchase 101,680 shares of Common Stock at a purchase price of $9.22 for an aggregate amount of $937,500, of which $150,000 was paid on January 4, 2019.
On March 30, 2017, KCF Investments LLC (KCF) and BBCF 2011 LLC, entities under the common control of Mr. Stephen L Perrone, an affiliate of the Company, exercised Warrants J and K and were issued an aggregate of 1,170,000 shares of the Companys Common Stock at an exercise price of $0.03 per share.
On December 10, 2018, the Company and KCF agreed to exchange a promissory note dated July 5, 2012 in the amount of $300,000 (the 2012 Note), and accrued interest on the 2012 Note of $192,233, for a new promissory note in the amount of $492,233 (the 2018 Note). The 2018 Note bears interest at a rate of 10% per annum and principal and interest are payable in sixty equal monthly installments of $10,458.50 commencing on January 15, 2019. See Note 9 for further discussion.
As discussed in Note 9, on September 20, 2017, the Company signed a promissory note with a term of one year, and received $150,000 in proceeds from Mr. Mayer. On December 18, 2017, the Company repaid the principal balance and accrued interest in the aggregate amount of $151,875.
On December 26, 2017, the following related parties purchased Units in the Company offering (a) Mr. ODowd purchased 88,500 Units; (b) Mr. Mayer purchased 60,000 Units and (c) Mr. Nicholas Stanham, Director of the Company purchased 12,100 Units.
NOTE 19 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. Content Production segment is composed of Dolphin Entertainment and Dolphin Films and engages in the production and distribution of digital content and feature films.
F-50
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating segment performance is operating (loss) income. 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 and Viewpoint, the Company assigned $9,395,215 of intangible assets, net of accumulated amortization of $2,714,785 as of December 31, 2018 and $8,136,219, net of accumulated amortization of $973,781 as of December 31, 2017 and goodwill of $15,922,601 (after goodwill impairment of $1.,857,000) as of December 31, 2018 and $12,778,860 as of December 31, 2017, to the Entertainment Publicity and Marketing segment. The balances reflected as of December 31, 2017 for Entertainment Publicity and Marketing segment comprise only 42West.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
Year ended December 31, 2017
|
|
Revenue
:
|
|
|
|
|
|
|
Entertainment publicity and marketing segment
|
|
$
|
21,916,727
|
|
|
$
|
16,458,929
|
|
Content production segment
|
|
|
634,612
|
|
|
|
5,954,115
|
|
Total
|
|
$
|
22,551,339
|
|
|
$
|
22,413,044
|
|
Segment operating loss:
|
|
|
|
|
|
|
|
|
Entertainment publicity and marketing segment
|
|
$
|
(1,185,384
|
)
|
|
$
|
2,213,060
|
|
Content production segment
|
|
|
(2,927,685
|
)
|
|
|
(3,176,639
|
)
|
Total
|
|
|
(4,113,069
|
)
|
|
|
(963,579
|
)
|
Interest expense
|
|
|
(1,050,478
|
)
|
|
|
(1,594,940
|
)
|
Other income, net
|
|
|
1,195,120
|
|
|
|
8,809,910
|
|
(Loss) income before income taxes
|
|
$
|
(3,968,427
|
)
|
|
$
|
7,251,391
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets:
|
|
|
|
|
|
|
Entertainment publicity and marketing segment
|
|
$
|
34,372,195
|
|
|
$
|
26,743,013
|
|
Content production segment
|
|
|
3,617,399
|
|
|
|
6,854,130
|
|
Total assets
|
|
$
|
37,989,594
|
|
|
$
|
33,597,143
|
|
F-51
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 20 INCOME TAXES
Income Tax Expense (Benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current Income Tax (Benefit) Expense
|
|
|
|
|
|
|
Federal
|
|
$
|
20,986
|
|
|
$
|
|
|
State
|
|
|
(100,092
|
)
|
|
|
151,330
|
|
|
|
$
|
(79,106
|
)
|
|
$
|
151,330
|
|
Deferred Income Tax (Benefit) Expense
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,405,925
|
|
|
$
|
1,799,157
|
|
Federal Tax Reform
|
|
|
|
|
|
|
6,049,711
|
|
State
|
|
|
760,503
|
|
|
|
(38,910
|
)
|
|
|
$
|
2,166,428
|
|
|
$
|
7,809,958
|
|
Change in Valuation (Benefit) Allowance
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,177,189
|
)
|
|
$
|
(7,661,331
|
)
|
State
|
|
|
(1,000,747
|
)
|
|
|
38,910
|
|
|
|
|
(3,177,936
|
)
|
|
|
(7,622,421
|
)
|
Income Tax (Benefit) Expense
|
|
$
|
(1,090,614
|
)
|
|
$
|
338,867
|
|
At December 31, 2018 and 2017, the Company had deferred tax assets and liabilities as a result of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax values at December 31, 2018 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
Accrued Expenses
|
|
$
|
786,750
|
|
|
$
|
299,855
|
|
Interest Expense
|
|
|
422,407
|
|
|
|
730,022
|
|
Deferred Rent
|
|
|
430,494
|
|
|
|
114,128
|
|
Accrued Compensation
|
|
|
696,235
|
|
|
|
653,375
|
|
Intangibles
|
|
|
1,280,126
|
|
|
|
132,219
|
|
Other Assets
|
|
|
78,217
|
|
|
|
183,524
|
|
Put Options
|
|
|
434,495
|
|
|
|
638,547
|
|
Capitalized Web Costs
|
|
|
555,370
|
|
|
|
563,596
|
|
Capitalized Production Costs
|
|
|
192,492
|
|
|
|
53,299
|
|
Charitable Contributions
|
|
|
218,352
|
|
|
|
273,982
|
|
Net Operating Losses and Credits
|
|
|
9,402,185
|
|
|
|
8,560,117
|
|
Total Deferred Tax Assets
|
|
|
14,497,123
|
|
|
|
12.202,664
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liability:
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
|
(105,767
|
)
|
|
|
(110,049
|
)
|
Other Liabilities
|
|
|
(132,313
|
)
|
|
|
|
|
Total Deferred Tax Liability
|
|
$
|
(238,080
|
)
|
|
$
|
(110,049
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
14,259,043
|
|
|
|
12,092,615
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(14,259,043
|
)
|
|
|
(12,280,152
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Taxes
|
|
$
|
|
|
|
$
|
(187,537
|
)
|
F-52
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
As of December 31, 2018, the Company has approximately $36,865,500 of net operating loss carryforwards for U.S. federal income tax purposes that begin to expire in 2028. Federal net operating losses generated after December 31, 2017 have an indefinite life and do not expire. Additionally, the Company has approximately $25,118,000 of net operating loss carryforwards for Florida state income tax purposes that begin to expire in 2029, approximately $561,800 of California net operating loss carryforwards that begin to expire in 2032, approximately $446,700 of New York and New York City net operating loss carryforwards that begin to expire in 2038, and approximately $307,000 of North Carolina net operating loss carryforwards that begin to expire in 2035. Utilization of net operating losses and tax credit carryforwards may be subject to an annual limitation provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities. In assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. Management believes it is more likely than not that the deferred tax asset will not be realized and has recorded a net valuation allowance of $14,259,043 and $12,280,152 as of December 31, 2018 and 2017, respectively.
A reconciliation of the federal statutory tax rate with the effective tax rate from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Federal Statutory Tax Rate
|
|
|
21
|
%
|
|
|
34.0
|
%
|
Permanent Items Affecting Tax Rate
|
|
|
2.3
|
%
|
|
|
(45.6
|
)%
|
State Income Taxes, Net of Federal Income Tax Benefit
|
|
|
6.6
|
%
|
|
|
(0.6
|
)%
|
Change in State Tax Rate
|
|
|
|
|
|
|
3.3
|
%
|
Return to Provision Adjustment
|
|
|
2.5
|
%
|
|
|
1.3
|
%
|
Business Combination
|
|
|
19.2
|
%
|
|
|
|
|
Other
|
|
|
(0.4
|
)%
|
|
|
0.3
|
%
|
Change in Valuation Allowance
|
|
|
(24.3
|
)%
|
|
|
(80.4
|
)%
|
Tax Reform Tax Rate Change
|
|
|
|
|
|
|
92.3
|
%
|
Effective Tax Rate
|
|
|
26.9
|
%
|
|
|
4.6
|
%
|
As of December 31, 2018 and 2017, the Company does not have any material unrecognized tax benefits and accordingly has not recorded any interest or penalties related to unrecognized tax benefits. The Company does not believe that unrecognized tax benefits will significantly change within the next twelve months. The Company and its subsidiaries file Federal, California, Florida, Illinois, Louisiana, Massachusetts, North Carolina, New York State, New York City and Pennsylvania income tax returns. These returns remain subject to examination by taxing authorities for all years after December 31, 2014.
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 tax reform legislation (the Act). The Act makes significant changes to tax law including a reduction in the corporate tax rates, increased ability to use bonus depreciation, reduced deductibility for meals and entertainment related expenses, changes to net operating loss carryforwards and carrybacks, limitations on the deductibility of interest expense, restrictions on employee parking, and a repeal of the corporate alternative minimum tax. The legislation reduced the corporate tax rate from the current gradual rate of 34% to a flat rate of 21%. As a result of the enacted law, the Company was required to revalue its deferred inventory of tax assets and liabilities at the enacted rate, reducing the pre-valuation allowance net deferred tax asset by approximately $6,800,000 for the tax year ended December 31, 2017. The tax expense of this re-measurement of deferred tax assets is offset by an equal and offsetting decrease to the valuation allowance.
F-53
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 21 LEASES
Viewpoint is obligated under an operating lease agreement for office space in Newton, Massachusetts, expiring in March 2021. The lease is secured by a certificate of deposit held by the Company in the amount of $55,014 and included in restricted cash as of December 31, 2018. The lease provides for increases in rent for real estate taxes and operating expenses, and contains a renewal option for an additional five years.
The Door occupies space in New York. An entity wholly owned by the former Members of The Door is obligated under an operating lease agreement for the office space expiring in August 2020. The Company made payments of $196,789 to the affiliate during the year ended December 31, 2018, related to this lease. The lease is secured by a cash security deposit of approximately $29,000.
The Door is obligated under an operating lease agreement for office space in Chicago, Illinois, at a fixed rate of $2,200 per month, expiring in May 2020. The lease is secured by a cash deposit of approximately $1,500.
42West is obligated under an operating lease agreement for office space in New York, expiring in December 2026. The lease is secured by a standby letter of credit amounting to $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 December 31, 2018 and $100,000 at December 31, 2017. The lease also provides for increases in rent for real estate taxes and operating expenses, and contains a renewal option for an additional five years, as well as an early termination option effective as of February 1, 2019. Should the early termination option be executed, the Company will be subject to a termination fee in the amount of approximately $637,000. The Company does not expect to execute such option.
The Company is obligated under an operating lease agreement for office space in Miami, Florida. The lease is secured by a cash security deposit of $8,433. The original term of the lease expired October 31, 2016 and the Company extended the lease until May 31, 2019 with substantially the same terms as the original lease.
The Company is obligated under an operating lease for office space in Los Angeles, California until July 31, 2019. The monthly rent is $13,746 with annual increases of 3% for years 1 3 and 3.5% for the remainder of the lease. The Company is also entitled to four half months of free rent over the life of the agreement. The lease is secured by a cash security deposit in the amount of $32,337. On June 1, 2017, the Company entered into an agreement to sublease the office space in Los Angeles, California. The sublease is effective June 1, 2017 through July 31, 2019 with lease payment as follows: (i) $14,892 per month for the first twelve months, with the first two months of rent abated and (ii) $15,338 per month for the remainder of the sublease.
Lease Payments
Future minimum payments for operating leases in effect at December 31, 2018 were as follows:
|
|
|
|
|
2019
|
|
$
|
1,887,959
|
|
2020
|
|
|
1,881,502
|
|
2021
|
|
|
1,524,627
|
|
2022
|
|
|
912,864
|
|
2023
|
|
|
918,075
|
|
Thereafter
|
|
|
2,844,905
|
|
Total
|
|
$
|
9,969,932
|
|
Rent expense for the years ended December 31, 2018 and 2017 was $1,566,910 and $1,314,502, respectively.
F-54
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 22 COMMITMENTS AND CONTINGENCIES
Litigation
On or about January 25, 2010, an action was filed by Tom David against Winterman Group Limited, Dolphin Digital Media (Canada) Ltd., Malcolm Stockdale and Sara Stockdale in the Superior Court of Justice in Ontario (Canada) alleging breach of a commercial lease and breach of a personal guaranty. On or about March 18, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Statement of Defense and Crossclaim. In the Statement of Defense, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale denied any liability under the lease and guaranty. In the Crossclaim filed against Dolphin Digital Media (Canada) Ltd., Winterman Group Limited, Malcolm Stockdale and Sara Stockdale seek contribution or indemnity against Dolphin Digital Media (Canada) Ltd. alleging that Dolphin Digital Media (Canada) agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. On or about March 19, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Third-Party Claim against the Company seeking contribution or indemnity against the Company, formerly known as Logica Holdings, Inc., alleging that the Company agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. The Third-Party Claim was served on the Company on April 6, 2010. On or about April 1, 2010, Dolphin Digital Media (Canada) filed a Statement of Defense and Crossclaim. In the Statement of Defense, Dolphin Digital Media (Canada) denied any liability under the lease and in the Crossclaim against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale, Dolphin Digital Media (Canada) seeks contribution or indemnity against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale alleging that the leased premises were used by Winterman Group Limited, Malcolm Stockdale and Sara Stockdale for their own use. On or about April 1, 2010, Dolphin Digital Media (Canada) also filed a Statement of Defense to the Crossclaim denying any liability to indemnify Winterman Group Limited, Malcolm Stockdale and Sara Stockdale. The ultimate results of these proceedings against the Company cannot be predicted with certainty. On or about March 12, 2012, the Court served a Status Notice on all the parties indicating that since more than (2) years had passed since a defense in the action had been filed, the case had not been set for trial and the case had not been terminated, the case would be dismissed for delay unless action was taken within ninety (90) days of the date of service of the notice. The Company has not filed for a motion to dismiss and no further action has been taken in the case. The ultimate results of these proceedings against the Company could result in a loss ranging from $0 to $325,000. On March 23, 2012, Dolphin Digital Media (Canada) Ltd filed for bankruptcy in Canada. The bankruptcy will not protect the Company from the Third-Party Claim filed against it. However, the Company has not accrued for this loss because it believes that the claims against it are without substance and it is not probable that they will result in loss. As of December 31, 2018, the Company has not received any other notifications related to this action.
The Company may be subject to other 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 all pending litigations is not expected to have a material effect in the Companys financial position, results of operations and cash flows.
Tax Filings
The Company accrued $120,000 for estimated penalties associated with not filing certain information returns. The penalties per return are $10,000 per entity per year. The Company received notification from the Internal Revenue Service concerning information returns for the year ended December 31, 2009. The Company responded with a letter stating reasonable cause for the noncompliance and requested that penalties be abated. During 2012, the Company received a notice stating that the reasonable cause had been denied. The Company decided to pay the penalties and not appeal the decision for the 2009 Internal Revenue Service notification. There is no associated interest expense as the tax filings are for information purposes only and would not result in further income taxes to be paid by the Company. The Company made payments in the amount of $40,000 during the year ended December 31, 2012 related to these penalties. At December 31, 2017, the Company had a remainder of $40,000 in accruals related to these late filing penalties which is presented as a component of other current liabilities. The Company did not receive any further notifications from the Internal Revenue Service and since the statute of limitations expired in 2018, the Company reversed the $40,000 accrual.
F-55
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Incentive Compensation Plan
On June 29, 2017, the shareholders of the Company approved 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 Companys 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 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 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 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. On August 21, 2017, the Company issued 59,320 Shares as Awards to certain employees that vested on February 21, 2018. On December 31, 2018 and 2017, the Company had recorded compensation expense of $20,422 and $329,175, respectively, on its consolidated statement of operations.
Employee Benefit Plan
The Companys wholly owned subsidiaries, 42West, The Door and Viewpoint have 401(K) profit sharing plan that covers substantially all employees of 42West, The Door and Viewpoint. Contributions to the 42West 401(K) plan are at discretion of management and The Door and Viewpoint plans match up to 4% of the employees contribution. The plans match dollar for dollar the first 3% of the employees contribution and then 50% of contributions up to 5%. There are certain limitations for highly compensated employees. The Companys contributions to these plans for the years ended December 31, 2018 and 2017, were approximately $370,343 and $246,138, respectively. The 2017 amount comprises only 42West.
Employment Contracts
As a condition to the Viewpoint Purchase, two of the Viewpoint Shareholders, Carlo DiPersio and David Shilale have entered into employment agreements with the Company to continue as employees after the closing of the Viewpoint Purchase. Mr. DiPersios employment agreement is through December 31, 2020 and the contract defines base compensation and a bonus structure based on Viewpoint achieving certain financial targets. Mr. Shilales employment agreement is for a period of three years from the Viewpoint Closing Date and the contract defines the base compensation and a commission structure based on Viewpoint achieving certain financial targets. The bonus for Mr. Shilale is determined at the sole discretion of the Companys board of directors and management. Neither agreement provides for guaranteed increases to the base salary. The employment agreements contain provisions for termination and as a result of death or disability and entitles the employee to vacations and to participate in all employee benefit plans offered by the Company.
Each of the Members has entered into a four-year employment agreement with The Door, pursuant to which each Member has agreed not to transfer any shares of Common Stock received as consideration for the Merger (the Share Consideration) in the first year following the closing date of the merger, no more than 1/3 of such Share Consideration in the second year and no more than an additional 1/3 of such Share Consideration in the third year.
During the year ended December 31, 2017, 42West renewed two senior level management employment agreements and entered into a new senior level management employment agreement, each with a three-year term. The contracts define each individuals 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.
F-56
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
As a condition to the closing of the 42West Acquisition described in Note 4, each of the three Principal Sellers has entered into employment agreements (the Employment Agreements) with the Company and will continue as employees of the Company for a three-year term. Each of the Employment Agreements provides for a base salary with annual increases and contain provisions for termination and as a result of death or disability. During the term of the Employment Agreement, the Principal Sellers shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company as well as are entitled to paid vacation in accordance with the Companys policy. Each of the Employment Agreements contains lock-up provisions pursuant to which each Principal Seller has agreed not to transfer any shares of Common Stock in the first year, no more than 1/3 of the Initial Consideration and Post-Closing Consideration received by such Seller in the second year and no more than an additional 1/3 of the Initial Consideration and Post-Closing Consideration received by such Seller in the third year, following the closing date of the 42West Acquisition.
On April 5, 2018, the Principal Sellers signed amendments to their respective employment agreements that modified the annual bonus provisions. These amendments eliminated the rights of each of them (i) to be eligible to receive in accordance with the provisions of the Companys incentive compensation plan, a cash bonus for the calendar year 2017 if certain performance goals were achieved and (ii) to receive an annual bonus, for each year during the term of each such employment agreement, of $200,000 in shares of common stock based on the 30-day trading average market price of such common stock. The amendment provides for each of the Principal Sellers to be eligible under the Companys incentive compensation plan to receive annual cash bonuses beginning with the calendar year 2018 based on the achievement of certain performance goals.
Talent, Director and Producer Participations
Per agreements with talent, directors and producers on certain projects, the Company will be responsible for bonus and back end payments upon release of a motion picture and achieving certain box office performance as determined by the individual agreements. The Company cannot estimate the amounts that will be due as these are based on future box office performance. As of December 31, 2018 and 2017, the Company had not recorded any liability related to these participations.
Motion Picture Industry Pension Accrual
42West is a contributing employer to the Motion Picture Industry Pension Individual Account and Health Plans (collectively the Plans), two multiemployer pension funds and one multiemployer welfare fund, respectively, that are governed by the Employee Retirement Income Security Act of 1974, as amended. The Plans conducted an audit of 42Wests books and records for the period June 7, 2011 through August 20, 2016 in connection with the alleged contribution obligations to the Plans. Based on the findings of the audit, 42West is liable for $314,256 in pension contributions, health and welfare plan contributions and union dues, which the Company has agreed to pay over a period of twelve months beginning in July 30, 2018. During the year ended December 31, 2018, the Company made payments in the amount of $139,606 related to the settlement of the Plan audit. For the year ended December 31, 2017, the Company had accrued $300,000 in anticipation of the Plan audit findings based on a similar audit conducted for the periods prior to June 7, 2011.
NOTE 23 SUBSEQUENT EVENTS
Pursuant to the Merger Agreement, on January 2, 2019, the Members of The Door were issued 307,692 shares of Common Stock and $725,500 as a cash payment as consideration for our acquisition of The Door. The Common Stock was issued based on a price of $3.25 per share.
On January 4 and 11, 2019, the Company paid an aggregate amount of $375,000 to the sellers of 42West to repurchase 40,672 shares of Common Stock pursuant to put rights under the Put Agreements that were exercised in December 2018.
On February 7, 2019, one of the sellers of 42West notified the Company that they would be exercising puts pursuant to the Put Agreements in the aggregate amount of 7,049 shares of Common Stock at a purchase price of $9.22 per share.
On February 18, 2019, the Company entered into a 62-month lease for 3,024 square feet of office space located at 150 Alhambra Circle, Suite 1200, Coral Gables, Florida 33134. The lease will commence once the tenant improvements are complete (subject to certain deadlines that must be met). The monthly lease payments are $9,954, with annual increases of 3%. The lease also provides for four months of abatement once the property becomes available for use.
F-57
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On March 11 and 12, 2019, the sellers of 42West notified the Company that they would be exercising puts pursuant to the Put Agreements in the aggregate amount of 25,488 shares of Common Stock at a purchase price of $9.22 per share.
Pursuant to the terms of the Merger Agreement, on March 12, 2019, the Company made payments in the aggregate amount of $46,000 to the Members as a working capital adjustment. The Company will also issue 26,821 shares of Common Stock related to the working capital adjustment.
On March 18 and 20, 2019, one of the sellers of 42West notified the Company that they would be exercising puts pursuant to the Put Agreements in the aggregate amount of 87,040 shares of Common Stock at a purchase price of $9.22 per share.
On March 21, 2019, one of the sellers of 42West notified the Company that they would be exercising a put pursuant to the Put Agreement for 8,134 shares of Common Stock at a purchase price of $9.22 per share.
On March 21, 2019, one of the convertible promissory note holders presented a Notice of Conversion of Note to the Company and converted the $75,000 convertible promissory note into 53,191 shares of common stock at a 90-day trailing trading average stock price of $1.41 per share of common stock. On March 21, 2019, the closing market price of the Companys common stock was $1.81. As a result, the Company recorded a loss on extinguishment of debt of $21,276 for the difference between the closing market price and the conversion price of the Companys common stock.
On March 25, 2019, the Company issued a convertible promissory note agreement to an unrelated investor and received $200,000. The convertible promissory note bears interest at a rate of 10% per annum and matures on March 25, 2021. The balance of the convertible promissory note and any accrued interest may be converted at the note holders option at any time at a purchase price based on the 30-day trailing average market price of the Common Stock.
F-58
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