The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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:
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 1 GENERAL
Dolphin Entertainment, Inc., a Florida corporation (the Company, Dolphin, we, us or our), is a leading independent entertainment marketing and premium content development company. Through its acquisitions of 42West LLC (42West), The Door Marketing Group LLC (The Door) and Viewpoint Computer Animation Incorporated (Viewpoint), the Company provides expert strategic marketing and publicity services to all of the major film studios, and many of the leading independent and digital content providers, A-list celebrity talent, including actors, directors, producers, celebrity chefs and recording artists. The Company also provides strategic marketing publicity services and creative brand strategies for prime hotel and restaurant groups. The strategic acquisitions of 42West, The Door and Viewpoint bring together premium marketing services with premium content production, creating significant opportunities to serve respective constituents more strategically and to grow and diversify the Companys business. Dolphins content production business is a well-established, leading entertainment producer, committed to distributing premium, best-in-class film and digital entertainment. Dolphin produces original feature film and digital programming primarily aimed at family and young adult markets.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films, Inc. (Dolphin Films), Cybergeddon Productions, LLC, Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC (Max Steel Holdings), Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The Door and Viewpoint.
The Company enters into relationships or investments with other entities, and, in certain instances, the entity in which the Company has a relationship or investment may qualify as a variable interest entity (VIE). The Company consolidates a VIE in its financial statements if the Company is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has the power to direct activities that most significantly impact the operations of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE. The Company has included in its condensed consolidated financial statements the following VIEs: Max Steel Productions, LLC, and JB Believe, LLC.
The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the Exchange Act), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Companys management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements and related notes included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Reclassifications
Reclassifications have been made to our condensed consolidated financial statements for the prior year period to conform to classifications used in 2019.
7
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to the expected revenue and costs for investments in digital and feature film projects; estimates of sales returns and other allowances, provisions for doubtful accounts and impairment assessments for investment in feature film projects, goodwill and intangible assets. Actual results could differ materially from such estimates.
Update to Significant Accounting Policies
Our significant accounting policies are detailed in "Note 3: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to our accounting policies as a result of adopting ASU No. 2016-02,
Leases (Topic 842)
on January 1, 2019 are discussed below:
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires all assets and liabilities arising from leases to be recognized in our consolidated balance sheets. The Company adopted this new accounting guidance effective January 1, 2019. In July 2018, the FASB added an optional transition method which the Company elected upon adoption of the new standard. This allowed us to recognize and measure leases existing at January 1, 2019 without restating comparative information. In addition, the Company elected to apply the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification.
The Company determines if an arrangement is a lease at the lease commencement date. In addition to the Companys lease agreements, we review all material new vendor arrangements for potential embedded lease obligations. The asset balance related to operating leases is presented within right-of-use (ROU) asset on the Companys consolidated balance sheet. The current and noncurrent balances related to operating leases are presented as Lease liability, in their respective classifications, on the Companys consolidated balance sheet.
The lease liability is recognized based on the present value of the remaining fixed lease payments discounted using the Companys incremental borrowing rate as of January 1, 2019. The ROU asset is calculated based on the lease liability adjusted for any lease payments paid to the lessor at or before the commencement date (i.e. prepaid rent) and initial direct costs incurred by Dolphin and excluding any lease incentives received from the Lessor.
The lease term for purposes of lease accounting may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option as of the commencement date of the lease. For operating leases, the lease expense is recognized on a straight-line basis over the lease term. The Company accounts for its lease and non-lease components as a single component, and therefore both are included in the calculation of lease liability recognized on the consolidated balance sheets. See Note 18 for further discussion.
The Company did not adopt any other accounting pronouncement during the three and six months ended June 30, 2019.
8
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Recent Accounting Pronouncements
Accounting Guidance not yet adopted
In March 2019, the FASB issued new guidance on film production costs ASU 2019-02, (Entertainment Films- Other Assets Film Costs (Subtopic 926-20)). The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and may be adopted early. The new guidance aligns the accounting for the production costs of an episodic series with those of a film by removing the content distinction for capitalization. It also addresses presentation, requires new disclosures for produced and licensed content and addresses cash flow classification for license agreements to better reflect the economics of an episodic series. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In October 2018, the FASB issued new guidance on consolidation ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and should be applied retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The new guidance provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In August 2018, the FASB issued new guidance on fair value measurement (ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure 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 June 2016, the FASB issued new guidance on measurement of credit losses (ASU 2016-13, Measurement of Credit Losses on Financial Instruments) with subsequent amendments issued in November 2018 (ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the accounting for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. It is applicable to trade accounts receivable. The guidance is effective for fiscal years beginning after December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
NOTE 2 GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP and contemplate the continuation of the Company as a going concern. The Company had net loss of $891,867 and $769,259, respectively for the three and six months ended June 30, 2019, and had an accumulated deficit of $95,298,433 as of June 30, 2019. As of June 30, 2019, the Company had a working capital deficit of $16,143,485 and therefore does not have adequate capital to fund its obligations as they come due or to maintain or grow its operations. The Company is dependent upon funds from the issuance of debt securities, securities convertible into shares of its common stock, par value $0.015 per share (Common Stock), sales of shares of Common Stock and financial support of certain shareholders. If the Company is unable to obtain funding from these sources within the next 12 months, it could be forced to liquidate.
9
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
These factors raise substantial doubt about the ability of the Company to continue as a going concern. The condensed consolidated financial statements, of which these notes form a part, do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management currently plans to raise any necessary additional funds through additional issuance of its Common Stock, securities convertible into its Common Stock, debt securities, as well as available bank and non-bank financing, or a combination of such financing alternatives. There is no assurance that the Company will be successful in raising additional capital. Any issuance of shares of Common Stock or securities convertible into Common Stock would dilute the equity interests of our existing shareholders, perhaps substantially. The Company currently has the rights to several scripts, including one currently in development for which it intends to obtain financing to produce and release following which it expects to earn a producer and overhead fee. There can be no assurances that such production, together with any other productions, will be commenced or released or that fees will be realized in future periods or at all. The Company is currently exploring opportunities to expand the services currently being offered by 42West, The Door and Viewpoint while reducing expenses of their respective operations through synergies with the Company. There can be no assurance that the Company will be successful in expanding such services or reducing expenses. Under the 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 its common stock held by non-affiliates; therefore, there is no assurance that the Company will be able to raise capital through the issuance and sale of equity securities under this registration statement, irrespective of whether there is market demand for such securities.
NOTE 3 MERGERS AND ACQUISITIONS
Viewpoint
On October 31, 2018, (the Viewpoint Closing Date) the Company acquired all of the issued and outstanding capital stock of Viewpoint, a Massachusetts corporation (the Viewpoint Purchase), pursuant to a share purchase agreement (the Viewpoint Purchase Agreement), among the Company and the former holders of Viewpoints outstanding capital stock (the Viewpoint Shareholders). Viewpoint is a full-service creative branding and production house that has earned a reputation as one of the top producers of promotional and brand-support videos for a wide variety of leading cable networks, media companies and consumer-product brands.
The total consideration payable to the Viewpoint Shareholders in respect of the Viewpoint Purchase comprises the following: (i) $500,000 in shares of Common Stock, based on a price per share of Common Stock of $2.29, (ii) $1.5 million in cash (as adjusted for certain working capital and closing adjustments and transaction expenses). On the Viewpoint Closing Date, the Company issued to the Viewpoint Shareholders 218,088 shares of Common Stock and paid the Viewpoint Shareholders an aggregate of $750,000 in cash (the Initial Consideration), adjusted for working capital, indebtedness and certain transaction expenses. Pursuant to the Viewpoint Purchase Agreement, the Company paid to the Viewpoint Shareholders an additional $230,076 cash ($250,000 less a working capital adjustment) on April 30, 2019 and has agreed to pay $250,000 on each of October 31, 2019 and April 30, 2020 for a total of $750,000, less any adjustments for working capital (the Post Closing Consideration and, together with the Initial Consideration, the Viewpoint Purchase Consideration). The Viewpoint Purchase Agreement contains customary representations, warranties and covenants of the parties thereto. The Common Stock issued as part of the Initial Consideration has not been registered under the Securities Act of 1933, as amended (the Securities Act).
As a condition to the Viewpoint Purchase, two of the Viewpoint Shareholders, Carlo DiPersio and David Shilale have entered into employment agreements with the Company to continue as employees after the closing of the Viewpoint Purchase. Mr. 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.
10
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The provisional acquisition-date fair value of the consideration transferred totaled $1,960,165, which consisted of the following:
|
|
|
|
|
Common Stock issued at closing (218,088 shares)
|
|
$
|
427,452
|
|
Cash Consideration paid at closing
|
|
|
750,000
|
|
Working capital adjustment, net
|
|
|
32,713
|
|
Cash Installment paid on April 30, 2019
|
|
|
250,000
|
|
Cash Installment to be paid on October 31, 2019 (included in other current liabilities)
|
|
|
250,000
|
|
Cash Installment to be paid on April 30, 2020 (included in other current liabilities)
|
|
|
250,000
|
|
|
|
$
|
1,960,165
|
|
The Company has engaged an independent third-party valuation expert to determine the fair values of the various forms of consideration transferred, which is not yet complete. The final amount of consideration may potentially change due to any working capital or other closing adjustments, which have not yet been determined.
The fair value of the 218,088 shares of Common Stock issued on the Viewpoint Closing Date was determined based on the closing market price of the Companys Common Stock on the Viewpoint Closing Date of $1.96 per share.
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the Viewpoint Closing Date (as adjusted). Amounts in the table are provisional estimates that may change, as described below.
|
|
|
|
|
Cash
|
|
$
|
206,950
|
|
Accounts receivable
|
|
|
503,906
|
|
Other current assets
|
|
|
102,411
|
|
Property, equipment and leasehold improvements
|
|
|
183,877
|
|
Prepaid expenses
|
|
|
32,067
|
|
Intangible assets
|
|
|
450,000
|
|
Total identifiable assets acquired
|
|
|
1,479,211
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(165,284
|
)
|
Accounts payable
|
|
|
(77,394
|
)
|
Deferred tax liability
|
|
|
(182,416
|
)
|
Contract liability
|
|
|
(190,854
|
)
|
Total liabilities assumed
|
|
|
(615,948
|
)
|
Net identifiable assets acquired
|
|
|
863,263
|
|
Goodwill
|
|
|
1,096,902
|
|
Net assets acquired
|
|
$
|
1,960,165
|
|
Of the provisional fair value of the $450,000 of acquired identifiable intangible assets, $220,000 was assigned to customer relationships (5 years useful life) and $100,000 was assigned to the trade name (5-year useful life), that were recognized at fair value on the acquisition date. The customer relationships will be amortized using an accelerated method, and the trade name will be amortized using the straight-line method. In addition, the Company recognized a favorable lease intangible asset from the Companys Massachusetts office lease in the amount of $130,000. The favorable lease intangible asset was amortized using the straight-line method over the remaining lease term of 26 months. On January 1, 2019, the Company adopted ASC 842 and reclassified the favorable lease asset recognized at the date of acquisition to right-of-use asset. The unamortized balance of the favorable lease asset on January 1, 2019 was $120,000.
The provisional fair value of accounts receivable acquired is $503,906, with the gross contractual amount being $509,406. The Company expects $5,500 to be uncollectible.
The provisional fair values of property and equipment and leasehold improvements of $183,877, and other assets of $102,411, are based on Viewpoints carrying values prior to the acquisition, which approximate their provisional fair values.
11
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The provisional amount of $1,096,902 of goodwill was assigned to the entertainment publicity and marketing segment. The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of Viewpoint.
Unaudited Pro Forma Consolidated Statements of Operations
The following represents the Companys unaudited pro forma consolidated operations for the three and six months ended June 30, 2018 as if Viewpoint had been acquired on January 1, 2018 and its results had been included in the consolidated results of the Company for such period:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
2018
|
|
|
For the six months ended June 30,
2018
|
|
Revenue
|
|
$
|
6,262,785
|
|
|
$
|
14,335,476
|
|
Net (loss) income
|
|
$
|
(107,321
|
)
|
|
$
|
1,210,392
|
|
The pro forma amounts have been calculated after applying the Companys accounting policies to the financial statements of Viewpoint and adjusting the combined results of the Company and Viewpoint to reflect the amortization that would have been charged assuming the intangible assets had been recorded on January 1, 2018 and applying the Companys effective tax rate to the net income of Viewpoint.
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, 2018, as provided in this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition and results of operations of the combined company.
The following table summarizes the original and revised estimated fair values of the assets acquired and liabilities assumed at the acquisition date of October 31, 2018 and the related measurement period adjustments to the fair values recorded during the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2018
(As initially reported)
|
|
|
Measurement Period Adjustments
|
|
|
June 30,
2019
(As adjusted)
|
|
Cash
|
|
$
|
206,950
|
|
|
$
|
|
|
|
$
|
206,950
|
|
Accounts receivable
|
|
|
503,906
|
|
|
|
|
|
|
|
503,906
|
|
Other current assets
|
|
|
102,411
|
|
|
|
|
|
|
|
102,411
|
|
Property, equipment and leasehold improvements
|
|
|
183,877
|
|
|
|
|
|
|
|
183,877
|
|
Prepaid expenses
|
|
|
32,067
|
|
|
|
|
|
|
|
32,067
|
|
Intangible assets
|
|
|
450,000
|
|
|
|
|
|
|
|
450,000
|
|
Total identifiable assets acquired
|
|
|
1,479,211
|
|
|
|
|
|
|
|
1,479,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(165,284
|
)
|
|
|
|
|
|
|
(165,284
|
)
|
Accounts payable
|
|
|
(77,394
|
)
|
|
|
|
|
|
|
(77,394
|
)
|
Deferred tax liability
|
|
|
(190,854
|
)
|
|
|
|
|
|
|
(190,854
|
)
|
Contract liability
|
|
|
(206,636
|
)
|
|
|
24,220
|
|
|
|
(182,416
|
)
|
Total liabilities assumed
|
|
|
(640,168
|
)
|
|
|
24,220
|
|
|
|
(615,948
|
)
|
Net identifiable assets acquired
|
|
|
839,043
|
|
|
|
24,220
|
|
|
|
863,263
|
|
Goodwill
|
|
|
1,141,046
|
|
|
|
(44,144
|
)
|
|
|
1,096,902
|
|
Net assets acquired
|
|
$
|
1,980,089
|
|
|
$
|
(19,924
|
)
|
|
$
|
1,960,165
|
|
12
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The above fair values of assets acquired and liabilities assumed are based on the information that was available as of the Viewpoint Closing Date to estimate the fair value of assets acquired and liabilities assumed. As of October 31, 2018, the Company recorded the identifiable net assets acquired of $839,043 as shown in the table above in its consolidated balance sheet. During the six months ended June 30, 2019, the Companys measurement period adjustments of $24,220 were made and, accordingly, the Company recognized these adjustments in its June 30, 2019 condensed consolidated balance sheet to reflect the adjusted identifiable net assets acquired of $863,263 as shown in the table above. The Company also made a provisional working capital adjustment of $19,924 that was deducted from the second installment paid to the Viewpoint Shareholders on April 30, 2019.
The following is a reconciliation of the initially reported fair value to the adjusted fair value of goodwill:
|
|
|
|
|
Goodwill originally reported at October 31, 2018
|
|
$
|
1,141,046
|
|
Changes to estimated fair values
|
|
|
|
|
Deferred tax liability
|
|
|
(24,220
|
)
|
Working capital adjustment
|
|
|
(19,924
|
)
|
Adjusted goodwill reported at June 30, 2019
|
|
$
|
1,096,902
|
|
The estimated fair value of the deferred tax liability decreased by $24,220 primarily due to the estimated expected future tax rate applied.
The Door
On July 5, 2018 (the Closing Date), the Company, entered into an Agreement and Plan of Merger (the Merger Agreement), in respect of its acquisition of The Door. On the Closing Date, The Door merged with and into Merger Sub, with Merger Sub surviving the merger and continuing as a wholly owned subsidiary of the Company. Upon consummation of the Merger, Merger Sub changed its name to The Door Marketing Group, LLC. The Door is an entertainment public relations agency, offering talent publicity, strategic communications and entertainment content marketing primarily in the hospitality sector.
The total consideration payable to the former members of The Door (the Members) in respect of the Merger comprises the following: (i) $2.0 million in shares of the Common Stock, based on a price per share of Common Stock of $3.25, (ii) $2.0 million in cash (as adjusted for certain working capital and closing adjustments and transaction expenses) and (iii) up to an additional $7.0 million of contingent consideration in a combination of cash and shares of Common Stock upon the achievement of specified financial performance targets over a four-year period as set forth in the Merger Agreement (the Contingent Consideration). On the Closing Date, the Company issued to the Members 307,692 shares of Common Stock and paid the Members an aggregate of $1.0 million in cash (the Initial Consideration). In October of 2018, the Company agreed to advance $274,500 of the second installment due January 3, 2019 to the Members so they could meet their tax obligations. Pursuant to the Merger Agreement, on January 3, 2019, the Company paid an aggregate of $725,500 and issued 307,692 shares of Common Stock to the Members (the Post-Closing Consideration and, together with the Initial Consideration and the Contingent Consideration, the Merger Consideration). The Merger Agreement contains customary representations, warranties and covenants of the parties thereto. The Common Stock issued as Stock Consideration has not been registered under the Securities Act.
Each of the Members has entered into a four-year employment agreement with The Door, pursuant to which each Member has agreed not to transfer any shares of Common Stock received as consideration for the Merger (the Share Consideration) in the first year following the closing date of the merger, no more than 1/3 of such Share Consideration in the second year and no more than an additional 1/3 of such Share Consideration in the third year.
13
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On the Closing Date, the Company entered into a registration rights agreement with the Members (the Registration Rights Agreement), pursuant to which the Members are entitled to rights with respect to the registration of the Share Consideration under the Securities Act. All fees, costs and expenses of underwritten registrations under the Registration Rights Agreement will be borne by the Company, other than underwriting discounts and commissions. At any time after July 5, 2019, the Company will be required, upon the request of such Members holding at least a majority of the Share Consideration received by the Members, to file up to two registration statements on Form S-3 covering up to 25% of the Share Consideration.
The acquisition-date fair value of the consideration transferred totaled $5,999,323, which consisted of the following:
|
|
|
|
|
Common Stock issued at closing (307,692 shares)
|
|
$
|
1,123,077
|
|
Common Stock issued on January 3, 2019 (307,692 shares)
|
|
|
1,123,077
|
|
Cash paid to Members on Closing Date
|
|
|
882,695
|
|
Members transaction costs paid on Closing Date
|
|
|
117,305
|
|
Cash paid October 2018
|
|
|
274,500
|
|
Cash paid on January 3, 2019
|
|
|
725,500
|
|
Contingent Consideration
|
|
|
1,620,000
|
|
Working capital adjustment ($46,000 paid in cash on March 12, 2019. $87,169 will be issued in shares of stock at a later date)
|
|
|
133,169
|
|
|
|
$
|
5,999,323
|
|
The Company has engaged an independent third-party valuation expert to determine the fair values of the various forms of consideration transferred. The fair values of the 307,692 shares of Common Stock issued on the Closing Date and the 307,692 shares of Common Stock issued on January 3, 2019 were determined based on the closing market price of the 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 fair value of the Contingent Consideration at the Closing Date was $1,620,000. The fair value of the Contingent Consideration was estimated using a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Contingent Consideration reflect managements own assumptions about the assumptions that market participants would use in valuing the Contingent Consideration as of the Closing Date. The key assumptions in applying the Monte Carlo Simulation model are as follows: a risk-free discount rate of between 2.11% and 2.67% based on the U.S government treasury obligation with a term similar to that of the contingent consideration, a discount rate of between 20.0% and 20.5%, and an annual asset volatility estimate of 62.5%. Changes in the fair value on the Contingent Consideration are recorded at each balance sheet date with changes reflected as gains or losses on the condensed consolidated statement of operations. See Note 10 for further discussion on the fair value as of June 30, 2019.
14
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The following table summarizes the fair values of the assets acquired and liabilities assumed at the Door Closing Date.
|
|
|
|
|
Cash
|
|
$
|
89,287
|
|
Accounts receivable
|
|
|
469,344
|
|
Property, equipment and leasehold improvements
|
|
|
105,488
|
|
Prepaid expense
|
|
|
31,858
|
|
Other assets
|
|
|
30,667
|
|
Intangible assets
|
|
|
2,110,000
|
|
Total identifiable assets acquired
|
|
|
2,836,644
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(203,110
|
)
|
Accounts payable
|
|
|
(1,064
|
)
|
Unearned income
|
|
|
(15,500
|
)
|
Other liabilities
|
|
|
(1,913
|
)
|
Deferred tax liabilities
|
|
|
(593,949
|
)
|
Total liabilities assumed
|
|
|
(815,536
|
)
|
Net identifiable assets acquired
|
|
|
2,021,108
|
|
Goodwill
|
|
|
3,978,215
|
|
Net assets acquired
|
|
$
|
5,999,323
|
|
Of the calculation of $2,110,000 of acquired intangible assets, $1,010,000 was assigned to customer relationships (10-year useful life), $670,000 was assigned to the trade name (10-year useful life), $260,000 was assigned to non-competition agreements (2-year useful life) and $170,000 was assigned to a favorable lease from the New York City location (26 months useful life), that were recognized at fair value on the Closing Date. On January 1, 2019, the Company adopted ASC 842 and reclassified the favorable lease asset recognized at the date of acquisition to right-of-use asset. The unamortized balance of the favorable lease asset on January 1, 2019 was $130,769.
The fair value of accounts receivable acquired is $469,344.
The fair values of property and equipment and leasehold improvements of $105,488, and other assets of $62,525, are based on The Doors carrying values prior to the Merger, which approximate their fair values.
The amount of $3,978,215 of goodwill was assigned to the Entertainment publicity and marketing segment. The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of The Door.
Unaudited Pro Forma Consolidated Statements of Operations
The following presents the Companys pro forma consolidated operations for the three and six months ended June 30, 2018 as if The Door had been acquired on January 1, 2018 and its results had been included in the consolidated results of the Company for such period:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
2018
|
|
|
For the six months ended June 30,
2018
|
|
Revenue
|
|
$
|
6,848,310
|
|
|
$
|
14,247,354
|
|
Net income
|
|
$
|
519,443
|
|
|
$
|
1,509,350
|
|
These amounts have been calculated after applying the Companys accounting policies and adjusting the results of The Door to reflect (a) the amortization that would have been charged, assuming the intangible assets had been recorded on January 1, 2018 and (b) interest expense from the convertible note payable used to partially pay the consideration for The Door, calculated as if the convertible note payable was outstanding as of January 1, 2018.
15
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The impact of the acquisition of The Door on the 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, 2018, as provided in this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition and results of operations of the combined company.
The following table summarizes the original and revised estimated fair values of the assets acquired and liabilities assumed at the Closing Date and the related measurement period adjustments to the fair values recorded during the six months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 5, 2018
(As initially reported)
|
|
|
Measurement Period Adjustments
|
|
|
June 30, 2019 (As adjusted)
|
|
Cash
|
|
$
|
89,287
|
|
|
$
|
|
|
|
$
|
89,287
|
|
Accounts receivable
|
|
|
469,344
|
|
|
|
|
|
|
|
469,344
|
|
Property, equipment and leasehold improvements
|
|
|
105,488
|
|
|
|
|
|
|
|
105,488
|
|
Prepaid expenses
|
|
|
31,858
|
|
|
|
|
|
|
|
31,858
|
|
Other assets
|
|
|
30,667
|
|
|
|
|
|
|
|
30,667
|
|
Intangible assets
|
|
|
2,110,000
|
|
|
|
|
|
|
|
2,110,000
|
|
Total identifiable assets acquired
|
|
|
2,836,644
|
|
|
|
|
|
|
|
2,836,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(203,110
|
)
|
|
|
|
|
|
|
(203,110
|
)
|
Accounts payable
|
|
|
(1,064
|
)
|
|
|
|
|
|
|
(1,064
|
)
|
Unearned income
|
|
|
(15,500
|
)
|
|
|
|
|
|
|
(15,500
|
)
|
Other liabilities
|
|
|
(1,913
|
)
|
|
|
|
|
|
|
(1,913
|
)
|
Deferred tax liability
|
|
|
(584,378
|
)
|
|
|
(9,571
|
)
|
|
|
(593,949
|
)
|
Total liabilities assumed
|
|
|
(805,965
|
)
|
|
|
(9,571
|
)
|
|
|
(815,536
|
)
|
Net identifiable assets acquired
|
|
|
2,030,679
|
|
|
|
(9,571
|
)
|
|
|
2,021,108
|
|
Goodwill
|
|
|
3,835,475
|
|
|
|
142,740
|
|
|
|
3,978,215
|
|
Net assets acquired
|
|
$
|
5,866,154
|
|
|
$
|
133,169
|
|
|
$
|
5,999,323
|
|
The above fair values of assets acquired and liabilities assumed are based on the information that was available as of the Closing Date to estimate the fair value of assets acquired and liabilities assumed. As of the Closing Date, the Company recorded the identifiable net assets acquired of $2,030,679 as shown in the table above in its condensed consolidated balance sheet. The Company has reflected adjustments of $142,740 made during the Companys measurement period on its June 30, 2019 condensed consolidated balance sheet to reflect the adjusted identifiable net assets acquired of $2,021,108 as shown in the table above.
The following is a reconciliation of the initially reported fair value to the adjusted fair value of goodwill:
|
|
|
|
|
Goodwill originally reported at July 5, 2018
|
|
$
|
3,835,475
|
|
Changes to estimated fair values
|
|
|
|
|
Working capital adjustment
|
|
|
133,169
|
|
Deferred tax liability
|
|
|
9,571
|
|
Adjusted goodwill at June 30, 2019
|
|
$
|
3,978,215
|
|
The estimated fair value of the deferred tax liability increased by $9,571 primarily due to the estimated expected future tax rate applied.
16
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
42West
On March 30, 2017, the Company entered into a purchase agreement (the 42West Purchase Agreement) pursuant to which the Company acquired 100% of the membership interests of 42West and 42West became a wholly owned subsidiary of the Company. 42West is an entertainment public relations agency offering talent, entertainment and targeted marketing, and strategic communication services. On January 1, 2019, the Company adopted ASC 842 and reclassified the favorable lease asset recognized at the date of acquisition to right-of-use asset. The unamortized balance of the favorable lease asset on January 1, 2019 was $277,878.
The Company agreed to settle change of control provisions with certain 42West employees and former employees by offering cash payments in lieu of shares of Common Stock. As a result, the Company made payments in the aggregate amount of (i) $20,000 on February 23, 2018; (ii) $292,112 on March 30, 2018 and (iii) $361,760 of March 29, 2019 related to the change of control provisions.
Also, in connection with the 42West acquisition, on March 30, 2017, the Company entered into put agreements (the Put Agreements) with each of the sellers. Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Company has granted the sellers the right, but not the obligation, to cause the Company to purchase up to an aggregate of 1,187,087 of their respective shares of Common Stock received as consideration for the Companys acquisition of 42West for a purchase price equal to $9.22 per share during certain specified exercise periods set forth in the Put Agreements up until December 2020 (the Put Rights). During the three and six months ended June 30, 2019, respectively, the sellers exercised Put Rights with respect to an aggregate of 74,891 and 202,602 shares of Common Stock. The Company paid $65,000 on February 2, 2019, $35,000 on March 13, 2019, $300,000 on April 1, 2019, $75,000 on April 10, 2019, $50,000 on May 6, 2019, $350,000 on June 3, 2019 and $115,500 on June 28, 2019 related to these Put Rights. An additional $877,500 is due from the exercise of these Put Rights. As of June 30, 2019, the Company had purchased an aggregate of 731,607 shares of Common Stock from the sellers for an aggregate purchase price of $6,745,500, of which $175,000 was paid in July of 2019, and $702,500 is still outstanding.
The Company entered into Put Agreements with three 42West employees with change of control provisions in their employment agreements. The Company agreed to purchase up to 50% of the shares of Common Stock to be received by the employees in satisfaction of the change of control provision in their employment agreements. The employees have the right, but not the obligation, to cause the Company to purchase up to an additional 20,246 shares of Common Stock in respect of the Earn Out Consideration.
NOTE 4 CAPITALIZED PRODUCTION COSTS, ACCOUNTS RECEIVABLES AND OTHER CURRENT ASSETS
Capitalized Production Costs
Capitalized production costs include the unamortized costs of
Max Steel
and costs of scripts for projects that have not been developed or produced. These costs include direct production costs and production overhead and are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in the proportion that current 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.
Revenues earned from motion pictures were $0 and
$97,961, for the three ended June 30, 2019 and 2018, respectively, and $78,990 and $427,153 for the six months ended June 30, 2019 and 2018, respectively. These revenues were attributable to
Max Steel
, the motion picture released on October 14, 2016. The Company amortized capitalized production costs (included as direct costs) in the condensed consolidated statements of operations using the individual film forecast computation method in the amounts of $53,862 and $203,560 for the three and six months ended June 30, 2018, related to
Max Steel.
As of each of June 30, 2019, and December 31, 2018, the Company had a balance of $629,585, recorded as capitalized production costs related to
Max Steel
.
The Company purchased scripts, including one from a related party, for other motion picture or digital productions and recorded $155,454 and $95,000 in capitalized production costs associated with these scripts as of June 30, 2019 and December 31, 2018, respectively. The Company intends to produce these projects, but they were not yet in production as of June 30, 2019.
17
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
As of June 30, 2019, and December 31, 2018, the Company had total capitalized production costs of $785,039 and $724,585, respectively, net of accumulated amortization, tax incentives and impairment charges, recorded on its condensed consolidated balance sheets.
The Company has assessed events and changes in circumstances that would indicate that the Company should assess whether the fair value of the productions is less than the unamortized costs capitalized and did not identify indicators of impairment.
Accounts Receivables
The Company entered into various agreements with foreign distributors for the licensing rights of our motion picture,
Max Steel
, in certain international territories. The Company delivered the motion picture to the distributors and satisfied the other requirements of these agreements. For six months ended June 30, 2019, the Company received $116,067 from a foreign distributor that had been deemed uncollectible for the year ended December 31, 2018 and recorded it against bad debt expense in its condensed consolidated statement of operations. In addition, the domestic distributor of
Max Steel
reports to the Company on a quarterly basis the sales of the motion picture in the United States. As of June 30, 2019, the Company had $43,275 in accounts receivable related to the domestic revenues of
Max Steel
. There were no accounts receivable related to the revenues of
Max Steel
at December 31, 2018.
The Companys trade accounts receivables related to its entertainment publicity and marketing segment are recorded at amounts billed to customers, and presented on the balance sheet, net of the allowance for doubtful accounts. The allowance is determined by various factors, including the age of the receivables, current economic conditions, historical losses and other information management obtains regarding the financial condition of customers. As of June 30, 2019 and December 31, 2018, the Company had accounts receivable balances of $2,436,024 and $3,173,107, respectively, net of allowance for doubtful accounts of $274,861 and $283,022, respectively, related to its entertainment publicity and marketing segment.
Other Current Assets
The Company had a balance of $614,301 and $620,970 in other current assets on its condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019 and December 31, 2018, these amounts were primarily composed of the following:
Indemnification asset
The Company recorded in other current assets on its condensed consolidated balance sheet, $300,000 related to certain indemnifications associated with the 42West Acquisition.
Prepaid expenses
The Company records in other assets on its condensed consolidated balance sheets amounts prepaid for insurance premiums. The amounts are amortized on a monthly basis over the life of the policies.
Tax Incentives
The Company has access to government programs that are designed to promote video production in the jurisdiction. As of June 30, 2019 and December 31, 2018, the Company had a balance of $60,000 from these tax incentives.
Income tax receivable
The Company is owed an overpayment from taxes paid to State of New York. As of each of June 30, 2019 and December 31, 2018, the Company had a balance of $62,776 from income tax receivable.
Capitalized costs
The Company capitalizes certain third-party costs used in the production of its marketing video content. As of June 30, 2019 and December 31, 2018, the Company had a balance of $3,576 and $76,313, respectively related to these third-party costs.
18
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 5 PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvement consists of:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Furniture and fixtures
|
|
$
|
720,777
|
|
|
$
|
713,075
|
|
Computers and equipment
|
|
|
1,666,104
|
|
|
|
1,636,391
|
|
Leasehold improvements
|
|
|
732,869
|
|
|
|
732,870
|
|
|
|
|
3,119,750
|
|
|
|
3,082,336
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,079,729
|
)
|
|
|
(1,899,816
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
1,040,021
|
|
|
$
|
1,182,520
|
|
The Company depreciates furniture and fixtures over a useful life of between five and seven years, computer and equipment over a useful life of between three and five years and leasehold improvements are amortized over the remaining term of the related leases. The Company recorded depreciation and amortization expense of $89,306 and $180,428 for the three and six months ended June 30, 2019, respectively.
NOTE 6 INVESTMENT
At June 30, 2019, investments, at cost, consisted of 344,980 shares of common stock of The Virtual Reality Company (VRC), a privately held company. In exchange for services rendered by 42West to VRC during 2015, 42West received both cash consideration and a promissory note that was convertible into shares of common stock of VRC. On April 7, 2016, VRC closed an equity financing round resulting in common stock being issued to a third-party investor. This transaction triggered the conversion of all outstanding promissory notes held by 42West into shares of common stock of VRC. The Companys investment in VRC represents less than a 1% noncontrolling ownership interest in VRC. The Company had a balance of $220,000 on its condensed consolidated balance sheets as of both June 30, 2019 and December 31, 2018, related to this investment.
NOTE 7 DEBT
Loan and Security Agreement
During 2016, Max Steel Holdings, a wholly owned subsidiary of Dolphin Films, entered into a loan and security agreement (the P&A Loan) providing for a non-revolving credit facility in an aggregate principal amount of up to $14,500,000 that matured on August 25, 2017. Proceeds of the credit facility in the aggregate amount of $12,500,000 were used to pay a portion of the print and advertising expenses (P&A) of the domestic distribution of Max Steel. Repayment of the loan was intended to be made from revenues generated by Max Steel in the United States. The loan was partially secured by a $4,500,000 corporate guaranty from an unaffiliated third-party associated with the film, of which Dolphin provided a backstop guaranty of $620,000. The Company also granted the lender a security interest in bank account funds totaling $1,250,000. Once it was determined that the
Max Steel
would not generate sufficient funds to repay the lender, the unaffiliated party paid the lender the $4,500,000 to reduce the loan balance and the lender applied the $1,250,000 of the funds in the Companys bank account to the reduce the loan balance. The loan is also secured by substantially all of the assets of Max Steel Holdings. As a result, if the lender forecloses on the collateral securing the loan, Max Steel Holding will lose the copyright for Max Steel and, consequently, will no longer receive any revenues from the domestic distribution of Max Steel. In addition, the Company would impair the entire capitalized production costs of Max Steel included as an asset on its balance sheet, which as of June 30, 2019 was $629,585. Amounts borrowed under the credit facility accrue interest at either (i) a fluctuating per annum rate equal to the 5.5% plus a base rate or (ii) a per annum rate equal to 6.5% plus the LIBOR determined for the applicable interest period, as determined by the borrower.
As of June 30, 2019 and December 31, 2018, the Company had outstanding balances of $699,542 and $682,842, respectively, related to this agreement recorded on its condensed consolidated balance sheets in the caption debt. On its condensed consolidated statement of operations for the three and six months ended June 30, 2019, the Company recorded interest expense of $20,549 and $47,249, respectively, and $51,884 and $112,491 for the three and six months ended June 30, 2018, respectively, related to the P&A Loan. For the six months ended June 30, 2018, the Company also recorded $500,000 in direct costs from loan proceeds that were not used by the distributor for the marketing of the film and returned to the lender.
19
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Production Service Agreement
During 2014, Dolphin Films entered into a financing agreement to produce
Max Steel
(the Production Service Agreement). The Production Service Agreement was for a total amount of $10,419,009 with the lender taking a $892,619 producer fee. The Production Service Agreement contained repayment milestones to be made during 2015, which, if not met, accrued interest at a default rate of 8.5% per annum above the published base rate of HSBC Private Bank (UK) Limited until maturity on January 31, 2016 or the release of the movie. Due to a delay in the release of
Max Steel
, the Company did not make the repayments as prescribed in the Production Service Agreement. As a result, the Company has balances in accrued interest of $1,698,280 and $1,624,754, respectively, as of June 30, 2019 and December 31, 2018 in other current liabilities on the Companys condensed consolidated balance sheets. The loan was partially secured by international distribution agreements entered into by the Company prior to the commencement of principal photography and the receipt of tax incentives. As a condition to the Production Service Agreement, the Company acquired a completion guarantee from a bond company for the production of the motion picture. The funds for the loan were held by the bond company and disbursed as needed to complete the production in accordance with the approved production budget. The Company recorded debt as funds were transferred from the bond company for the production.
As of June 30, 2019, and December 31, 2018, the Company had outstanding balances of $1,612,919 and $1,728,986, respectively, in the caption debt related to this Production Service Agreement on its condensed consolidated balance sheets, not including the accrued interest discussed above and included in other current liabilities.
Line of Credit
On March 15, 2018, 42West entered into a business loan agreement with BankUnited, N.A. for a revolving line of credit (the Loan Agreement). The Loan Agreement matures on March 15, 2020 and bears interest on the outstanding balance at the banks prime rate plus 0.25% per annum. The maximum amount that can be drawn on the revolving line of credit is $2,250,000 with a sublimit of $750,000 for standby letters of credit. Amounts outstanding under the Loan Agreement are secured by 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. As of June 30, 2019 and December 31, 2018, the outstanding balance on the line of credit was $1,700,390.
The Loan Agreement contains customary affirmative covenants, including covenants regarding maintenance of a maximum debt to total net worth ratio of at least 4.0:1.0 and a minimum debt service coverage of 1.40x based on fiscal year-end audit to be calculated as provided in the Loan Agreement. Further, the Loan Agreement contains customary negative covenants, including those that, subject to certain exceptions, restrict the ability of 42West to incur additional indebtedness, grant liens, make loans, investments or certain acquisitions, or enter into certain types of agreements
. Upon the occurrence of an event of default, the bank may accelerate the maturity of the loan and declare the unpaid principal balance and accrued but unpaid interest immediately due and payable. In the event of 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 June 30, 2019, the Company was in compliance with all covenants under the Loan Agreement.
20
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 8 NOTES PAYABLE
Convertible Notes
2019 Lincoln Park Note
On May 20, 2019, the Company entered into a securities purchase agreement with Lincoln Park Capital Fund LLC, an Illinois limited liability company (Lincoln Park), pursuant to which the Company agreed to issue and sell to Lincoln Park a senior convertible promissory note in an initial principal amount of $1,100,000 (the Lincoln Park Note) at a purchase price of $1,000,000 (representing an original issue discount of approximately 9.09%), together with warrants to purchase up to 137,500 shares of Common Stock (the Lincoln Park Warrants) at an exercise price of $2.00 per share. The securities purchase agreement provides for issuance of warrants to purchase 137,500 shares of Common Stock on each of the second, fourth and sixth month anniversaries of the securities purchase agreement if any of the balance remains outstanding on such dates. The Lincoln Park Note is convertible at any time into shares of Common Stock (the Conversion Shares) at an initial conversion price equal to the lower of (a) $5.00 per share and (B) the lower of (i) the lowest intraday sale price of the Common Stock on the applicable conversion date and (ii) the average of the three lowest closing sales prices of the Common Stock during the twelve consecutive trading days ending on and including the trading day immediately preceding the conversion date, subject in the case of this clause (B), to a floor of $1.00 per share. If an event of default under the Lincoln Park Note occurs prior to maturity, the Lincoln Park Note will be convertible into share of Common Stock at a 15% discount to the applicable conversion price. Outstanding principal under the Lincoln Park Note will not accrue interest, except upon an event of default, in which case interest at a default rate of 18% per annum would accrue until such event of default is cured. The Lincoln Park Note matures on May 21, 2021 and can be paid at prior to the maturity date without any penalty.
On May 21, 2019, the date of the issuance of the Lincoln Park Note, the Companys Common Stock had a market value of $1.37 per share. The Company determined that the Lincoln Park Note contained a beneficial conversion feature by calculating the amount of shares using the conversion rate of the Lincoln Park Note of $1.18 per share, (after allocating a portion of the convertible debt to the warrants based on the fair value of the warrants) and then calculating the market value of the shares that would be issued at conversion using the market value of the Companys Common Stock on the date of the Lincoln Park Note. The Company recorded a beneficial conversion feature on the Note of $166,887 that is amortized and recorded as interest expense over the life of the Lincoln Park Note. The original issue discount of $100,000 is amortized and recorded as interest expense over the life of the Lincoln Park Note. For the three months ended June 30, 2019, the Company recorded $11,120 of interest expense from the amortization of the original issue discount and beneficial conversion feature. As of June 30, 2019, the Company had a balance of $844,234, net of $95,833 of original debt discount and $159,933 of beneficial conversion feature, related to the Lincoln Park Note in noncurrent liabilities on its condensed consolidated balance sheet.
In connection with the transactions contemplated by the securities purchase agreement, on May 20, 2019, the Company entered into a registration rights agreement with Lincoln Park, pursuant to which the Company agreed to register the Conversion Shares for resale by Lincoln Park under the Securities Act, if during the six-month period commencing on the date of the Registration Rights Agreement, the Company determines to file a resale registration statement with the Securities and Exchange Commission.
2019 Convertible Debt
On March 25, 2019, the Company issued a convertible promissory note agreement to a third-party investor and received $200,000 to be used for working capital. The convertible promissory note bears interest at a rate of 10% per annum and matures on March 25, 2021. The balance of the convertible promissory note and any accrued interest may be converted into shares of Common Stock at the note holders option at any time at a purchase price based on the 30-day trailing average closing price of the Common Stock. As of June 30, 2019, the Company had a balance of $200,000 in noncurrent liabilities related to this convertible promissory note.
21
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
2018 Convertible Debt
On July 5, 2018, the Company issued an 8% secured convertible promissory note in the principal amount of $1.5 million (the Pinnacle Note) to Pinnacle Family Office Investments, L.P. (Pinnacle) pursuant to a Securities Purchase Agreement, dated the same date, between the Company and Pinnacle. The Company used the proceeds of the convertible promissory note to finance the Companys acquisition of The Door. The Companys obligations under the Pinnacle Note are secured primarily by a lien on the assets of The Door and Viewpoint.
The Company must pay interest on the principal amount of the Pinnacle Note, at the rate of 8% per annum, in cash on a quarterly basis. The Pinnacle Note matures on January 5, 2020. The Company may prepay the Pinnacle Note in whole, but not in part, at any time prior to maturity; however, if the Company voluntarily prepays the Pinnacle Note, it must (i) pay Pinnacle a prepayment penalty equal to 10% of the prepaid amount and (ii) issue to Pinnacle warrants to purchase 100,000 shares of Common Stock with an exercise price equal to $3.25 per share. The Pinnacle Note also contains certain customary events of default. The holder may convert the outstanding principal amount of the Pinnacle Note into shares of Common Stock at any time at a price per share equal to $3.25, subject to adjustment for stock dividends, stock splits, dilutive issuances and subsequent rights offerings. At the Companys election, upon a conversion of the Pinnacle Note, the Company may issue Common Stock in respect of accrued and unpaid interest with respect to the principal amount of the Pinnacle Note not converted by Pinnacle.
On the date of the Pinnacle Note, the 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 amount of shares using the conversion rate of the Pinnacle Note of $3.25 per share, and then calculating the market value of the shares that would be issued at conversion using the market value of the Companys Common Stock on the date of the Pinnacle Note. The Company recorded a debt discount on the Note of $184,614 that is amortized and recorded as interest expense over the life of the Pinnacle Note.
For the three and six months ended June 30, 2019, the Company paid interest and recorded interest expense of $30,000 and $60,000, respectively related to the Pinnacle Note. For the three and six months ended June 30, 2019, the Company recorded $30,769 and $61,538 as interest expense related to the amortization of the debt discount. As of June 30, 2019, the Company had a balance of $1,438,462, net of $61,538 of debt discount, recorded in current liabilities on its condensed consolidated balance sheet, related to the Pinnacle Note. As of December 31, 2018, the Company had a balance of $1,376,924, net of $123,076 of debt discount, recorded in noncurrent liabilities on its consolidated balance sheet, related to the Pinnacle Note.
2017 Convertible Debt
In 2017, the Company entered into subscription agreements pursuant to which it issued unsecured convertible promissory notes, each with substantially similar terms, for an aggregate principal amount of $625,000. Each of the convertible promissory notes matures one year from the date of issuance, with the exception of one note in the amount of $75,000 which matures two years from the date of issuance, and bears interest at a rate of 10% per annum. During 2018, the Company and the note holders agreed to extend the maturity date for another year from the original maturity date, with the exception of the $75,000 note with a two-year maturity date. The principal and any accrued and unpaid interest of the convertible promissory notes are convertible by the respective holders into shares of Common Stock at a price equal to either (i) the 90-trading day average price per share of Common Stock as of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as defined in the convertible promissory notes) of Common Stock is made, 95% of the public offering price per share of Common Stock.
On March 21, 2019, the holder of a $75,000 convertible promissory note elected to convert the note into 53,191 shares of Common Stock on the 90-day trailing trading average price of $1.41 per share. On March 21, 2019, the closing market price of the Companys common stock was $1.81. As a result, the Company recorded a loss on extinguishment of debt on its condensed consolidated statement of operations of $21,276 for the difference between the closing market price and the conversion price of the Common Stock.
22
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
For the three and six months ended June 30, 2019, the Company paid interest on these notes in the aggregate amount of $17,521 and $33,146, respectively and recorded interest expense in the amount of $18,750 and $34,465, respectively relating to these notes. For the three and six months ended June 30, 2018, the Company paid interest on these notes in the aggregate amount of $15,625 and $34,890, respectively and recorded interest expense in the amount of $21,480 and $43,355, respectively relating to these notes. As of June 30, 2019 and December 31, 2018, the Company recorded accrued interest of $6,181 and $4,861, respectively, relating to the convertible notes payable. As of June 30, 2019 and December 31, 2018, the Company had a balance of $550,000 and $625,000, respectively, in current liabilities and a balance of $200,000 in noncurrent liabilities as of June 30, 2019 on its condensed consolidated balance sheets relating to these convertible notes payable.
Nonconvertible Notes Payable
On July 5, 2012 the Company entered into an unsecured promissory note in the amount of $300,000 bearing 10% interest per annum and payable on demand with KCF Investments LLC (KCF), an entity controlled by Mr. Stephen L Perrone, an affiliate of the Company. On December 10, 2018, the Company agreed to exchange this note, including accrued interest of $192,233 for a new unsecured promissory note in the amount of $492,233 that matures on December 10, 2023. This promissory note bears interest of 10% per annum and can be prepaid without a penalty at any time prior to its maturity. The note requires monthly repayments of principal and interest in the amount of $10,459 throughout the life of the note.
On November 30, 2017, the Company
entered into an unsecured promissory note in the amount of $200,000 that matures on January 15, 2020. The promissory note bears interest of 10% per annum and can be prepaid without a penalty at any time prior to its maturity.
On June 14, 2017, the Company entered into an unsecured promissory note in the amount of $400,000, with an initial maturity date of June 14, 2019. On May 1, 2019, the holder of the promissory note agreed to extend the maturity date until June 14, 2021 on the same terms as the original promissory note. The promissory note bears interest of 10% per annum and can be prepaid without a penalty after the initial six months.
During the three and six months ended June 30, 2019, the Company paid interest on its nonconvertible promissory notes in the aggregate amount of $26,662 and $53,808, respectively. During the three and six months ended June 30, 2018, the Company paid interest on its nonconvertible promissory notes in the aggregate amount of $15,000 and $30,834, respectively. The Company had balances of $6,038 and $6,315 as of June 30, 2019 and December 31, 2018, respectively, for accrued interest recorded in other current liabilities in its condensed consolidated balance sheets, relating to these promissory notes. The Company recorded interest expense for the three and six months ended June 30, 2019 of $26,497 and $53,532, respectively, and $22,479 and $44,877, for the three and six months ending June 30, 2018, respectively, relating to these promissory notes. As of June 30, 2019, the Company had a balance of $283,952 in current liabilities and $769,339 in noncurrent liabilities related to these nonconvertible promissory notes. As of December 31, 2018, the Company had balances of $79,874 in current liabilities and $1,012,359 in noncurrent liabilities on its condensed consolidated balance sheets relating to these nonconvertible promissory notes.
NOTE 9 LOANS FROM RELATED PARTY
Dolphin Entertainment, LLC (DE LLC), an entity wholly owned by the 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.
For the three and six months ended June 30, 2019, the Company did not repay any principal balance of the DE LLC Note and recorded interest expense of $27,621 and $54,938, respectively. For the three and six months ended June 30, 2018, the Company repaid $470,000 and $601,001, respectively of principal balance and recorded interest expense of $33,605 and $73,535, respectively, relating to the DE LLC Note. As of June 30, 2019 and December 31, 2018, the Company had a principal balance of $1,107,873 and accrued interest of $359,826 and $304,888, respectively, relating to the DE LLC Note on its condensed consolidated balance sheet.
23
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 10 FAIR VALUE MEASUREMENTS
Put Rights
In connection with the 42West Acquisition (see Note 3) on March 30, 2017, the Company entered into the Put Agreements, pursuant to which it granted the Put Rights to the sellers. During the six months ended June 30, 2019, the sellers exercised their Put Rights, in accordance with the Put Agreements, for an aggregate amount of 202,602 shares of Common Stock. As a result, the sellers were paid $65,000 on February 7, 2019, $35,000 on March 13, 2019, $300,000 on April 1, 2019, $75,000 on April 10, 2019, $50,000 on May 6, 2019, $350,000 on June 3, 2019 and $115,500 on June 28, 2019 related to these Put Rights. An additional $877,500 is due from the exercise of these Put Rights of which $175,000 was paid in July 2019.
In addition, the Company entered in put agreements with three 42West employees with change of control provision in their employment agreements. The Company agreed to purchase up to 50% of the shares of Common Stock to be received by the employees in satisfaction of the change of control provision in their employment agreements. The employees have the right, but not the obligation, to cause the Company to purchase an additional 20,246 shares of Common Stock.
The Company records the fair value of the liability in the condensed consolidated balance sheets under the caption Put Rights and records changes to the liability against earnings or loss under the caption Changes in fair value of put rights in the consolidated statements of operations. The carrying amount at fair value of the aggregate liability for the Put Rights recorded on the condensed consolidated balance sheets at June 30, 2019 and December 31, 2018 was $4,708,191 and $5,984,067, respectively. Due to the change in the fair value of the Put Rights for the period in which the Put Rights were outstanding for the three and six months June 30, 2019, the Company recorded a gain of $251,350 and $1,778,376, respectively, and $333,043 and $1,416,639, respectively for the three and six months ended June 30, 2018, on the change in the fair value of the Put Rights in the condensed consolidated statement of operations.
The Company utilized the Black-Scholes Option Pricing Model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Put Rights reflect managements own assumptions about the assumptions that market participants would use in valuing the Put Rights as of the June 30, 2019 and December 31, 2018.
The Company determined the fair value by using the following key inputs to the Black-Scholes Option Pricing Model:
|
|
|
|
|
|
|
|
|
Inputs
|
|
As of
June 30,
2019
|
|
|
As of
December 31,
2018
|
|
Equity volatility estimate
|
|
|
42.0% 44.0
|
%
|
|
|
35.0% 59.4
|
%
|
Discount rate based on US Treasury obligations
|
|
|
1.78% 2.13
|
%
|
|
|
2.45% 2. 63
|
%
|
For the Put Rights, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2018 to June 30, 2019:
|
|
|
|
|
Ending fair value balance reported in the consolidated balance sheet at December 31, 2018
|
|
$
|
5,984,067
|
|
Put rights exercised in December 2018 paid in January 2019
|
|
|
(375,000
|
)
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(1,778,376
|
)
|
Put rights exercised June 2019 and paid in July 2019
|
|
|
175,000
|
|
Put rights exercised March 2019 and not yet paid
|
|
|
702,500
|
|
Ending fair value of put rights reported in the condensed consolidated balance sheet at June 30, 2019
|
|
$
|
4,708,191
|
|
24
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Contingent Consideration
In connection with the Companys acquisition of The Door (See Note 3), the Members have the potential to earn the Contingent Consideration, comprising up to 1,538,462 shares of Common Stock, based on a purchase price of $3.25, and up $2,000,000 in cash on achievement of adjusted net income targets based on the operations of The Door over the four-year period beginning January 1, 2018.
The Company records the fair value of the liability in the condensed consolidated balance sheets under the caption Contingent Consideration and records changes to the liability against earnings or loss under the caption Changes in fair value of contingent consideration in the condensed consolidated statements of operations. The fair value of the Contingent Consideration on the date of the acquisition of The Door was $1,620,000. The carrying amount at fair value of the aggregate liability for the Contingent Consideration recorded on the condensed consolidated balance sheet at June 30, 2019 and December 31, 2018 is $460,000 and $550,000, respectively. Due to the change in the fair value of the Contingent Consideration for the period in which the Contingent Consideration was outstanding during the three and six months ended June 30, 2019, the Company recorded a gain on the Contingent Consideration of $360,000 and $90,000, respectively, in the condensed consolidated statement of operations.
The Company utilized a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Contingent Consideration reflect 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
|
|
As of June 30, 2019
|
|
|
As of
December 31,
2018
|
|
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration)
|
|
|
1.73% - 2.09
|
%
|
|
|
2.47% - 2.59
|
%
|
Annual Asset Volatility Estimate
|
|
|
40.0
|
%
|
|
|
65.0
|
%
|
For the Contingent Consideration, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2018 to June 30, 2019:
|
|
|
|
|
Beginning fair value balance reported on the consolidated balance sheet at December 31, 2018
|
|
$
|
550,000
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(90,000
|
)
|
Ending fair value balance reported in the condensed consolidated balance sheet at June 30, 2019
|
|
$
|
460,000
|
|
NOTE 11 CONTRACT LIABILITIES
The Company receives advance payments from customers for public relations projects or as deposits for promotional or brand-support video projects, that it records as contract liabilities. Once the work is performed or the projects are delivered to the customer, the contract liability is recorded as revenue. The Company had balances of $192,471 and $522,620 as of June 30, 2019 and December 31, 2018, respectively, in contract liabilities.
25
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 12 VARIABLE INTEREST ENTITIES
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the 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.
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 on historical cost. A gain or loss may be recognized upon deconsolidation of a VIE depending on the amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Max Steel Productions LLC
|
|
|
JB Believe LLC
|
|
|
|
As of and
for the
six months
ended
June 30,
|
|
|
For the
three months
ended
June 30,
|
|
|
As of
December 31,
|
|
|
As of and
for the
six months
ended
June 30,
|
|
|
As of and
for the
three months
ended
June 30,
|
|
|
As of and
for the
six months
ended
June 30,
|
|
|
For the
three months
ended
June 30,
|
|
|
As of
December 31,
|
|
|
As of and
for the
six months
ended
June 30,
|
|
|
As of and
for the
three months
ended
June 30,
|
|
(in USD)
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
Assets
|
|
|
8,052,711
|
|
|
|
|
|
|
|
7,978,887
|
|
|
|
8,820,966
|
|
|
|
|
|
|
|
185,000
|
|
|
|
|
|
|
|
205,725
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
(11,856,455
|
)
|
|
|
|
|
|
|
(11,887,911
|
)
|
|
|
(12,153,196
|
)
|
|
|
|
|
|
|
(6,743,568
|
)
|
|
|
(6,750,573
|
)
|
|
|
(6,741,834
|
)
|
|
|
(6,743,568
|
)
|
|
|
|
|
Revenues
|
|
|
78,990
|
|
|
|
|
|
|
|
|
|
|
|
427,153
|
|
|
|
97,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
26,290
|
|
|
|
(14,035
|
)
|
|
|
|
|
|
|
(464,418
|
)
|
|
|
(128,691
|
)
|
|
|
(29,464
|
)
|
|
|
(8,223
|
)
|
|
|
|
|
|
|
(290
|
)
|
|
|
|
|
The Company evaluated the entities in which it did not have a majority voting interest and determined that it had (1) the power to direct the activities of the entities that most significantly impact their economic performance and (2) had the obligation to absorb losses or the right to receive benefits from these entities. As such the financial statements of Max Steel Productions, LLC and JB Believe, LLC are consolidated in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, and in the condensed consolidated statements of operations and statements of cash flows presented herein for the three and six months ended June 30, 2019 and 2018. These entities were previously under common control and have been accounted for at historical costs for all periods presented.
26
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Max Steel Productions, LLC was initially formed for the purpose of recording the production costs of the motion picture
Max Steel.
Prior to the commencement of the production, the Company entered into a Production Service Agreement to finance the production of the film. As described in Note 7, the Production Service Agreement was for a total amount of $10,419,009 with the lender taking a producer fee of $892,619. Pursuant to the financing agreements, the lender acquired 100% of the membership interests of Max Steel Productions, LLC with the Company controlling the production of the motion picture and having the rights to sell the motion picture.
As of each of June 30, 2019 and December 31, 2018, the Company had a balance in capitalized production costs of $629,585. For the year ended December 31, 2018, the Company wrote off accounts receivable of $618,165, of which it had an allowance for doubtful account of $227,280 and did not have a balance in accounts receivable related to
Max Steel
as of December 31, 2018. For the six months ended June 30, 2019, the Company collected $116,067 of receivables that had previously been written off and recorded the receipt against bad debt expense. All proceeds from the sale of international licensing rights to the motion picture
Max Steel
and certain tax credits
are used to repay the amounts due under the Production Service Agreement. As such, the Company will not receive any cash proceeds from the sale of the international licensing rights until the proceeds received from the Production Service Agreement are repaid. For the six months ended June 30, 2019 and 2018, the proceeds from the international sales agreements and certain tax credits that were used to repay amounts due under the Production Service Agreement amounted to $116,067 and $4,582, respectively. If the amounts due under the Production Service Agreement are not repaid from the proceeds of the international sales, the Company may lose the international distribution rights, in which case it would no longer receive the revenues from these territories and would impair the capitalized production costs and related accounts receivable. The Company believes that the lenders only recourse under the Production Service Agreement is to foreclose on the collateral securing the loans, which consists of the foreign distribution rights for
Max Steel
. However, if the lender were to successfully assert that the Company is liable to the lender for the payment of this debt despite the lack of any contractual obligation on behalf of the Company, payment of the loan would have a material adverse effect on its liquidity, results of operations and financial condition.
As of June 30, 2019 and December 31, 2018, there were outstanding balances of $1,612,919 and $1,728,986, respectively, related to this debt which are included in the caption debt in the condensed consolidated balance sheets.
JB Believe LLC, an entity owned by Believe Film Partners LLC, of which the Company owns a 25% membership interest, was formed for the purpose of recording the production costs of the motion picture
Believe
. The Company was given unanimous consent by the members of this entity to enter into domestic and international distribution agreements for the licensing rights of the motion picture,
Believe
, until such time as the Company had been repaid $3,200,000 for the investment in the production of the film and $5,000,000 for the P&A to market and release the film in the United States. The Company has not been repaid these amounts and as such is still in control of the distribution of the film. The capitalized production costs were either amortized or impaired in previous years. JB Believe LLCs primary liability is to the Company, which it owes $6,491,834.
NOTE 13 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 an amendment to 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. Additionally, on July 6, 2017, the Second Amended and Restated Articles of Incorporation eliminated previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, no shares of which are outstanding.
27
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Pursuant to the Second Amended and Restated Articles of Incorporation, each share of Series C Convertible Preferred Stock will be convertible into one share of Common Stock (one half of a share post-split on September 14, 2017) subject to adjustment for each issuance of Common Stock (but not upon issuance of common stock equivalents) that occurred, or occurs, from the date of issuance of the Series C Convertible Preferred Stock (the issue date) until the fifth (5th) anniversary of the issue date (i) upon the conversion or exercise of any instrument issued on the issued date or thereafter issued (but not upon the conversion of the Series C Convertible Preferred Stock), (ii) upon the exchange of debt for shares of Common Stock, or (iii) in a private placement, such that the total number of shares of Common Stock held by an Eligible Class C Preferred Stock Holder (based on the number of shares of Common Stock held as of the date of issuance) will be preserved at the same percentage of shares of Common Stock outstanding held by such Eligible Class C Preferred Stock Holder on the issue. An Eligible Class C Preferred Stock Holder means any of (i) DE LLC for so long as Mr. ODowd continues to beneficially own at least 90% of DE LLC and serves on its board of directors or other governing entity, (ii) any other entity in which Mr. 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 be convertible by the Eligible Class C Preferred Stock Holder only upon the Company satisfying one of the optional conversion thresholds. Specifically, a majority of the independent directors of the Board, in its sole discretion, must have determined that the Company accomplished any of the following (i) EBITDA of more than $3.0 million in any calendar year, (ii) production of two feature films, (iii) production and distribution of at least three web series, (iv) theatrical distribution in the United States of one feature film, or (v) any combination thereof that is subsequently approved by a majority of the independent directors of the Board based on the strategic plan approved by the Board. While certain events may have occurred that could be deemed to have satisfied this criteria, the independent directors of the Board have not yet determined that an optional conversion threshold has occurred. Except as required by law, holders of Series C Convertible Preferred Stock will have voting rights only if the independent directors of the Board determine that an optional conversion threshold has occurred. Only upon such determination will the Series C Convertible Preferred Stock be entitled or permitted to vote on all matters required or permitted to be voted on by the holders of Common Stock and will be entitled to that number of votes equal to three votes for the number of shares of Common Stock into which the Series C Convertible Preferred Stock may then be converted.
The Certificate of Designation also provides for a liquidation value of $0.001 per share and dividend rights of the Series C Convertible Preferred Stock on parity with the Companys Common Stock.
B.
Common Stock
On January 3, 2019, the Company issued 307,692 shares of its Common Stock to the sellers of The Door pursuant to the Merger Agreement. (See Note 3)
On February 7, 2019, one of the sellers of 42West exercised Put Rights for 7,049 shares of Common Stock and was paid an aggregate amount of $65,000 on February 7, 2019.
On March 11, 2019, one of the sellers of 42West exercised Put Rights for 3,796 shares of Common Stock and was paid an aggregate amount of $35,000 on March 13, 2019.
On March 12, 2019, one of the sellers of 42West exercised Put Rights for 21,692 shares of Common Stock and was paid an aggregate amount of $200,000 on April 1, 2019.
On March 20, 2019, one of the sellers of 42West exercised Put Rights for 87,040 shares of Common Stock and was paid an aggregate amount of $100,000 on April 1, 2019. The remaining $702,500 is still outstanding.
On March 21, 2019, one of the sellers of 42West exercised Put Rights for 8,134 shares of Common Stock and was paid an aggregate amount of $75,000 on April 10, 2019.
On March 21, 2019, one of the convertible promissory note holders elected to convert a $75,000 convertible promissory note into 53,191 shares of common stock at a 90-day trailing trading average stock price of $1.41 per share of Common Stock.
28
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On May 6, 2019, one of the sellers of 42West exercised Put Rights for 5,422 shares of Common Stock and was paid $50,000 on May 6, 2019.
On May 13, May 16 and May 22, 2019, three of the sellers of 42West exercised Put Rights for an aggregate amount of 37,961 shares of Common Stock and were paid $350,000 on June 3, 2019.
On June 25, 2019, one of the sellers of 42West exercised Put Rights for 12,527 shares of Common Stock and was paid $115,500 on June 28, 2019.
On June 24, 2019, one of the sellers of 42West exercised Put Rights for 8,134 shares of Common Stock and was paid $75,000 on July 10, 2019.
On June 30, 2019 one of the sellers of 42West exercised Put Rights for 10,846 shares of Common Stock and was paid $100,000 on July 17, 2019.
As of June 30, 2019 and December 31, 2018, the Company had 14,394,562 and 14,123,157 shares of Common Stock issued and outstanding, respectively.
NOTE 14 EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net(loss) income attributable to Dolphin Entertainment shareholders and numerator for basic earnings per share
|
|
$
|
(891,867
|
)
|
|
$
|
170,474
|
|
|
$
|
(769,259
|
)
|
|
$
|
1,003,432
|
|
Change in fair value of put rights
|
|
|
(251,350
|
)
|
|
|
(333,043
|
)
|
|
|
(1,778,376
|
)
|
|
|
(1,416,639
|
)
|
Numerator for diluted earnings per share
|
|
$
|
(1,143,217
|
)
|
|
$
|
(162,569
|
)
|
|
$
|
(2,547,635
|
)
|
|
$
|
(413,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS - weighted-average shares
|
|
|
15,969,926
|
|
|
|
12,349,014
|
|
|
|
15,957,085
|
|
|
|
12,432,872
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put rights
|
|
|
3,202,161
|
|
|
|
1,682,987
|
|
|
|
3,714,039
|
|
|
|
2,100,352
|
|
Denominator for diluted EPS - adjusted weighted-average shares
|
|
|
19,172,087
|
|
|
|
14,032,001
|
|
|
|
19,671,124
|
|
|
|
14,533,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
Diluted (loss) per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
Basic earnings per share is computed by dividing income attributable to the shareholders of Common Stock (the numerator) by the weighted-average number of shares of Common Stock outstanding (the denominator) for the period. Diluted earnings per share assume that any dilutive equity instruments, such as put rights and convertible notes payable were exercised and outstanding Common Stock adjusted accordingly.
In periods when the Put Rights are assumed to have been settled at the beginning of the period in calculating the denominator for diluted (loss) income per share, the related change in the fair value of Put Right liability recognized in the consolidated statements of operations for the period, is added back or subtracted from net income during the period. The denominator for calculating diluted income per share for the three and six months ended June 30, 2019 and 2018 assumes the Put Rights had been settled at the beginning of the period, and therefore, the related income due to the decrease in the fair value of the Put Right liability during the three and six months ended June 30, 2019 and 2018 is subtracted from net income.
29
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Other potentially dilutive equity instruments such as convertible notes payable, were not included in the calculation diluted (loss) income per share for the three and six months ended June 30, 2019 and 2018 because they were determined to be anti-dilutive.
NOTE 15 WARRANTS
A summary of warrants outstanding at December 31, 2018 and issued, exercised and expired during the six months ended June 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
Warrants:
|
|
Shares
|
|
|
Weighted Avg.
Exercise Price
|
|
Balance at December 31, 2018
|
|
|
2,727,253
|
|
|
$
|
3.62
|
|
Issued
|
|
|
137,500
|
|
|
|
2.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,000,000
|
)
|
|
|
2.29
|
|
Balance at June 30, 2019
|
|
|
1,864,753
|
|
|
$
|
4.06
|
|
On November 4, 2016, the Company issued a Warrant G, a Warrant H and a Warrant I to T Squared (Warrants G, H and I). A summary of Warrants G, H and I issued to T Squared is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
:
|
|
Number of Shares
|
|
|
Exercise
price at
June 30,
2019
|
|
|
Original Exercise
Price
|
|
|
Exercise
price at
December 31,
2018
|
|
|
Expiration
Date
|
Warrant G
|
|
|
750,000
|
|
|
$
|
Expired
|
|
|
$
|
10.00
|
|
|
$
|
2.29
|
|
|
|
January 31, 2019
|
Warrant H
|
|
|
250,000
|
|
|
$
|
Expired
|
|
|
$
|
12.00
|
|
|
$
|
2.29
|
|
|
|
January 31, 2019
|
Warrant I
|
|
|
250,000
|
|
|
$
|
2.00
|
|
|
$
|
14.00
|
|
|
$
|
2.29
|
|
|
|
January 31, 2020
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Warrants G, H and I contain a round down provision providing that, in the event the Company sells grants or issues any Common Stock or options, warrants, or any instrument convertible into shares of Common Stock or equity in any other form at a deemed per share price below the then current exercise price per share of the Warrants G, H and I, then the then current exercise price per share for the warrants that are outstanding will be reduced to such lower price per share. Under the terms of the Warrants G, H and I, T Squared has the option to continually pay the Company an amount of money to reduce the exercise price of any of Warrants G, H and I until such time as the exercise price of Warrant G, H and/or I is effectively $0.02 per share. At such time when the T Squared has paid down the warrants to an exercise price of $0.02 per share or less T Squared will have the right to exercise the Warrants G, H and I via a cashless provision. Due to the existence of the round down provision, the Warrants G, H and I were carried in the consolidated financial statements as derivative liabilities at fair value. However, on July 1, 2018, the Company adopted ASU 2017-11 that states down round provisions no longer preclude equity classification when assessing whether the instrument is indexed to an entitys own stock. As a result, the Company used the modified retrospective approach and recorded a cumulative effect adjustment to retained earnings to classify the instruments as equity. Warrants G and H were not exercised and expired on January 31, 2019.
In the Companys 2017 offering of its Common Stock, the Company issued 1,215,000 units, each comprising one share of Common Stock, and one warrant exercisable for one share of Common Stock for $4.74 per share. In addition to the units issued and sold in this 2017 offering, the Company also issued warrants to the underwriters to purchase up to an aggregate of 85,050 shares of Common Stock at a purchase price of $4.74 per share. On January 22, 2018, the underwriters exercised their over-allotment option with respect to 175,750 warrants to purchase Common Stock at a purchase price of $4.74 per share. In connection with the exercise of the over-allotment option, the Company issued to the underwriters warrants to purchase an aggregate of 1,453 shares of Common Stock at a purchase price of $4.74 per share. The Company determined that each of these warrants should be classified as equity and recorded the fair value of the warrants in additional paid in capital.
30
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On May 21, 2019, the Company issued warrants to purchase up to 137,500 shares of Common Stock at a purchase price of $2.00 per share to Lincoln Park related to the Lincoln Park Note (the Lincoln Park Warrants). The Lincoln Park Warrants become exercisable on the six-month anniversary and for a period of five years thereafter. If a resale registration statement covering the shares of Common Stock underlying the Lincoln Park Warrants is not effective and available at the time of exercise, the Lincoln Park Warrants may be exercised by means of a cashless exercise formula. The Lincoln Park Warrants had a fair value at issuance of $89,543. The Company determined that the Lincoln Park Warrants should be classified as equity and recorded the fair value of the warrants in additional paid in capital.
NOTE 16 RELATED PARTY TRANSACTIONS
On December 31, 2014, the Company and its CEO renewed his employment agreement for a period of two years commencing January 1, 2015. The agreement stated that the CEO was to receive annual compensation of $250,000. In addition, the CEO was entitled to an annual discretionary bonus as determined by the 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 condensed consolidated balance sheets. Any unpaid and accrued compensation due to the CEO under this agreement will accrue interest on the principal amount at a rate of 10% per annum from the date of this agreement until it is paid. Even though the employment agreement expired and has not been renewed, the Company has an obligation under the agreement to continue to accrue interest on the unpaid balance. As of June 30, 2019 and December 31, 2018, the Company accrued $2,625,000 of compensation as accrued compensation and has balances of $1,360,890 and $1,230,719 respectively, in accrued interest in other current liabilities on its condensed consolidated balance sheets, related to Mr. ODowds employment. The Company recorded interest expense related to the accrued compensation of $65,445 and $64,418, respectively, for the three months ended June 30, 2019 and 2018, and $130,171 and $126,581 for the six months ended June 30, 2019 and 2018, respectively, on the condensed consolidated statements of operations.
On March 30, 2017, in connection with the acquisition of 42West, the Company and Mr. ODowd, as personal guarantor, entered into the Put Agreements with each of the sellers of 42West, pursuant to which the Company granted the Put Rights. Pursuant to the terms of one such Put Agreement, Mr. Allan Mayer, a member of the board of directors of the Company, exercised Put Rights and caused the Company to purchase 37,961 shares of Common Stock at a purchase price of $9.22 per share for an aggregate purchase price of $350,000, during the six months ended June 30, 2019.
NOTE 17 SEGMENT INFORMATION
The Company operates in two reportable segments, Entertainment Publicity and Marketing Segment and Content Production Segment. The Entertainment Publicity and Marketing segment is composed of 42West, The Door and Viewpoint and provides clients with diversified services, including public relations, entertainment and hospitality content marketing and strategic marketing consulting. The Content Production segment is composed of Dolphin Entertainment and Dolphin Films and engages in the production and distribution of digital content and feature films.
The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating segment performance is operating income (loss). Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. Legal and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees.
31
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
In connection with the acquisitions of 42West, The Door, and Viewpoint, the Company assigned $8,086,773 of intangible assets, net of accumulated amortization of $3,494,560 and goodwill of $15,996,977 (after goodwill impairment of $1,857,000) as of June 30, 2019 to the Entertainment Publicity and Marketing segment. The balances reflected as of June 30, 2018 for Entertainment Publicity and Marketing segment comprise only 42West.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
$
|
6,273,983
|
|
|
$
|
12,523,890
|
|
|
$
|
5,121,487
|
|
|
$
|
10,577,220
|
|
CPD
|
|
|
|
|
|
|
78,990
|
|
|
|
97,961
|
|
|
|
427,153
|
|
Total
|
|
$
|
6,273,983
|
|
|
$
|
12,602,880
|
|
|
$
|
5,219,448
|
|
|
$
|
11,004,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
$
|
(450,165
|
)
|
|
$
|
(810,759
|
)
|
|
$
|
497,886
|
|
|
$
|
965,702
|
|
CPD
|
|
|
(751,913
|
)
|
|
|
(1,216,481
|
)
|
|
|
(428,619
|
)
|
|
|
(995,359
|
)
|
Total
|
|
|
(1,202,078
|
)
|
|
|
(2,027,240
|
)
|
|
|
69,267
|
|
|
|
(29,657
|
)
|
Interest expense
|
|
|
(301,139
|
)
|
|
|
(589,108
|
)
|
|
|
(265,992
|
)
|
|
|
(533,419
|
)
|
Other income (expense)
|
|
|
611,350
|
|
|
|
1,847,089
|
|
|
|
595,215
|
|
|
|
1,847,128
|
|
Income (loss) before income taxes
|
|
$
|
(891,867
|
)
|
|
$
|
(769,259
|
)
|
|
$
|
398,490
|
|
|
$
|
1,284,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
|
|
|
|
|
|
|
|
$
|
36,811,890
|
|
|
$
|
25,410,350
|
|
CPD
|
|
|
|
|
|
|
|
|
|
|
2,766,619
|
|
|
|
3,227,077
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
39,578,509
|
|
|
$
|
28,637,427
|
|
NOTE 18 LEASES
Viewpoint is obligated under an operating lease agreement for office space in Newton, Massachusetts, expiring in March 2021. The lease is secured by a certificate of deposit held by the Company in the amount of $55,014 and included in restricted cash as of June 30, 2019 and December 31, 2018. The lease provides for increases in rent for real estate taxes and operating expenses, and contains a renewal option for an additional five years.
The Door occupies space in New York. An entity wholly owned by the former Members of The Door is obligated under an operating lease agreement for the office space expiring in August 2020. The Company made payments of $108,785 to the affiliate during the six months ended June 30, 2019 related to this lease. The lease is secured by a cash security deposit of approximately $29,000.
The Door is obligated under an operating lease agreement for office space in Chicago, Illinois, at a fixed rate of $2,200 per month, expiring in May 2020. The lease is secured by a cash deposit of approximately $1,500.
42West is obligated under an operating lease agreement for office space in New York, expiring in December 2026. The lease is secured by a standby letter of credit in the amount of $677,354 and provides for increases in rent for real estate taxes and building operating costs. The lease also contains a renewal option for an additional five years.
42West is obligated under an operating lease agreement for office space in California, expiring in December 2021. The lease is secured by a cash security deposit of $44,788 and a standby letter of credit in the amount of $50,000 at June 30, 2019. The lease also provides for increases in rent for real estate taxes and operating expenses, and contains a renewal option for an additional five years, as well as an early termination option effective as of February 1, 2019. Should the early termination option be executed, the Company will be subject to a termination fee in the amount of approximately $637,000. The Company has not and does not expect to execute such option.
The Company is obligated under an operating lease agreement for office space in Miami, Florida. The lease is secured by a cash security deposit of $8,433. The original term of the lease expired October 31, 2016 and the Company extended the lease until September 30, 2019 with substantially the same terms as the original lease.
32
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The Company is obligated under an operating lease for office space in Los Angeles, California until July 31, 2019. The monthly rent is $13,746 with annual increases of 3% for years 1 3 and 3.5% for the remainder of the lease. The lease is secured by a cash security deposit in the amount of $32,337. On June 1, 2017, the Company entered into an agreement to sublease the office space in Los Angeles, California. The sublease is effective June 1, 2017 through July 31, 2019 with lease payment as follows: (i) $14,892 per month for the first twelve months, with the first two months of rent abated and (ii) $15,338 per month for the remainder of the sublease. The subtenant vacated the premises on July 31, 2019 and the Companys obligations under the sublease and master lease agreements have been satisfied.
The amortizable life of the right of use asset is limited by the expected lease term. Although certain leases include options to extend the Company did not include these in the right of use asset or lease liability calculations because it is not reasonably certain that the options will be executed.
|
|
|
|
|
|
|
|
|
|
|
January 1,
2019
|
|
|
June 30,
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
$
|
7,547,769
|
|
|
$
|
6,529,077
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Lease liability
|
|
$
|
1,394,479
|
|
|
$
|
1,408,122
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
Lease liability
|
|
$
|
6,298,437
|
|
|
$
|
5,608,043
|
|
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
7,692,916
|
|
|
$
|
7,016,165
|
|
The table below shows the lease income and expenses recorded in the consolidated statement of operations incurred during the three and six months ended June 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
Lease costs
|
|
Classification
|
|
Three months
ended
June 30,
2019
|
|
|
Six months
ended
June 30,
2019
|
|
Operating lease costs
|
|
Selling, general and administrative expenses
|
|
$
|
542,325
|
|
|
$
|
1,121,729
|
|
Operating lease costs
|
|
Direct costs
|
|
|
60,861
|
|
|
|
121,722
|
|
Sublease income
|
|
Selling, general and administrative expenses
|
|
|
(47,522
|
)
|
|
|
(94,738
|
)
|
Net lease costs
|
|
|
|
$
|
555,664
|
|
|
$
|
1,148,713
|
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
2019 (excluding six months ended June 30, 2019)
|
$
|
961,081
|
|
2020
|
|
|
1,892,725
|
|
2021
|
|
|
1,550,344
|
|
2022
|
|
|
926,500
|
|
2023
|
|
|
927,564
|
|
Thereafter
|
|
|
2,860,001
|
|
Total lease payments
|
|
$
|
9,118,215
|
|
Less: Imputed interest
|
|
|
(2,102,050
|
)
|
Present value of lease liabilities
|
|
$
|
7,016,165
|
|
The Company used its incremental borrowing rate on January 1, 2019, deemed to be 8%, to calculate the present value of the lease liabilities and right of use asset. The weighted average remaining lease term for our operating leases was six years at June 30, 2019.
33
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On February 19, 2019, the Company entered into an agreement to lease 3,024 square feet of office space in Coral Gables, Florida. The lease is for a period of 62 months from the commencement date, at a monthly lease rate of $9,954 with annual increases of 3%. The rent payments are abated for the first four months of the lease after the commencement date. Per the lease agreement, the commencement date is defined as the earlier of (i) date on which landlord delivers to the tenant possession of the premises with the work (as defined in the lease) substantially completed and (ii) the date of which the tenant begins occupying the premises for the conduct of business. The lease allows for a tenant improvement allowance to build out the space and any cost of the improvements over the tenant allowance are the Companys responsibility. The landlord is responsible for the construction of the improvements. The Company evaluated the provisions of the lease and determined that (i) it does not have the right to obtain the partially constructed underlying asset during the construction, (ii) the lessor does not have an enforceable right to payment for its performance to date (iii) the asset has an alternative use to the lessor and (iv) the Company does not own the land or the property improvements being constructed. As such this lease was not included in the right of use asset or lease liabilities on the Companys consolidated balance sheet as of June 30, 2019.
The Company adopted ASU 2016-02 with respect to leases effective January 1, 2019. In July 2018, the FASB added an optional transition method which the Company elected upon adoption of the new standard. This allowed us to recognize and measure leases existing at January 1, 2019 without restating comparative information.
NOTE 19 COMMITMENTS AND CONTINGENCIES
Litigation
On or about January 25, 2010, an action was filed by Tom David against Winterman Group Limited, Dolphin Digital Media (Canada) Ltd., Malcolm Stockdale and Sara Stockdale in the Superior Court of Justice in Ontario (Canada) alleging breach of a commercial lease and breach of a personal guaranty. On or about March 18, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Statement of Defense and Crossclaim. In the Statement of Defense, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale denied any liability under the lease and guaranty. In the Crossclaim filed against Dolphin Digital Media (Canada) Ltd., Winterman Group Limited, Malcolm Stockdale and Sara Stockdale seek contribution or indemnity against Dolphin Digital Media (Canada) Ltd. alleging that Dolphin Digital Media (Canada) agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. On or about March 19, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Third-Party Claim against the Company seeking contribution or indemnity against the Company, formerly known as Logica Holdings, Inc., alleging that the Company agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. The Third-Party Claim was served on the Company on April 6, 2010. On or about April 1, 2010, Dolphin Digital Media (Canada) filed a Statement of Defense and Crossclaim. In the Statement of Defense, Dolphin Digital Media (Canada) denied any liability under the lease and in the Crossclaim against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale, Dolphin Digital Media (Canada) seeks contribution or indemnity against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale alleging that the leased premises were used by Winterman Group Limited, Malcolm Stockdale and Sara Stockdale for their own use. On or about April 1, 2010, Dolphin Digital Media (Canada) also filed a Statement of Defense to the Crossclaim denying any liability to indemnify Winterman Group Limited, Malcolm Stockdale and Sara Stockdale. The ultimate results of these proceedings against the Company cannot be predicted with certainty. On or about March 12, 2012, the Court served a Status Notice on all the parties indicating that since more than (2) years had passed since a defense in the action had been filed, the case had not been set for trial and the case had not been terminated, the case would be dismissed for delay unless action was taken within ninety (90) days of the date of service of the notice. The Company has not filed for a motion to dismiss and no further action has been taken in the case. The ultimate results of these proceedings against the Company could result in a loss ranging from 0 to $325,000. On March 23, 2012, Dolphin Digital Media (Canada) Ltd filed for bankruptcy in Canada. The bankruptcy will not protect the Company from the third-party claim filed against it. However, the Company has not accrued for this loss because it believes that the claims against it are without substance and it is not probable that they will result in loss. As of June 30, 2019, the Company had not received any other notifications related to this action.
34
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Incentive Compensation Plan
On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the 2017 Plan). The 2017 Plan was adopted as a flexible incentive compensation plan that would allow us to use different forms of compensation awards to attract new employees, executives and directors, to further the goal of retaining and motivating existing personnel and directors and to further align such individuals interests with those of the 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 Internal Revenue Code of 1986, as amended (the Code). Under these limitations, in any fiscal year of the Company during any part of which the 2017 Plan is in effect, no participant may be granted (i) stock options or stock appreciation rights with respect to more than 300,000 shares, or (ii) performance shares (including shares of restricted stock, restricted stock units, and other stock based-awards that are subject to satisfaction of performance goals) that the Compensation Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to more than 300,000 shares, in each case, subject to adjustment in certain circumstances. The maximum amount that may be paid out to any one participant as performance units that the Compensation Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to any 12-month performance period is $1,000,000 (pro-rated for any performance period that is less than 12 months), and with respect to any performance period that is more than 12 months, $2,000,000. During the six months ended June 30, 2019, the Company did not issue any Awards under the 2017 Plan.
Employee Benefit Plan
The Company has a 401(K) profit sharing plan that covers substantially all of its employees. The Company matches 100% of the first 3% contributed by the employee and then 50% up to a maximum of 4% contributed by the employee. The contribution is also limited by annual maximum amount determined by the Internal Revenue Service. The Companys contributions were $51,777 and $149,220 during the three and six months ended June 30, 2019. Contributions to the 42West 401(K) plan that was in existence during the six months ended June 30, 2019, are at the discretion of management. The Companys contributions were $44,030, for the six months ended June 30, 2019. 42West adopted the Companys plan during the quarter ended June 30, 2019.
Employment Contracts
As a condition to the Viewpoint Purchase, two of the Viewpoint Shareholders, Carlo DiPersio and David Shilale entered into employment agreements with the Company to continue as employees after the closing of the Viewpoint Purchase. Mr. 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 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. A third senior management level employee with an employment contract with similar terms as described above, left 42West during the six months ended June 30, 2019.
35
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
As a condition to the closing of the acquisition of 42West each of the three principal sellers entered into employment agreements (the Employment Agreements) with the Company and have agreed to continue as employees of the Company for a three-year term. Each of the Employment Agreements provides for a base salary with annual increases and contain provisions for termination and as a result of death or disability. During the term of the Employment Agreement, these persons are entitled to participate in all employee benefit plans, practices and programs maintained by the Company as well as are entitled to paid vacation in accordance with the Companys policy. Each of the Employment Agreements contains lock-up provisions pursuant to which each such person has agreed to certain transfer restrictions with respect to the shares of Common Stock received in connection with the acquisition of 42West.
On April 5, 2018, the principal sellers of 42West signed amendments to their respective employment agreements that modified the annual bonus provisions. These amendments eliminated the rights of each of them (i) to be eligible to receive in accordance with the provisions of the 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 closing 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. No cash bonuses were paid during the six months ended June 30, 2019 to the principal sellers of 42West.
Letter of Credit
Pursuant to the lease agreements of the 42West New York and Los Angeles office locations, the Company is required to issue letters of credit to secure the leases. On July 24, 2018, the Company renewed the letter of credit issued by City National Bank for the 42West office space in New York. The letter of credit is for $677,354 and originally expired on August 1, 2018. This letter of credit renews automatically annually unless City National Bank notifies the landlord 60-days prior to the expiration of the banks election not to renew the letter of credit. The Company granted City National Bank a security interest in bank account funds totaling $677,354 pledged as collateral for the letter of credit. On June 29, 2018, the Company issued a letter of credit through Bank United, in the amount of $50,000, reducing the borrowing capacity under the Loan Agreement by that amount. The letters of credit commit the issuer to pay specified amounts to the holder of the letter of credit under certain conditions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. The Company was not aware of any material claims relating to its outstanding letters of credit as of June 30, 2019.
Motion Picture Industry Pension Accrual
Until April 2, 2019, 42West was a contributing employer to the Motion Picture Industry Pension Individual Account and Health Plans (collectively the Plans), two multiemployer pension funds and one multiemployer welfare fund, respectively, that are governed by the Employee Retirement Income Security Act of 1974, as amended. The Plans conducted an audit of 42Wests books and records for the period June 7, 2011 through August 20, 2016 in connection with the contribution obligations to the Plans. During 2018, 42West came to an agreement with the Plans to pay $314,256 over a twelve-month period. During the three and six months ended June 30, 2019, it paid an aggregate amount of $83,764 and $167,527, respectively, to the Plans related to this agreement. The remaining balance of $27,921 is recorded in other current liabilities on the condensed consolidated balance sheet as of June 30, 2019. As of December 31, 2018, the Company had accrued $174,651 in its consolidated balance sheet related to the audit.
NOTE 20 SUBSEQUENT EVENTS
On July 10, 2019, the Company paid $75,000 to one of the sellers of 42West for a Put Right that was exercised on June 24, 2019.
On July 9, 2019, the Company issued a convertible promissory note agreement to a third-party investor and received $150,000. The convertible promissory note bears interest at a rate of 10% per annum and matures on July 9, 2021. The balance of the convertible promissory note and any accrued interest may be converted at the note holders option at any time at a purchase price based on the 30-day average closing market price per share of the Common Stock
On July 17, 2019, the Company paid $100,000 to one of the sellers of 42West for a Put Right that was exercised on June 28, 2019.
36
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On July 23, 2019, pursuant to the terms of the securities purchase agreement with Lincoln Park, the Company issued Series B Warrants that entitle the holder to purchase up to 137,500 shares of Common Stock at $2.00 per share. The initial exercise date of the Series B Warrants is January 23, 2020 and can be exercised thereafter for a period of five years.
On August 12, 2019, the Compensation Committee of the Companys Board of Directors unanimously approved a salary increase of $50,000 each to the Companys Chief Executive Officer and Chief Financial Officer effective January 1, 2019.
In connection with the Put Agreement with 42West co-CEO Leslee Dart, on August 12, 2019, the Company entered into an amendment, waiver and exchange agreement (the Dart Exchange Agreement) pursuant to which Ms. Dart waived her Put Right with respect to 76,194 shares of Common Stock in exchange for a convertible note (the Dart Convertible Note) in the aggregate principal amount of $702,500, issued on the date of the Dart Exchange Agreement.
The Dart Convertible Note is convertible at any time into shares of Common Stock (the Conversion Shares) at a conversion price (the Conversion Price) equal to the quotient obtained by dividing (i) the principal and interest being converted by (ii) the average closing price per share of Common Stock, as reported by the Nasdaq Stock Market (or such other exchange or quotation system on which the Common Stock is then traded) for the 30-trading days immediately prior to, but not including the date on which the holder delivers the notice of conversion. The Conversion Price subject to adjustments for stock splits, reclassifications and certain other transactions involving the Company or its securities. The Dart Convertible Note bears an interest rate of ten percent per annum. The Dart Convertible Note matures on August 12, 2020 unless earlier converted or redeemed. The Company may, at its option, prepay all or any portion of the outstanding balance under the Dart Convertible Note without penalty or premium.
The Dart Convertible Note provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others, the following: nonpayment of principal or interest; failure to maintain corporate existence; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the Dart Convertible Note, the holder may declare the principal of, and accrued interest on, the Dart Convertible Note due and payable. In the case of certain events of bankruptcy or insolvency, all amounts outstanding under the Dart Convertible Note, together with accrued and unpaid interest thereon, would automatically become due and payable. The Dart Convertible Note was issued to the holder in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act, based upon the representation made by the holder that she is an accredited investor and that she is acquiring the Dart Convertible Note solely for the purposes of investment and not with a present view to, or for sale in connection with, any distribution or resale thereof. In addition, there was no general advertisement conducted by the Company in connection with the issuance of the Dart Convertible Note.
In connection with the Put Agreement with Allan Mayer, a member of the Companys board of directors and 42West co-CEO, on August 12, 2019, the Company entered into an amendment, waiver and exchange agreement (the Mayer Exchange Agreement) pursuant to which Mr. Mayer waived his Put Right with respect to 44,740 shares of Common Stock in exchange for 385,514 shares of the Companys Common Stock (the Mayer Common Stock) issued on the date of the Mayer Exchange Agreement The Mayer Common Stock was issued to the holder in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act, based upon the representation made by the holder that he is an accredited investor and that he is acquiring the Mayer Common Stock solely for the purposes of investment and not with a present view to, or for sale in connection with, any distribution or resale thereof. In addition, there was no general advertisement conducted by the Company in connection with the issuance of the Mayer Common Stock.
37