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
MARCH 31, 2020
NOTE 1 GENERAL
Dolphin Entertainment, Inc., a Florida corporation (the Company, Dolphin, we, us or our), is a leading independent entertainment marketing and premium content development company. Through its acquisitions of 42West LLC (42West), The Door Marketing Group, LLC (The Door), Shore Fire Media, Ltd (Shore Fire) and Viewpoint Computer Animation Incorporated (Viewpoint), the Company provides expert strategic marketing and publicity services to all of the major film studios, and many of the leading independent and digital content providers, A-list celebrity talent, including actors, directors, producers, celebrity chefs and recording artists. The Company also provides strategic marketing publicity services and creative brand strategies for prime hotel and restaurant groups. The strategic acquisitions of 42West, The Door, Shore Fire and Viewpoint bring together premium marketing services with premium content production, creating significant opportunities to serve respective constituents more strategically and to grow and diversify the Companys business. Dolphins content production business is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. Dolphin produces original feature films and digital programming primarily aimed at family and young adult markets.
Impact of COVID-19
On March 11, 2020, the World Health Organization categorized a novel coronavirus (COVID-19) as a pandemic, and it continues to spread throughout the United States. The outbreak of COVID-19 and public and private sector measures to reduce its transmission, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place have adversely affected the demand for certain of the services the Company offers resulting in decreased revenues and cash flows. Hotels, restaurants and content productions have reduced or suspended operating activities which has negatively impacted the Companys clients, and as a result, negatively impacted the Companys revenues from the services offered to clients operating in these industries. The Company expects that the effects of COVID-19 pandemic will continue to negatively impact its results of operations, cash flows and financial position; however, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of COVID-19. The Company has taken steps such as freezes on hiring, staff reductions, salary reductions and cuts in non-essential spending to mitigate the effects of COVID-19 on the Companys financial results. Between April 19, 2020 and April 23, 2020, the Company and its subsidiaries received five separate unsecured loans for an aggregate amount of $2.8 million (the PPP Loans) under the Paycheck Protection Program (the PPP) which was established under the Coronavirus Aid, Relief and Economic Security Act (the CARES Act). Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments and covered utilities during the measurement period beginning on the date of first disbursement of the PPP Loans. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount can be attributable to non-payroll costs. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of the PPP Loans based on its future adherence to the forgiveness criteria.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films, Inc. (Dolphin Films), Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC (Max Steel Holdings), Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The Door, Viewpoint and Shore Fire.
The Company enters into relationships or investments with other entities, and, in certain instances, the entity in which the Company has a relationship or investment may qualify as a variable interest entity (VIE). The Company consolidates a VIE in its financial statements if the Company is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has the power to direct activities that most significantly impact the operations of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE. The Company has included in its condensed consolidated financial statements JB Believe, LLC as a VIE. During the three months ended March 31, 2020, the Company analyzed its status as the primary beneficiary of Max Steel Productions LLC (Max Steel VIE) that has previously been consolidated in the financial statements of the Company and determined that it was no longer the primary beneficiary. As a result, the Company deconsolidated the financial statements of Max Steel VIE on a prospective basis from the Companys condensed consolidated financial statements as of March 31, 2020. See Note 13 for further discussion.
7
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the Exchange Act), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the 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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements and related notes included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to the expected revenue and costs for investments in digital and feature film projects, estimates of sales returns and other allowances, provisions for doubtful accounts and impairment assessments for investment in feature film projects, goodwill and intangible assets. Actual results could differ materially from such estimates.
Additionally, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. However, management has made appropriate accounting estimates on certain accounting matters, which include the allowance for doubtful accounts, carrying value of the goodwill and other intangible assets, carrying amount of certain convertible notes payable and embedded derivatives and warrant liabilities, based on the facts and circumstances available as of the reporting date. The Companys future assessment of the magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in material impacts to the Companys financial statements in future reporting periods.
Revision of Prior Period Financial Statements
During the preparation of condensed consolidated financial statement for the three months ended March 31, 2020, the Company identified certain immaterial errors related to its accounting of the 2019 Lincoln Park Note, 2019 Lincoln Park Warrants and the Pinnacle Note. The Company concluded that the conversion feature of the 2019 Lincoln Park Note and the 2019 Lincoln Park Warrants met the definition of a derivative and should have been recorded at fair value at inception and remeasured at each reporting period with changes in the fair value recognized in earnings. The accretion to par value of the 2019 Lincoln Park Note is recorded as interest expense. The Company had originally accounted for the 2019 Lincoln Park Warrants as equity-linked instruments and had not bifurcated the conversion feature in the 2019 Lincoln Park Note.
The Company also reviewed the Pinnacle Note that had a down round provision allowing for the repricing of the conversion price upon the Companys issuance of equity securities at a price lower than the Pinnacle Note conversion price. On October 21, 2019, the Company sold shares of Common Stock in a registered public offering, at a price of $0.7828 when the Pinnacle Note conversion price was $3.00. As a result, the conversion price of the Pinnacle Note was repriced to $0.7828. Due to the repricing, the Company should have recorded a beneficial conversion feature on the date of the repricing and amortized the beneficial conversion feature as interest expense over the remaining life of the Pinnacle Note that matured on January 5, 2020.
In accordance with SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company evaluated the errors and determined that the related impact was not material to the Company’s financial statements for any prior annual or interim period, but that correcting the cumulative impact of the error would be significant to the Company’s results of operations for the three months ended March 31, 2020. Accordingly, the Company revised the consolidated balance sheets and quarterly and year to date 2019 consolidated statements of operations as of and for the quarterly and year to date periods ended June 30, 2019, September 30, 2019 and December 31, 2019, including the related notes presented herein, as applicable. The errors did not impact revenue or loss from operations in the consolidated statements of operations, or net cash used in operations reported in the consolidated statements of cash flows for any of those periods, which the Company understands to be the key metrics investors focus on.
8
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
A summary of the revisions to previously reported financial information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
|
|
|
As Adjusted
|
|
Revised Consolidated Balance Sheet as of June 30, 2019
|
|
Convertible note payable (noncurrent)
|
|
$
|
1,044,232
|
|
|
$
|
(380,636
|
)
|
|
[2]
|
|
$
|
663,596
|
|
Warrant liability (noncurrent)
|
|
$
|
|
|
|
$
|
302,306
|
|
|
[3]
|
|
$
|
302,306
|
|
Derivative liability
|
|
$
|
|
|
|
$
|
150,000
|
|
|
[4]
|
|
$
|
150,000
|
|
Total noncurrent liabilities
|
|
$
|
8,559,526
|
|
|
$
|
71,670
|
|
|
|
|
$
|
8,631,196
|
|
Total liabilities
|
|
$
|
31,088,896
|
|
|
$
|
71,670
|
|
|
|
|
$
|
31,160,566
|
|
Additional paid in capital
|
|
$
|
103,571,126
|
|
|
$
|
(166,887
|
)
|
|
[5]
|
|
$
|
103,404,239
|
|
Accumulated deficit
|
|
$
|
(95,298,433
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(95,203,216
|
)
|
Total stockholders' equity
|
|
$
|
8,489,611
|
|
|
$
|
(71,670
|
)
|
|
|
|
$
|
8,417,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated Statement of Operations for the three months ended June 30, 2019
|
Change in fair value of derivative liability
|
|
$
|
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
Change in fair value of warrant liability
|
|
$
|
|
|
|
$
|
81,766
|
|
|
[7]
|
|
$
|
81,766
|
|
Interest expense
|
|
$
|
(301,138
|
)
|
|
$
|
(16,549
|
)
|
|
[8]
|
|
$
|
(317,687
|
)
|
Total other income
|
|
$
|
310,211
|
|
|
$
|
95,217
|
|
|
|
|
$
|
405,429
|
|
Loss before income taxes/Net loss
|
|
$
|
(891,867
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(796,650
|
)
|
Basic net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.05
|
)
|
Diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated Statement of Operations for the six months ended June 30, 2019
|
Change in fair value of derivative liability
|
|
$
|
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
Change in fair value of warrant liability
|
|
$
|
|
|
|
$
|
81,766
|
|
|
[7]
|
|
$
|
81,766
|
|
Interest expense
|
|
$
|
(589,108
|
)
|
|
$
|
(16,549
|
)
|
|
[8]
|
|
$
|
(605,657
|
)
|
Total other income
|
|
$
|
1,257,981
|
|
|
$
|
95,217
|
|
|
|
|
$
|
1,353,198
|
|
Loss before income taxes/Net loss
|
|
$
|
(769,259
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(674,042
|
)
|
Basic net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.04
|
)
|
Diluted net loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Consolidated Balance Sheet as of September 30, 2019
|
Convertible note payable (noncurrent)
|
|
$
|
1,477,597
|
|
|
$
|
(330,989
|
)
|
|
[2]
|
|
$
|
1,146,608
|
|
Warrant liability (noncurrent)
|
|
$
|
|
|
|
$
|
228,269
|
|
|
[3]
|
|
$
|
228,269
|
|
Derivative liability
|
|
$
|
|
|
|
$
|
150,000
|
|
|
[4]
|
|
$
|
150,000
|
|
Total noncurrent liabilities
|
|
$
|
8,299,494
|
|
|
$
|
47,280
|
|
|
|
|
$
|
8,346,774
|
|
Total liabilities
|
|
$
|
29,890,000
|
|
|
$
|
47,280
|
|
|
|
|
$
|
29,937,280
|
|
Additional paid in capital
|
|
$
|
103,146,270
|
|
|
$
|
(166,887
|
)
|
|
[5]
|
|
$
|
102,979,383
|
|
Accumulated deficit
|
|
$
|
(95,649,264
|
)
|
|
$
|
119,607
|
|
|
|
|
$
|
(95,529,657
|
)
|
Total stockholders' equity
|
|
$
|
7,717,630
|
|
|
$
|
(47,280
|
)
|
|
|
|
$
|
7,670,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated Statement of Operations for the three months ended September 30, 2019
|
Change in fair value of derivative liability
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
Change in fair value of warrant liability
|
|
$
|
|
|
|
$
|
74,037
|
|
|
[7]
|
|
$
|
74,037
|
|
Interest expense
|
|
$
|
(295,556
|
)
|
|
$
|
(49,647
|
)
|
|
[8]
|
|
$
|
(345,203
|
)
|
Total other income
|
|
$
|
1,061,340
|
|
|
$
|
24,390
|
|
|
|
|
$
|
1,085,730
|
|
Loss before income taxes/Net loss
|
|
$
|
(350,831
|
)
|
|
$
|
24,390
|
|
|
|
|
$
|
(326,441
|
)
|
Basic net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
|
|
|
|
|
$
|
(0.02
|
)
|
Diluted net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
|
|
$
|
(0.05
|
)
|
9
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
|
|
|
As Adjusted
|
|
Revised Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019
|
Change in fair value of derivative liability
|
|
$
|
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
Change in fair value of warrant liability
|
|
$
|
|
|
|
$
|
155,803
|
|
|
[7]
|
|
$
|
155,803
|
|
Interest expense
|
|
$
|
(884,665
|
)
|
|
$
|
(66,196
|
)
|
|
[8]
|
|
$
|
(950,861
|
)
|
Total other income
|
|
$
|
2,319,321
|
|
|
$
|
119,607
|
|
|
|
|
|
|
$
|
2,438,928
|
|
Loss before income taxes/Net loss
|
|
$
|
(1,120,090
|
)
|
|
$
|
119,607
|
|
|
|
|
$
|
(1,000,483
|
)
|
Basic net loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.06
|
)
|
Diluted net loss per share
|
|
$
|
(0.17
|
)
|
|
$
|
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Consolidated Balance Sheet as of December 31, 2019
|
Convertible note payable (noncurrent)
|
|
$
|
1,907,575
|
|
|
$
|
(177,957
|
)
|
|
[2]
|
|
$
|
1,729,618
|
|
Convertible note payable (current)
|
|
$
|
2,452,960
|
|
|
$
|
(69,350
|
)
|
|
[9]
|
|
$
|
2,383,610
|
|
Warrant liability (noncurrent)
|
|
$
|
|
|
|
$
|
189,590
|
|
|
[3]
|
|
$
|
189,590
|
|
Derivative liability
|
|
$
|
|
|
|
$
|
170,000
|
|
|
[4]
|
|
$
|
170,000
|
|
Total current liabilities
|
|
$
|
22,490,861
|
|
|
$
|
(69,350
|
)
|
|
|
|
$
|
22,421,511
|
|
Total noncurrent liabilities
|
|
$
|
10,392,050
|
|
|
$
|
181,633
|
|
|
|
|
$
|
10,573,683
|
|
Total liabilities
|
|
$
|
32,882,911
|
|
|
$
|
112,283
|
|
|
|
|
$
|
32,995,194
|
|
Additional paid in capital
|
|
$
|
105,443,656
|
|
|
$
|
1,022,240
|
|
|
[10]
|
|
$
|
106,465,896
|
|
Accumulated deficit
|
|
$
|
(96,024,243
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(97,158,766
|
)
|
Total stockholders' equity
|
|
$
|
9,688,815
|
|
|
$
|
(112,283
|
)
|
|
|
|
$
|
9,576,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated Statement of Operations for the three months ended December 31, 2019[1]
|
Change in fair value of derivative liability
|
|
$
|
|
|
|
$
|
(20,000
|
)
|
|
[6]
|
|
$
|
(20,000
|
)
|
Change in fair value of warrant liability
|
|
$
|
|
|
|
$
|
38,679
|
|
|
[7]
|
|
$
|
38,679
|
|
Interest expense
|
|
$
|
(321,536
|
)
|
|
$
|
(1,272,809
|
)
|
|
[11]
|
|
$
|
(1,594,345
|
)
|
Total other income
|
|
$
|
154,258
|
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,099,872
|
)
|
Loss before income taxes
|
|
$
|
(491,486
|
)
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,745,616
|
)
|
Net loss
|
|
$
|
(73,287
|
)
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,327,417
|
)
|
Basic net loss per share
|
|
$
|
|
|
|
$
|
(0.07
|
)
|
|
|
|
$
|
(0.07
|
)
|
Diluted net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated Statement of Operations for the year ended December 31, 2019
|
Change in fair value of derivative liability
|
|
$
|
|
|
|
$
|
10,000
|
|
|
[6]
|
|
$
|
10,000
|
|
Change in fair value of warrant liability
|
|
$
|
|
|
|
$
|
194,482
|
|
|
[7]
|
|
$
|
194,482
|
|
Interest expense
|
|
$
|
(1,206,201
|
)
|
|
$
|
(1,339,006
|
)
|
|
[11]
|
|
$
|
(2,545,207
|
)
|
Total other income
|
|
$
|
2,473,579
|
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
1,339,056
|
|
Loss before income taxes
|
|
$
|
(1,611,576
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(2,746,099
|
)
|
Net loss
|
|
$
|
(1,193,377
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(2,327,900
|
)
|
Basic net loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
$
|
(0.14
|
)
|
Diluted net loss per share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
$
|
(0.24
|
)
|
|
|
[1]
|
The Company is not required to and has not previously reported information on the statement of operations for the three months ended December 31, 2019
|
[2]
|
Fair value and accretion to par value of the 2019 Lincoln Park Note.
|
[3]
|
Fair value of the 2019 Lincoln Park Warrants.
|
[4]
|
Fair value of the conversion feature of the 2019 Lincoln Park Note.
|
[5]
|
Reversal of beneficial conversion feature recorded for the 2019 Lincoln Park Note
|
[6]
|
Change in fair value of bifurcated conversion feature of 2019 Lincoln Park Note.
|
[7]
|
Change in fair value of 2019 Lincoln Park Warrant liability.
|
[8]
|
Reversal of the amortization of the beneficial conversion feature of the 2019 Lincoln Park Note offset by accretion of the 2019 Lincoln Park Note.
|
[9]
|
Unamortized discount on the beneficial conversion feature of the Pinnacle Note.
|
[10]
|
Contingent beneficial conversion feature on repricing of Pinnacle Note conversion, offset by reversal of beneficial conversion feature of the 2019 Lincoln Park Note.
|
[11]
|
Accretion of the 2019 Lincoln Park Note and $1.2 million of amortization of the beneficial conversion feature of the Pinnacle Note.
|
10
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Update to Significant Accounting Policies
Our significant accounting policies are detailed in "Note 3: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019. Significant changes to our accounting policies as a result of electing the fair value option for certain convertible notes and warrants issued during the three months ended March 31, 2020 is discussed below:
Fair Value Option (FVO) Election
2020 Convertible Notes
The Company accounts for certain convertible notes issued during the three months ended March 31, 2020 under the fair value option election of ASC 825, Financial Instruments (ASC-825) as discussed below.
The convertible notes accounted for under the FVO election are each a debt host financial instrument containing embedded features which would otherwise be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements under ASC 815, Derivatives and Hedging (ASC-815). Notwithstanding, ASC 825-10-15-4 provides for the fair value option (FVO) election, to the extent not otherwise prohibited by ASC 825-10-15-5, to be afforded to financial instruments, wherein bifurcation of an embedded derivative is not necessary, and the financial instrument is initially measured at its issue-date estimated fair value and then subsequently remeasured at estimated fair value on a recurring basis at each reporting period date.
The estimated fair value adjustment, as required by ASC 825-10-45-5, is recognized as a component of other comprehensive income (OCI) with respect to the portion of the fair value adjustment attributed to a change in the instrument-specific credit risk, with the remaining amount of the fair value adjustment recognized as other income (expense) in the accompanying condensed consolidated statement of operations. With respect to the above notes, as provided for by ASC 825-10-50-30(b), the estimated fair value adjustment is presented in a respective single line item within other income (expense) in the accompanying consolidated statement of operations, since the change in fair value of the convertible notes payable was not attributable to instrument specific credit risk.
Recent Accounting Pronouncements
Accounting Guidance Adopted
In March 2019, the Financial Accounting Standards Board (the FASB) issued new guidance on film production costs Accounting Standards Update (ASU) 2019-02, (Entertainment Films- Other Assets Film Costs (Subtopic 926-20)). The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and may be adopted early. The new guidance aligns the accounting for the production costs of an episodic series with those of a film by removing the content distinction for capitalization. It also addresses presentation, requires new disclosures for produced and licensed content and addresses cash flow classification for license agreements to better reflect the economics of an episodic series. The Company adopted this new guidance without a material impact on its consolidated financial statements.
In October 2018, the FASB issued new guidance on consolidation ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and should be applied retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The new guidance provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The Company adopted this new guidance without a material impact on its consolidated financial statements.
11
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
In August 2018, the FASB issued new guidance on fair value measurement (ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure 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 adopted this new guidance without a material impact on its consolidated financial statements.
Accounting Guidance Not yet Adopted
In June 2016, the FASB issued new guidance on measurement of credit losses (ASU 2016-13, Measurement of Credit Losses on Financial Instruments) with subsequent amendments issued in November 2018 (ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the accounting for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. It is applicable to trade accounts receivable. The guidance is effective for fiscal years beginning after December 15, 2022 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company's consolidated financial statements and disclosures.
NOTE 2 GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP and contemplate the continuation of the Company as a going concern. The Company had net income of $2,073,847 for the three months ended March 31, 2020, and had an accumulated deficit of $93,959,002 as of March 31, 2020. The net income for the three months ended March 31, 2020, is primarily attributable to gains on extinguishment of debt and changes in the fair value of certain derivative liabilities. As of March 31, 2020, the Company had a working capital deficit of $10,677,566 and therefore does not have adequate capital to fund its obligations as they come due or to maintain or grow its operations. In addition, one of the Companys subsidiaries operates in the food and hospitality industries that have been adversely affected by the government mandated work-from-home, stay-at-home and shelter-in-place orders as a result of the novel coronavirus COVID-19. As a result, the Companys revenues have been negatively impacted by a reduction in the services we provide to clients operating in these industries. The Company is dependent upon funds from the issuance of debt securities, securities convertible into shares of its common stock, par value $0.015 per share (Common Stock), sales of shares of Common Stock and financial support of certain shareholders. The continued spread of COVID-19 and uncertain market conditions may limit the Companys ability to access capital. If the Company is unable to obtain funding from these sources within the next 12 months, it could be forced to curtail its business operations or liquidate.
12
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
These factors raise substantial doubt about the ability of the Company to continue as a going concern. The condensed consolidated financial statements, of which these notes form a part, do not include any adjustments that might result from the outcome of these uncertainties. On June 5, 2020, the Company entered into a share purchase agreement with certain institutional investors and sold to such investors an aggregate of 7,900,000 shares of Common Stock in a registered direct offering for net proceeds of approximately $7.6 million. The Companys management currently plans to raise any necessary additional funds through additional issuances of its Common Stock, securities convertible into its Common Stock and/or debt securities, as well as available bank and non-bank financing, or a combination of such financing alternatives. There is no assurance that the Company will be successful in raising additional capital. Any issuance of shares of Common Stock or securities convertible into Common Stock would dilute the equity interests of our existing shareholders, perhaps substantially. The Company currently has the rights to several scripts, including one currently in development for which it intends to obtain financing to produce and release following which it expects to earn a producer and overhead fee. There can be no assurances that such production, together with any other productions, will be commenced or released or that fees will be realized in future periods or at all. The Company is currently exploring opportunities to expand the services currently being offered by 42West, The Door, Viewpoint and Shore Fire while reducing expenses of their respective operations through synergies with the Company. There can be no assurance that the Company will be successful in expanding such services or reducing expenses. Between April 19, 2020 and April 23, 2020, the Company and its subsidiaries received five separate PPP Loans for an aggregate amount of $2.8 million under PPP which was established under the Cares Act. The application for the PPP Loans requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operation of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that is not significantly detrimental to the business. The receipt of the funds from the PPP Loans and the forgiveness of the PPP Loans is dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of such PPP Loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the PPP Loans. There is no assurance that the Companys obligation under the PPP Loans will be forgiven. If the PPP Loans are not forgiven, the Company will need to repay the PPP Loans over a two-year period, commencing six months after the funding of the PPP Loans, at an interest rate of 1% per annum.
NOTE 3 GOODWILL
As of March 31, 2020, in connection with its acquisitions of 42West, The Door, Viewpoint and Shore Fire, the Company has a balance of $18,072,825 of goodwill on its condensed consolidated balance sheet which management has assigned to the entertainment publicity and marketing segment. This amount includes a working capital adjustment made during the three months ended March 31, 2020, in the amount of $124,836 pursuant to the terms of the Shore Fire purchase agreement. The Company accounts for goodwill in accordance with FASB ASC No. 350, IntangiblesGoodwill and Other (ASC 350). ASC 350 requires goodwill to be reviewed for impairment annually, or more frequently if circumstances indicate a possible impairment. The Company evaluates goodwill in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, management conducts a quantitative goodwill impairment test. This impairment test involves comparing the fair value of the reporting unit with its carrying value (including goodwill). The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies data. If the estimated fair value of the reporting unit is less than its carrying value, a goodwill impairment exists for the reporting unit and an impairment loss is recorded.
The Company determined that the adverse effects of COVID-19 on certain of the industries in which it operates could be an indicator of a possible impairment of goodwill. As such, the Company updated its estimates and assumptions, with the information available as of the date of this report, performed an impairment test on the carrying value of its goodwill and determined that an impairment adjustment was not necessary. As previously discussed, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. The Companys future assessment of the magnitude of the effects of the COVID-19 outbreak on its business could result in impairment of goodwill in future reporting periods.
13
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
NOTE 4 MERGERS AND ACQUISITIONS
Shore Fire Media, Ltd
On December 3, 2019, (the Shore Fire Closing Date), the Company acquired all of the issued and outstanding capital stock of Shore Fire, a New York corporation (the Shore Fire Purchase), pursuant to a share purchase agreement (the Shore Fire Share Purchase Agreement) dated on the Shore Fire Closing Date, between the Company and Shore Fire seller. Shore Fire is an entertainment public relations agency, offering talent publicity in the music, events, books, podcasts, and comedy sectors.
The total consideration paid to the Shore Fire seller in respect of the Shore Fire Purchase is $3.1 million as follows: (i) $1,140,000 in cash on the Shore Fire Closing date (adjusted for Shore Fires indebtedness, working capital and cash targets); (ii) $200,000 in shares of Common Stock at a price of $0.64 per share (314,812 shares) issued to the seller on the Shore Fire Closing Date, (iii) an additional $400,000 in shares of common stock paid in two equal installments of $200,000 each on the first and second anniversary of the Shore Fire Closing Date, (iv) an additional $1,000,000 in cash paid in four equal payments of $250,000 each to the seller on the three, six, twelve, and twenty-four month anniversaries of the Shore Fire Closing Date, and (v) $140,000 and $120,000 in cash paid to key employees on the first and second anniversary of the Shore Fire Closing Date. In addition, on March 31, 2020, the Company and the seller agreed on $124,836 as the amount of the working capital adjustment, pursuant to the terms of the Shore Fire Purchase Agreement. The Shore Fire Purchase Agreement contains customary representations, warranties, and covenants of the parties thereto. The Common Stock issued as part of the Initial Consideration has not been registered under the Securities Act of 1933, as amended (the Securities Act).
As a condition to the Shore Fire Purchase, the seller entered into an employment agreement with the Company to continue as an employee after the closing of the Shore Fire Purchase. The sellers employment agreement is through December 3, 2022 and the contract defines base compensation and a bonus structure based on Shore Fire achieving certain financial targets. The employment agreement contains provisions for termination and as a result of death or disability and entitles the employee to vacations and to participate in all employee benefit plans offered by the Company.
The provisional acquisition-date fair value of the consideration transferred totaled $3,124,836, which consisted of the following:
|
|
|
|
|
Common Stock issued at closing (314,812 shares)
|
|
$
|
200,000
|
|
Cash Consideration paid at closing
|
|
|
1,140,000
|
|
Cash Installment to be paid on March 3, 2020
|
|
|
250,000
|
|
Cash Installment to be paid on June 3, 2020
|
|
|
250,000
|
|
Cash Installment to be paid on December 3, 2020
|
|
|
390,000
|
|
Common Stock to be issued on December 3, 2020
|
|
|
200,000
|
|
Cash Installment to be paid on December 3, 2021
|
|
|
370,000
|
|
Common Stock to be issued on December 3, 2021
|
|
|
200,000
|
|
Working capital adjustment paid on April 1, 2020
|
|
|
124,836
|
|
|
|
$
|
3,124,836
|
|
The final amount of consideration may potentially change due to other closing adjustments, which have not yet been determined.
The fair value of the 314,812 shares of Common Stock issued on the Shore Fire Closing Date was determined based on the closing market price of the Companys Common Stock on the Shore Fire Closing Date of $0.64 per share.
14
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the Shore Fire Closing Date. Amounts in the table are provisional estimates that may change, as described below.
|
|
|
|
|
Cash
|
|
$
|
384,530
|
|
Accounts receivable
|
|
|
294,033
|
|
Other current assets
|
|
|
33,402
|
|
Property, plant & equipment
|
|
|
112,787
|
|
Intangibles
|
|
|
1,080,000
|
|
Total identifiable assets acquired
|
|
|
1,904,752
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(298,870
|
)
|
Accounts payable
|
|
|
(38,750
|
)
|
Deferred tax liability
|
|
|
(358,153
|
)
|
Contract liability
|
|
|
(143,339
|
)
|
Other current liability
|
|
|
(16,651
|
)
|
Total liabilities assumed
|
|
|
(855,763
|
)
|
Net identifiable assets acquired
|
|
|
1,048,989
|
|
Goodwill
|
|
|
2,075,847
|
|
Net assets acquired
|
|
$
|
3,124,836
|
|
Of the provisional fair value of the $1,080,000 of acquired identifiable intangible assets, $510,000 was assigned to customer relationships (5 years useful life) and $570,000 was assigned to the trade name (10-year useful life), that were recognized at a provisional fair value on the acquisition date. The customer relationships will be amortized using an accelerated method, and the trade name will be amortized using the straight-line method.
The provisional fair value of accounts receivable acquired is $294,033.
The provisional fair values of property and equipment and leasehold improvements of $112,787, and other assets of $33,402, are based on Shore Fires carrying values prior to the acquisition, which approximate their provisional fair values.
The provisional amount of $2,075,847 of goodwill was assigned to the entertainment publicity and marketing segment. The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of Shore Fire.
The following is a reconciliation of the initially reported fair value to the adjusted fair value of goodwill:
|
|
|
|
|
Goodwill originally reported at December 3, 2020
|
|
$
|
1,951,011
|
|
Changes to estimated fair values:
|
|
|
|
|
Working capital adjustment
|
|
|
124,836
|
|
Adjusted goodwill
|
|
$
|
2,075,847
|
|
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. As of March 31, 2020, the Company recorded the identifiable net assets acquired of $1,048,989 as shown in the table above in its condensed consolidated balance sheet. The Company did not recognize any adjustments to the identifiable net assets during the three months ended March 31, 2020.
15
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Unaudited Pro Forma Consolidated Statements of Operations
The following represents the Companys unaudited pro forma consolidated operations for the three months ended March 31, 2019 as if Shore Fire had been acquired on January 1, 2019 and its results had been included in the consolidated results of the Company for such period:
|
|
|
|
|
|
|
March 31,
2019
|
|
Revenue
|
|
$
|
7,461,227
|
|
Net income
|
|
$
|
162,035
|
|
These amounts have been calculated after applying the Companys accounting policies and adjusting the results of the acquisitions to reflect the amortization that would have been charged, assuming the intangible assets had been recorded on January 1, 2019.
The impact of the acquisition of Shore Fire on the 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 acquisitions been completed on January 1, 2019, as provided in this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition and results of operations of the combined company.
42West
In connection with the 42West acquisition, on March 30, 2017, the Company entered into put agreements (the Put Agreements) with each of the 42West sellers. Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Company has granted the 42West sellers the right, but not the obligation, to cause the Company to purchase up to an aggregate of 1,187,087 of their respective shares of Common Stock received as consideration for the 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 months ended March 31, 2020, the 42West sellers exercised Put Rights with respect to an aggregate of 177,518 shares of Common Stock. During the three months ended March 31, 2020, the Company made payments of $375,000 related to exercise of Put Rights, of which $275,000 pertained to Put Rights that were exercised in December 2019. As of March 31, 2020, the Company had a balance of $1,537,200 of Put Rights that were exercised but not yet paid. The Company also entered into Put Agreements with three separate 42West employees with change of control provisions in their employment agreements. The Company agreed to purchase up to 50% of the shares of Common Stock to be received by the employees in satisfaction of the change of control provision in their employment agreements. The employees have the right, but not the obligation, to cause the Company to purchase up to an additional 20,246 shares of Common Stock in respect of the Earn Out Consideration.
NOTE 5 CAPITALIZED PRODUCTION COSTS, ACCOUNTS RECEIVABLES AND OTHER CURRENT ASSETS
Capitalized Production Costs
Capitalized production costs include the unamortized costs of completed motion pictures and digital projects that have been produced by the Company, costs of scripts for projects that have not been developed or produced and costs for projects that are in production. These costs include direct production costs and production overhead and are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in the proportion that current years revenue bears to managements estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the motion picture or web series.
16
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The Company did not have any revenues from motion pictures for the three months ended March 31, 2020. Revenues earned from motion pictures was $78,990 for the three months ended March 31, 2019. These revenues were primarily attributable to Max Steel, the motion picture released on October 14, 2016. The Company amortizes capitalized production costs (included as direct costs) in the condensed consolidated statements of operations using the individual film forecast computation method, and did not record any amortization for the three months ending March 31, 2020 and 2019, related to Max Steel. As of each of March 31, 2020 and December 31, 2019, the Company did not have any capitalized productions costs related to Max Steel on its balance sheet.
The Company purchased scripts for other motion picture or digital productions and recorded $239,277 and $203,036 in capitalized production costs associated with these scripts as of March 31, 2020 and December 31, 2019, respectively. The Company intends to produce these projects, but they were not yet in production as of March 31, 2020 and there can be no assurance that these projects will be produced on the timelines anticipated or at all.
As of March 31, 2020, and December 31, 2019, the Company had total capitalized production costs of $239,277 and 203,036, respectively, recorded on its condensed consolidated balance sheets related to motion pictures.
The Company has assessed events and changes in circumstances that would indicate whether the Company should assess if the fair value of the productions is less than the unamortized costs capitalized and did not identify indicators of impairment.
Accounts Receivables
The 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 March 31, 2020 and December 31, 2019, the Company had accounts receivable balances of $3,464,936 and $3,581,155, respectively, net of allowance for doubtful accounts of $391,082 and $307,887, respectively, related to its entertainment publicity and marketing segment. The Company did not have any accounts receivable related to its content production segment.
Other Current Assets
The Company had a balance of $540,387 and $372,872 in other current assets on its condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, these amounts were primarily composed of the following:
Indemnification asset As of March 31, 2020 and December 31, 2019, the Company included in other current assets on its condensed consolidated balance sheet, $300,000 related to certain indemnifications associated with the 42West acquisition.
Prepaid expenses The Company records in other assets on its condensed consolidated balance sheets amounts prepaid for insurance premiums. The amounts are amortized on a monthly basis over the life of the policies.
Tax Incentives The Company has access to government programs that are designed to promote video production in the jurisdiction. As of March 31, 2020 and December 31, 2019, the Company had a balance of $5,228 from these tax incentives.
Income tax receivable The Company is owed an overpayment from certain taxes paid for 2018. As of March 31, 2020 and December 31, 2019, the Company had a balance of $19,610 from income tax receivable.
Capitalized costs The Company capitalizes certain third-party costs used in the production of its marketing video content. As of March 31, 2020 and December 31, 2019, the Company had a balance of $28,981 and $0, respectively related to these third-party costs.
17
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
NOTE 6 PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvement consists of:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Furniture and fixtures
|
|
$
|
797,289
|
|
|
$
|
792,611
|
|
Computers and equipment
|
|
|
1,734,753
|
|
|
|
1,728,916
|
|
Leasehold improvements
|
|
|
770,629
|
|
|
|
770,628
|
|
|
|
|
3,302,671
|
|
|
|
3,292,155
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,345,381
|
)
|
|
|
(2,255,306
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
957,290
|
|
|
$
|
1,036,849
|
|
The Company depreciates furniture and fixtures over a useful life of between five and seven years, computer and equipment over a useful life of between three and five years and leasehold improvements are amortized over the remaining term of the related leases. The Company recorded depreciation and amortization expense of $90,091 for the three months ended March 31, 2020.
NOTE 7 INVESTMENT
At March 31, 2020, investments, at cost, consisted of 344,980 shares of common stock of The Virtual Reality Company (VRC), a privately held company. In exchange for services rendered by 42West to VRC during 2015, 42West received both cash consideration and a promissory note that was convertible into shares of common stock of VRC. On April 7, 2016, VRC closed an equity financing round resulting in common stock being issued to a third-party investor. This transaction triggered the conversion of all outstanding promissory notes held by 42West into shares of common stock of VRC. The 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 March 31, 2020 and December 31, 2019, related to this investment.
NOTE 8 DEBT
Production Service Agreement
During 2014, Dolphin Films entered into a financing agreement to produce Max Steel (the Production Service Agreement). The Production Service Agreement was for a total amount of $10,419,009 with the lender taking a $892,619 producer fee. The Production Service Agreement contained repayment milestones to be made during 2015, which, if not met, accrued interest at a default rate of 8.5% per annum above the published base rate of HSBC Private Bank (UK) Limited until maturity on January 31, 2016 or the release of the movie. Due to a delay in the release of Max Steel, the Company did not make the repayments as prescribed in the Production Service Agreement. The loan was partially secured by international distribution agreements entered into by the Company prior to the commencement of principal photography and the receipt of tax incentives.
On February 20, 2020, the Company received notification from the lender of the Production Service Agreement that Max Steel VIE did not owe any debt to the lender. As a result, the Company recorded a gain on extinguishment of debt in the amount of $3,311,198 during the three months ended March 31, 2020.
As of March 31, 2020, and December 31, 2019, the Company had outstanding balances of $0 and $3,311,198 including accrued interest in the amount of $0 and 1,698,280, respectively, in the caption debt related to this Production Service Agreement on its condensed consolidated balance sheets.
18
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Line of Credit
On March 15, 2018, 42West entered into a business loan agreement with BankUnited, N.A. for a revolving line of credit (the Loan Agreement). The Loan Agreement matured on March 15, 2020 and bore interest on the outstanding balance at the banks prime rate plus 0.25% per annum throughout its term. The maximum amount that could have been drawn on the revolving line of credit was $2,250,000 with a sublimit of $750,000 for standby letters of credit. Amounts outstanding under the Loan Agreement were secured by 42Wests current and future inventory, chattel paper, accounts, equipment and general intangibles. On March 28, 2018, the Company drew $1,690,000 under the Loan Agreement to purchase 183,296 shares of Common Stock, pursuant to the Put Agreements. On February 20, 2020, the Company paid down $500,000 of the line of credit as part of an agreement to convert the line of credit into a three-year term loan described below. As of March 31, 2020, there was no balance on the line of credit due to its conversion to a term loan, and as of December 31, 2019, the outstanding balance on the line of credit was $1,700,390.
Term Loan
On March 31, 2020, 42West and The Door, as co-borrowers, entered into a business loan agreement with Bank United, N.A. to convert the balance of the 42West line of credit of $1,200,390 into a three-year term loan (the Term Loan). The Term Loan bears interest at a rate of 0.75% points over the Lenders Prime Rate and matures on March 15, 2023. As of March 31, 2020, the Company had balances of $372,863 in current liabilities and $827,527 in other noncurrent liabilities under the caption Term Loan on its condensed consolidated balance sheet.
The Term Loan contains customary affirmative covenants, including covenants regarding maintenance of a maximum debt to total net worth ratio of at least 4.0:1.0 and a minimum fixed charge coverage of 1.06x based on fiscal year-end audit to be calculated as provided in the Term Loan. Further, the Term Loan contains customary negative covenants, including those that, subject to certain exceptions, restrict the ability of 42West and The Door to incur additional indebtedness, grant liens, make loans, investments or certain acquisitions, or enter into certain types of agreements. Upon the occurrence of an event of default, the bank may accelerate the maturity of the loan and declare the unpaid principal balance and accrued but unpaid interest immediately due and payable. In the event of 42West and The Doors insolvency, such outstanding amounts will automatically become due and payable. 42West and The Door may prepay any amounts outstanding under the Term Loan without penalty. As of March 31, 2020, the Company was in compliance with all covenants under the Term Loan.
NOTE 9 NOTES PAYABLE
Convertible Notes
Fair Value Convertible Notes
On January 3, 2020, the Company entered into a securities purchase agreement with Lincoln Park Capital Fund LLC, an Illinois limited liability company (Lincoln Park) and issued a convertible promissory note with a principal amount of $1.3 million (the 2020 Lincoln Park Note) at a purchase price of $1.2 million together with warrants to purchase up to 207,588 shares of our common stock at an exercise price of $0.78 per share. The securities purchase agreement provides for issuance of warrants to purchase up to 207,588 shares of our common stock on each of the second, fourth, and sixth month anniversaries of the securities purchase agreement if the principal balance has not been paid on such dates (the 2020 Lincoln Park Warrants). As such, on March 4, 2020 the Company issued warrants to purchase up to 207,588 shares of its common stock. The 2020 Lincoln Park Note may be converted at any time into shares of our common stock (the 2020 Conversion Shares) at an initial conversion price equal to the lower of (A) $2.00 per share and (B) the lower of (i) the lowest intraday sales price of our common stock on the applicable conversion date and (ii) the average of the three lowest closing sales prices of our common stock during the twelve consecutive trading days including the trading day immediately preceding the conversion date but under no circumstances lower than $0.78 per share. If an event of default under the 2020 Lincoln Park Note occurs prior to maturity, the 2020 Lincoln Park Note will be convertible into shares of Common Stock at a 15% discount to the applicable conversion price. Outstanding principal under the 2020 Lincoln Park Note will not accrue interest, except upon an event of default, in which case interest at a default rate of 18% per annum would accrue until such event of default is cured. The 2020 Lincoln Park Note matures on January 3, 2022. The proceeds of the 2020 Lincoln Park Note were used to repay the 2018 Convertible Debt described below.
19
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The Company elected the fair value option to account for the 2020 Lincoln Park Note and determined that the 2020 Lincoln Park Warrants met the criteria to be accounted for as a derivative. The fair value of the 2020 Lincoln Park Note and the 2020 Lincoln Park Warrants on issuance was recorded as $885,559 and $314,441, respectively. The fair value of the note and warrants decreased by $105,550 and $54,441, respectively, and the change was recognized as current period other income in the condensed consolidated statement of operations for the three months ended March 31, 2020 (as no portion of such fair value adjustment resulted from instrument-specific credit risk). As of March 31, 2020 the balance of the 2020 Lincoln Park Note and the 2020 Lincoln Park Warrants recorded on the Companys condensed consolidated balance sheet was $780,000 and $260,000, respectively.
In connection with the transactions contemplated by the securities purchase agreement, on January 3, 2020, the Company entered into a registration rights agreement with Lincoln Park, pursuant to which the Company agreed to register the 2020 Conversion Shares for resale by Lincoln Park under the Securities Act, if during the six-month period commencing on the date of the Registration Rights Agreement, the Company files a resale registration statement with the Securities and Exchange Commission for any other shareholder of the Company.
On March 4, 2020, the Company issued a convertible promissory note to a third-party investor and in exchange received $500,000. The Company also agreed to issue a warrant (Series I Warrant) to purchase up to 100,000 shares of our common stock at purchase price of $0.78 per share. The convertible promissory note bears interest at a rate of 8% per annum and matures on March 4, 2030. The Company elected the fair value option to account for the convertible promissory note and determined that the Series I Warrant met the criteria to be accounted for as a derivative. As such, the Company recorded the fair value on issuance of the convertible promissory note and Series I Warrant as $460,000 and $40,000, respectively. For the three months ended March 31, 2020, the fair value of the convertible promissory note and Series I Warrant decreased by $90,000 and $10,000, respectively, and was recognized as current period other income (as no portion of such fair value adjustment resulted from instrument-specific credit risk) in the Companys condensed consolidated statement of operations. As of March 31, 2020, the balance of the convertible promissory note and Series I Warrant on the Companys condensed consolidated balance sheet was $370,000 and $30,000, respectively. The balance of the convertible promissory note and any accrued interest may be converted at the noteholders option at any time at a purchase price $0.78 per share of our common stock.
On March 25, 2020, the Company issued a convertible promissory note to a third-party investor for a principal amount of $560,000 and received $500,000, net of transaction costs of $10,000 paid to the investor and original issue discount. The Company also issued 50,000 shares of our common stock related to this convertible note payable. The maturity date of the convertible promissory note is March 25, 2021 and the balance of the convertible promissory note and any accrued interest may be converted at the noteholders option at any time at a purchase price $0.78 per share of our common stock. The Company elected the fair value option to account for the convertible promissory note. The convertible promissory notes fair value on issuance was recorded at $500,000. The fair value of the note increased by $48,100 and was recognized as current period other expense in the Companys condensed consolidated statement of operations for the three months ended March 31, 2020 (as no portion of such fair value adjustment resulted from instrument-specific credit risk). As of March 31, 2020 the balance of the convertible promissory note on the Companys condensed consolidated balance sheet was $548,100.
20
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On May 20, 2019, the Company entered into a securities purchase agreement with Lincoln Park pursuant to which the Company agreed to issue and sell to Lincoln Park a senior convertible promissory note in an initial principal amount of $1,100,000 (the 2019 Lincoln Park Note) at a purchase price of $1,000,000 (representing an original issue discount of approximately 9.09%), together with warrants to purchase up to 137,500 shares of Common Stock at an exercise price of $2.00 per share and 137,500 additional warrants on each of the second, fourth and sixth month anniversaries of the securities purchase agreement if any of the balance remains outstanding on such dates (the 2019 Lincoln Park Warrants). As such, on each of July 23, 2019, September 20, 2019, and November 20, 2019, the Company issued warrants to purchase up to 137,500 shares of Common Stock. During the three months ended March 31, 2020, the exercise price of the 2019 Lincoln Park Warrants was reduced to $0.78 per share. The 2019 Lincoln Park Note is convertible at any time into shares of Common Stock (the Conversion Shares) at an initial conversion price equal to the lower of (A) $5.00 per share and (B) the lower of (i) the lowest intraday sale price of the Common Stock on the applicable conversion date and (ii) the average of the three lowest closing sales prices of the Common Stock during the twelve consecutive trading days ending on and including the trading day immediately preceding the conversion date, subject in the case of this clause (B), to a floor of $1.00 per share. Pursuant to a re-pricing clause in the 2019 Lincoln Park Note, the $5.00 fixed conversion price was reduced to $0.78, the purchase price used in the Companys public offering that closed on October 21, 2019. Outstanding principal under the 2019 Lincoln Park Note will not accrue interest, except upon an event of default, in which case interest at a default rate of 18% per annum would accrue until such event of default is cured. The 2019 Lincoln Park Note matures on May 21, 2021 and can be paid prior to the maturity date without any penalty.
The Company accounts for the embedded conversion feature of the 2019 Lincoln Park Note at fair value under ASC-815. Under ASC-815, an embedded feature in a debt instrument that meets the definition of a derivative is fair valued at issuance and remeasured at each reporting period with changes in fair value recognized in earnings. The Company also determined that the 2019 Lincoln Park Warrants met the definition of a derivative and should be classified as a liability recorded at fair value upon issuance and remeasured at each reporting period with changes recorded in earnings. On each of February 3, February 12, February 27, and March 4, 2020, (the Conversion Dates) Lincoln Park converted $250,000 of principal ($1,000,000 total) into shares of Common Stock at a conversion price of $0.78. As of March 31, 2020, the carrying value of the 2019 Lincoln Park Note, after interest accretion and conversions, was $64,786 and the fair value of the embedded conversion feature was $15,456. The Company also recorded $54,711 of interest expense to accrete the note to par value for the three months ending March 31, 2020.
As of March 31, 2020, the aggregate fair value of the convertible promissory notes described above in Fair Value Convertible Debt was recorded under the caption convertible notes payable at fair value at $548,100 and $1,214,786 in current and noncurrent liabilities, respectively, in the Companys condensed consolidated balance sheet.
2020 Convertible Debt
On March 18, 2020, the Company issued two convertible promissory notes to two third-party investors for principal amounts of $120,000 and $75,000. The notes earn interest at 10% per annum and mature on March 18, 2022. The balance of each of the convertible promissory notes and any accrued interest may be converted at the noteholders option at any time at a purchase price $0.78 per share of our common stock.
2019 Convertible Debt
On each of March 25, 2019, July 9, 2019, September 25, 2019, and October 11, 2019 the Company issued convertible promissory note agreements to third-party investors and received $200,000, $150,000, $250,000, and $500,000, respectively, to be used for working capital. The convertible promissory notes bear interest at a rate of 10% per annum and mature on March 25, 2021, July 9, 2021, September 25, 2021, and October 11, 2021, respectively. The balance of the convertible promissory notes and any accrued interest may be converted into shares of Common Stock at the noteholders option at any time at a purchase price based on the 30-day trailing average closing price of the Common Stock. On January 1, 2020, $200,000 was converted into 346,021 shares of common stock. On January 12, 2020, $150,000 was converted into 254,326 shares of common stock. On January 1 and 12, 2020, the price of the Common Stock was $0.68 and $0.65, respectively, resulting in a loss of $51,333 related to the conversion of these convertible notes payable.
21
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On August 12, 2019, the Company entered into the Exchange Agreement whereby one of the 42West Members agreed to take a convertible note instead of cash in exchange for 76,194 Put Rights that had been exercised by one of the 42West Members and not paid. The principal amount of the convertible note is $702,500, bears interest at a rate of 10% per annum and matures on August 12, 2020. The balance of the convertible note and any accrued interest may be converted into shares of Common Stock at the noteholders option at any time during the term of the convertible note payable, at a purchase price based on the 30-day trailing average closing price of the Common Stock.
2018 Convertible Debt
On July 5, 2018, the Company issued an 8% secured convertible promissory note in the principal amount of $1.5 million (the Pinnacle Note) to Pinnacle Family Office Investments, L.P. (Pinnacle) pursuant to a Securities Purchase Agreement, dated the same date, between the Company and Pinnacle. The Company used the proceeds of the Pinnacle Note to finance the Companys acquisition of The Door. The Companys obligations under the Pinnacle Note were secured primarily by a lien on the assets of The Door and Viewpoint.
The principal amount of the Pinnacle Note bore interest at the rate of 8% per annum. The Pinnacle Note matured on January 5, 2020. The Company had the ability to prepay the Pinnacle Note in whole, but not in part, at any time prior to maturity; however, if the Company voluntarily prepaid the Pinnacle Note, it must have (i) paid Pinnacle a prepayment penalty equal to 10% of the prepaid amount and (ii) issued to Pinnacle warrants to purchase 100,000 shares of Common Stock with an exercise price equal to $3.25 per share. The Pinnacle Note also contained certain customary events of default. Pinnacle had the option to convert the outstanding principal amount of the convertible promissory note into shares of Common Stock at any time at a price per share equal to $3.25, subject to adjustment for stock dividends, stock splits, dilutive issuances and subsequent rights offerings. The conversion price was adjusted to $0.78, the purchase price used in the Companys public offering that closed on October 21, 2019. At the Companys election, upon a conversion of the Pinnacle note, the Company had the option to issue Common Stock in respect of accrued and unpaid interest with respect to the principal amount of the Pinnacle note converted.
On the date of the Pinnacle Note, the 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 was amortized and recorded as interest expense over the life of the Pinnacle Note. Upon the re-pricing of the conversion feature of the Pinnacle Note on October 21, 2019, the Company recognized an additional beneficial conversion feature of $1,315,386, of which $69,350 was amortized as interest expense for the three months ended March 31, 2020
On December 4, 2019, Pinnacle converted $297,936 of the principal on the note to 380,603 shares of the Company at a price of $0.78 per share.
The Pinnacle note was paid in full on January 5, 2020. For the three months ended March 31, 2020, the Company recorded interest expense of $70,686 (including the $69,350 amortization of beneficial conversion feature discussed above) and paid interest in the amount of $29,614. As of March 31, 2020, the Company did not have a balance related to the Pinnacle Note. As of December 31, 2019 the Company had a balance of $1,202,064 recorded in current liabilities on its condensed consolidated balance sheet related to the Pinnacle Note and $28,279 of accrued interest recorded in other current liabilities.
2017 Convertible Debt
In 2017, the Company entered into subscription agreements pursuant to which it issued unsecured convertible promissory notes, each with substantially similar terms, for an aggregate principal amount of $875,000, with a balance of $550,000 outstanding as of March 31, 2020. Each of the convertible promissory notes had an initial maturity date of one year from the date of issuance, with the exception of one note in the amount of $75,000, which had an initial maturity date of two years from the date of issuance, and bears interest at a rate of 10% per annum. During 2018, the respective maturity dates of the promissory notes were extended for a period of one year from the original maturity dates and in 2019 were extended for another one-year period. The principal and any accrued and unpaid interest of the convertible promissory notes are convertible by the respective holders into shares of Common Stock at a price equal to either (i) the 90-trading day average price per share of Common Stock as of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as defined in the convertible promissory notes) of Common Stock is made, 95% of the public offering price per share of Common Stock.
22
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
In regard to the 2020, 2019, 2018, and 2017 Convertible Debt discussed above, for the three months ended March 31, 2020 and 2019, the Company paid interest in the aggregate amount of $65,515 and $45,625, respectively, and recorded interest expense in the amount of $354,346 and $45,715, respectively in the Companys condensed consolidated statement of operations. The interest expense for the three months ended March 31, 2020 included the amortization of a beneficial conversion feature in the amount of $301,781 related to two of the 2017 Convertible Debt notes that were converted during the three months ended March 31, 2020. As of March 31, 2020 and December 31, 2019, the Company recorded accrued interest of $56,132 and $40,803, respectively, relating to the 2020, 2019, 2018 and 2017 Convertible Debt. As of March 31, 2020 and December 31, 2019, the Company had a balance of $1,252,500 and $2,385,214, respectively, in current liabilities and a balance of $945,000 and $1,100,000, respectively, in noncurrent liabilities, related to the 2020, 2019, 2018, and 2017 Convertible Debt in its condensed consolidated balance sheet.
Nonconvertible Notes Payable
On July 5, 2012 the Company entered into an unsecured promissory note in the amount of $300,000 bearing 10% interest per annum and payable on demand with KCF Investments LLC (KCF). On December 10, 2018, the Company agreed to exchange this note, including accrued interest of $192,233, for a new unsecured promissory note in the amount of $492,233 that matures on December 10, 2023. This promissory note bears interest of 10% per annum and can be prepaid without a penalty at any time prior to its maturity. The note requires monthly repayments of principal and interest in the amount of $10,459 throughout the life of the note. For the three months ended March 31, 2020, the Company repaid $21,243 of the principal amount of the promissory note.
On November 30, 2017, the Company entered into an unsecured promissory note in the amount of $200,000 that matures on January 15, 2021. The promissory note bears interest of 10% per annum and can be prepaid without a penalty at any time prior to its maturity.
On June 14, 2017, the Company entered into an unsecured promissory note in the amount of $400,000, with a maturity date of June 14, 2021. The promissory note bears interest of 10% per annum and can be prepaid without a penalty after the initial six months.
On November 5, 2019, the Company entered into an unsecured promissory note in the amount of $350,000, maturing on November 4, 2021. The promissory note bears interest of 10% per annum and can be prepaid without a penalty after the initial six months.
During the three months ended March 31, 2020 and 2019, the Company paid interest on its nonconvertible promissory notes in the aggregate amount of $33,883 and $27,146, respectively. The Company had balances of $8,664 and $8,788 as of March 31, 2020 and December 31, 2019, respectively, for accrued interest recorded in other current liabilities in its condensed consolidated balance sheets, relating to these promissory notes. The Company recorded interest expense for the three months ended March 31, 2020 and 2019 of $33,759 and $27,034, respectively, relating to these nonconvertible promissory notes. As of March 31, 2020, the Company had a balance of $290,462 in current liabilities and $1,049,270 in noncurrent liabilities related to these nonconvertible promissory notes. As of December 31, 2019, the Company had balances of $286,633 in current liabilities and $1,074,122 in noncurrent liabilities on its condensed consolidated balance sheets relating to these nonconvertible promissory notes.
NOTE 10 LOANS FROM RELATED PARTY
Dolphin Entertainment, LLC (DE LLC), an entity wholly owned by the 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.
23
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
For the three months ended March 31, 2020, the Company did not repay any principal balance of the DE LLC Note. For the three months ended March 31, 2020 and 2019, the Company recorded interest expense of $27,621 and $27,317, respectively. As of March 31, 2020 and December 31, 2019, the Company had a principal balance of $1,107,873 and accrued interest of $443,213 and $415,592, respectively, relating to the DE LLC Note on its condensed consolidated balance sheets.
NOTE 11 FAIR VALUE MEASUREMENTS
Put Rights
In connection with the 42West acquisition on March 30, 2017, the Company entered into the put agreements, pursuant to which it granted Put Rights to the sellers. During the three months ended March 31, 2020, the sellers exercised their Put Rights, for an aggregate amount of 177,518 shares of Common Stock. During the three months ended March 31, 2020, the Company paid $375,000 related to Put Rights that were exercised of which $275,000 were exercised in December 2019. As of March 31, 2020, an additional $1,537,200 was due from the exercise of these Put Rights.
In addition, the Company entered into put agreements with three 42West employees with change of control provision in their employment agreements. The Company agreed to purchase up to 50% of the shares of Common Stock to be received by the employees in satisfaction of the change of control provision in their employment agreements. The employees have the right, but not the obligation, to cause the Company to purchase an additional 20,246 shares of Common Stock.
The Company records the fair value of the liability in the condensed consolidated balance sheets under the caption Put Rights and records changes to the liability against earnings or loss under the caption Changes in fair value of put rights in the consolidated statements of operations. The carrying amount at fair value of the aggregate liability for the Put Rights recorded on the condensed consolidated balance sheets at March 31, 2020 and December 31, 2019 was $2,795,007 and $3,003,547, respectively. Due to the change in the fair value of the Put Rights for the period in which the Put Rights were outstanding for the three months ending March 31, 2020 and 2019, the Company recorded a gain of $1,470,740 and $1,083,596, respectively, in the consolidated statement of operations.
The Company utilized the Black-Scholes Option Pricing Model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Put Rights reflect managements own assumptions about the assumptions that market participants would use in valuing the Put Rights as of March 31, 2020 and December 31, 2019.
The Company determined the fair value by using the following key inputs to the Black-Scholes Option Pricing Model:
|
|
|
|
|
|
|
|
|
Inputs
|
|
As of
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
Equity volatility estimate
|
|
|
97.3% 133
|
%
|
|
|
64.0% 70.0
|
%
|
Discount rate based on US Treasury obligations
|
|
|
0.14% 0.73
|
%
|
|
|
1.54% 1.59
|
%
|
For the Put Rights, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2019 to March 31, 2020:
|
|
|
|
|
Ending fair value balance reported in the consolidated balance sheet at December 31, 2019
|
|
$
|
3,003,547
|
|
Put rights exercised in December 2019 paid in January 2020
|
|
|
(275,000
|
)
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(1,470,740
|
)
|
Put rights exercised March 2020 and not yet paid
|
|
|
1,537,200
|
|
Ending fair value of put rights reported in the condensed consolidated balance sheet at March 31, 2020
|
|
$
|
2,795,007
|
|
24
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Contingent Consideration
In connection with the Companys acquisition of The Door, the Door Members have the potential to earn the Contingent Consideration, comprising up to 1,538,462 shares of Common Stock, based on a purchase price of $3.25, and up $2,000,000 in cash on achievement of adjusted net income targets based on the operations of The Door over the four-year period beginning January 1, 2018.
The Company records the fair value of the liability in the condensed consolidated balance sheets under the caption Contingent Consideration and records changes to the liability against earnings or loss under the caption Changes in fair value of contingent consideration in the condensed consolidated statements of operations. The fair value of the Contingent Consideration on the date of the acquisition of The Door was $1,620,000. The carrying amount at fair value of the aggregate liability for the Contingent Consideration recorded on the condensed consolidated balance sheet at March 31, 2020 and December 31, 2019 is $227,000 and $330,000, respectively. Due to the change in the fair value of the Contingent Consideration for the period in which the Contingent Consideration was outstanding during the three months ended March 31, 2020, the Company recorded a gain on the Contingent Consideration of $103,000 in the condensed consolidated statement of operations.
The Company utilized a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Contingent Consideration reflect 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
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration)
|
|
|
0.16% - 0.22
|
%
|
|
|
1.58% - 1.59
|
%
|
Annual Asset Volatility Estimate
|
|
|
44.0
|
%
|
|
|
40.0
|
%
|
For the Contingent Consideration, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2019 to March 31, 2020:
|
|
|
|
|
Beginning fair value balance reported on the consolidated balance sheet at December 31, 2019
|
|
$
|
330,000
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(103,000
|
)
|
Ending fair value balance reported in the condensed consolidated balance sheet at March 31, 2020
|
|
$
|
227,000
|
|
Fair Value Option Election Convertible notes payable and freestanding warrants
2020 convertible notes payable
The Company issued the 2020 Lincoln Park Note with a principal amount of $1.3 million at a purchase price of $1.2 million on January 3, 2020. This note is accounted for under the ASC 825-10-15-4 FVO election. Under the FVO election the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. As provided for by ASC 825-10-50-30(b), the estimated fair value adjustment is presented as a single line item within other income (expense) in the accompanying consolidated statement of operations under the caption change in fair value of convertible notes and derivative liabilities.
25
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
For the 2020 Lincoln Park Note, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from January 3, 2020 (date of issuance) to March 31, 2020:
|
|
|
|
|
Beginning fair value balance on issue date - January 3, 2020
|
|
$
|
885,559
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(105,559
|
)
|
Ending fair value balance - March 31, 2020
|
|
$
|
780,000
|
|
The estimated fair value of the 2020 Lincoln Park Note as of its January 3, 2020 issue date and as of March 31, 2020, was computed using a Monte Carlo simulation, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the 2020 Lincoln Park Note reflects managements own assumptions about the assumptions that market participants would use in valuing the 2020 Lincoln Park Note as of the acquisition date and subsequent reporting periods.
The Company determined the fair value by using the following key inputs to the Monte Carlo Simulation Model
|
|
|
|
|
|
|
|
|
Fair Value Assumption - 2020 Lincoln Park Note
|
|
January 3,
2020
|
|
|
March 31,
2020
|
|
Face value principal payable
|
|
$
|
1,300,000
|
|
|
$
|
1,300,000
|
|
Original conversion price
|
|
|
Variable
|
|
|
|
Variable
|
|
Value of Common Stock
|
|
$
|
0.64
|
|
|
$
|
0.54
|
|
Expected term (years)
|
|
|
2.00
|
|
|
|
1.76
|
|
Volatility
|
|
|
87.5%
|
|
|
|
90%
|
|
Straight debt yield
|
|
|
9.5%
|
|
|
|
18.0%
|
|
Risk free rate
|
|
|
1.53%
|
|
|
|
0.22%
|
|
The variable conversion price is the lower of (A) $2.00 per share and (B) the lower of (i) the lowest intraday sales price of our common stock on the applicable conversion date and (ii) the average of the three lowest closing sales prices of our common stock during the twelve consecutive trading days including the trading day immediately preceding the conversion date but under no circumstances lower than $0.78 per share.
In addition to the 2020 Lincoln Park Note, the Company issued two other convertible notes during the three months ending March 31, 2020 for which it elected FVO. The first was issued for a face value of $500,000 on March 4, 2020, and the second was issued for a face value of $560,000 on March 25, 2020. Under the FVO election the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. As provided for by ASC 825-10-50-30(b), the estimated fair value adjustment is presented as a single line item within other income (expense) in the accompanying consolidated statement of operations under the caption change in fair value of convertible notes and derivative liabilities.
For the March 4, 2020 note, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from March 4, 2020 (date of issuance) to March 31, 2020:
|
|
|
|
|
Beginning fair value balance on issue date - March 4, 2020
|
|
$
|
460,000
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(90,000
|
)
|
Ending fair value balance - March 31, 2020
|
|
$
|
370,000
|
|
26
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The estimated fair value of the note as of its March 4, 2020 issue date and as of March 31, 2020, was computed using a Black-Scholes simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:
|
|
|
|
|
|
|
|
|
Fair Value Assumption - 2020 Convertible Note (March 4 note)
|
|
March 4,
2020
|
|
|
March 31,
2020
|
|
Face value principal payable
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Original conversion price
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
Value of Common Stock
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
Expected term (years)
|
|
|
10.00
|
|
|
|
9.92
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
Risk free rate
|
|
|
1.02%
|
|
|
|
0.70%
|
|
|
|
|
|
|
|
|
|
|
For the March 25, 2020 note, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from March 25, 2020 (date of issuance) to March 31, 2020:
|
|
|
|
|
Beginning fair value balance on issue date - March 25, 2020
|
|
$
|
500,000
|
|
Change in fair value (loss) reported in the statements of operations
|
|
|
48,100
|
|
Ending fair value balance - March 31, 2020
|
|
$
|
548,100
|
|
The estimated fair value of the note as of its March 25, 2020 issue date and as of March 31, 2020, was computed using a Monte-Carlo simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:
|
|
|
|
|
|
|
|
|
Fair Value Assumption - 2020 Convertible Note (March 25 note)
|
|
March 25,
2020
|
|
|
March 31,
2020
|
|
Face value principal payable
|
|
$
|
560,000
|
|
|
$
|
560,000
|
|
Original conversion price
|
|
$
|
0.40
|
|
|
$
|
0.78
|
|
Value of Common Stock
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
Expected term (years)
|
|
|
1.00
|
|
|
|
0.98
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
Straight debt yield
|
|
|
23.5%
|
|
|
|
19.5%
|
|
Risk free rate
|
|
|
0.25%
|
|
|
|
0.17%
|
|
Warrants
In connection with the 2020 Lincoln Park Note, the Company issued warrants to purchase up to 207,588 shares of its common stock on January 3, 2020, as well as on each of the second, fourth, and six month anniversaries of the 2020 Lincoln Park Note issuance.
For the 2020 Lincoln Park Warrants, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from January 3, 2020 (date of issuance) to March 31, 2020:
|
|
|
|
|
2020 Lincoln Park Warrants:
|
|
Fair Value
|
|
2020 Lincoln Park Warrants derivative liability - January 3, 2020
|
|
$
|
314,441
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(54,441
|
)
|
2020 Lincoln Park Warrants derivative liability - March 31, 2020
|
|
$
|
260,000
|
|
27
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The estimated fair value of the 2020 Lincoln Park Warrants was computed using a Black-Scholes valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
|
Fair Value Assumption - 2020 Lincoln Park Warrants
|
|
January 3,
2020
|
|
|
March 31,
2020
|
|
Aggregate Fair Value
|
|
$
|
314,441
|
|
|
$
|
260,000
|
|
Exercise Price per share
|
|
$
|
0.7828
|
|
|
$
|
0.7828
|
|
Value of Common Stock
|
|
$
|
0.64
|
|
|
$
|
0.54
|
|
Expected term (years)
|
|
|
5.50
|
|
|
|
5.26
|
|
Volatility
|
|
|
87.5%
|
|
|
|
90%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Risk free rate
|
|
|
1.62%
|
|
|
|
0.42%
|
|
In connection with the March 4, 2020, convertible promissory note (see Note 9) issued, the Company issued Series I Warrant to purchase up to 100,000 shares of Common Stock at a purchase price of $0.78 per share.
For the Series I Warrant, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from March 4, 2020 (date of issuance) to March 31, 2020:
|
|
|
|
|
Series I Warrant:
|
|
Fair Value
|
|
2020 Series I Warrants derivative liability - March 4, 2020
|
|
$
|
40,000
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(10,000
|
)
|
2020 Series I Warrants derivative liability - March 31, 2020
|
|
$
|
30,000
|
|
The estimated fair value of the Series I Warrants was computed using a Black-Scholes valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
|
Fair Value Assumption - Series I Warrants
|
|
March 4,
2020
|
|
|
March 31,
2020
|
|
Aggregate Fair Value
|
|
$
|
40,000
|
|
|
$
|
30,000
|
|
Exercise Price per share
|
|
$
|
0.7828
|
|
|
$
|
0.7828
|
|
Value of Common Stock
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
Expected term (years)
|
|
|
5.50
|
|
|
|
5.43
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Risk free rate
|
|
|
0.80%
|
|
|
|
0.42%
|
|
In connection with the $1,200,000 2019 Lincoln Park Note issued on May 20, 2019, the Company issued warrants to purchase up to 550,000 shares of common stock.
For the 2019 Lincoln Park Warrants, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2019 to March 31, 2020:
|
|
|
|
|
2019 Lincoln Park Warrants:
|
|
Fair Value
|
|
2019 Lincoln Park Warrants liability - December 31, 2019
|
|
$
|
189,590
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
(8,074
|
)
|
2019 Lincoln Park Warrants liability - March 31, 2020
|
|
$
|
181,516
|
|
28
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The estimated fair value of the 2019 Lincoln Park Warrants was computed using a Black-Scholes valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
|
Fair Value Assumption - 2019 Lincoln Park Warrants
|
|
December 31, 2019
|
|
|
March 31,
2020
|
|
Aggregate Fair Value
|
|
$
|
189,590
|
|
|
$
|
181,516
|
|
Exercise Price per share
|
|
$
|
2.00
|
|
|
$
|
0.78
|
|
Value of Common Stock
|
|
$
|
0.70
|
|
|
$
|
0.54
|
|
Expected term (years)
|
|
|
5.39
|
|
|
|
4.80
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Risk free rate
|
|
|
1.69%
|
|
|
|
0.38%
|
|
Derivative Liability (2019 Lincoln Park Note Embedded Conversion Feature)
The Company accounted for the embedded conversion feature of the 2019 Lincoln Park Note as a derivative liability. For the embedded conversion feature of the 2019 Lincoln Park Note, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2019 to March 31, 2020:
|
|
|
|
|
Beginning fair value balance - December 31, 2019
|
|
$
|
170,000
|
|
Change in fair value (gain) reported in the statements of operations
|
|
|
|
|
Reduction in value due to note principal conversion
|
|
|
(154,544
|
)
|
Ending fair value balance - March 31, 2020
|
|
$
|
15,456
|
|
The estimated fair value of the 2019 Lincoln Park Note conversion option as of December 31, 2019 and March 31, 2020, was computed using a Black-Scholes valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
|
Fair Value Assumption - 2019 Lincoln Park Note Conversion Option
|
|
December 31, 2019
|
|
|
March 31,
2020
|
|
Face value principal payable
|
|
$
|
1,100,000
|
|
|
$
|
100,000
|
|
Original conversion price
|
|
|
0.78
|
|
|
$
|
0.78
|
|
Value of Common Stock
|
|
$
|
0.70
|
|
|
$
|
0.54
|
|
Expected term (years)
|
|
|
1.38
|
|
|
|
1.09
|
|
Volatility
|
|
|
90.0%
|
|
|
|
90%
|
|
Straight debt yield
|
|
|
9.5%
|
|
|
|
18.0%
|
|
Risk free rate
|
|
|
1.59%
|
|
|
|
0.18%
|
|
NOTE 12 CONTRACT LIABILITIES
The Company receives advance payments from customers for public relations projects or as deposits for promotional or brand-support video projects, that it records as contract liabilities. Once the work is performed or the projects are delivered to the customer, the contract liability is recorded as revenue. The Company had balances of $525,712 and $309,880 as of March 31, 2020 and December 31, 2019, respectively, in contract liabilities.
29
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
NOTE 13 VARIABLE INTEREST ENTITIES
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the 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 evaluated the entities in which it did not have a majority voting interest and determined that it had (1) the power to direct the activities of the entities that most significantly impact their economic performance and (2) had the obligation to absorb losses or the right to receive benefits from these entities. As such the financial statements of JB Believe, LLC are consolidated in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, and in the condensed consolidated statements of operations and statements of cash flows presented herein for the three months ended March 31, 2020 and 2019. The financial statements of Max Steel Productions LLC are consolidated in the condensed consolidated balance sheet as of December 31, 2019 and in condensed consolidated statement of operations and statement of cash flows presented herein for the period between January 1, and February 20, 2020 and the three months ended March 31, 2019. These entities were previously under common control and have been accounted for at historical costs for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Max Steel Productions, LLC
|
|
|
JB Believe LLC
|
|
(in USD)
|
|
As of and for the three ended March 31,
2020
|
|
|
As of December 31, 2019
|
|
|
As of and for the three ended March 31,
2019
|
|
|
As of and for the three ended March 31,
2020
|
|
|
As of December 31, 2019
|
|
|
As of and for the three ended March 31,
2019
|
|
Assets
|
|
|
|
|
|
|
7,379,851
|
|
|
|
8,021,288
|
|
|
|
190,347
|
|
|
|
190,347
|
|
|
|
184,484
|
|
Liabilities
|
|
|
|
|
|
|
(11,816,966
|
)
|
|
|
(11,810,997
|
)
|
|
|
(6,749,914
|
)
|
|
|
(6,749,914
|
)
|
|
|
(6,741,834
|
)
|
Revenues
|
|
|
3,311,198
|
|
|
|
78,990
|
|
|
|
|
|
|
|
|
|
|
|
7,616
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
(607,081
|
)
|
|
|
(76,914
|
)
|
|
|
|
|
|
|
(31,075
|
)
|
|
|
(21,241
|
)
|
The Company performs ongoing reassessments of (1) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain triggering events, and therefore would be subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding the 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.
30
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Max Steel VIE was initially formed for the purpose of recording the production costs of the motion picture Max Steel. Prior to the commencement of the production, the Company entered into a Production Service Agreement to finance the production of the film. As described in Note 8 (Debt), the Production Service Agreement was for a total amount of $10,419,009 with the lender taking a producer fee of $892,619. Pursuant to the financing agreements, the lender acquired 100% of the membership interests of Max Steel VIE with the Company controlling the production of the motion picture and having the rights to sell the motion picture. On February 20, 2020, the lender of the Production Service Agreement confirmed that Max Steel VIE did not owe any debt under the Production Service Agreement. The Company recorded a gain on extinguishment of debt in the amount of $3,311,198. In addition, the Company assessed its status as primary beneficiary of the VIE and determined that it was no longer the primary beneficiary. As such, the Company deconsolidated Max Steel VIE and recorded a loss on deconsolidation in the amount of $1,484,591 on its condensed consolidated statement of operations for the three months ended March 31, 2020.
During the three months ended March 31, 2019, the Company recorded interest expense of $39,153 and recorded $116,067 of receivables that had previously been written off against bad debt.
As of March 31, 2020 and December 31, 2019, there were outstanding balances of $0 and $3,311,198, including accrued interest of $0 and $1,698,280, respectively, related to this debt which are included in the caption debt in the condensed consolidated balance sheets. The accrued interest was reclassified from other current liabilities to debt as of December 31, 2019.
JB Believe LLC, an entity owned by Believe Film Partners LLC, of which the Company owns a 25% membership interest, was formed for the purpose of recording the production costs of the motion picture Believe. The Company was given unanimous consent by the members of this entity to enter into domestic and international distribution agreements for the licensing rights of the motion picture, Believe, until such time as the Company had been repaid $3,200,000 for the investment in the production of the film and $5,000,000 for the P&A to market and release the film in the United States. The Company has not been repaid these amounts and as such is still in control of the distribution of the film. The capitalized production costs were either amortized or impaired in previous years. JB Believe LLCs primary liability is to the Company, which it owes $6,491,834.
NOTE 14 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.
31
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Pursuant to the Second Amended and Restated Articles of Incorporation, each share of Series C Convertible Preferred Stock will be convertible into one share of Common Stock (one half of a share post-split on September 14, 2017) subject to adjustment for each issuance of Common Stock (but not upon issuance of common stock equivalents) that occurred, or occurs, from the date of issuance of the Series C Convertible Preferred Stock (the issue date) until the fifth (5th) anniversary of the issue date (i) upon the conversion or exercise of any instrument issued on the issued date or thereafter issued (but not upon the conversion of the Series C Convertible Preferred Stock), (ii) upon the exchange of debt for shares of Common Stock, or (iii) in a private placement, such that the total number of shares of Common Stock held by an Eligible Class C Preferred Stock Holder (based on the number of shares of Common Stock held as of the date of issuance) will be preserved at the same percentage of shares of Common Stock outstanding held by such Eligible Class C Preferred Stock Holder on the issue. An Eligible Class C Preferred Stock Holder means any of (i) DE LLC for so long as Mr. 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 13, 2020, a holder of a convertible promissory note converted a note with a principal amount of $200,000 into 346,021 shares of Common Stock.
On January 13, 2020, one of the sellers of 42West that had exercised Put Rights in December was paid $100,000 for 10,846 shares of Common Stock.
On January 23, 2020, the Company issued 248,733 shares of Common Stock to one of the sellers of Viewpoint as payment for the third installment of the consideration for the acquisition of Viewpoint.
On February 3, 2020, a holder of a convertible promissory note converted a note with a principal amount of $150,000 into 254,326 shares of Common Stock.
On February 6, 2020, a holder of a convertible promissory note converted $250,000 of the principal amount of the note 319,366 shares of Common Stock.
On February 7, 2020, one of the sellers of 42West that had exercised Put Rights in December was paid $100,000 for 10,846 shares of Common Stock.
On February 13, 2020, a holder of a convertible promissory note converted $250,000 of the principal amount of the note 319,366 shares of Common Stock.
32
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On February 27, 2020, a holder of a convertible promissory note converted $250,000 of the principal amount of the note 319,366 shares of Common Stock.
On February 28, 2020, one of the sellers of 42West exercised Put for 10,846 shares of Common Stock and was paid $100,000.
On March 24, 2020, the Company issued 50,000 shares of Common Stock as partial consideration for a $560,000 convertible note payable and received net proceeds of $500,000.
On March 26, 2020, a holder of a convertible promissory note converted $250,000 of the principal amount of the note 319,366 shares of Common Stock.
As of March 31, 2020 and December 31, 2019, the Company had 20,036,906 and 17,892,900 shares of Common Stock issued and outstanding, respectively.
NOTE 15 EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
Net income
|
|
$
|
2,073,847
|
|
|
$
|
122,608
|
|
Deemed dividend attributable to participating securities
|
|
|
369,557
|
|
|
|
|
|
Net income attributable to Dolphin Entertainment common stock shareholders and numerator for basic earnings per share
|
|
$
|
1,704,290
|
|
|
$
|
122,608
|
|
Change in fair value of put rights
|
|
|
(1,470,740
|
)
|
|
|
(1,527,026
|
)
|
Interest expense
|
|
|
52,566
|
|
|
|
|
|
Numerator for diluted earnings (loss) per share
|
|
$
|
286,116
|
|
|
$
|
(1,404,418
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic EPS - weighted-average shares
|
|
|
20,498,564
|
|
|
|
15,944,443
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Put rights
|
|
|
4,398,323
|
|
|
|
2,745,934
|
|
Convertible notes payable
|
|
|
3,488,095
|
|
|
|
|
|
Denominator for diluted EPS - adjusted weighted-average shares
|
|
|
28,384,982
|
|
|
|
18,690,377
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
Diluted earnings (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
Basic earnings per share is computed by dividing income attributable to the shareholders of Common Stock (the numerator) by the weighted-average number of shares of Common Stock outstanding (the denominator) for the period. Diluted earnings per share assume that any dilutive equity instruments, such as put rights and convertible notes payable were exercised and outstanding Common Stock adjusted accordingly.
Certain of the Companys convertible notes payable and the Series C Preferred Stock have clauses that entitle the holder to participate if dividends are declared to the common stockholders as if the instruments had been converted into shares of common stock. As such, the Company uses the two-class method to compute earnings per share and attribute a portion of the Companys net income to these participating securities.
33
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
In periods when the Put Rights are assumed to have been settled at the beginning of the period in calculating the denominator for diluted earnings (loss) per share, the related change in the fair value of Put Right liability recognized in the consolidated statements of operations for the period, is added back or subtracted from net income during the period. The denominator for calculating diluted earnings (loss) per share for the three ended March 31, 2020 and 2019 assumes the Put Rights had been settled at the beginning of the period, and therefore, the related income due to the decrease in the fair value of the Put Right liability during the three months ended March 31, 2020 and 2019 is subtracted from net income.
For the three months ended March 31, 2020, convertible promissory notes that were not considered participating securities, were included in the calculation of fully diluted loss per share using the if-converted method that assumes the convertibles promissory notes are converted at the beginning of the reporting period using the average market price for the three months ended March 31, 2020 of the Common Stock. For the three months ended March 31, 2019, the convertible promissory notes were not included in diluted loss per share because inclusion was considered to be anti-dilutive.
NOTE 16 WARRANTS
A summary of warrants outstanding at December 31, 2019 and issued, exercised and expired during the three months ended March 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
Warrants:
|
|
Shares
|
|
|
Weighted Avg.
Exercise Price
|
|
Balance at December 31, 2019
|
|
|
2,277,253
|
|
|
$
|
3.47
|
|
Issued
|
|
|
515,176
|
|
|
|
0.78
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(250,000
|
)
|
|
|
0.78
|
|
Balance at March 31, 2020
|
|
|
2,542,429
|
|
|
$
|
3.37
|
|
On November 4, 2016, the Company issued warrants to T Squared to purchase up to 250,000 shares of Common Stock at an initial exercise price of $14.00 per share. The warrants contain a down round provision and on October 21, 2019, as a result of the Companys sale of Common Stock through an underwritten public offering, the exercise price of the warrants was reduced to $0.78 per share. The warrants were not exercised and expired on January 31, 2020.
In the 2017 public offering, the Company issued 1,215,000 units, each comprising one share of Common Stock, and one warrant exercisable for one share of Common Stock for $4.74 per share. In addition to the units issued and sold in this 2017 public offering, the Company also issued warrants to the underwriters to purchase up to an aggregate of 85,050 shares of Common Stock at a purchase price of $4.74 per share. On January 22, 2018, the underwriters exercised their over-allotment option with respect to 175,750 warrants to purchase Common Stock at a purchase price of $4.74 per share. In connection with the exercise of the over-allotment option, the Company issued to the underwriters warrants to purchase an aggregate of 1,453 shares of Common Stock at a purchase price of $4.74 per share. The Company determined that each of these warrants should be classified as equity and recorded the fair value of the warrants in additional paid in capital.
On each of May 21, July 23, September 20, and November 20, 2019 the Company issued 2019 Lincoln Park Warrants to purchase up to 137,500 shares of Common Stock (550,000 total) at a purchase price of $2.00 per share to Lincoln Park related to the 2019 Lincoln Park Note. The 2019 Lincoln Park Warrants became exercisable on the six-month anniversary of issuance and for a period of five years thereafter. If a resale registration statement covering the shares of Common Stock underlying the 2019 Lincoln Park Warrants is not effective and available at the time of exercise, the 2019 Lincoln Park Warrants may be exercised by means of a cashless exercise formula. The Company determined that the 2019 Lincoln Park Warrants should be classified as freestanding financial instruments and meet the criteria to be accounted for as derivative liabilities at fair value. The Company recorded the change in fair value of these warrants as $8,074 of current period income in the condensed consolidated statement of operations. The fair value of these warrants was $181,516 on March 31, 2020.
34
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On January 3, 2020 and March 4, 2020, in relation to the 2020 Lincoln Park Note, the Company issued the 2020 Lincoln Park Warrants to purchase up to 207,588 shares of Common Stock (415,176 total) at a purchase price of $0.78 per share to Lincoln Park and intends to issue additional warrants to purchase up to 207,588 shares of Common Stock on each of the fourth and sixth anniversary of the 2020 Lincoln Park Note. The 2020 Lincoln Park Warrants become exercisable on the six-month anniversary of issuance and for a period of five years thereafter. If a resale registration statement covering the shares of Common Stock underlying the 2020 Lincoln Park Warrants is not effective and available at the time of exercise, the 2020 Lincoln Park Warrants may be exercised by means of a cashless exercise formula. The Company determined that the 2020 Lincoln Park Warrants should be classified as freestanding financial instruments that meet the criteria to be accounted for as derivative liabilities and recorded a fair value at issuance of $314,441. The Company recorded $54,441 of income due to change in fair value during the three months ended March 31, 2020, and had a balance of $260,000 as of March 31, 2020 recorded in its condensed consolidated balance sheet.
On March 4, 2020, in connection with the $500,000 convertible note payable (see Note 9) the Company issued Series I Warrant to purchase up to 100,000 shares of Common Stock at a purchase price of $0.78 per share. The warrants become exercisable on the six-month anniversary and for a period of five years thereafter. If a resale registration statement covering the shares of Common Stock underlying the warrants is not effective and available at the time of exercise, the warrants may be exercised by means of a cashless exercise formula. The Company determined that the Series I Warrant should be classified as a freestanding financial instrument that meets the criteria to be accounted for as a derivative liability and recorded a fair value at issuance of $40,000. The Company recorded $10,000 of income due to change in fair value during the three months ended March 31, 2020, and had a balance of $30,000 as of March 31, 2020 recorded in its condensed consolidated balance sheet.
NOTE 17 RELATED PARTY TRANSACTIONS
On December 31, 2014, the Company and its CEO renewed his employment agreement for a period of two years commencing January 1, 2015. The agreement stated that the CEO was to receive annual compensation of $250,000. In addition, the CEO was entitled to an annual discretionary bonus as determined by the 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 March 31, 2020 and December 31, 2019, the Company accrued $2,625,000 of compensation as accrued compensation and has balances of $1,558,664 and $1,493,219 respectively, in accrued interest in other current liabilities on its condensed consolidated balance sheets, related to Mr. ODowds employment. The Company recorded interest expense related to the accrued compensation of $65,445 and $64,726 for each three-month period ended March 31, 2020 and 2019 on the condensed consolidated statements of operations.
NOTE 18 SEGMENT INFORMATION
The Company operates in two reportable segments, Entertainment Publicity and Marketing Segment and Content Production Segment. The Entertainment Publicity and Marketing segment is composed of 42West, The Door and Viewpoint and provides clients with diversified services, including public relations, entertainment and hospitality content marketing and strategic marketing consulting. The Content Production segment is composed of Dolphin Entertainment and Dolphin Films and engages in the production and distribution of digital content and feature films.
The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating segment performance is operating income (loss) which is the same as Loss before other income (expenses) on the Companys consolidated statement of operations for the three months ended March 31, 2020. Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. Legal and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees.
35
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
In connection with the acquisitions of 42West, The Door, Viewpoint, and Shore Fire, the Company assigned $7,930,627 of intangible assets, net of accumulated amortization of $4,730,706 and goodwill of $18,072,825 as of March 31, 2020 to the Entertainment Publicity and Marketing segment. The balances reflected as of March 31, 2019 for Entertainment Publicity and Marketing segment comprise 42West, The Door, and Viewpoint.
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
EPD
|
|
$
|
6,633,800
|
|
|
$
|
6,238,099
|
|
CPD
|
|
|
|
|
|
|
78,990
|
|
Total
|
|
$
|
6,633,800
|
|
|
$
|
6,317,089
|
|
|
|
|
|
|
|
|
|
|
Segment Operating (Loss) Income:
|
|
|
|
|
|
|
|
|
EPD
|
|
$
|
(258,966
|
)
|
|
$
|
(414,628
|
)
|
CPD
|
|
|
(611,893
|
)
|
|
|
(410,533
|
)
|
Total operating loss
|
|
|
(870,859
|
)
|
|
|
(825,161
|
)
|
Interest expense
|
|
|
(624,282
|
)
|
|
|
(287,970
|
)
|
Other income, net
|
|
|
3,568,988
|
|
|
|
1,235,739
|
|
Income before income taxes
|
|
$
|
2,073,847
|
|
|
$
|
122,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31,
2020
|
|
|
As of
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
|
|
|
|
|
|
|
|
$
|
38,534,464
|
|
|
$
|
40,083,491
|
|
CPD
|
|
|
|
|
|
|
|
|
|
|
2,657,088
|
|
|
|
2,488,235
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
41,191,552
|
|
|
$
|
42,571,726
|
|
NOTE 19 LEASES
Viewpoint is obligated under an operating lease agreement for office space in Newton, Massachusetts, expiring in March 2021. The lease is secured by a certificate of deposit held by the Company and included in restricted cash in the amounts of $36,735 as of March 31, 2020. The lease provides for increases in rent for real estate taxes and operating expenses and contains a renewal option for an additional five years.
The Door occupies space in New York. An entity wholly owned by the former Door Members is obligated under an operating lease agreement for the office space expiring in August 2020. The Company made payments of $50,737 to the affiliate during the three months ended March 31, 2020 related to this lease. The lease is secured by a cash security deposit of approximately $29,000.
The Door is obligated under an operating lease agreement for office space in Chicago, Illinois, at a fixed rate of $2,200 per month, expiring in May 2020. The lease is secured by a cash deposit of approximately $1,500.
42West is obligated under an operating lease agreement for office space in New York, expiring in December 2026. The lease is secured by a standby letter of credit in the amount of $677,354 and provides for increases in rent for real estate taxes and building operating costs. The lease also contains a renewal option for an additional five years.
42West is obligated under an operating lease agreement for office space in California, expiring in December 2021. The lease is secured by a cash security deposit of $44,788 and a standby letter of credit in the amount of $50,000 at March 31, 2020. The lease also provides for increases in rent for real estate taxes and operating expenses and contains a renewal option for an additional five years.
36
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On February 19, 2019, the Company entered into an agreement to lease 3,024 square feet of office space in Coral Gables, Florida. The lease is for a period of 62 months from the commencement date, at a monthly lease rate of $9,954 with annual increases of 3%. The rent payments are abated for the first four months of the lease after the commencement date, which was October 1, 2019. The lease is secured by a cash deposit of $19,908.
Shore Fire Media is obligated under an operating lease agreement for office space in Brooklyn, New York, expiring in February 2026. The lease is secured by a cash deposit of $34,490.
Shore Fire Media is obligated under an operating lease agreement for office space in Nashville, Tennessee, expiring July 2020. The lease is secured by a cash deposit of $1,575.
The amortizable life of the right-of-use asset is limited by the expected lease term. Although certain leases include options to extend the Company did not include these in the right-of-use asset or lease liability calculations because it is not reasonably certain that the options will be executed.
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Right-of-use asset
|
|
$
|
7,026,745
|
|
|
$
|
7,435,903
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Lease liability
|
|
$
|
1,604,264
|
|
|
$
|
1,610,022
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
Lease liability
|
|
$
|
5,976,977
|
|
|
$
|
6,386,209
|
|
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
7,581,241
|
|
|
$
|
7,996,231
|
|
The table below shows the lease income and expenses recorded in the consolidated statement of operations incurred during the three months ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Lease costs
|
|
Classification
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
Selling, general and administrative expenses
|
|
$
|
547,037
|
|
$
|
517,178
|
|
Operating lease costs
|
|
Direct costs
|
|
|
60,861
|
|
|
60,861
|
|
Sublease income
|
|
Selling, general and administrative expenses
|
|
|
(2,400
|
)
|
|
(47,099
|
)
|
Net lease costs
|
|
|
|
$
|
605,498
|
|
$
|
530,940
|
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
2020 (excluding three months ended March 31, 2020)
|
$
|
1,675,724
|
|
2021
|
|
|
1,919,733
|
|
2022
|
|
|
1,294,106
|
|
2023
|
|
|
1,305,358
|
|
2024
|
|
|
1,357,335
|
|
Thereafter
|
|
|
2,173,036
|
|
Total lease payments
|
|
$
|
9,725,292
|
|
Less: Imputed interest
|
|
|
(2,144,052
|
)
|
Present value of lease liabilities
|
|
$
|
7,581,240
|
|
37
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The Company used its incremental borrowing rate on January 1, 2019, deemed to be 8%, to calculate the present value of the lease liabilities and right-of-use asset. The weighted average remaining lease term for our operating leases was six years at March 31, 2020.
NOTE 20 COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. In the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Companys financial position, results of operations and cash flows.
Incentive Compensation Plan
On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the 2017 Plan). The 2017 Plan was adopted as a flexible incentive compensation plan that would allow us to use different forms of compensation awards to attract new employees, executives and directors, to further the goal of retaining and motivating existing personnel and directors and to further align such individuals interests with those of the 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 three months ended March 31, 2020, the Company did not issue any Awards under the 2017 Plan.
Employee Benefit Plan
The Company has a 401(K) profit sharing plan that covers substantially all of its employees. The Company matches 100% of the first 3% contributed by the employee and then 50% up to a maximum of 4% contributed by the employee. The contribution is also limited by annual maximum amount determined by the Internal Revenue Service. The Companys contributions were $105,788 during the three months ended March 31, 2020.
Employment Contracts
As a condition to the Shore Fire Purchase, the Marilyn Laverty, the Shore Fire seller, entered into an employment agreement with the Company to continue as employees after the closing of the Shore Fire Purchase. Ms. Lavertys employment agreement is through December 31, 2022 and may be renewed by Ms. Laverty for two successive one-year terms. The employment agreement defines base compensation and a salary increase and bonus structure based on Shore Fire achieving certain financial targets. Ms. Laverty will serve as Shore Fires President. The employment agreements contain provisions for termination and as a result of death or disability and entitles the employee to vacations and to participate in all employee benefit plans offered by the Company.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
As a condition to the acquisition of Viewpoint, David Shilale entered into an employment agreement with the Company to continue as an employee after the closing of the Viewpoint purchase. Mr. Shilales employment agreement is for a period of three years from the closing date of the Viewpoint purchase and the contract defines the base compensation and a commission structure based on Viewpoint achieving certain financial targets. The bonus for Mr. Shilale is determined at the sole discretion of the Companys Board of Directors and management. The agreement does not provide for guaranteed increases to the base salary. The employment agreement contains provisions for termination and as a result of death or disability and entitles the employee to vacations and to participate in all employee benefit plans offered by the Company.
In connection with the acquisition of The Door, each of the former members of The Door (the Door Members) has entered into a four-year employment agreement with The Door, pursuant to which each Door Member has agreed not to transfer any shares of Common Stock received as consideration for the merger (the Share Consideration) in the first year following the closing date of the merger, no more than 1/3 of such Share Consideration in the second year and no more than an additional 1/3 of such Share Consideration in the third year.
During the year ended December 31, 2017, 42West renewed two senior level management employment agreements each with a three-year term. The contracts define each 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.
As a condition to the closing of the acquisition of 42West each of the three principal sellers entered into employment agreements with the Company and have agreed to continue as employees of the Company for a three-year term. Each of the Employment Agreements provides for a base salary with annual increases and contain provisions for termination and as a result of death or disability. During the term of the employment agreements, these persons are entitled to participate in all employee benefit plans, practices and programs maintained by the Company as well as are entitled to paid vacation in accordance with the 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. The Company is negotiating the renewal of two of the employment agreements with the principal sellers of 42West.
Letter of Credit
Pursuant to the lease agreements of the 42West New York and Los Angeles office locations, the Company is required to issue letters of credit to secure the leases. On July 24, 2018, the Company renewed the letter of credit issued by City National Bank for the 42West office space in New York. The letter of credit is for $677,354 and originally expired on August 1, 2018. This letter of credit renews automatically annually unless City National Bank notifies the landlord 60-days prior to the expiration of the 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 March 31, 2020.
NOTE 21 SUBSEQUENT EVENTS
On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Between April 19, 2020 and April 23, 2020, the Company and four of its subsidiaries executed notes and received an aggregate amount of approximately $2.8 million from five PPP Loans from BankUnited, N.A., under the Paycheck Protection Program which was established under the CARES Act and is administered by the U.S. Small Business Administration. The proceeds from each PPP Loan will be used in accordance with the terms of the CARES Act program, as described further below. The application for the PPP Loans requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operation of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that is not significantly detrimental to the business. The receipt of the funds from the PPP Loan and the forgiveness of the PPP Loans is dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of such PPP Loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the PPP Loans.
The PPP Loans mature between April 19, 2022 and April 23, 2022 and bear interest at a rate of 1.0% per annum. Commencing November 19, 2020 through November 23, 2020 (the First Payment Dates), the Company and its subsidiaries are required to pay the Lender all accrued interest that has not been forgiven. Additionally, beginning on the First Payment Dates and each month thereafter, the Company and its subsidiaries shall make equal monthly payments of principal and accrued interest as necessary to fully amortize the principal amount outstanding by the maturity date. The PPP Loans may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The PPP Loans are unsecured, and all or a portion of the PPP Loans may be forgiven upon application to the Lender for certain expenditure amounts made, including payroll costs and rent, during the 8-week period beginning on the date of first disbursement, in accordance with the requirements under the PPP.
On May 1 and May 8, 2020, the Company made payments in the aggregate amount of $250,000 as the final installment for the consideration of the acquisition of Viewpoint.
Pursuant to the Shore Fire purchase agreement, on April 1, 2020, the Company paid $124,836 to the seller of Shore Fire as a working capital adjustment and on June 4, 2020, the Company paid the Shore Fire seller $250,000 for the third installment of the purchase price. (see Note 4 for additional details on the Shore Fire purchase)
On June 2, 2020, Lincoln Park converted the remaining balance of $100,000 of the 2019 Lincoln Park Note into 127,746 shares of Common Stock.
On June 4, 2020, the Company issued 932,866 shares of Common Stock to the sellers of 42West related to the earnout consideration that was earned during the year ended December 31, 2017.
On June 5, 2020, the Company issued and sold to certain institutional investors through a registered direct offering an aggregate of 7,900,000 shares of the Common Stock at a price of $1.05 per share. The offering of the shares was made pursuant to the Companys effective shelf registration statement on Form S-3 previously filed with the Securities and Exchange Commission. The Company received proceeds of approximately $7.6 million from the issuance and sale of the Common Stock after deducting related offering expenses.
On June 5, 2020, Lincoln Park, through a cashless exercise formula, exercised 2019 Lincoln Park Warrants and issued 377,016 shares of Common Stock.
On June 4, 5, 15, and 17, 2020 and on July 1, 2020, eight holders of convertible promissory notes converted an aggregate amount of approximately $1.3 million of principal and accrued interest into 2,322,399 shares of Common Stock.
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