42West

Through 42West, an entertainment public relations agency, we offer talent publicity, entertainment (motion picture and television) marketing and strategic communications services. Prior to its acquisition, 42West grew to become one of the largest independently-owned public relations firms in the entertainment industry, and in December 2019, 42West was ranked #4 in the annual rankings of the nation’s Power 50 PR firms by the New York Observer, the highest position held by an entertainment PR firm. As such, we believe that 42West has served, and will continue to serve, as an “acquisition magnet” for us to acquire new members of our marketing “super group,” which has the ability to provide synergistic new members with the opportunity to grow revenues and profits through 42West’s access, relationships and experience in the entertainment industry.

Our public relations and marketing professionals at 42West develop and execute marketing and publicity strategies for dozens of movies and television shows annually, as well as for individual actors, filmmakers, recording artists, and authors. Through 42West, we provide services in the following areas:

Entertainment Marketing

We provide marketing direction, public relations counsel and media strategy for productions (including theatrical films, DVD and VOD releases, television programs, and online series) as well as content producers, ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. Our capabilities include worldwide studio releases, independent films, television programming and web productions. We provide entertainment marketing services in connection with film festivals, awards campaigns, event publicity and red-carpet management.

Talent Publicity

We focus on creating and implementing strategic communication campaigns for performers and entertainers, including film, television and Broadway stars. Our talent roster includes multiple Oscar-, Emmy- and Tony-winning actors. Our services in this area include ongoing strategic counsel, media relations, studio, network, charity, corporate liaison and event support.

Strategic Communications

Our strategic communications team advises brands and non-profits seeking to utilize entertainment and pop culture in their marketing campaigns. We also help companies define objectives, develop messaging, create brand identities, and construct long-term strategies to achieve specific goals, as well as manage functions such as media relations or internal communications on a day-to-day basis. Our clients include major studios and production companies, record labels, media conglomerates, technology companies, philanthropic organizations, talent guilds, and trade associations, as well as a wide variety of high-profile individuals, ranging from major movie and pop stars to top executives and entrepreneurs.

The Door

Through The Door, a hospitality, lifestyle and consumer products public relations agency, we offer traditional public relations services, as well as social media marketing, creative branding, and strategic counsel. Prior to its acquisition, The Door was widely considered the leading independent public relations firm in the hospitality and lifestyle industries. Among other benefits, The Door acquisition has expanded our entertainment verticals through the addition of celebrity chefs and their restaurants, as well as with live events, such as some of the most prestigious and well-attended food and wine festivals in the United States. Our public relations and marketing professionals at The Door develop and execute marketing and publicity strategies for dozens of restaurant and hotel groups annually, as well as for individual chefs, live events, and consumer-facing corporations.

Shore Fire Media

Through Shore Fire Media, we represent musical artists and culture makers at the top of their fields. The company's dedicated teams in New York, Los Angeles, and Nashville wield extensive, varied expertise to strategically amplify narratives and shape reputations for career-advancing effect. Shore Fire Media represents top recording artists in multiple genres, songwriters, music producers, record labels, music industry businesses, venues, trade organizations, authors, comedians, social media personalities and cultural institutions.

Viewpoint

Viewpoint is a full-service, boutique creative branding and production agency that has earned a reputation as one of the top producers of promotional brand-support videos for a wide variety of leading cable networks in the television industry.  Viewpoint’s capabilities run the full range of creative branding and production, from concept creation to final delivery, and include:  brand strategy, concept and creative development, design & art direction, script & copywriting, live action production & photography, digital development, video editing & composite, animation, audio mixing & engineering, project management and technical support.

Content Production

Dolphin Films

Dolphin Films is a content producer of motion pictures. We own the rights to several scripts that we intend to produce at a future date.

Our pipeline of feature films includes:

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Youngblood, an updated version of the 1986 hockey classic;

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Sisters Before Misters,a comedy about two estranged sisters finding their way back to each other after a misunderstanding causes one of them to have to plan the other’s wedding; and

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Out of Their League, a romantic comedy pitting husband against wife in the cut-throat world of fantasy football.

We have completed development of each of these feature films, which means that we have completed the script and can begin pre-production if and when financing is obtained.  We also own several other scripts that we may determine to produce as digital content if online distribution is secured.

Dolphin Digital Studios

Dolphin Digital Studios creates original content to premiere online, sources financing for our digital media projects and distributes our series through a variety of distribution partners depending on the demographic served.

Competition

The businesses in which we engage are highly competitive. Through 42West, The Door and Shore Fire, we compete against other public relations and marketing communications companies, as well as independent and niche agencies to win new clients and maintain existing client relationships. Through Viewpoint, we compete against other creative branding agencies, as well as in-house creative teams at many of our clients.  Our content production business faces competition from companies within the entertainment business and from alternative forms of leisure entertainment, such as travel, sporting events, video games and computer-related activities. We are subject to competition from other digital media and motion production companies, as well as from large, well-established companies within the entertainment industry that have significantly greater development, production, distribution and capital resources than us. We compete for the acquisition of literary properties and for the services of producers, directors, actors and other artists as well as creative and technical personnel and production financing, all of which are essential to the success of our business. In addition, our productions compete for audience acceptance and advertising dollars.

We believe that we compete on the basis of the following competitive strengths:

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Market Reputations of 42West,The Door and Shore Fire—  42West and The Door consistently rank among the most prestigious and powerful public relations firms in the United States (each ranking in the Top 50 Most Powerful PR Firms each of the last three years, as published by the New York Observer), which is a significant competitive advantage given the nature of the entertainment marketing and public relations industry, in which “perception is power”.  Our latest acquisition, Shore Fire was listed for the first time in 2019;

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An Exceptional Management Team—our CEO, Mr. O’Dowd, has a 20-year history of producing and delivering high-quality family entertainment. In addition, 42West’s three co-CEOs, Leslee Dart, Amanda Lundberg, and Allan Mayer, The Door’s CEO, Charlie Dougiello and President, Lois O’Neill, and Shore Fire’s President Marilyn Laverty are all longtime PR practitioners, with decades of experience, and are widely regarded as being among the top communications strategists in the entertainment, hospitality and music industries, as evidenced by the market reputation of their companies; and

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Our Ability to Offer Interrelated Services—we believe that the ability to create video and other promotional content for our 42West, The Door and Shore Fire clients, primarily through the services of Viewpoint, and the ability to internally develop and execute marketing campaigns for our digital and film productions will allow us to expand and grow each of our business lines.

Employees

As of March 20, 2020, we had 159 full-time employees. We believe our relationship with our employees is good. We also utilize consultants in the ordinary course of our business and hire additional employees on a project-by-project basis in connection with the production of digital media projects or motion pictures.

Regulatory Matters

We are subject to state and federal work and safety laws and disclosure obligations, under the jurisdiction of the U.S. Occupational Safety and Health Administration and similar state organizations.

As a public company, we are subject to the reporting requirements under Section 13(a) and Section 15(d) of the Exchange Act. To the extent we are subject to these requirements, we will have our financial statements audited by an independent public accounting firm that is registered with the Public Company Accounting Oversight Board and comply with Rule 8-03 or 10-01(d), as applicable, of Regulation S-X.

Corporate Offices

Our corporate headquarters is located at 150 Alhambra Circle, Suite 1200, Coral Gables, Florida 33134. We also have offices located at 600 3rd Avenue, 23rd Floor, New York, New York, 10016, 37 West 17^th Street, 5^th Floor, New York, New York, 10011, 1840 Century Park East, Suite 700, Los Angeles, California 90067, 1460 West Chicago Avenue, Chicago, Illinois, 60642, 55 Chapel Street, Newton, Massachusetts, 02458, 1017 17^th Ave S Unit 4, Nashville, TN 37212, and 12 Court Street, Suite 1800, Brooklyn, NY 11201. Our telephone number is (305) 774-0407 and our website address is www.dolphinentertainment.com.  Information available on, or accessible through, our website is not incorporated by reference into this Annual Report on Form 10-K.

ITEM 1A.RISK FACTORS

Risks Related to our Business and Financial Condition

Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern.

The financial statements included with this report are presented under the assumption that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern, such as incurring substantial net losses and losses from operations for the years ended December 31, 2019 and 2018. As of December 31, 2019, the Company had cash and cash equivalents of approximately $2.9 million, of which $0.7 million is a guaranty for certain leases. Management is planning to raise any necessary additional capital to fund our operating expenses through loans and additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there can be no assurance that we will be successful in raising any necessary additional capital. If we are not successful in raising additional capital, we may not have enough financial resources to support our business and operations and, as a result, may not be able to continue as a going concern and could be forced to liquidate. The financial statements do not include any adjustments that might result from the outcome of this uncertainties. Please also see Note 2 to our audited consolidated financial statements contained in this Annual Report on Form 10-K.

We have a history of net losses and may continue to incur net losses.

We have a history of net losses and may be unable to generate sufficient revenue to achieve profitability in the future. For the fiscal years ended December 31, 2019 and 2018, respectively, our net loss was $1,193,377 and $2,913,321. Our accumulated deficit was $96,024,243 and $94,529,174 at December 31, 2019 and 2018, respectively. Our ability to generate net profit in the future will depend on our ability to realize the financial benefits from the operations of 42West, The Door, Shore Fire, Viewpoint and to successfully produce and commercialize multiple web series or films, as no single project is likely to generate sufficient revenue to cover our operating expenses. If we are unable to generate net profit at some point, we will not be able to meet our debt service or working capital requirements. As a result, we may need to (i) issue additional equity, which could substantially dilute the value of your share holdings, (ii) sell a portion or all of our assets, including any project rights which might have otherwise generated revenue, or (iii) cease operations.

We currently have substantial indebtedness which may adversely affect our cash flow and business operations and may affect our ability to continue to operate as a going concern.

We currently have a substantial amount of debt. We do not currently have sufficient assets to repay such debt in full when due, and our available cash flow may not be adequate to maintain our current operations if we are unable to repay, extend or refinance such indebtedness. The table below sets forth our total principal amount of debt and stockholders’ equity as of December 31, 2019 and 2018. Approximately $3.0 million of our total debt as of December 31, 2019 represented the fair value of the put options in connection with the 42West acquisition, which may or may not be exercised by the sellers. Approximately $3.3 million of our indebtedness as of December 31, 2019 was incurred by Max Steel Productions, LLC.  Max Steel Productions, LLC is a variable interest entity (or VIE) created in connection with the financing and production ofMax Steel(the “Max Steel VIE”). We are not a party to the indebtedness of our VIE, however, if a lender were to successfully assert that we are liable to the lender for the payment of Max Steel VIE’s debt despite the lack of contractual obligation, we do not have sufficient funds to repay this loan, which would have a material adverse effect on our liquidity, financial condition and results of operations. Approximately $4.4 million of our debt is related to convertible notes payable, $1.4 million to non-convertible notes payable and $1.7 million is a line of credit with Bank United.

Our indebtedness could have important negative consequences, including:

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our ability to obtain additional financing for working capital, capital expenditures, future productions or other purposes may be impaired or such financing may not be available on favorable terms or at all;

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we may have to pay higher interest rates upon obtaining future financing, thereby reducing our cash flows; and

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we may need a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, reducing the funds that would otherwise be available for operations and future business opportunities.

Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance and our ability to obtain additional financing, which will be affected by prevailing economic conditions, the profitability of our content production and entertainment publicity and marketing businesses and other factors contained in theseRisk Factors, some of which are beyond our control.

If we are not able to generate sufficient cash to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying digital or film productions, delaying or abandoning potential acquisitions, selling assets, restructuring or refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms or at all and our indebtedness may affect our ability to continue to operate as a going concern.

Our business and operations, and the operations of our customers, may be adversely affected by epidemics and pandemics, such as the recent COVID-19 outbreak.

We may face risks related to health epidemics and pandemics or other outbreaks of communicable diseases, which could result in a widespread health crisis that could adversely affect general commercial activity and the economies and financial markets of the country as a whole. For example, the recent outbreak of COVID-19, which began in China, has been declared by the World Health Organization to be a “pandemic,” has spread across the globe, including the United States of America, where we conduct most of our business. A health epidemic or pandemic or other outbreak of communicable diseases, such as the current COVID-19 pandemic, poses the risk that we or our customers, suppliers and other business partners may be disrupted or prevented from conducting business activities for certain periods of time, the durations of which are uncertain, and may otherwise experience significant impairments of business activities, including due to, among other things, operational shutdowns or suspensions that may be requested or mandated by national or local governmental authorities or self-imposed by us, our customers, suppliers or other business partners. As an example, our subsidiary, The Door, operates in the food and hospitality industry, which is being adversely affected by the government imposed shut down of restaurants and hotels throughout the United States.  While it is not possible at this time to estimate the impact that COVID-19 could have on our business, customers, suppliers or other business partners, the continued spread of COVID-19, the measures taken by the local and federal government, actions taken to protect employees, and the impact of the pandemic on various business activities could adversely affect our results of operations and financial condition.

Litigation or legal proceedings could expose us to significant liabilities.

We may in the future become party to litigation claims and legal proceedings.We face litigation risks regarding a variety of issues, including without limitation, copyright infringement, allegations against clients or events we provide marketing services for, alleged violations of federal and state labor and employment laws, securities laws, and other matters. These proceedings may be time consuming, expensive and disruptive to normal business operations. The defense of such lawsuits could result in significant expense and the diversion of our management’s time and attention from the operation of our business. Costs we incur to defend or to satisfy a judgment or settlement of these claims may not be covered by insurance or could exceed the amount of that coverage or increase our insurance costs and could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. 

Our management has determined that our disclosure controls and procedures and our internal controls over financial reporting are not effective as we have identified material weaknesses in our internal controls.

As disclosed in Part II, Item 9A. Controls and Procedures of this Annual Report on Form 10-K, management concluded that for the years ended December 31, 2019 and 2018, our internal control over financial reporting was not effective and we identified several material weaknesses. Our management concluded that our disclosure controls and procedures were not effective due to material weaknesses in our internal control over financial reporting. A material weakness is adeficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We have commenced our remediation efforts as discussed in Part II, 9A. Controls and Procedures of this Annual Report on Form 10-K to address the material weaknesses in internal control over financial reporting and ineffective disclosure controls and procedures.  If our remedial measures are insufficient, or if additional material weaknesses or significant deficiencies in our internal controls occur in the future, we could be required to restate our financial results, which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the weakness or deficiencies, harm our reputation and otherwise cause a decline in investor confidence. In addition, we could be subject to, among other things, regulatory or enforcement actions by the Securities and Exchange Commission, (the “SEC” or the “Commission”).

We rely on information technology systems that are susceptible to cybersecurity risks.  In the event of a cybersecurity incident, we could experience operational interruptions, incur substantial additional costs, become subject to legal or regulatory proceedings or suffer damage to our reputation.

We rely on information technologies and infrastructure to manage our businesses, including digital storage of marketing strategies and client information, films and digital programming and delivery of digital marketing services for our businesses. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. The incidence of malicious technology-related events, such as cyberattacks, computer hacking, computer viruses, worms or other destructive or disruptive software, denial of service attacks or other malicious activities is on the rise worldwide. Power outages, equipment failure, natural disasters (including extreme weather), terrorist activities or human error may also affect our systems and result in disruption of our services or loss or improper disclosure of personal data, business information or other confidential information.

Likewise, data privacy breaches, as well as improper use of social media, by employees and others may pose a risk that sensitive data, such as personally identifiable information, strategic plans and trade secrets, could be exposed to third parties or to the general public. We also utilize third parties, including third-party “cloud” computing services, to store, transfer or process data, and system failures or network disruptions or breaches in the systems of such third parties could adversely affect our reputation or business. Any such breaches or breakdowns could lead to business interruption, exposure of our or our clients’ proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings and other costs.  Such events could have a material adverse impact on our financial condition, results of operations and cash flows.  In addition, we could be adversely affected if any of our significant customers or suppliers experience any similar events that disrupt their business operations or damage their reputation. Efforts to develop, implement and maintain security measures are costly, may not be successful in preventing these events from occurring and require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Although we maintain monitoring practices and protections of our information technology to reduce these risks, there can be no assurance that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.

Risks Related to Our Entertainment Publicity and Marketing Business

Our business could be adversely affected if we fail to retain the principal sellers, and other key employees of 42West, The Door and Shore Fire and the clients they serve.

The success of our entertainment publicity and marketing business operated by 42West, The Door and Shore Fire substantially depends on our ability to retain the services of the former owners and certain key employees of 42West, The Door and Shore Fire. If we lose the services of one or more of these individuals, our ability to successfully implement our business plan with respect to our entertainment publicity and marketing business and the value of our common stock could be materially adversely affected. Although we entered into employment agreements with each of the principal sellers, there can be no assurance that they will serve the terms of their respective employment agreements or choose to remain with us following the expiration of such terms. In addition, the employees of 42West, The Door and Shore Fire, and their skills and relationships with clients, are among our most valuable assets. In June of 2018, three of 42West’s most senior publicists and their related staff left the firm to form their own company.  Their departures resulted in a significant decrease in revenues.  An important aspect of the business’ competitiveness is its ability to retain such key employees. If 42West, The Door or Shore Fire fail to hire and retain a sufficient number of these key employees, it may have a material adverse effect on our overall business and results of operations.

42West, The Door and Shore Fire’s talent rosters currently include some of the best known and most highly respected members of the entertainment, hospitality, and musical communities.  These include major studios and networks, corporations, well-known consumer brands, celebrity chefs, leading restaurant and hotel brands, and recording artists.  These clients often form highly loyal relationships with certain public relations and marketing professionals rather than with a particular firm. The employment agreements with the principal sellers currently contain non-competition provisions that prohibit the principal sellers from continuing to provide services to such clients should they leave our company, however, clients are free to engage other public relations and marketing professionals and there can be no assurance that they will choose to remain with our company. The success of 42West, The Door, and Shore Fire, therefore, depend on our ability to continue to successfully maintain such client relationships should the principal sellers or other key employees leave our company. If we are unable to retain the current 42West, The Door, and Shore Fire clients or attract new clients, then we could suffer a material adverse effect on our business and results of operations.

42West, The Door, Shore Fire and Viewpoint operate in a highly competitive industry.

The entertainment publicity and marketing business is highly competitive. Through 42West, The Door and Shore Fire, we must compete with other agencies, and with other providers of marketing and publicity services, in order to maintain existing client relationships and to win new clients. Through Viewpoint, we compete against other creative branding agencies, as well as in-house creative teams at many of our clients.  The client’s perception of the quality of an agency’s creative work and the agency’s reputation are critical factors in determining its competitive position.

The success of our entertainment publicity and marketing business depends on its ability to consistently and effectively deliver marketing and public relations services to its clients.

42West, The Door and Shore Fire’s success depends on its ability to effectively and consistently staff and execute client engagements to achieve the clients’ unique personal or professional goals. 42West, The Door and Shore Fire work to design customized communications or publicity campaigns tailored to the particular needs and objectives of particular projects. In some of its engagements, 42West, The Door and Shore Fire rely on other third parties to provide some of the services to its clients, and we cannot guarantee that these third parties will effectively deliver their services or that we will have adequate recourse against these third parties in the event they fail to effectively deliver their services. Other contingencies and events outside of our control may also impact 42West, The Door and Shore Fire’s ability to provide its services. 42West, The Door and Shore Fire’s failure to effectively and timely staff, coordinate and execute its client engagements may adversely impact existing client relationships, the amount or timing of payments from clients, its reputation in the marketplace and ability to secure additional business and our resulting financial performance. In addition, our contractual arrangements with our clients may not provide us with sufficient protections against claims for lost profits or other claims for damages.

If we are unable to adapt to changing client demands, social and cultural trends or emerging technologies, we may not remain competitive and our business, revenues and operating results could suffer.

We operate in an industry characterized by rapidly changing client expectations, marketing technologies, and social mores and cultural trends that impact our target audiences. The entertainment industry continues to undergo significant developments as advances in technologies and new methods of message delivery and consumption emerge. These developments drive changes in our target audiences’ behavior to which we must adapt in order to reach our target audiences. In addition, our success depends on our ability to anticipate and respond to changing social mores and cultural trends that impact the entertainment industry and our target audiences. We must adapt our business to these trends, as well as shifting patterns of content consumption and changing behaviors and preferences of our target audiences, through the adoption and exploitation of new technologies. If we cannot successfully exploit emerging technologies or if the marketing strategies we choose misinterpret cultural or social trends and prove to be incorrect or ineffective, any of these could havea material adverse effect on our business, financial condition, operating results, liquidity and prospects.

A significant labor dispute in our clients’ industries could have a material adverse effect on our business.

An industry-wide strike or other job action by or affecting the Writers Guild, Screen Actors Guild or other major entertainment industry union could reduce the supply of original entertainment content, which would in turn reduce the demand for our talent and entertainment marketing services. An extensive work stoppage would affect feature film production as well as television and commercial production and could have a material adverse effect on our clients and the motion picture production industry in general. For example, on November 5, 2007, the Writers Guild declared a strike affecting the script writing for television shows and films. The strike, which lasted until February 12, 2008, significantly affected the entertainment industry which consequently, had a material adverse impact on revenue generated by public relations and entertainment marketing agencies. Contracts between entertainment industry unions and the Alliance of Motion Picture and Television Producers, which we refer to as AMPTP, expire from time to time. The failure to finalize and ratify a new agreement with the AMPTP or the failure to enter into new commercial contracts upon expiration of the current contracts could lead to a strike or other job action. Any such severe or prolonged work stoppage could have an adverse effect on the television and/or motion picture production industries and could severely impair our clients’ prospects. Any resulting decrease in demand for our talent and entertainment marketing and other public relations services would have a material adverse effect on our cash flows and results of operations.

Clients may terminate or reduce their relationships with us on short notice.

As is customary in the industry, 42West, The Door and Shore Fire’s agreements with their respective clients generally provide for termination by either party on relatively short notice, usually 30 days. Consequently, these clients may choose to reduce or terminate their relationships with us, on a relatively short time frame and for any reason. If a significant number of the 42West, The Door or Shore Fire clients were to reduce the volume of business they conducted with us or terminate their relationships with us completely, this could have a material adverse effect upon our business and results of operations.  Viewpoint’s revenue is derived on a project by project basis.  Clients may decide to use other creative branding and production companies for their projects which would have an adverse effect upon our business and results of operations.

42West’s, The Door’s, Shore Fire’s and Viewpoint’s ability to generate new business from new and existing clients may be limited.

To increase their revenues, 42West, The Door, Shore Fire and Viewpoint need to obtain additional clients or generate demand for additional services from existing clients. 42West, The Door, Shore Fire and Viewpoints ability to generate initial demand for its services from new clients and additional demand from existing clients is subject to such clients’ and potential clients’ needs, trends in the entertainment industry, financial conditions, strategic plans and internal resources of corporate clients, as well as the quality of 42West, The Door, Shore Fire and Viewpoints employees, services and reputation. To the extent 42West, The Door, Shore Fire and Viewpoint cannot generate new business from new or existing clients due to these limitations, their ability to grow their respective businesses, and our ability to increase our revenues, will be limited.

Revenues from our Entertainment Publicity and Marketing segment are susceptible to declines as a result of unfavorable economic conditions.

Economic downturns often severely affect the marketing services industry. Some of our corporate clients may respond to weak economic performance by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in the short-term than other expenses related to operations. In addition, economic downturns could lead to reduced public demand for varying forms of entertainment for which we are engaged to provide public relations and media strategy and promotional services. Such reduced demand for our services could have a material adverse effect on our revenues and results of operations.

If our clients experience financial distress, or seek to change or delay payment terms, it could negatively affect our own financial position and results.

We have a large and diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business. Unfavorable economic and financial conditions, such as the current events surrounding the COVID-19 global outbreak, could result in an increase in client financial difficulties that affect us. As an example, the temporary closure of restaurants and hotels due to the pandemic will most likely adversely affect the revenues of our subsidiary, The Door. The direct impact on us could include reduced revenues, write-offs of accounts receivable and expenditures billable to clients, and negatively impact our operating cash flow. While we currently cannot estimate what those effects will be, if they are severe, the indirect impact could include impairments of intangible assets, credit facility covenant violations and reduced liquidity.

Risks Related to Our Content Production Business

Our content production business requires a substantial investment of capital, and failure to access sufficient capital while awaiting delayed revenues will have a material adverse effect on our results of operation.

The production, acquisition and distribution of film or digital media content require significant capital. The budget for the projects we intend to produce will each require between $6 and $8 million to produce. In addition, if a distributor does not provide the funds for the distribution and marketing of our film, we will require additional capital to distribute and market the film. We estimate that distribution and marketing fees will be approximately $10,000 per theatrical screen. A significant amount of time may elapse between our expenditure of funds and the receipt of revenues from our productions. Our content production business does not have a traditional credit facility with a financial institution on which to depend for our liquidity needs, and a time lapse may require us to fund a significant portion of our capital requirements through loans and additional issuances of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives. There can be no assurance that any additional financing will be available to us as and when required, or on terms that will be acceptable to us. Our inability to raise capital necessary to sustain our operations while awaiting delayed revenues would have a material adverse effect on our liquidity and results of operations.

Our success is highly dependent on audience acceptance of our films and digital media productions, which is extremely difficult to predict and, therefore, inherently risky.

We cannot predict the economic success of any of our films because the revenue derived from the distribution of a film (which does not necessarily directly correlate with the production or distribution costs incurred) depends primarily upon its acceptance by the public, which cannot be accurately predicted. The economic success of a film also depends upon the public’s acceptance of competing films, the availability of alternative forms of entertainment and leisure-time activities, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty.

The economic success of a film is largely determined by our ability to produce content and develop stories and characters that appeal to a broad audience and by the effective marketing of the film. The theatrical performance of a film is a key factor in predicting revenue from post-theatrical markets. If we are unable to accurately judge audience acceptance of our film content or to have the film effectively marketed, the commercial success of the film will be in doubt, which could result in costs not being recouped or anticipated profits not being realized. Moreover, we cannot assure you that any particular feature film will generate enough revenue to offset its distribution, fulfillment services and marketing costs, in which case we would not receive any revenues for such film from our distributors.

In addition, changing consumer tastes affect our ability to predict which digital media productions will be popular with web audiences. As we invest in various digital projects, stars and directors, it is highly likely that at least some of the digital projects in which we invest will not appeal to our target audiences. If we are unable to produce web content that appeals to our target audiences, the costs of such digital media productions could exceed revenues generated and anticipated profits may not be realized. Our failure to realize anticipated profits could have a material adverse effect on our results of operations.

We have in the past and may, in the future, incur significant write-offs if our feature films and other projects do not perform well enough to recoup production, marketing, distribution and other costs.

We are required to amortize capitalized production costs over the expected revenue streams as we recognize revenue from our films or other projects. The amount of production costs that will be amortized each quarter depends on, among other things, how much future revenue we expect to receive from each project. Unamortized production costs are evaluated for impairment when events or circumstances indicate that the carrying value of the capitalized production costs may be below their fair value. If estimated remaining revenue is not sufficient to recover the unamortized production costs, the unamortized production costs will be written down to fair value. In any given quarter, if we lower our previous forecast with respect to total anticipated revenue from any individual feature film or other project, we may be required to accelerate amortization or record impairment charges with respect to the unamortized costs, even if we have previously recorded impairment charges for such film or other project. For example, in 2019, we recorded $0.6 million impairment of the capitalized production costs for our feature film,Max Steel.  In addition, certain GAAP guidance requires us to impair costs that have been capitalized for projects that are not set for production within three years of capitalizing the cost.  In 2019 and 2018, we impaired the cost of several scripts based on this guidance.  Such impairment charges have had, and in the future could have, a material adverse impact on our business, operating results and financial condition.

Our content production business is substantially dependent upon the success of a limited number of film releases and digital media productions, if any, in any given year and our inability to release any film or digital media productions or the unexpected delay or commercial failure of any one of them could have a material adverse effect on our financial results and cash flows.

Our content production business is currently substantially dependent upon the success of a limited number of film releases and digital media productions, if any, in any given year. The unexpected delay in release or commercial failure of just one of these films or digital media productions, or our inability to release any productions at all, could have a significant adverse impact on our results of operations and cash flows in both the year of release and in the future. Historically, feature films that are successful in the domestic theatrical market are generally also successful in the international theatrical and ancillary markets, although each film is different and there is no way to guarantee such results. If our films fail to achieve domestic box office success, their success in the international box office and ancillary markets and our business, results of operations and financial condition could be adversely affected. Further, we can make no assurances that the historical correlation between results in the domestic box office and results in the international box office and ancillary markets will continue in the future. If we are unable to release any film or digital media productions in a given year, or if the feature films we release do not perform well in the domestic or international theatrical markets and ancillary markets, or our digital media productions do not perform as anticipated, the failure to release any productions, or the failure of any one of the productions we release, could a material adverse effect on our financial results and cash flows.

Delays, cost overruns, cancellation or abandonment of the completion or release of our web series or films may have an adverse effect on our business.

There are substantial financial risks relating to production, completion and release of web series and feature films. Actual costs may exceed their budgets due to factorssuch as labor disputes, unavailability of a star performer, equipment shortages, disputes with production teams or adverse weather conditions, any of which may cause cost overruns and delay or hamper film completion. We are typically responsible for paying all production costs in accordance with a budget and receive a fixed producer’s fee for our services plus a portion of any project income. However, to the extent that delays or cost overruns result in us not completing the web series or film within budget, there may not be enough funds left to pay us our producer’s fee, to generate any project income or complete the project at all. If this were to occur, it would significantly and adversely affect our revenue and results of operations.

We rely on third party distributors to distribute our films and their failure to perform or promote our films could negatively impact our ability to generate revenues and have a material adverse effect on our operating results.

Our films are primarily distributed and marketed by third party distributors. If any of these third-party distributors fails to perform under their respective arrangements, such failure could negatively impact the success of our films and have a material adverse effect on our business, reputation and ability to generate revenues.

We generally do not control the timing and manner in which our distributors distribute our films; their decisions regarding the timing of release and promotional support are important in determining success. Any decision by those distributors not to distribute or promote one of our films or to promote our competitors’ films or related products to a greater extent than they promote ours could have a material adverse effect on our business, cash flows and operating results.  Additionally, because third parties are the principal distributors of our movies, the amount of revenue that is recognized from films in any given period is dependent on the timing, accuracy and sufficiency of the information received from our distributors. As is typical in the film industry, our distributors may make adjustments in future periods to information previously provided to us that could have a material impact on our operating results in later periods. In 2018, our domestic distributor ofMax Steel andBelieve, Open Road Films, LLC (“Open Road”) filed for bankruptcy protection under Chapter 11.  The assets of Open Road were purchased by Raven Capital Management (“Raven Capital”) which now has the rights to distribute the films under the same arrangements as Open Road.  There is no guaranty that Raven Capital will be successful in distributingMax Steel andBelieve.

Our success depends on the services of our Chief Executive Officer.

Our success greatly depends on the skills, experience and efforts of our Chief Executive Officer, Mr. O’Dowd. We do not have an employment agreement with Mr. O’Dowd. If Mr. O’Dowd resigns or becomes unable to continue in his present role and is not adequately replaced, the loss of his services could have a material adverse effect on our business, operating results or financial condition.

The popularity and commercial success of our digital media productions and feature films are subject to numerous factors, over which we may have limited or no control.

The popularity and commercial success of our digital media productions and films depends on many factors including, but not limited to, the key talent involved, the timing of release, the promotion and marketing of the digital media production or film, the quality and acceptance of other competing productions released into the marketplace at or near the same time, the availability of alternative forms of entertainment, general economic conditions, the genre and specific subject matter of the digital media production or film, its critical acclaim and the breadth, timing and format of its initial release. We cannot predict the impact of such factors on any digital media production or film, and many are factors that are beyond our control. As a result of these factors and many others, our digital media productions and films may not be as successful as we anticipate, and as a result, our results of operations may suffer.

The creation of content for the entertainment industry is highly competitive and we will be competing with companies with much greater resources than we have.

The business in which we engage is highly competitive. Our content production business operations are subject to competition from companies which, in many instances, have greater development, production and distribution and capital resources than us. We compete for the services of writers, producers, directors, actors and other artists to produce our digital media and motion picture content, as well as for advertisement dollars. Larger companies have a broader and more diverse selection of scripts than we do, which translates to a greater probability that they will be able to more closely fit the demands and interests of advertisers than we can.

As a small independent producer, we compete with major U.S. and international studios. Most of the major U.S. studios are part of large diversified corporate groups with a variety of other operations that can provide both the means of distributing their products and stable sources of earnings that may allow them better to offset fluctuations in the financial performance of their film and other operations. In addition, the major studios have more resources with which to compete for ideas, storylines and scripts created by third parties, as well as for actors, directors and other personnel required for production. Such competition for the industry’s talent and resources may negatively affect our ability to acquire, develop, produce, advertise and distribute digital media and motion picture content.

We must successfully respond to rapid technological changes and alternative forms of delivery or storage to remain competitive.

The entertainment industry continues to undergo significant developments as advances in technologies and new methods of product delivery and storage, and certain changes in consumer behavior driven by these developments emerge. New technologies affect the demand for our content, the manner in which our content is distributed to consumers, the sources and nature of competing content offerings and the time and manner in which consumers acquire and view our content. We and our distributors must adapt our businesses to shifting patterns of content consumption and changing consumer behavior and preferences through the adoption and exploitation of new technologies. If we cannot successfully exploit these and other emerging technologies, it could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.

Our business may be affected by changes in consumer discretionary spending in the U.S. or internationally.

Our success depends on our ability to distribute or otherwise generate income from our current and future motion pictures and digital productions.  Our industry is subject to discretionary consumer spending, which is influenced by general economic conditions, consumer confidence and the availability of discretionary income. Changes in economic conditions affecting potential distributors or viewers of our motion pictures could reduce our ability to generate income from our motion pictures.  Furthermore, weak economic conditions and geopolitical and economic uncertainties in international regions and countries where our movie productions are distributed could lead to lower consumer spending for our content, which could have a material adverse effect on our financial condition and results of operations.

We have in the past and may, in the future, be adversely affected by union activity.

We retain the services of actors who are covered by collective bargaining agreements with Screen Actors Guild – American Federation of Television and Radio Artists, which we refer to as SAG-AFTRA, and we may also become signatories to certain guilds such as Directors Guild of America and Writers Guild of America in order to allow us to hire directors and talent for our productions. Collective bargaining agreements are industry-wide agreements, and we lack practical control over the negotiations and terms of these agreements. In addition, our digital projects fall within SAG-AFTRA’s definition of “new media”, which is an emerging category covered by its New Media and Interactive Media Agreements for actors. As such, our ability to retain actors is subject to uncertainties that arise from SAG-AFTRA’s administration of this relatively new category of collective bargaining agreements. Such uncertainties have resulted and may continue to result in delays in production of our digital projects.

In addition, if negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the union could take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns or work stoppages or the possibility of such actions could result in delays in production of our digital projects. We could also incur higher costs from such actions, new collective bargaining agreements or the renewal of collective bargaining agreements on less favorable terms. Depending on their duration, union activity or labor disputes could have an adverse effect on our results of operations.

Others may assert intellectual property infringement claims or liability claims for digital media or film content against us which may force us to incur substantial legal expenses.

There is a possibility that others may claim that our productions and production techniques misappropriate or infringe the intellectual property rights of third parties with respect to their previously developed web series, films, stories, characters, other entertainment or intellectual property. In addition, as distributors of digital media and film content, we may face potential liability for such claims as defamation, invasion of privacy, negligence, copyright or trademark infringement or other claims based on the nature and content of the materials distributed. If successfully asserted, our insurance may not be adequate to cover any of the foregoing claims. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and diversion of resources in defending against them, which could have a material adverse effect on our operating results.

If we fail to protect our intellectual property and proprietary rights adequately, our business could be adversely affected.

Our ability to compete depends, in part, upon successful protection of our intellectual property. We attempt to protect proprietary and intellectual property rights to our productions through available copyright and trademark laws and distribution arrangements with companies for limited durations. Unauthorized parties may attempt to copy aspects of our intellectual property or to obtain and use property that we regard as proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. Intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to steal our intellectual property. Our failure to protect adequately our intellectual property and proprietary rights could adversely affect our business and results of operations.

Risks Related to Acquisitions

We are subject to risks associated with acquisitions and we may not realize the anticipated benefits of such acquisitions.

We have in the past completed acquisitions, and may in the future consummate additional acquisitions and otherwise engage in discussions and activities with respect to possible acquisitions, intended to complement or expand our business, some of which may be significant transactions for us. Identifying suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis or at all.

Even if we complete an acquisition, we may not realize the anticipated benefits of such transaction. Our recent acquisitions have required, and any similar future transactions may also require, significant efforts and expenditures, including with respect to integrating the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection with acquisition activities and integration efforts, including, without limitation:

·

diversion of management attention from managing our historical core business;

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potential disruption of our historical core business or of the acquired business;

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the strain on, and need to continue to expand, our existing operational, technical, financial and administrative infrastructure;

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inability to achieve synergies as planned;

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challenges in controlling additional costs and expenses in connection with and as a result of the acquisition;

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dilution to existing shareholders from the issuance of equity securities;

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becoming subject to adverse tax consequences or substantial depreciation;

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difficulties in assimilating employees and corporate cultures or in integrating systems and controls;

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difficulties in anticipating and responding to actions that may be taken by competitors;

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difficulties in realizing the anticipated benefits of the transaction;

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inability to generate sufficient revenue from acquisitions to offset the associated acquisition costs;

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potential loss of key employees, key clients or other partners of the acquired business as a result of the change of ownership; and

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the assumption of and exposure to unknown or contingent liabilities of the acquired businesses.

If any of our acquisitions do not perform as anticipated for any of the reasons noted above or otherwise, there could be a negative impact on our results of operations and financial condition.

Any due diligence conducted by us in connection with potential future acquisition may not reveal all relevant considerations or liabilities of the target business, which could have a material adverse effect on our financial condition or results of operations.

We conduct such due diligence with respect to our acquisitions as we deem reasonably practicable and appropriate. The objective of the due diligence process is to identify material issues and liabilities that may affect the decision to proceed with any one particular acquisition target or the consideration payable for an acquisition. We also use information revealed during the due diligence process to formulate our business and operational planning for, and our valuation of, any target company or business. While conducting due diligence and assessing a potential acquisition, we may rely on publicly available information, if any, information provided by the relevant target company to the extent such company is willing or able to provide such information and, in some circumstances, third party investigations.

There can be no assurance that the due diligence undertaken with respect to an acquisition, will reveal all relevant facts that may be necessary to evaluate such acquisition including the determination of the price we may pay for an acquisition target or to formulate a business strategy. Furthermore, the information provided during due diligence may be incomplete, inadequate or inaccurate. As part of the due diligence process, we will also make subjective judgments regarding the results of operations, financial condition and prospects of a potential target. Our due diligence investigation of a particular acquisition target may not uncover all material issues and liabilities to which we may become subject. If our due diligence investigation fails to correctly identify material issues and liabilities that may be present in a target company or business, or if we consider such material risks to be commercially acceptable relative to the opportunity, and we proceed with an acquisition, we may subsequently incur substantial impairment charges or other losses.

In addition, following an acquisition, including those already completed, we may be subject to significant, previously undisclosed liabilities of the acquired business that were not identified during due diligence. Any such liabilities could contribute to poor operational performance, undermine any attempt to restructure the acquired company or business in line with our business plan and otherwise have a material adverse effect on our financial condition and results of operations.

Losses incurred by us subsequent to completion of an acquisition may not be indemnifiable by the seller or may exceed the seller’s indemnification obligations.

As discussed above, there may be liabilities assumed in any acquisition that we did not discover or that we underestimated in the course of performing our due diligence. Although a seller generally will have indemnification obligations to us under an acquisition agreement, these obligations are usually subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations. We cannot assure you that our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any losses that we incur with respect to a particular acquisition. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and operating results.

We recognized a goodwill impairment charge for the year ended December 31, 2018 and may be required to recognize additional goodwill and intangible asset impairment charges in the future.

We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment at least annually. Events or changes indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include reduced future cash flow estimates, slower growth rates in industry segments in which we participate and a decline in our stock price and market capitalization. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations.  For the year ended December 31, 2018, we recorded approximately $1.9 million in charges for the impairment of goodwill for 42West based on a reduced cash flow estimate.

Risks Related to our Common Stock and Preferred Stock

We have recently issued, and may in the future issue, a significant amount of equity securities and, as a result, your ownership interest in our company has been, and may in the future be, substantially diluted and your investment in our common stock could suffer a material decline in value.

From January 1, 2018 to December 31, 2019, the number of shares of our common stock issued and outstanding has increased from 10,565,789 to 17,892,900 shares. During this period, we issued approximately 1,979,904 shares of our common stock as consideration for 42West, The Door, Shore Fire and Viewpoint acquisitions.   We will issue an additional 971,735 shares of our common stock to the sellers of 42West for the earn out (net of indemnifications) that was earned in 2017.  On August 14, 2019 we exchanged 44,740 put rights held by one of the sellers of 42West for 385,514 shares of common stock. We will issue 26,821 shares of our common stock for the working capital adjustment to the sellers of The Door.  Furthermore, we may issue up to 1,538,462 shares of our common stock to the sellers of The Door if the applicable earn out financial target is achieved in the following two years.  We will issue to the Shore Fire seller the equivalent of $200,000 of our common stock at the trading stock price on each of the first and second anniversaries of the acquisition of Shore Fire.  During the year ended December 31, 2019, certain holders of convertible notes exercised their right to convert all or a portion of their convertible notes and we issued 433,794 shares of common stock. As of December 31, 2019, we had outstanding convertible notes payable that as of the date of this report are still outstanding in the aggregate principal amount of $2,352,500, which are currently convertible into 3,372,612 shares of our common stock (calculated based on either a 30-trading-day average price per share, 90-trading-day average price per share as of March 6, 2020 or $0.78 per share based on the terms of the convertible notes payable).  As of December 31, 2019, we had convertible notes payable in the amount of $1.1 million that were converted subsequent to year end for 1,877,811 shares of our common stock. On October 21, 2019, we issued 2,700,000 shares of our common stock in a public offering at a purchase price of $0.78 per share.  As a result of these past issuances and potential future issuances, your ownership interest in the Company has been, and may in the future be, substantially diluted.

The market price for our common stock has been volatile, and these issuances could cause the price of our common stock to continue to fluctuate substantially. In addition, we have historically experienced significantly low trading volume. Once restricted stock issued in either private placements or to the sellers of the companies we acquired becomes freely tradable, these shareholders may decide to sell their shares of common stock and, if our stock is thinly traded, this could have a material adverse effect on its market price.

We currently have an effective shelf registration statement on Form S-3 filed with the SEC under which we may offer from time to time any combination of common stock, warrants and units.In the near term, we will need to raise additional capital and may seek to do so by selling additional securities under the shelf registration statement, conducting one or more private placements of equity securities, securities convertible into equity securities or debt securities, or through a combination of one or more of such financing alternatives. Such issuances of additional securities would further dilute the equity interests of our existing shareholders, perhaps substantially, and may further exacerbate any or all of the above risks.

The Series C Convertible Preferred Stock has anti-dilution protections and super voting rights that may adversely affect our shareholders.

For a period of five years from March 7, 2016, the date of issuance, the Series C Convertible Preferred Stock, which are all held by Mr. O’Dowd, will have certain anti-dilution protections. Upon triggers specified in the Series C Certificate of Designation, the number of shares of common stock into which any Series C Convertible Preferred Stock held by Mr. O’Dowd (or any entity directly or indirectly controlled by Mr. O’Dowd) can be converted will be increased, such that the total number of shares of common stock held by Mr. O’Dowd (or any entity directly or indirectly controlled by Mr. O’Dowd) (based on the number of shares of common stock held as of the date of issuance of such Series C Convertible Preferred Stock) will be preserved at the same percentage of shares of common stock outstanding held by such persons on such date. As a result, your ownership interests may be further diluted.

Except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold (as defined in the Series C Certificate of Designation) has occurred. Upon such determination by the Board, a holder of Series C Convertible Preferred Stock (Mr. O’Dowd) will be entitled to super voting rights of three votes for each share of common stock into which such holder’s shares of Series C Convertible Preferred Stock could then be converted. Holders of Series C Convertible Preferred Stock will be entitled to vote together as a single class on all matters upon which common stockholders are entitled to vote. Your voting rights will be diluted as a result of these super voting rights. In addition, the anti-dilution protections may result in an increase in the number of shares of common stock into which Series C Convertible Preferred Stock held by Mr. O’Dowd and certain eligible persons can be converted, which could further dilute your percentage of voting rights.

If we are unable to maintain compliance with Nasdaq listing requirements, our stock could be delisted, and the trading price, volume and marketability of our stock could be adversely affected.

Our common stock and certain of our warrants are listed on the Nasdaq Capital Market. We cannot assure you, that we will be able to maintain compliance with Nasdaq’s current listing standards, or that Nasdaq will not implement additional listing standards with which we will be unable to comply. On October 17, 2019, we received a deficiency notice from Nasdaq informing us that our common stock failed to comply with the $1 minimum bid price required for continued listing on Nasdaq under Nasdaq Listing Rule 5550(a)(2) based upon the closing bid price of the Common Stock for the 30 consecutive business days prior to the date of the notice from Nasdaq.  Nasdaq provides us an initial cure period of six months or until April 14, 2020 to regain compliance which requires us to have a closing bid price of our common stock that meets or exceeds $1.00 per share for a minimum of ten days prior to such date.  If we are unable to regain compliance by April 14, 2020, we may be eligible for an additional 180 calendar day compliance period to demonstrate compliance with the minimum bid requirement.  There is no assurance that we can regain compliance of the minimum bid requirement before April 14, 2020 or that Nasdaq will grant us an additional 180 calendar day compliance period. Failure to maintain compliance with Nasdaq listing requirements could result in the delisting of our shares from Nasdaq, which could have a material adverse effect on the trading price, volume and marketability of our common stock.  Furthermore, a delisting could adversely affect our ability to issue additional securities and obtain additional financing in the future or result in a loss of confidence by investors or employees.

Accounting for the put rights and contingent consideration could cause variability in the results we report.

In connection with the 42West acquisition, we granted put rights to the sellers to cause us to purchase up to an aggregate of 1,187,087 (including the shares from the earn out consideration) of their shares of common stock received as consideration for a purchase price equal to $9.22 per share during certain specified exercise periods set forth in the put agreements up until December 2020. As of the date of this report, the sellers have exercised an aggregate of 895,653 shares of common stock pursuant to the put rights. We have also purchased 120,451 shares of common stock and may purchase up to an additional 20,246 shares of common stock, at a purchase price of $9.22, from certain 42West employees with change of control provisions in their employment agreements, who received shares of our common stock at the time of the 42West acquisition and will receive additional shares in 2019 related to the earn out consideration. The sellers of The Door may also earn up to 1,538,462 shares of common stock if certain financial targets are achieved over a four-year period.  The put rights are an embedded derivative within our common stock requiring certain fair value measurements at each reporting period. We record the fair value of the put right liability and the contingent consideration liability in the consolidated balance sheets and we record changes to the liability against earnings or loss in the consolidated statements of operations. The put rights and contingent consideration are inherently difficult to value. We could have substantial variability in the related periodic fair value measurements, which would affect our operating results and in turn could impact our stock price.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

As of the date of this report, we do not own any real property. For our content production business, we lease 3,024 square feet of office space with a lease commencement date of October 1, 2019, located at 150 Alhambra Circle, Suite 1200, Coral Gables, Florida 33134, at a monthly rate of $9,954, with annual increase of 3% and four months of rent abatement.  The lease expires on November 30, 2024.  

For our entertainment publicity and marketing business, we lease the following office space: (i)12,505 square feet located at 600 Third Avenue, 23rd Floor, New York, NY 10016, at a monthly rate of $67,735 with increases every three years; (ii) 5,000 square feet located at 37 West 17^th Street, 5^th Floor, New York, NY 10010 at a monthly rent of $16,912 with a 2.5% annual increase and expiring in August of 2020; (iii) two office suites located at 1460 West Chicago Avenue, Chicago, Illinois 60642 at a monthly rate of $2,200 and expiring on May 31, 2020; (iv) 12,139 square feet of office space at 1840 Century Park East, Suite 700, Los Angeles, CA 90067 at a base rate of $36,417 (commencing on February 1, 2014), with annual increases of 3% per year; (v) 12,376 square feet located at 55 Chapel Street, Newton, MA 02458 at a current monthly rate of $23,656 with annual increases of 3% and expiring on March 31, 2021; (vi) 32 Court Street, Brooklyn, NY at a current monthly rate of $17,000 with annual increases of 3% and expiring on February 28, 2026 and (vii) 1017 17^th Avenue, Unit 4, Nashville, TN 37212 at a current monthly rate of $2,179 and expiring on July 31, 2020.  We believe our current facilities are adequate for our operations for the foreseeable future.

ITEM 3.LEGAL PROCEEDINGS

We currently do not have any material legal proceedings, including those relating to claims arising in the ordinary course of business.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders of our Common Stock

Our common stock trades on The Nasdaq Capital Market under the symbol “DLPN”.

As of March 18, 2020, there were approximately 333 shareholders of record, of our issued and outstanding shares of common stock based on information provided by our transfer agent.

Recent Sales of Unregistered Securities

On October 11, 2019 the Company issued convertible promissory note agreement to a third-party investor and received $500,000 to be used for working capital. The convertible promissory note bear interest at a rate of 10% per annum and mature on October 11, 2021. The balance of the convertible promissory note and any accrued interest may be converted into shares of Common Stock at the noteholder’s option at any time at a purchase price based on the 30-day trailing average closing price of the Common Stock.

Company Purchases of Equity Securities

The following table presents information related to our repurchases of our shares of common stock during the quarter ended December 31, 2019:

———————

⁽¹⁾

Pursuant to the terms and subject to the conditions set forth in put agreements, entered into with the sellers of 42West, certain of such sellers exercised their put rights and caused us to purchase 62,364 shares of common stock for an aggregate amount of $575,000 of which $275,000 was paid in January 2020. See Note 4 — Acquisitions to our audited consolidated financial statements contained in this Annual Report on Form 10-K for further discussion of these put agreements.

ITEM 6.SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our audited historical consolidated financial statements and the notes thereto, which are included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2019 ( this“2019 Form 10-K”). The following discussion includes forward-looking statements that involve certain risks and uncertainties, including, but not limited to, those described in Item 1A. Risk Factors in this 2019 Form 10-K. Our actual results may differ materially from those discussed below. See “Special Note Regarding Forward-Looking Statements” and Item 1A. Risk Factors, in each case contained in this 2019 Form 10-K.

OVERVIEW

We are a leading independent entertainment marketing and premium content development company. We were first incorporated in the State of Nevada on March 7, 1995 and domesticated in the State of Florida on December 4, 2014.  Our common stock trades on The Nasdaq Capital Market under the symbol “DLPN”.

Through our acquisition ofsubsidiaries 42West, The Door and Shore Fire, we provide expert strategic marketing and publicity services to all of the major film studios, and many of the leading independenttop brands, both individual and digital content providers, as well ascorporate, in the entertainment and hospitality industries.  42West, The Door and Shore Fire are each recognized global leaders in PR services for hundreds of A-list celebrity talent, including actors, directors, producers, recording artists, athletes and authors. The strategicthe respective industries they serve.  Our acquisition of 42West brings together premiumViewpoint has added full-service creative branding and production capabilities to our marketing services with premium content production, creating significant opportunities to serve our respective constituents more strategically and to grow and diversify our business. Ourgroup.  Dolphin’s legacy content production business, is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. We produce originalfounded by Emmy-nominated Chief Executive Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital programmingseries, primarily aimed at family and young adult markets.

On March 30, 2017,December 3, 2019, referred to as the Shore Fire Closing Date, we acquired 42West, an entertainmentall of the issued and outstanding capital stock of Shore Fire, a New York corporation. Shore Fire is a public relations agency offering talent,and media management firm that specializes in music, entertainment and targeted marketing,popular culture.

We agreed to pay an aggregate purchase price of $3 million for Shore Fire, before adjustments, comprising (i) $1,000,000 in cash paid to the seller on the Shore Fire Closing Date (as adjusted for Shore Fire’s indebtedness, working capital and strategic communications services. As consideration for the 42West acquisition, we paid approximately $18.7 millioncash targets, and transaction expenses); (ii) $200,000 in shares of our common stock based on the 30-trading-day average stocka price, priorper share of $0.64, issued to the closing date of $9.22 per share (less certain working capital and closing adjustments, transaction expenses and payments of indebtedness), plus the potential to earn up to an additional $9.3 million in shares of common stock basedseller on the achievement of specified financial performance targetsShore Fire Closing Date and (iii) $140,000 in cash paid on the Shore Fire Closing Date to certain key employees, referred to as set forththe Shore Fire Key Employees; (iv)  additional $250,000 in the membership interest purchase agreement. During the year ended December 31, 2017, 42West achieved the required financial performance targets, and the principal sellers earned the additional consideration, which will becash paid in shares of common stock in equal installments over a three-year period.

Prior to its acquisition, 42West grew to become oneon each of the largest independently-owned public-relations firmsthird, sixth, twelve and twenty-four month anniversary of the Shore Fire Closing Date; (v) $200,000 in the entertainment industry. Among other benefits, we believe that the 42West acquisition will strengthen and complement our current content production business, while expanding and diversifying our operations.

In connection with the 42West acquisition, pursuant to put agreements we granted the sellers the right, but not the obligation, to cause us to purchase up to an aggregate of 1,187,094 (including the shares from the earn out consideration) of shares of our common stock that they received as consideration for a purchase price of $9.22 per share during certain specified exercise periods up until December 2020. Duringto the year ended December 31, 2017, we purchased 132,859 shares of our common stock from certainseller on each of the sellers in accordance with the put agreements for an aggregate purchase price of $1,225,000. Subsequent to December 31, 2017, we purchased an additional 56,940 shares of our common stock for $525,000 from certaintwelve and twenty-four month anniversary of the sellersShore Fire Closing Date; (vi) $140,000 in accordance withcash to the put agreements. Additionally, subsequent to December 31, 2017, we agreed to purchase 51,484 shares of common stock and up to an additional 85,472 shares of common stock in July of 2018 at a purchase price of $9.22, from certain 42West employees, with change of control provisions in their employment agreements and who received shares of our common stock atShore Fire Key Employees on the timetwelve month anniversary of the 42West acquisitionShore Fire Closing Date and will receive additional shares(vii) $120,000 in July 2018 and in 2019 relatedcash to the earn out consideration.Shore Fire Key Employees on the twenty-four month anniversary of the Shore Fire Closing Date. In connection with the 42West acquisition of Shore Fire, we acquired an estimated $9.5 million of intangible assets of approximately $1.1 million and recorded approximately $12.8 milliongoodwill of goodwill. We amortize our intangible assets over useful lives of between 3 and 14 years. $1.9 million.

We have recorded amortization in the amount of approximately $1.0 million during the year ended December 31, 2017.

On March 7, 2016, we acquired Dolphin Films from Dolphin Entertainment, LLC,established an entity wholly owned by our President, Chairman and Chief Executive Officer, Mr. William O’Dowd, IV. Dolphin Films is a content producer of family feature films. In 2016, we released our feature film,Max Steel, which was produced by Dolphin Films. All financial information has been retrospectively adjusted at the historical values of Dolphin Films, as the merger was between entities under common control.

Our acquisition strategy is based on identifying and acquiring companies that complement our existing content production and entertainment publicity and marketing services and content production businesses. We believe that complementary businesses, such as data analytics and digital marketing, can create synergistic opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion and diligence with such targets. We intend to complete at least one acquisition during 2018, although2020, but there is no assurance that we will be successful in doing so.so, whether in 2020 or at all. We are planningcurrently intend to fund such acquisitionany acquisitions through loans or additional salesissuances of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there can be no assurance that we will be successful in raising the capital necessary to consummate any necessary capital.acquisitions, whether on favorable terms or at all.

Effective May 10, 2016, we amended our Articles of Incorporation to effectuate a 1-for-20 reverse stock split.

Effective July 6, 2017, we amended our Articles of Incorporation to (i) change our name to Dolphin Entertainment, Inc.; (ii) cancel previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock; (iii) reduce the number of Series C Convertible Preferred Stock (described below) outstanding in light of our 1-for-20 reverse stock split from 1,000,000 to 50,000 shares; and (iv) clarify the voting rights of the Series C Convertible Preferred Stock that, except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred.

Effective September 14, 2017, we amended our Amended and Restated Articles of Incorporation to effectuate a 1-for-2 reverse stock split. Shares of common stock have been retrospectively adjusted to reflect the reverse stock split in the following management discussion and analysis.

As a result of the acquisition of 42West, weWe operate in two reportable segments:  our entertainment publicity and marketing segment and our content production segment. The entertainment publicity divisionand marketing segment comprises 42West, The Door, Shore Fire and Viewpoint and provides clients with diversified services, including public relations, entertainment content marketing, and strategic marketing consulting.consulting, creative branding and in-house production of content for marketing. The content production divisionsegment comprises Dolphin Films and Dolphin Digital Studios and specializes in the production and distribution of digital content and feature films.

Going Concern

In the audit opinion for our financial statements as of and for the year ended December 31, 2017,2019, our independent auditors included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern based upon our accumulated deficit as of December 31, 20172019 and our level of working capital. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is planning to raise any necessary additional funds through loans and additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there can be no assurance that we will be successful in raising any necessary additional capital or securing loans. Such issuances of additional securities would further dilute the equity interests of our existing shareholders, perhaps substantially. With the acquisitionacquisitions of 42West, The Door, Viewpoint and now Shore Fire, we are currently exploring opportunities to expand the services currently being offered by 42Westthem to the entertainment and hospitality community. In addition, we are exploring ways to reduce expenses by identifying certain costs that can be combined, for example, subleasing one of our Los Angeles, CA facilitiesconsolidating certain “back office” functions such as accounting and consolidating our Los Angeles, CA operations. See “Properties” for more information.human resources.  There can be no assurance that we will be successful in selling these services to clients or reducing expenses.

REVENUES

For the yearyears ended December 31, 2016,2019 and 2018, we derived the majority of our revenues from the release of our motion picture,Max Steel, and a portion of fees obtained from the sale of memberships to online kids clubs. By contrast, for the year ended December 31, 2017, we derived the majoritysubstantially all of our revenues from our recently acquired subsidiary 42West, whichentertainment publicity and marketing segment. The entertainment publicity and marketing segment derives its revenues from providing talent,public relations services for celebrities and musicians, entertainment and targeted content marketing for film and television series, strategic communications services. During 2017, we also continued to deriveservices for corporations and public relations, marketing services and brand strategies for hotels and restaurants.  We additionally derived revenues from the content production segment primarily from the distribution of our motion picturefeature films,Max Steel: andBelieve.  The table below sets forth the percentage of total revenue derived from our two segments for the years ended December 31, 2019 and 2018:

Entertainment Publicity and Marketing

Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we currently have a stable client base, and we have continued to grow organically through referrals and actively soliciting new business. Our revenue is directly impacted bybusiness as well as through acquisition of new businesses within the retention and spending levels of existing clients and by our ability to win new clients. Our entertainment publicity segment generatessame industry. We earn revenues primarily from threethe following sources: we provide(i) celebrity talent services in exchange for monthly fees of approximately $5,000 per client; we provide entertainmentservices; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees ranging from $25,000 to $300,000 per project; and we havefees; (iii) numerous projects per year per clientindividual engagements for entertainment content marketing services for durations of generally between three and six months related to these master service agreements. In addition, we providemonths; (iv) strategic communications services in exchangeservices; (v) engagements for marketing of special events such as food and wine festivals and (vi) content productions of marketing materials on a project contract basis. For these revenue streams, we collect fees through either fixed fee monthly fees ranging from $10,000 to $30,000 per client.retainer agreements or project-based fees.  

We earn entertainment publicity and marketing revenues primarily through the following:

·

Talent– We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs and film stars,Grammy winning recording artists, authors, models, athletes, and theater actors. Our talent roster includes Oscar- and Emmy-winning actors and Grammy-winning singers and musicians and New York Times best-selling authors.artists. Our services in this area include ongoing strategic counsel, media relations, studio and/or network charity, corporate liaison work, and event and tour support. Many of our clients have been with 42West since it was founded in 2004. Our services may be ongoing or related to a specific project that our talent is associated with.

In the Talent division, 42West experienced approximately 22% revenue growth for the year ended December 31, 2017, as compared to the prior year due to an increase in the number of new clients. We intend to hire new individuals or teams whose existing books of business and talent rosters can be accretive to revenues and profits of the business. For example, we hired a new managing director in July 2017, who was previously a 12-year public relations veteran of The Walt Disney Studios. We expect to experience further growth through the hiring of additional individuals or teams.

·

Entertainment Marketing and Targeted MarketingBrand Strategy– We earn fees from providing marketing direction, public relations counsel and media strategy for productionsentertainment content (including theatrical films, television programs, DVD and VOD releases, television programs, and online series)streaming services) from all the major studios, as well as content producers ranging from individual filmmakers and creative artists to production companies, streaming services, film financiers, DVD distributors, and other entities. Our capabilities include worldwide studio releases, independent films, television programming and web productions. In addition, we provide entertainment marketing services in connection with film and festivals, food and wine festivals, awards campaigns, event publicity and red carpetred-carpet management. As part of our services we offer marketing and publicity services that are tailored to reach diverse audiences. We also provide marketing direction targeted to the ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups. Our clients for this type of service may include major studios, and independent producers for whom we create strategictargeted multicultural marketing campaigns and provide strategic guidance aimed at reaching diverse audiences.leading hotel and restaurant groups.

We expect that increased moviedigital streaming marketing budgets at several large key clients will drive growth of revenue and profit in 42West’s42West’s Entertainment and Targeted Marketing division over the next several years. We experienced revenue growth in this division of approximately 7% for the year ended December 31, 2017, as compared to the prior year.

·

Strategic Communications – We earn fees through our strategic communications team by advising high-profile individuals and companies faced with sensitive situations or looking to create, raise reposition, or rehabilitatereposition their public profiles. We also help studios and filmmakers deal with controversial movies.profiles, primarily in the entertainment industry. We believe that growth in 42West’s Strategic Communications division will be driven by increasing demand for these services by traditional and non-traditional media clients who are expanding their activities in the content production, branding, and consumer products PR sectors. We expect that this growth trend will continue for the next three to five years. During the year ended December 31, 2017, we experienced an 11% growth in revenuesWe also help studios and filmmakers deal with controversial movies, as compared to the same period in the prior year. We believe that such growth trend could result in the Strategic Communications division significantly increasing its percentage of the overall revenue mix of 42West, which has typically had higher profit margins than the other 42West divisions.

Production and Distribution

Dolphin Digital Studios

For the year ended December 31, 2016, we derived revenues from Dolphin Digital Studios through the release of our web series,South Beach–Fever.  For the year ended December 31, 2017, we releasedJack of all Tastes, a digital project that showcased favorite restaurants of NFL players, but we did not derive any revenues from this initial release. We determined that the carrying value of the capitalized production costs related toJack of all Tastes was below the fair value and recorded an impairment of $0.3 million during the year ended December 31, 2017. We are currently sourcing distribution platforms in which to release completed projects and those for which we have the rights, and which we intend to produce.

We earn production and online distribution revenues through the following:well as high-profile individuals address sensitive situations.

·

Producer’s FeesCreative Branding and Production– We earn fees for producing each web series, as includedoffer clients creative branding and production services from concept creation to final delivery.  Our services include brand strategy, concept and creative development, design and art direction, script and copyrighting, live action production and photography, digital development, video editing and composite, animation, audio mixing and engineering, project management and technical support.  We expect that our ability to offer these services to our existing clients in the production budget for each project. We either recognize producer’s fees on a percentage of completion or a completed contract basis depending on the terms of the producer agreements, which we negotiate on a project by project basis.entertainment and hospitality industries will be accretive to our revenue.

·

Initial Distribution/Advertising Revenue– We earn revenues from the distribution of online content on advertiser supported video-on-demand, or AVOD, platforms. Distribution agreements contain revenue sharing provisions which permit the producer to retain a percentage of all domestic and international advertising revenue generated from the online distribution of a particular web series. Typically, these rates range from 30% to 45% of such revenue. We have previously distributed our productions on various online platforms including Yahoo!, Facebook, Hulu and AOL. No revenues from this source were derived during the years ended December 31, 2017 and 2016.

·

Secondary Distribution Revenue– Once our contractual obligation with the initial online distribution platform expires, we have the ability to derive revenues from distributions of the web series in ancillary markets such as DVD, television and subscription video-on-demand, or SVOD. We did not derive any revenue from this source for the years ended December 31, 2017 and 2016. We intend to source potential secondary distribution partners for our web series,South Beach–Fever that was released in 2015, once our agreement with the initial distributor expires.Content Production

Dolphin Films

For the years ended December 31, 20172019 and 2016,2018, we derived revenues from Dolphin Films primarily through the domestic and international distribution of our motion picture,Max Steel.

The production of the motion picture,Max Steel, was completed during 2015 and released in the United States on October 14, 2016. The motion picture did not perform as well as expected domestically, but we secured approximately $8.2 million in international distribution agreements prior to its release. As part of our domestic distribution arrangement, we still have the ability to derive revenues from the ancillary markets described below, although the amount of revenue derived from such channels is typically commensurate with the performance of the film in the domestic box office. We determined that the carrying value of the capitalized production costs related toMax Steelwas below the fair value and recorded an impairment of $2 million during the year ended December 31, 2016.

We earn motion picture revenues through the following:

·

Theatrical– We earn theatrical revenues from the domestic theatrical release of motion pictures, licensed to a U.S. theatrical distributor that has agreements with theatrical exhibitors. The financial terms negotiated with theMax Steel’sU.S. theatrical distributor provided that we receive a percentage of the box office results, after related distribution fees.

·

International– We earn international revenues through license agreements with international distributors to distribute our motion pictures in an agreed upon territory for an agreed upon time. Several of the international distribution agreements related toMax Steelwere contingent on a domestic wide release that occurred on October 14, 2016.

·

Other– We earn additional revenues through Dolphin Films’ U.S. theatrical distributor which has existing output arrangements for the distribution of productions to home entertainment, video-on-demand, or VOD, pay-per-view, or PPV, electronic-sell-through, or EST, SVOD and free and pay television markets. The revenues expected to be derived from these channels are based on the performance of the motion picture in the domestic box office. During the year ended December 31, 2017, we began to derive revenue from these channels related toMax Steeland anticipate thatBelieve,in the remaining revenues from these channels will be received in 2018 and thereafter.ancillary markets.

Our ability to receive additional revenues fromMax Steel depends on our ability to repay our loans under our production service agreement and prints and advertising loan agreement from the profits ofMax Steel. Max Steel did not generate sufficient funds to repay either of these loans prior to the applicable maturity date.dates. On August 23, 2019, we entered into a revenue participation agreement with the lender of the prints and advertising loan.  Under this revenue participation agreement, we agreed to give the lender all of the future domestic distribution proceeds ofMax Steel up to $0.9 million in exchange for the payment and satisfaction in full of the prints and advertising loan. As a result, if the lenders foreclosewe recorded a gain on the collateral securingextinguishment of debt of $0.7 million and impaired the loans, our subsidiary and the Max Steel VIE will lose the copyright forMax Steel and, consequently, will no longer receive any revenues fromMax Steel. In addition, we would impair the entire capitalized production costs and accounts receivable related toof $0.6 million during the foreign sales ofMax Steel included as assets on our balance sheet, which as ofyear ended December 31, 2017 were $0.8 million and $1.8 million (net of an allowance for doubtful accounts of $0.2 million), respectively.2019.  We are not parties to either of the loan agreements and have not guaranteed to the lenders any of the amounts outstanding under these loans, although we have provided a $620,000$0.6 million backstop to the guarantor of the prints and advertising loan and that amount is recorded in other current liabilities.

If the lender of the production loan forecloses on the collateral securing the loan, our subsidiary Max Steel VIE would lose any future international distribution revenue ofMax Steel, which we believe is minimal.  We are not a party to this loan and have not guaranteed to the lender any of the amounts outstanding under this loan.  For a discussion of the terms of such agreements and the $620,000 backstop, see “Liquidity and Capital Resources” below.

Project Development and Related Services

We have a team that dedicates a portion of its time to sourcing scripts for future developments.development. The scripts can be for either digital or motion picture productions. We have acquired the rights to certain scripts one of whichthat we intend to produce in the last quarter of 2018 and release in 2019.the future, subject to obtaining financing.  We have not yet determined if these projects would be produced for digital or theatrical distribution.

Our pipeline of feature films includes:

·

Youngblood, an updated version of the 1986 hockey classic;

·

Out of Their League, a romantic comedy pitting husband versus wife in the cut-throat world of fantasy football; and

·

Ask MeSisters Before Misters,, a teen comedy in whichabout two estranged sisters finding their way back to each other after a high-school student starts a businessmisunderstanding causes one of them to help her classmates create elaborate Promposals.have to plan the other’s wedding.

We have completed development of each of these feature films, which means that we have completed the script and can begin pre-production once financing is obtained. We are planning to fund these projects through loans or additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there can be no assurance that we will be successful in raising any necessary capital. There is no assurance that we will be able to obtain the financing necessary to produce these feature films.

We also intend to expand into television production in the near future.EXPENSES

Membership

Online Kids Clubs

We partnered with US Youth Soccer in 2012,Our expenses consist primarily of: (1) direct costs; (2) selling, general and with United Way Worldwide in 2013, to create online kids clubs. Our online kids clubs derived revenue from the sale of memberships in the online kids clubs to various individualsadministrative expenses; (3) depreciation and organizations. We shared in a portion of the membership fees as outlined in our agreements with the respective entities. During 2016, we terminated, by mutual accord, the agreement with United Way Worldwideamortization; (4) legal and retained the trademark to the online kids club that we continued to operate until December 31, 2017. Pursuant to the terms of our agreement with US Youth Soccer, we notified them that we did not intend to renew our agreement that terminated on February 1, 2017.professional fees; and (5) payroll. For the year ended December 31, 2016,2018, we did not record significant revenues from the online kids clubs, and we derived no such revenues for the year ended December 31, 2017. Management decided to discontinue the online kids clubs, asalso had non-cash charge of December 31, 2017, to dedicate its time and resources to our entertainment publicity and content production businesses.

We operated our online kids club activities through our subsidiary, Dolphin Kids Clubs, LLC. On December 29, 2016, we entered into a purchase agreement to acquire the remaining 25% membership interest in Dolphin Kids Clubs and as a result, Dolphin Kids Clubs became our wholly owned subsidiary. As consideration for the purchasegoodwill impairment of the 25% membership interest, we issued Warrant J which was exercised to acquire 1,085,000 shares of our common stock at a purchase price of $0.03 per share (See Note 17 to the consolidated financial statements included elsewhere in this 2017 Form 10-K for further discussion on the warrants).

EXPENSES

Our expenses consist primarily of (1) direct costs; (2) distribution and marketing; (3) selling, general and administrative expenses; (4) depreciation and amortization; (5) payroll expenses; and (6) legal and professional fees.approximately $1.9 million.

Direct costs include certain cost of services, as well as certain production costs, related to our entertainment publicity business,and marketing business.  Direct costs also include amortization of deferred production costs, impairment of deferred production costs, residuals and other costs associated with production.our content production business. Residuals represent amounts payable to various unions or “guilds” such as the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, based on the performance of the motion picture and digital productions in certain ancillary markets. Included within direct costs are immaterial impairments for any of our projects. Capitalized production costs are recorded at the lower of their cost, less accumulated amortization and tax incentives, or fair value. If estimated remaining revenue is not sufficient to recover the unamortized capitalized production costs for that title, the unamortized capitalized production costs will be written down to fair value.

Distribution and marketing expenses include the costs of theatrical prints and advertising, or P&A, distribution fees and of DVD/Blu-ray duplication and marketing. Theatrical P&A includes the costs of the theatrical prints delivered to theatrical exhibitors and the advertising and marketing cost associated with the theatrical release of the motion picture. Distribution fees consist of the percentage of revenues paid to the domestic distributor to release our motion picture. DVD/Blu-ray duplication represents the cost of the DVD/Blu-ray product and the manufacturing costs associated with creating the physical products. DVD/Blu-ray marketing costs represent the cost of advertising the product at or near the time of its release.

Selling, general and administrative expenses include all overhead costs except for payroll, depreciation and amortization and legal and professional fees that are reported as a separate expense item.

Depreciation and amortization includesinclude the depreciation of our property, equipment and leasehold improvements and amortization of intangible assets, including the favorable lease asset.

Legal and professional fees include fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants.

Payroll expenses include wages, payroll taxes and employee benefits.

Other Income and Expenses

For the yearyears ended December 31, 2017,2019 and 2018, other income and expenses consisted primarily of: (1) gainsgain or loss on extinguishment of debt; (2) acquisition costs; (3) changes in the fair value of warrant liabilities;put rights; (4) changes in the fair value of put rights and contingent consideration; and (5) interest expense. For the year ended December 31, 2016, other income and expenses consisted primarily of (1) loss on extinguishment of debt; (2) warrant issuance expense; (3) changes in fair value of the warrant liability;contingent consideration and (4)(5) interest expense.

During the year ended December 31, 2016, we entered into agreements with certain debtholders, including Dolphin Entertainment, LLC, to convert an aggregate of $25,164,798 principal and interest into 2,516,480 shares of common stock at a price of $10.00 per share. The conversions occurred on days when the market price of the stock was between $12.00 and $13.98 per share. As a result, we recorded a loss on the extinguishment of the debt of approximately $6.3 million. In addition, we entered into (i) a termination agreement to terminate an equity finance agreement, (ii) a purchase agreement for the acquisition of 25% membership interest of Dolphin Kids Clubs and (iii) a debt exchange agreement to convert certain notes. As consideration for the three agreements, we issued Warrant J and Warrant K that entitled the warrant holder to purchase up to 1,170,000 shares of common stock at a price of $0.03 per share. As a result of the issuance of the shares, we recorded a loss on extinguishment of debt of approximately $3.3 million. In addition to Warrants J and K, we entered into a warrant purchase agreement whereby we agreed to issue Warrants G, H and I in exchange for a $50,000 payment that was used to reduce the exercise price of Warrant E. The warrant purchase agreement entitles the warrant holder to purchase shares of common stock as follows: (i) up to 750,000 shares of common stock prior to January 31, 2019 (after amended and restated Warrant G in January 2018) at $10.00 per share (ii) up to 250,000 shares of common stock at $12.00 per share prior to January, 31, 2019, and (iii) up to 250,000 shares of common stock at $14.00 per share prior to January 31, 2020. We determined that Warrants G, H, I, J, and K, which we refer to, collectively, as the New Warrants, should be accounted for as a derivative for which a liability is recorded in the aggregate and measured at fair value in the consolidated balance sheets and changes in the fair value from one reporting period to the next are reported as income or expense. As a result of the issuance of the New Warrants, we recorded a warrant issuance expense of approximately $7.4 million and income of approximately, $2.2 million from changes in the fair value of the New Warrants from the dates of issuance through December 31, 2016.

During the year ended December 31, 2017, Warrants J and K were exercised and the change in fair value of the Warrants G, H and I, the remaining New Warrants, was $9.0 million. As of December 31, 2017, Warrants G, H and I were exercisable at a price of $4.12 per share. As part of the acquisition of 42West, (i) we entered into Put Agreements that grants the sellers of 42West the option to sell back to us up to 1,187,094 shares of our common stock at a purchase price of $9.22; and (ii) the sellers may earn up to an additional 981,563 shares of common stock based on the achievement of specified financial performance targets as set forth in the membership interest purchase agreement (contingent consideration). Based upon the results of operations of 42West in 2017, the sellers have earned the additional consideration, which will be paid in three annual installments. Both the put rights and the contingent consideration were fair valued on the date of acquisition and because they were determined to be liabilities, they are fair valued at each balance sheet date. Changes in the fair value of both liabilities are recorded in the statement of operations as changes in fair value of put rights and contingent consideration.

RESULTS OF OPERATIONS

Year ended December 31, 2017 as compared to year ended December 31, 2016

Revenues

For the years ended December 31, 2017Other Income and 2016, our revenues were as follows:

We derived increased revenues from entertainment publicity for the year ended December 31, 2017, as compared to the prior year, due to the acquisition of 42West on March 30, 2017, as previously discussed.

Revenues from production and distribution decreased by $3.4 million for the year ended December 31, 2017 as compared to the prior year primarily due to the release ofMax Steel during the year ended December 31, 2016. As a result, during the year ended December 31, 2016, we recognized the revenues from the theatrical release and from certain international licensing arrangements with international distributors that had accepted delivery of the film. During the year ended December 31, 2017, we continued to record revenues, to a lesser extent, from international licensing arrangements and from home entertainment and pay TV in the domestic market.

Revenues from the sale of memberships to online kids clubs was insignificant during the year ended December 31, 2016, and as discussed above, we decided to discontinue the online kids clubs during the year ended December 31, 2017.

Expenses

For the years ended December 31, 20172019 and 2016, our operating2018, other income and expenses were as follows:

Our operating expenses for the year ended December 31, 2017, other than distribution and marketing, include expenses related to entertainment publicity, as the 42Westconsisted primarily of: (1) gain or loss on extinguishment of debt; (2) acquisition occurred on March 30, 2017.

Direct costs decreased by approximately $6.0 million for the year ended December 31, 2017 as compared to the prior year, primarily due to decreases in (i) amortization of capitalized production costs and (ii) impairment of capitalized production costs.  Capitalized production costs are amortized based on revenues recorded during the period over the estimated ultimate revenues of the film. SinceMax Steel was released in October of 2016, revenues were higher during 2016 as compared to 2017. As a result, we amortized $7.8 million of capitalized production costs during 2016 as compared to $3.4 million during 2017. In addition, we impaired approximately $2.0 million of capitalized production costs related toMax Steel during 2016, as compared to approximately $0.3 million of capitalized production costs related toJack of all Tastesthat were impaired during 2017. Entertainment publicity’s direct costs of servicescosts; (3) changes in the amountfair value of $0.9 million are includedput rights; (4) changes in direct costs for the year ended December 31, 2017.fair value of contingent consideration and (5) interest expense.  

Distribution and marketing expenses decreased by approximately $10.2 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016, primarily due to P&A expenses, distributor fees and residuals related to the domestic release and distribution ofMax Steelduring 2016.

Selling, general and administrative expenses increased by approximately $1.9 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016. $2.0 million of selling, general and administrative expenses for the year ended December 31, 2017 are attributable to our entertainment publicity business. This was offset by a decrease in selling, general and administrative expenses related to the content production business of approximately $0.5 million for the year ended December 31, 2017, as compared to year ended December 31, 2016 primarily attributable to (i) sublease of one of our LA offices during 2017; (ii) payments made to writer’s pension for the writer of one of our scripts during 2016; (iii) a charitable contribution of $0.1 million made during 2016; and (iv) selling costs forMax Steel of $0.2 million prior to its release in 2016. The savings were offset by an allowance for doubtful accounts in the amount of $0.2 million recorded during the year ended December 31, 2017.

Depreciation and amortization increased by approximately $1.2 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Amortization and depreciation for the year ended December 31, 2017 consisted primarily of (i) amortization of intangible assets related to the acquisition of 42West and (ii) $0.2 million attributable to the depreciation of the assets of 42West. The amortization and depreciation expense for the year ended December 31, 2016 did not include any depreciation or amortization for any of the assets of 42West or intangibles related to the acquisition of 42West.

Legal and professional fees for the year ended December 31, 2017 decreased by approximately $0.6 million as compared to the year ended December 31, 2016. Legal and professional fees attributable to our entertainment publicity business in the amount of $0.3 million are included in the balances for the year ended December 31, 2017. Legal and professional expenses related to the content production business decreased by approximately $0.9 million for the year ended December 31 2017, as compared to the same period in the prior year primarily due to (i) legal and consulting fees paid in 2016 related to the P&A financing forMax Steel; and (ii) termination of the services of several consultants during 2017 involved with the managing and financing ofMax Steel as such services were no longer required.

Payroll expenses increased by approximately $10.1 million for the year ended December 31, 2017 as compared to the same period in the prior year. Payroll expenses attributable to our entertainment publicity business in the amount of approximately $10.3 million are included in the balances for the year ended December 31, 2017. Payroll expenses for the content production business decreased by approximately $0.5 million due to a reduction in employee headcount during 2017. We entered into separation agreements and paid severance of approximately $0.2 million to employees that had been terminated.

Other Income and Expenses

For the years ended December 31, 2019 and 2018, other income and expenses consisted primarily of: (1) gain or loss on extinguishment of debt; (2) acquisition costs; (3) changes in the fair value of put rights; (4) changes in fair value of contingent consideration and (5) interest expense.  

RESULTS OF OPERATIONS

Year ended December 31, 2019 as compared to year ended December 31, 2018

Revenues

For the years ended December 31, 2019 and 2018, our revenues were as follows:

Revenues from entertainment publicity and marketing increased by approximately $3.0 million, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The increase was due to a full year of revenue of The Door acquired on July 5, 2018 and Viewpoint acquired on October 31, 2018 and one month of revenue of Shore Fire acquired December 3, 2019.  The increase is partially offset by the decrease in revenue of 42West due to departures of senior publicists and their staff in 2018.

Revenues from content production decreased by $0.5 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to the normal revenue cycle of our motion pictureMax Steel. The majority of the revenues of a motion picture are recognized in the first twelve months following the release of the film.Max Steel was released on October 14, 2016, and we have already recognized the revenues from the theatrical release, a majority of home entertainment (i.e. DVD) and from international licensing arrangements. For the year ended December 31, 2017,2018, we also recorded $0.2 million of revenues from domestic ancillary markets, related to our motion pictureBelievethat was released in December of 2013.

On September 4, 2018, our domestic distributor, Open Road, filed for Chapter 11 bankruptcy protection. The assets of Open Road were sold on December 21, 2018 to Raven Capital, with the final deal closing in February 2019.  We expect that our domestic distribution agreements forMax Steel andBelieve, which were purchased in the sale of the assets of Open Road, will continue on the same terms as agreed upon with Open Road.   On August 23, 2019, we entered into a revenue participation agreement with the lender of the prints and advertising loan and agreed to give them up $0.9 million of future domestic distribution revenue in exchange for the payment and full satisfaction of the prints and advertising loan in the amount of $0.7 million, including accrued interest, on the date of the agreement.  We do not expect to receive any significant future revenues from the domestic distribution ofMax Steel.  

Expenses

For the years ended December 31, 2019 and 2018, our operating expenses were as follows:

Overall expenses increased by approximately $2.4 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The increase was due to a full year of expenses of The Door acquired on July 5, 2018 and Viewpoint acquired on October 31, 2018 and one month of expenses of Shore Fire acquired December 3, 2019.  

Direct costs increased by approximately $2.9 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018.  Direct costs related to the entertainment publicity and marketing segment were approximately $4.3 million in 2019, as compared to $1.6 million in 2018.  The increase was primarily due to a full year of direct costs associated with the operations of The Door and Viewpoint during 2019.  The Door was acquired on July 5, 2018 and Viewpoint was acquired on October 31, 2018 and as such, we only recorded direct costs from their respective dates of acquisition.

Direct costs related to the content production segment were approximately $0.8 million for 2019, as compared to $0.6 million for 2018.  During 2019, direct costs for the content production segment consisted primarily of impairment of capitalized production costs.  Capitalized production costs forMax Steel were impaired during the year ended December 31, 2019 as a result of the agreement to direct all future domestic film revenues up to $0.9 million to the print and advertising loan’s creditor, in settlement of said loan.  We evaluate capitalized production costs to determine if the fair value of the capitalized production costs is below the carrying value.  Based on management’s estimate of ultimate revenues forMax Steel, the capitalized production costs in the amount of $0.6 million were determined to be above fair value and were impaired during the year ended December 31, 2019.  During 2018, direct costs for the content production segment consisted primarily of amortization of capitalized production costs.  Capitalized production costs are amortized based on revenues recorded during the period over the estimated ultimate revenues of the film.

Selling, general and administrative expenses decreased by approximately $0.7 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018.  The decrease is mainly due to bad debt expenses recorded for the year ended December 31, 2018 of approximately $0.6 million.  Of that amount, $0.4 million was from the content production segment and consisted of receivables from the international sales ofMax Steel. The other $0.2 million was related to the entertainment publicity and marketing segment.

Depreciation and amortization had an immaterial decrease of $0.03 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018.  However, we should note that this decrease is in spite of a full year of amortization for the intangible assets acquired in the acquisitions of The Door and Viewpoint.  This decrease is due to our adoption of the new lease accounting (ASC 842) on January 1, 2019, that requires favorable leases be accounted for as a right-of-use asset rather than be amortized as an intangible asset.

Legal and professional fees for the year ended December 31, 2019 decreased by approximately $0.6 million as compared to the year ended December 31, 2019.  Legal and professional fees attributable to the entertainment publicity and marketing segment decreased by approximately $0.2 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily due to Bank United not requiring a stand-alone audit for 42West.  Legal and professional fees for the content production segment decreased by approximately $0.4 million for the year ended December 31, 2019 as compared to December 31, 2018, primarily due to the elimination of services of consultants and legal fees.

Payroll expenses increased by approximately $2.7 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018.  Payroll expenses attributable to our entertainment publicity and marketing business increased by approximately $1.8 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 due to including payroll expenses for a full year of The Door and Viewpoint that were acquired on July 5, 2018 and October 31, 2018, offset by a decrease in payroll of 42West related to the departures of certain senior publicists in mid-2018.  Payroll expenses related to the content production segment increased by approximately $0.09 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018 due to salary increases of the CEO and CFO.

Goodwill impairment decreased by approximately $1.9 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 as a result of our 2018 test of goodwill that determined that the carrying value of our goodwill was higher than the fair value of the goodwill for the reporting unit 42West within the entertainment publicity and marketing segment.  We did not have any goodwill impairment for the year ended December 31, 2019.

Other Income and Expenses

As previously discussed, during the year ended December 31, 2019, we agreed to exchange up to $0.9 million of future domestic revenues ofMax Steel for the extinguishment of the prints and advertising loan and recorded $0.7 million of a gain on the extinguishment of debt of $4.0 million primarily due to the third-party guarantor to the prints and advertising loan paying $4.5 million to the lender to comply with its obligation under the financing agreements. This amount was offset by our backstop to the third-party guarantor of $0.6 million. By contrast, duringthat debt.  During the year ended December 31, 2016, we recorded2018, a lossholder of a convertible promissory note exchanged the principal and accrued interest on extinguishment of debt of $9.6 million as a result of exchanging certain debt instruments forthe promissory note into 85,299 shares of our common stock. The debt was exchangedstock pursuant to the terms of the promissory note, at a purchasean exercise price of $10.00$3.21 per share on dates whenshare. On the date of the conversion, the market price of our common stock was between $12.00 and $13.98$3.83 per share resulting in a loss on extinguishment of debt.debt of $0.05 million.

We incurred approximately $0.7 million of acquisitionAcquisition costs consistingconsisted primarily of legal, consulting and auditing costs related to our acquisition of 42West during the year ended December 31, 2017 that are classified as acquisition costs.

The fair value of the warrant liability decreased by approximately $9.0 millionacquisitions. Acquisition costs for the year ended December 31, 2017, resulting in a gain2019 were related to the acquisition of Shore Fire on December 3, 2019.  Acquisition costs for the change in fair value. During 2016, certain warrants were issued that required derivative liability classification. We recorded the warrants at their fair valueyear ended December 31, 2018 consisted primarily of costs associated with our acquisition of The Door and Viewpoint on the date of issuanceJuly 5, 2018 and record any changes to fair value at each balance sheet date on our consolidated statements of operation.October 31, 2018, respectively.

The fair value of put rights and contingent consideration related to the 42West acquisition were recorded on our balance sheet on the date of the acquisition. The fair value of these liabilitiesthe put rights is measured at every balance sheet date and any changes are recorded on our consolidated statements of operations. The change in fair value of the put rights increased fromputs was $2.8 million and $0.6 million, respectively, for the acquisition date to December 31, 2017 by $2.4 million. The sellers of 42West achieved their financial targets and earned the  contingent consideration of $9.3 million during the yearyears ended December 31, 2017. During2019 and 2018.

The fair value of contingent consideration related to our acquisition of The Door was recorded on our balance sheet on July 5, 2018. The fair value of the yearrelated contingent consideration is measured at every balance sheet date and any changes recorded on our consolidated statements of operations. For the years ended December 31, 2019 and 2018, we recorded a gain of $0.2 million and $1.1 million related to the change in fair value of the contingent consideration liability increased by $0.02 million from the date of acquisition. A number of shares to be issued became fixed and the contingent consideration was reclassified to equity as of December 31, 2017, using the closing market price of our stock as of December 29, 2017 of $3.60.for The Door.

Interest expense decreasedincreased by approximately $3.1$0.2 million for the year ended December 31, 2017,2019, as compared to the same period in the prior year and was directly related to the extinguishment, during 2016, of loan and security agreements related to the First Group Film Funding, Second Group Film Funding and the Web Series Funding, each described under “Liquidity and Capital Resources” and loan amortization fees in the amount of $0.5 million reported for the year ended December 31, 2017.2018, primarily due to additional convertible and non-convertible promissory notes signed during 2019.  See Liquidity and Capital Resources for further discussion on these notes payable.  

During theIncome Tax Benefit

We had an income tax benefit of $0.4 million for year ended December 31, 2016,2019, compared to a benefit of $1.1 million for year ended December 31, 2018.  The primary component of the income tax benefit in both years is due to a release of the valuation allowance against the deferred tax liabilities of the companies acquired.

As of December 31, 2019, we issued warrants G, Hhave approximately $43.7 million of net operating loss carryforwards for U.S. federal income tax purposes that begin to expire in 2028. Federal net operating losses generated after December 31, 2017 have an indefinite life and Ido not expire. Additionally, we have approximately $25.3 million of net operating loss carryforwards for Florida state income tax purposes that begin to expire in 2029, approximately $13.1 million of California net operating loss carryforwards that begin to expire in 2032, and approximately $1.8 million of New York and New York City net operating loss carryforwards that begin to expire in 2038.  A portion of the carryforwards may expire before being applied to reduce future income tax liabilities.

In assessing the ability to realize the deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. We believe it is more likely than not that the deferred tax asset will not be realized and we have accordingly recorded a warrant issuance expensenet valuation allowance of approximately $7.4$16.2 million due to the fair valueand $14.3 million as of the warrants on the date of issuance.December 31, 2019 and 2018, respectively.

Net Income (Loss)Loss

Net incomeloss was approximately $6.9$(1.2) million or $0.72$(0.07) per share based on 9,586,98616,522,924 weighted average shares outstanding and $(2.1) million orapproximately $(0.20) per share based on 10,608,82821,425,506 weighted average shares outstanding on a fully diluted basis for the year ended December 31, 2017.2019. Net loss for common shareholderswas approximately $(2.9) million or $(0.22) per share based on 13,773,395 weighted average shares outstanding and approximately $(0.23) per share based on 16,159,486 weighted average shares outstanding on a fully diluted basis for the year ended December 31, 2016 was approximately $(42.4) million, after taking into account $5.2 million of deemed dividends to preferred shareholders, or $(9.66) per share based on 4,389,096 weighted average shares for the year ended December 31, 2016.2018. Net income and net loss for the years ended December 31, 20172019 and 2016,2018, respectively, were related to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Year ended December 31, 20172019 as compared to year ended December 31, 20162018

Cash flows providedused by operating activities for the year ended December 31, 20172019 were approximately $8.4$2.9 million compared to cash flows used by operating activities of approximately $15$0.6 million duringfor the year ended December 31, 2016.2018. The increase in cash provided byused in operating activities is primarily due to (i) collection of receivables from the motion pictureMax Steeland (ii) collection of production tax incentives related toMax Steelthat were both used to pay the debt incurred for the production and P&A for the release of the motion picture. In addition, during the year ended December 31, 2016, we used2019 as compared to the year ended December 31, 2018 is primarily due to lower cash flows from operations before changes in operating assets and liabilities of approximately $13$2.0 million. In addition, we used approximately $0.1 million to purchase the rights to scripts for the prints and advertising and other expenses related to the release ofMax Steel.our content production segment.

Cash flows provided byused in investing activities for the year ended December 31, 20172019 were approximately $0.9 million as comparedprimarily related to $1.3 millionthe purchase of Shore Fire, net of cash acquired and the purchase of fixed assets.  Cash flows used byin investing activities duringfor the year ended December 31, 2016. The increase in cash provided by investing activities is mainly due to restricted cash that became available and was used to pay a portion of our debt offset by purchases of fixed assets in the amount of $0.22018, were approximately $1.6 million and payment of a working capital adjustment in the amount of $0.2 millionwere primarily related to the 42West acquisition.purchase of The Door and  Viewpoint, net of cash acquired and for the purchase of fixed assets.

Cash flows provided by financing activities for year ended December 31, 2019 was approximately $0.4 million as compared to $3.2 million for the year ended December 31, 2018. Cash flows used forin financing activities for the year ended December 31, 2017 were approximately $4.6 million as compared to $14.52019 consisted primarily of (i) $0.1 million of cash flows provided by financing activities during the year ended December 31, 2016. The increase in cash used for financing activities is primarily due to (i) thenet repayment of the debt incurred for the production and P&A for the release ofrelated toMax Steel; (ii) repayment of two notes payable upon maturity and (iii) payment for put rights$2.3 million used to purchase our Common Stock pursuant to Put Rights that were exercised byexercised; (iii) $0.3 million comprising the sellerssecond and third installments of 42West. During the year ended December 31, 2017, we generated cash flows from financing activities by (i) salesconsideration paid for Viewpoint; (iv) second installment of our common stock and warrants, including sales pursuantthe consideration for The Door in the amount of $0.8 million; (v) final installment of the consideration paid to employees of 42West to settle change of control provisions in their employment contracts in the Offering (as defined later); (ii)amount of $0.4 million; (vi) $1.9 million proceeds from the linesale of credit; (iii)common stock through a public offering in October 2019; (vii) proceeds from convertible notes payable of $2.1 million and (iv) advances(viii) proceeds from our CEO. We generatednon-convertible note payable of $0.3 million.  By contrast, cash flows fromprovided by financing activities for the year ended December 31, 20162018 consisted primarily of (i) $1.7 million in proceeds from our loan agreement with Bank United; (ii) repayment of $0.8 million on a line of credit with City National Bank; (iii) repayment of our debt under the prints and advertising loan; (iv) $3.9 million used to buy back our common stock pursuant to the put agreements with the sellers of 42West; (v) repayment of $0.6 million of a related party promissory note; (vi) $1.5 million in proceeds of loanfrom a note payable and security agreements and(vii) $6.8 million in proceeds from the sale of our common stock.

As previously discussed, in connection with the 42West acquisition, we may be required to purchase from the sellers upstock including shares sold through a public offering and shares sold to an aggregate of 1,187,094 of their shares of common stock atinvestor in a price of $9.22 per share during certain specified exercise periods up until December 2020. On April 14, 2017, June 1, 2017, July 10, 2017, September 1, 2017 and October 10, 2017, the sellers of 42West exercised put options in the aggregate amount of 132,862 shares of common stock, which we purchased for aggregate consideration of approximately $1.2 million.registered direct offering.

As of December 31, 20172019 and 2016,2018, we had cash available for working capital of approximately $5.3$2.2 million and approximately$5.5 million, respectively, not including $0.7 million respectively,pledged as collateral for standby letter of credit for the New York office, and a working capital deficit of approximately $10.2$15.6 million and approximately $31.4$11.9 million, respectively.

These factors, along with an accumulated deficit of $92.9$96.0 million as of December 31, 2017,2019, raise substantial doubt about our ability to continue as a going concern. TheOur audited consolidated financial statements contained in this 2019 Form 10-K do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise any necessary additional funds through loans and additional issuances of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives. There is no assurance that we will be successful in raising additional capital. Such issuances of additional shares of common stock or securities convertible into common stock would further dilute the equity interests of our existing shareholders, perhaps substantially. We currently have the rights to several scripts, andthat we intend to obtain financing to produce one of them during 2018 and release it in 2019.subject to obtaining financing.  We will potentially earn a producer and overhead fee for this production. There can be no assurances that such production will be released or fees will be realized in future periods. With the acquisition of 42West, we are currently exploring opportunities to expand the services currently being offered by 42West to the entertainment community. There can be no assurance that we will be successful in selling these services to clients.

In addition, we have a substantial amount of debt. We do not currently have sufficient assets to repay such debt in full when due, and our available cash flow may not be adequate to maintain our current operations if we are unable to repay, extend or refinance such indebtedness. As of December 31, 2017,2019, our total debt was approximately $14.4$14.8 million and our total stockholders’ equity was approximately $6.1$9.7 million. Approximately $6.2$3.0 million of the total debt as of December 31, 20172019 represents the fair value of put options in connection with the 42West acquisition, which may or may not be exercised by the sellers. Approximately $4.0$3.3 million (including $1.7 of accrued interest) of our indebtedness as of December 31, 2017 ($1.9 million outstanding under the prints and advertising loan agreement plus $2.1 million outstanding under the production service agreement)2019 was incurred by the variable interest entity consolidated in our financial statements, Max Steel subsidiary and the Productions LLC (“Max Steel VIE.VIE”). Repayment of these loansthis loan was intended to be made from revenues generated byMax Steel both within and outside of the United States.Max Steeldid not generate sufficient funds to repay either of these loansthis loan prior to the maturity date. As a result, ifIf the lenders forecloselender of this loan forecloses on the collateral securing the loans,loan, our subsidiary willMax Steel VIE would lose the copyright forMax Steel and, consequently, will no longer receive any revenues fromMax Steel. In addition, we would impair the capitalized production costs and accounts receivable related to the salesfuture international distribution revenue ofMax Steel included as assets on our balance sheet,, which as of December 31, 2017 were approximately $0.8 million and $1.8 million, net of $0.2 million allowance for doubtful accounts.we believe is minimal.   

If we are not able to generate sufficient cash to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying digital or film productions, selling assets, restructuring or refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to effectaffect any of these remedies on satisfactory terms or at all and our indebtedness may affect our ability to continue to operate as a going concern.

Financing Arrangements

Prints and Advertising Loan

On August 12, 2016, Dolphin Max Steel Holdings LLC, or Max Steel Holdings, a wholly owned subsidiary of Dolphin Films, entered into a loan and security agreement, or the P&A Loan, providing for a $14.5 million non-revolving credit facility that matured on August 25, 2017. The loan is not guaranteed by any other Dolphin entity and the only asset held by Max Steel Holdings is the copyright for the motion picture, which secures the loan. The proceeds of the credit facility were used to pay a portion of the P&A expenses of the domestic distribution of our feature film,Max Steel. To secure Max Steel Holding’s obligations under the P&A Loan, we granted to the lender a security interest in bank account funds totaling $1,250,000 pledged as collateral. During the year ended December 31, 2017, we agreed to allow the lender to apply the $1,250,000 to the loan balance. The loan iswas partially secured by a $4,500,000 corporate guaranty from an unaffiliated party associated with the motion picture, of which we have agreed to backstop $620,000. As a condition precedent to closing the loan, Max Steel Holdings delivered to the lender clear chain-of-title to the rights of the motion pictureMax Steel.The lender has retained a reserve of $1.5 million for loan fees and interest. Amounts borrowed under the credit facility accrue interest at either (i) a fluctuating per annum rate equal to the 5.5% plus a base rate or (ii) a per annum rate equal to 6.5% plus the LIBOR determined for the applicable interest period. As of December 31, 2017 and 2016, we recorded a liability of $1,900,970 and $12,500,000, respectively, including the reserve, related to this agreement on our consolidated balance sheets. Approximately $11.0 million was recorded as distribution and marketing costs on our consolidated statement of operations for the year ended December 31, 2016, related to the release of the motion picture. On our consolidated statement of operations for the year ended December 31, 2016 we recorded (i) interest expense of $716,796 and (ii) a reduction of $500,000 in direct costs from loan proceeds that were not used by the distributor for the marketing of the film and returned to the lender. During the year ended December 31, 2017, the third-party guarantor paid $4.5 million pursuant to the guarantee of the loan, reducing the outstanding balance by such amount and increasing our accrued expenses by the $620,000 backstop related to the guarantee. We have recorded a gain on the extinguishment of debt on our consolidated statement of operations of approximately $3.9 million for the year ended December 31, 2017. Repayment of the loan was intended to be made from revenues generated byMax Steel in the United States.Max Steel did not generate sufficient funds to repay the loan prior to the maturity date. AsOn August 23, 2019, we entered into a result, ifrevenue participation agreement with the lender forecloses onwhereby they are entitled to the collateral securing the loan, Max Steel Holdings will lose the copyright forMax Steel and, consequently, will no longer receive anynext $0.9 million of revenues from the domestic distribution ofMax Steel. In addition, we would impair in exchange for payment and satisfaction in full of the entire capitalized production costs ofMax Steel included as an asset on our balance sheet, which as ofP&A Loan.  During the year ended December 31, 2017 was $0.8 million.2019, we recognized a gain on extinguishment of debt of $0.7 million related to this revenue participation agreement.

Production Service Agreement

During 2014, the Max Steel VIE, a variable interest entity (or VIE) created in connection with the financing and production ofMax Steel, entered into a loan agreement in the amount of $10.4 million to produceMax Steel. The loan is partially secured by international distribution agreements made prior to the commencement of principal photography and tax incentives. The agreement contains repayment milestones to be made during the year ended December 31, 2015, thatwhich, if not met, accrue interest at a default rate of 8.5% per annum above the published base rate of HSBC Private Bank (UK) Limited until the maturity on January 31, 2016 or the release of the movie. As a condition precedent to closing the loan, Max Steel Holdings delivered to the lender clear chain-of-title to the rights of the motion pictureMax Steel. Due to delays in the release of the film, Max Steel VIE was unable to make some of the scheduled payments and, pursuant to the terms of the agreement, the Max Steel VIE has accrued $1.5$1.6 million of interest at the default rate. The film was released in theaters in the United States on October 14, 2016 and delivery to the international distributors began after the US release. As of December 31, 20172019 and 2016,2018, we had outstanding balances of $2.1$3.3 million and $6.2$3.4 million, respectively, including accrued interest of $1.7 million and $1.6 million, respectively, related to this debt on our consolidated balance sheets. Repayment of the loan was intended to be made from revenues generated byMax Steeloutside of the United States.Max Steel did not generate sufficient funds to repay the loan prior to the maturity date. AsOn February 20, 2020, we received a result, ifletter from the lender forecloses onstating that no sums, debts, liabilities, expenses, opportunity costs, revenues and any other amounts were due from the collateral securing the loan, Max Steel VIE will loseVIE.  We are currently evaluating the copyright forstatus of Max Steel Productions LLC as a VIE and consequently, our consolidated financial statements will no longer reflect any revenues from the distributionprimary beneficiary status ofMax Steelin foreign territories. In addition, we would impair the accounts receivable related to the foreign distribution agreements included as an asset on our balance sheet, which as of December 31, 2017 was approximately $0.7 million, net of allowance for doubtful accounts. VIE.

42West Line of Credit

42West had a revolving line of credit with City National Bank under a revolving note, which matured on November 1, 2017. The revolving note was not renewed. Upon closing of our acquisition of 42West, the line of credit had a balance of $500,000. On April 27, 2017, we drew an additional $250,000 from the line of credit to be used for working capital. City National Bank did not call the outstanding principal of the revolving note but on January 28, 2018, we paid the outstanding balance of $750,000 and satisfied in full our obligation under the revolving note.

On March 15, 2018, 42West entered into a business loan agreement with BankUnited, N.A., (the “Loan Agreement”), for a revolving line of credit agreement under a revolving note. The revolving line of credit matures on March 15, 2020 and bears interest on the outstanding balance at the bank’s prime rate plus 0.25% per annum. The maximum amount that can be drawn on the revolving line of credit is $2,300,000. Amounts outstanding under the note are secured by 42West’s current and future inventory, chattel paper, accounts, equipment and general intangibles. On March 28, 2018, we drew $1,690,000 from the line of credit facility to purchase 183,296 shares of our common stock, per the put agreements with the sellers.

The Loan Agreement contains customary affirmative covenants, including covenants regarding maintenance On June 29, 2018, we issued a standby letter of a maximum debt to total net worth ratio of at least 4.0:1.0 and a minimum debt service coverage of 1.40x based on fiscal year-end audit to be calculated as providedcredit, in the Loan Agreement.  Further,amount of $50,000, to secure the lease of 42West’s Los Angeles office. The borrowing capacity under the Loan Agreement contains customary negative covenants, including those that, subject to certain exceptions, restrictwas reduced by the abilitysame amount. As of 42West to incur additional indebtedness, grant liens, make loans, investments or certain acquisitions, or enterDecember 31, 2019 and 2018, the outstanding balance on the line of credit was $1,700,390.  Subsequently on February 20, 2020, in anticipation of converting the line of credit into certain typesa term loan, we partially repaid the line of agreements. Uponcredit in the occurrenceamount of an event$500,000. On March 27, 2020 we received loan documents from Bank United for a one year term loan in the amount of default, the bank may accelerate the maturity of$1,200,390, amortizable over 36 months, with a rate prime plus 0.75 percentage points.  The Door will be a co-borrower on the loan and declareit will be guaranteed by the unpaid principal balance and accrued but unpaid interest immediately due and payable. In the event of 42West’s insolvency, such outstanding amounts will automatically become due and payable. 42West may prepay any amounts outstanding under the Credit Facility without penalty.Company.

Promissory Notes

Convertible Notes

2020 Lincoln Park Note

On November 30, 2017,January 3, 2020, we entered into a securities purchase agreement with Lincoln Park Capital Fund LLC and issued a convertible promissory note with a principal amount of $1.3 million 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. As such, on March 4, 2020 we issued warrants to purchase up to 207,588 shares of our common stock.  The convertible promissory note has an original issue discount of $100,000 and does not bear interest unless there is an event of default. The convertible promissory note may be converted at any time into shares of our common stock 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. The convertible promissory note matures on January 3, 2022.  The proceeds of the convertible promissory note were used to repay the 2018 Convertible Debt described below.

On January 3, 2020, in connection with the securities purchase agreement with Lincoln Park discussed above, we entered into a Registration Rights Agreement with Lincoln Park pursuant to which we agreed to register any shares converted into our Common Stock pursuant to the terms of the convertible promissory note with Lincoln Park, if during the six-month period commencing on the date of the Registration Rights Agreement, we determine to file a resale registration statement with the Securities and Exchange Commission.

2020 Convertible Notes

On March 4, 2020, we issued a convertible promissory note thatto a third-party investor and received $500,000. We also agreed to issue a 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 January 15, 2019March 4, 2030. The balance of the convertible promissory note and any accrued interest may be converted at the note holder’s option at any time at a purchase price $0.78 per share of our common stock.

On March 18, 2020, we issued two convertible promissory notes to two third-party investors for principal amounts of $120,000 and $75,000. The notes earn interest at 10% per annum and mature on March 18, 2022.  The balance of each of the convertible promissory notes and any accrued interest may be converted at the noteholder’s option at any time at a purchase price $0.78 per share of our common stock.

On March 25, 2020, we issued a convertible promissory note to a lenderthird-party investor for a principal amount of $560,000 and received $200,000. We$500,000, net of transaction costs of $10,000 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 prepay thisbe converted at the noteholder’s option at any time at a purchase price $0.78 per share of our common stock.

2019 Lincoln Park Note

On May 20, 2019, we entered into a securities purchase agreement with Lincoln Park Capital Fund LLC and issued a convertible promissory note with no penaltya principal amount of $1.1 million at a purchase price of $1.0 million together with warrants to purchase up to 137,500 shares of our common stock at an exercise price of $2.00 per share. The securities purchase agreement provides for issuance of warrants to purchase up to 137,500 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. As such, on each of July 23, 2019, September 20, 2019 and November 20, 2019 we issued warrants to purchase up to 137,500 shares of our common stock.  The convertible promissory note has an original issue discount of $100,000 and does not bear interest unless there is an event of default. The convertible promissory note may be converted at any time.time into shares of our common stock at an initial conversion price equal to the lower of (A) $5.00 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. The convertible promissory note matures on May 21, 2021. As of December 31, 2019, we had a balance of $0.8 million, net of $0.1 million original issue discount and $0.1 million of a beneficial conversion feature, on our consolidated balance sheet.

The 2019 Lincoln Park Note contains a clause that re-prices the conversion price if we sell equity securities within 180-days of the 2019 Lincoln Park Note.  On October 21, 2019, we issued 2,700,000 shares of common stock pursuant to a public offering at a purchase price of $0.78 per share.  As such, the conversion price of the Lincoln Park Note was adjusted to $0.78.  On each of February 3, February 13 and February 27, 2020, Lincoln Park notified us that they were converting $250,000 of the Lincoln Park Note into 319,366 shares of our common stock.

2019 Convertible Debt

On October 11, 2019, we issued a convertible promissory note agreement to a third-party investor and received $500,000. The convertible promissory note bears interest at a rate of 10% per annum.annum and matures on October 11, 2021. The balance of the convertible promissory note and any accrued interest may be converted at the note holder’s option at any time at a purchase price based on the 30-day average closing market price per share of our common stock.

On September 25, 2019, we issued a convertible promissory note agreement to a third-party investor and received $250,000. The convertible promissory note bears interest at a rate of 10% per annum and matures on September 25, 2021. The balance of the convertible promissory note and any accrued interest may be converted at the note holder’s option at any time at a purchase price based on the 30-day average closing market price per share of our common stock.

On August 12, 2019, in lieu of cash, we issued a $702,500 convertible promissory note agreement in exchange for 76,194 shares of our common stock related to 76,194 exercised put rights of one of the 42West Sellers. The convertible promissory note bears interest at a rate of 10% per annum and matures on August 12, 2020. The balance of the convertible promissory note and any accrued interest may be converted at the note holder’s option at any time at a purchase price based on the 30-day average closing market price per share of our common stock.

On July 9, 2019, we issued a convertible promissory note agreement to a third-party investor and received $150,000. The convertible promissory note bears interest at a rate of 10% per annum and matures on July 9, 2021. The balance of the convertible promissory note and any accrued interest may be converted at the note holder’s option at any time at a purchase price based on the 30-day average closing market price per share of our common stock.  On January 12, 2020, the convertible note holder notified us that they were converting the principal balance of the convertible note into 254,326 shares of our common stock using 30-day average closing market price (January 10, 2020) of $0.59 per share of common stock.

On March 25, 2019, we issued a convertible promissory note agreement to an unrelated investor and received $200,000. The convertible promissory note bears interest at a rate of 10% per annum and matures on March 25, 2021. The balance of the convertible promissory note and any accrued interest may be converted at the note holders’ option at any time at a purchase price based on the 30-day trailing average market price of the Common Stock.  On January 1, 2020, the convertible note holder notified us that they were converting the principal balance of the convertible note into 346,021 shares of our common stock using 30-day average closing market price (December 31, 2019) of $0.58 per share of common stock.

As of December 31, 2019, we had a balance of $702,500 in current liabilities and $1,100,000 in noncurrent liabilities related to these convertible notes payable.

2018 Convertible Debt

On July 5, 2018, we issued an 8% secured convertible promissory note in the principal amount of $1.5 million (the “Note”), to Pinnacle Family Office Investments, L.P. (“Pinnacle”), pursuant to a Securities Purchase Agreement, dated the same date. We used the proceeds of the convertible promissory note to finance the Company’s acquisition of The Door. Our obligations under the Note are secured primarily by a lien on the assets of The Door and Viewpoint. We must pay interest on the principal amount of the Note, at the rate of 8% per annum in cash on a quarterly basis. The Note matures on January 5, 2020. The Note contained a clause that re-prices the conversion price if we sell equity securities at a price lower than the conversion price at any time that the Note is outstanding. On October 21, 2019, we issued 2,700,000 shares of common stock pursuant to a public offering at a purchase price of $0.78 per share.  As such, the conversion price of the Note was adjusted to $0.78.  On December 4, 2019, Pinnacle notified us that they were converting $297,936 of the Note into 380,603 shares of our common stock.

On the date of the Note, our common stock had a market value of $3.65. We determined that the Note contained a beneficial conversion feature or debt discount by calculating the number of shares using the conversion rate of the Note of $3.25 per share, and then calculating the market value of the shares that would be issued at conversion using the market value of our common stock on the date of the Note. We recorded a debt discount on the Note of $184,614 that is amortized and recorded as interest expense over the life of the Note. For the year ended December 31, 2019, we recorded interest expense in our audited consolidated statement of operations in the amount of $118,279 and paid $90,000 of interest. For the year ended December 31, 2018, we paid interest and recorded interest expense in the amount of $58,333.

 For the year ended December 31, 2019 and 2018, respectively, we recorded interest expense of $123,076 and $61,538 from the amortization of the beneficial conversion of the Note.  As of December 31, 2019, we had a balance of $1,202,064 (after the conversion of $297,936 into shares of our common stock) recorded in current liabilities on our balance sheet, related to this Note.  As of December 31, 2018, we had $1,376,924, net of $123,076 of debt discount, recorded in noncurrent liabilities on our audited consolidated balance sheet, related to this Note.

On January 5, 2020, the Note maturity date, we paid Pinnacle $1,231,678, including accrued interest of $29,614, in full satisfaction and repayment of the Note.

2017 Convertible Debt

In 2017, we entered into subscription agreements pursuant to which we issued unsecured convertible promissory notes, each with substantially similar terms, for an aggregate principal amount of $875,000. The convertible promissory notes mature during the third quarter of 2020 and each bears interest at a rate of 10% per annum. The principal and any accrued and unpaid interest of the convertible promissory notes are convertible by the respective holders into shares of our common stock at a price of either (i) the 90 day average closing market price per share of our 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 our common stock is made, 95% of the public offering price per share of our common stock. As of December 31, 2019, we had a balance of $550,000 in current liabilities related to these convertible promissory notes.

On June 25, 2018, one of the holders of a convertible promissory note notified us that they would convert $250,000 of principal and $23,425 of accrued interest into 85,299 shares of common stock at a price of $3.21 per share using the 90-day trading average price per share of common stock as of June 22, 2018. On the date of the conversion (June 25, 2018), the market price of the Common Stock was $3.83 per share and we recorded a loss on extinguishment of debt in the amount of $53,271 on our consolidated statements of operation for the year ended December 31, 2018.

On March 21, 2019, one of the holders of a convertible promissory note notified us that they would convert $75,000 of principal into 53,191 shares of common stock at a price of $1.41 per share using the 90-day trading average price per share of common stock as of March 20, 2019. On the date of the conversion the market price of the Common Stock was $1.81 per share and we recorded a loss on extinguishment of debt in the amount of $21,287 on our consolidated statements of operation for the year ended December 31, 2019.

As of December 31, 2019 and 2018, respectively, we have a balance of $550,000 and $625,000 in current liabilities related to the 2017 convertible promissory notes.

Nonconvertible Notes Payable

On November 5, 2019, we issued a promissory note maturing one year after issuance and bearing interest of 10% per annum, to an entity related to one of our directors, Allan Mayer, and received $150,000. On December 18, 2017, we repaid the principal and accrued interest in the amount of $151,875 to satisfy our obligation under the promissory note.

On June 14, 2017, we issued a promissory note$350,000 that matures two years after issuance, to a lender and received $400,000.issuance. We may prepay this promissory note with no penalty after the initial six months. The promissory note bears interest at a rate of 10% per annum. We have a balance of $400,000 in noncurrent liabilities and accrued interest of $1,778 related to this promissory note payable as of December 31, 2017.

 On April 10 and April 18, 2017, we issued three promissory notes, maturing six months after issuance, to two separate lenders and received a total of $550,000. The notes bore interest at 10% per annum and could have been prepaid without any penalty. On October 10 and October 18, 2017, these three promissory notes matured. The lenders agreed to extend the maturity dates of these three promissory notes until December 15, 2017. The interest rate of one of the promissory notes in the amount of $250,000 increased for the period between October 18, 2017 and December 15, 2017, from 10% to 12%. All other provisions of the promissory notes remained unchanged. On December 28, 2017, we repaid the aggregate principal of $550,000 outstanding on these three notes plus accrued interest of $6,667.

On July 5, 2012, we issued an unsecured promissory note in the amount of $300,000 bearing interest at a rate of 10% per annum and payable on demand.demand to KCF Investments LLC (“KCF”), an entity controlled by Mr. Stephen L Perrone, an affiliate of Dolphin. The proceeds from the notesthis note were used for working capital.

We have a balance of $300,000 in current liabilities, a balance of $600,000 in noncurrent liabilities and On December 10, 2018, we agreed to exchange this promissory note, including accrued interest of $169,073 in other current liabilities related to these$192,233, for a new unsecured promissory notes payable as of December 31, 2017.

Kids Club Agreements

During February 2011, we entered into two kids clubs agreements with individual parties, for the development of a child fan club for the promotion of a local university and its collegiate athletic program, which we refer to as a Group Kids Club. Under each kids club agreement, each party paid us $50,000 in return for the participation of future revenue generated by the Group Kids Club. Pursuant to the terms of each of the kids club agreements, the amount invested by the individual investor was to be repaid by the Group Kids Club, with a specified percentage of the Group Kids Club’s net receipts, until the total investment was recouped. Each individual party was to recoup its investment with a percentage of net revenue based upon a fraction, the numerator of which was the amount invested ($50,000), and the denominator of which was $500,000, which we refer to as the investment ratio. Thereafter, each individual party would share in a percentage of the net revenue of the Group Kids Club, in an amount equal to one half of the investment ratio. During 2015 and 2016, we made aggregate payments of $45,000 to the party to one of the kids clubs agreements. On July 18, 2016, we paid such party $15,000 in full settlement of our remaining obligations under such kids club agreement, and the agreement was terminated. On October 3, 2016, we entered into a debt exchange agreement and issued 6,000 shares of our common stock at an exchange price of $10.00 per share to terminate the remaining kids club agreement for (i) $10,000 plus (ii) the original investment of $50,000. On the date of the exchange agreement, the market price of our common stock was $13.50 and we recorded a loss on extinguishment of debtnote in the amount of $21,000 on our consolidated statement of operations.

Equity Finance Agreements

During the years ended December 31, 2012 and 2011, we entered into equity finance agreements, for the future production of web series and the option to participate in the production of future web series. The investors contributed a total equity investment of $1,000,000 and had the ability to share in the future revenues of the relevant web series, on a pro rata basis, until the total equity investment was recouped and then would have shared at a lower percentage of the additional revenues. The equity finance agreements stated$492,233 that prior to December 31, 2012, we could utilize all, or any portion, of the total equity investment to fund any chosen production. Per the equity finance agreements, we were entitled to a producer’s fee, not to exceed $250,000, for each web series that we produced before calculating the share of revenues owed to the investors. We invested these funds in eleven projects. On January 1, 2013, the production “cycle” ceased and the investors were entitled to share in the future revenues of any productions for which the funds invested were used. Two of the productions were completed and there was no producer gross revenue as defined in the equity finance agreements. The remaining projects were impaired and there are no future projects planned with funds from the equity finance agreements. As a result, we were not required to pay the investors any amount in excess of the existing liability already recorded as of December 31, 2015.

On June 23, 2016, we entered into a settlement agreement with one of the investors that had originally contributed $0.1 million. Pursuant to the terms of the settlement agreement, we made a payment of $0.2 million to the investor on June 24, 2016. On October 3, 2016, October 13, 2016 and October 27, 2016 we entered into debt exchange agreements with three investors to issue an aggregate amount of 33,100 shares of our common stock at an exchange price of $10.00 per share to terminate each of their equity finance agreements for a cumulative original investment amount of $0.3 million. The market price of our common stock on the date of the debt exchange agreement was between $12.50 and $13.50 and, as such, we recorded a loss on extinguishment of debt on our consolidated statement of operations in the amount of $0.1 million.

On December 29, 2016, we entered into a termination agreement with the remaining investor, whereby we mutually agreed to terminate the equity finance agreement in exchange for the issuance of Warrant K. Warrant K entitles the holder to purchase up to 85,000 shares of our common stock at a price of $0.03 prior to December 29, 2020. We recorded a loss on extinguishment of debt in the amount of $0.5 million on our consolidated statement of operations for the difference between the outstanding amount of the equity finance agreement and the fair value of Warrant K.

As of December 31, 2017 and 2016, we did not have any debt outstanding or accrued interest related to such equity finance agreements on our consolidated balance sheets.

Loan and Security Agreements

First Group Film Funding

During the years ended December 31, 2013 and 2014, we entered into various loan and security agreements with individual noteholders for an aggregate principal amount of notes of $11,945,219 to finance future motion picture projects. During the year ended December 31, 2015, one of the noteholders increased its funding under its loan and security agreement for an additional $500,000 investment and we used the proceeds to repay $405,219 to another noteholder. Pursuant to the terms of the loan and security agreements, we issued notes that accrued interest at rates ranging from 11.25% to 12% per annum, payable monthly through June 30, 2015. During 2015, we exercised our option under the loan and security agreements, to extend the maturity date of these notes until December 31, 2016. In consideration of our exercise of the option to extend the maturity date, we were required to pay a higher interest rate, increasing 1.25% to a range between 12.50% and 13.25%. The noteholders, as a group, were to receive our entire share of the proceeds from these projects, on a prorata basis, until the principal investment was repaid. Thereafter, the noteholders, as a group, had the right to participate in 15% of our future profits from these projects (defined as our gross revenues of such projects less the aggregate amount of principal and interest paid for the financing of such projects) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund specific motion picture productions.

On May 31, 2016 and June 30, 2016, we entered into various debt exchange agreements on substantially similar terms with certain of the noteholders to convert an aggregate of $11.3 million of principal and $1.8 million of interest into shares of common stock. Pursuant to the terms of such debt exchange agreements, we agreed to convert the debt at $10.00 per share and issued 1,315,149 shares of common stock. On May 31, 2016, the market price of a share of common stock was $13.98 and on June 30, 2016 it was $12.16. As a result, we recorded a loss on the extinguishment of debt on our consolidated statement of operations of $3.3 million for the year ended December 31, 2016.

Please see “Warrant J” below for a discussion of the satisfaction of the last remaining note. As of December 31, 2017 and 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our consolidated balance sheets.

Web Series Funding

During the years ended December 31, 2014 and 2015, we entered into various loan and security agreements with individual noteholders for an aggregate principal amount of notes of $4.0 million which we used to finance production of our 2015 web series,South Beach–Fever. Under the loan and security agreements, we issued promissory notes that accrued interest at rates ranging from 10% to 12% per annum payable monthly through August 31, 2015, with the exception of one note that accrued interest through February 29, 2016. During 2015, we exercised our option under the loan and security agreements to extend the maturity date of these notes until August 31, 2016. In consideration for our exercise of the option to extend the maturity date, we were required to pay a higher interest rate, increasing 1.25% to a range between 11.25% and 13.25%. Pursuant to the terms of the loan and security agreements, the noteholders, as a group, had the right to participate in 15% of our future profits generated by the series (defined as our gross revenues of such series less the aggregate amount of principal and interest paid for the financing of such series) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund the series.

During the year ended December 31, 2016, we entered into thirteen individual debt exchange agreements on substantially similar terms with the noteholders. Pursuant to the terms of the debt exchange agreements, we and each noteholder agreed to convert an aggregate of $3.8 million of principal and $0.4 million of interest into an aggregate of 420,455 shares of common stock at $10.00 per share as payment in full for each of the notes. On the dates of the exchange, the market price of our common stock was between $12.00 and $12.90 per share. As a result, we recorded a loss on the extinguishment of debt on our consolidated statement of operations $0.9 million for the year ended December 31, 2016, related to this transaction.

Please see “Warrant J” below for a discussion of the satisfaction of the last remaining note. As of December 31, 2017 and 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our consolidated balance sheets.

Second Group Film Funding

During the year ended December 31, 2015, we entered into various loan and security agreements with individual noteholders for an aggregate principal amount of notes of $9.3 million to fund a new group of film projects. Of this amount, notes with an aggregate principal value of $8.8 million were issued in exchange for debt that had originally been incurred by Dolphin Entertainment, LLC, primarily related to the production and distribution of the motion picture,Believe. The remaining $0.5 million was issued as a note in exchange for cash. Pursuant to the loan and security agreements, we issued notes that accrued interest at rates ranging from 11.25% to 12% per annum, payable monthly through December 31, 2016. We had the option to extend the maturity date of these notes until July 31, 2018. If we chose to exercise our option to extend the maturity date, we would have been required to pay a higher interest rate, increasing 1.25% to a range between 11.25% and 13.25%. The noteholders, as a group, would have received our entire share of the proceeds from these projects, on a prorata basis, until the principal investment was repaid. Thereafter, the noteholders, as a group, had the right to participate in 15% of our future profits from such projects (defined as our gross revenues of such projects less the aggregate amount of principal and interest paid for the financing of such projects) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund specific motion picture productions.

On May 31, 2016 and June 30, 2016, we entered into various debt exchange agreements on substantially similar terms with certain of the noteholders to convert an aggregate of $4.0 million of principal and $0.3 million of interest into shares of common stock. Pursuant to such debt exchange agreements, we agreed to convert the debt at $10.00 per share and issued 434,435 shares of common stock. On May 31, 2016, the market price of a share of the common stock was $13.98 and on June 30, 2016, it was $12.16. As a result, we recorded a loss on the extinguishment of debt on our consolidated statement of operations of $1.3 million for the year ended December 31, 2016. In addition, during 2016, we repaid one of our noteholders its principal investment of $0.3 million.

Please see “Warrant J” below for a discussion of the satisfaction of the last remaining note. As of December 31, 2017 and 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our consolidated balance sheets.

Warrant J

On December 29, 2016, we entered into a debt exchange agreement with an investor that held the last remaining notes discussed above with the following balances:

In addition to the debt exchange agreement, we entered into a purchase agreement with the same investor to acquire 25% of the membership interest of Dolphin Kids Clubs to own 100% of the membership interest. Pursuant to the debt exchange agreement and the purchase agreement, we issued Warrant J that entitled the warrant holder to purchase up to 1,085,000 shares of our common stock at a price of $0.03 through December 29, 2020, its expiration date. We recorded a loss on extinguishment of debt of $2.7 million on our consolidated statement of operations for the year ended December 31, 2016 related to the debt exchange. The loss on extinguishment of debt was calculated as the difference between the fair value of Warrant J and the outstanding debt under the notes described above.

Subscription Agreements

2015 Convertible Note Agreement

On December 7, 2015 we entered into a subscription agreement with an investor to sell up to $7 million in convertible promissory notes of our company. Under the subscription agreement, we issued a convertible promissory note to the investor in the amount of $3,164,000 at a conversion price of $10.00 per share. The convertible promissory note was to bear interest on the unpaid balance at a rate of 10% per annum and became due and payablematures on December 7, 2016.10, 2023.  The outstanding principal amount and all accrued interest were mandatorily and automatically convertible into common stock, at the conversion price, upon the average market price of the common stock being greater than or equal to the conversion price for twenty trading days. On February 5, 2016, this triggering event occurred pursuant to the convertiblepromissory note agreement and 316,400 shares of common stock were issued in satisfaction of the convertible note payable.

April 2016 Subscription Agreements

On April 1, 2016, we entered into substantially identical subscription agreements with certain private investors, pursuant to which we issued and sold to the investors in a private placement an aggregate of 537,500 shares of common stock at a purchase price of $10.00 per share for aggregate gross proceeds of $5,375,000 in the private placement. On March 31, 2016, we received $1,500,000, in advance for one of these agreements. The amount was recorded as noncurrent debt on our consolidated balance sheet. Under the terms of the April 2016 subscription agreements, each investor had the option to purchase additional shares of common stock at the purchase price, not to exceed the number of such investor’s initial number of subscribed shares, during each of the second, third and fourth quarters of 2016. One investor delivered notices of its election to purchase shares on each of June 28, 2016 and October 13, 2016 and we issued (i) 50,000 shares for an aggregate purchase price of $0.5 million and (ii) 60,000 shares for an aggregate purchase price of $0.6 million, respectively.

June 2016 Subscription Agreements

On June 22, 2016 and June 30, 2016, we entered into two additional subscription agreements with two investors. Pursuant to the terms of the subscription agreements, we sold an aggregate of 35,000 shares of our common stock at a purchase price of $10.00 per share.

November 2016 Subscription Agreements

On November 15 and November 22, 2016, we entered into eight additional subscription agreements with four investors. Pursuant to the terms of the subscription agreements, we sold an aggregate of 67,500 shares of our common stock at a purchase price of $10.00 per share.

2017 Convertible Promissory Notes

On July 18, July 26, July 27, July 31, August 30, September 6, September 8, and September 22, 2017, we entered into subscription agreements pursuant to which we issued convertible promissory notes, each with substantially similar terms, for an aggregate principal amount of $875,000. Each of the convertible promissory notes bears interest at a rate of 10% per annum and matures one year fromprovides for monthly repayments of principal and interest in the dateamount of issue, with the exception of one$10,459 beginning January 15, 2019.  The promissory note may be repaid at any time prior to maturity without a penalty.  

On November 30, 2017, we issued a promissory note in the amount of $75,000 which$200,000 that matures on January 15, 2019. We may prepay this promissory note with no penalty at any time. The promissory note bears interest at a rate of 10% per annum. We agreed to extend the maturity date until January 15, 2021.

On June 14, 2017, we issued a promissory note in the amount of $400,000 that matures two years fromafter issuance. We may prepay this promissory note with no penalty after the dateinitial six months. The promissory note bears interest at a rate of issue. The principal10% per annum.

As of December 31, 2019, we have a balance of $288,237 in current liabilities, a balance of $1,074,122 in noncurrent liabilities and any accrued interest of the each of the convertible$8,788 in other current liabilities related to these promissory notes are convertible by the respective holder aton our balance sheet.  As of December 31, 2018, we have a pricebalance of either (i) the 90 trading day average price per share$479,874 in current liabilities, a balance of common stock as$612,359 in noncurrent liabilities and accrued interest of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as defined$6,315 in each of the convertibleother current liabilities related to these promissory notes) of common stock is made, 95% of the Public Offering Share price (as defined in each of the convertible promissory notes).notes payable.

Payable to Former Member of 42West

During 2011, 42West entered into an agreement to purchase the membership interest of one of its members. Pursuant to the agreement, the outstanding principal was payable immediately if 42West sold, assigned, transferred, or otherwise disposed of all or substantially all of its assets and/or business prior to December 31, 2018. In connection with our acquisition of 42West, payment of this redemption was accelerated, with $300,000 paid in April 2017, and the remaining $225,000 paid in January 2018.

20172019 Public Offering

On December 26, 2017,October 21, 2019, in an underwritten registered public offering, we sold 1,215,000 units2,700,000 shares of common stock at a public offering price of $4.13 per unit. Each unit consisted of one share of our common stock and one warrant to purchase one share of our common stock at an exercise price of $4.74$0.78 per share. The net proceeds of the 2019 Public Offering were approximately $4.2$1.9 million, after deducting underwriting discounts and commissions and offering expenses payable by us.  Pursuant to

2018 Public Offering

On July 24, 2018, in an underwritten registered public offering, we sold 2,000,000 shares of common stock at a public offering price of $3.00 per share. The net proceeds of the Offering were approximately $5.3 million, after deducting underwriting agreement, we issued 86,503 underwriter warrantsdiscounts and granted an over-allotment option to the underwriters in the Offering.commissions and offering expenses payable by us.  In JanuaryAugust 2018, the underwriters exercised their over-allotment option with respect to 20,750265,000 shares of common stock and 175,750 warrants and we received proceeds, net of $81,043.69.the underwriter discount and expenses, of $0.7 million.

2018 Registered Direct Offering

On September 19, 2018, we issued and sold to a single investor in a registered direct offering an aggregate of 250,000 shares of our common stock at a price of $3.00 per share.  The offering was made pursuant to our effective shelf registration statement on Form S-3 previously filed with the Securities and Exchange Commission. We received proceeds of approximately $0.7 million from this issuance and sale of our common stock after deducting related expenses.

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or “GAAP”. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Capitalized Production Costs

Capitalized production costs represent the costs incurred to develop and produce a web series or feature films. These costs primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to scripts. Capitalized production costs are stated at the lower of cost, less accumulated amortization and tax credits, if applicable, or fair value. These costs are capitalized in accordance with Financial Accounting Standards Board, or “FASB”, Accounting Standards Codification, or “ASC”, Topic 926-20-50-2 “Other Assets – Film Costs”. Unamortized capitalized production costs are evaluated for impairment each reporting period on a title-by-title basis. If estimated remaining revenue is not sufficient to recover the unamortized capitalized production costs for that title, the unamortized capitalized production costs will be written down to fair value. Any project that is not greenlit for production within three years is written off.