Asstatement of
September 30, 2016, andoperations for the three and
ninesix months
then ended
June 30, 2023.Intangible Assets
Finite-lived intangible assets consisted of the Company had nofollowing as of June 30, 2023 and December 31, 2022:
| Schedule of intangible assets | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2023 | | December 31, 2022 | |
| | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | |
| Customer relationships | | $ | 13,350,000 | | $ | 6,591,362 | | $ | 6,758,638 | | $ | 13,350,000 | | $ | 5,842,498 | | $ | 7,507,502 | |
| Trademarks and trade names | | | 4,640,000 | | | 2,533,499 | | | 2,106,501 | | | 4,640,000 | | | 2,283,166 | | | 2,356,834 | |
| Non-compete agreements | | | 690,000 | | | 680,000 | | | 10,000 | | | 690,000 | | | 670,000 | | | 20,000 | |
| | | $ | 18,680,000 | | $ | 9,804,861 | | $ | 8,875,139 | | $ | 18,680,000 | | $ | 8,795,664 | | $ | 9,884,336 | |
Amortization expense associated with the Company’s intangible assets or liabilities measured at fair value, on a recurring or nonrecurring basis.was $503,357 and $341,833 for the three months ended June 30, 2023 and 2022, respectively, and $1,009,197 and $683,666 for the six months ended June 30, 2023 and 2022, respectively.
Amortization expense related to intangible assets for the remainder of 2023 and thereafter is as follows:
| Schedule of amortization expense | | | | | |
| 2023 | | | $ | 1,006,714 | |
| 2024 | | | | 1,701,993 | |
| 2025 | | | | 1,597,789 | |
| 2026 | | | | 1,465,978 | |
| 2027 | | | | 854,992 | |
| Thereafter | | | | 2,247,674 | |
| Total | | | $ | 8,875,139 | |
Business Segments
Through March 30, 2017 (the dateDOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the Company acquired 42West) (see Note 4)changes in goodwill and intangible assets (in thousands):
| Schedule of changes in goodwill and intangible assets | | | | | | |
| | | Goodwill | | | Intangible Assets | |
| Balance December 31, 2022 | | $ | 29,314,083 | | | $ | 9,884,336 | |
| Amortization expense | | | — | | | | (505,840 | ) |
| Balance March 31, 2023 | | | 29,314,083 | | | | 9,378,496 | |
| Amortization expense | | | — | | | | (503,357 | ) |
| Impairment of goodwill | | | (6,517,400 | ) | | | — | |
| Balance June 30, 2023 | | $ | 22,796,683 | | | $ | 8,875,139 | |
NOTE 4 —ACQUISITIONS
Socialyte, LLC
On November 14, 2022 (“Closing Date”), the Company, operated the following business segments:
1)
Dolphin Digital Media (USA): The Company created online kids clubs and derives revenue from annual membership fees.
2)
Dolphin Digital Studios: Dolphin Digital Studios creates original programming that premieres online, with an initial focus on content geared toward tweens and teens.
3)
Dolphin Films: Dolphin Films produces motion pictures, with an initial focus on family content. The motion pictures are distributed, through third parties, in the domestic and international markets. The Company derived a majority of its revenues from this segment during the three and nine months ended September 30, 2016.
Based on an analysiswholly owned subsidiary, Social MidCo LLC, (“MidCo”), acquired all of the Company’s operating segmentsissued and the provisionsoutstanding membership interests of ASC 280, Segment Reporting (ASC 280), the Company believes it meets the criteria for aggregating these operating segments intoSocialyte, a single reporting segment because they have similar economic characteristics, similar nature of product sold, (content), similar production processDelaware limited liability company (the Company uses the same labor force, and content) and similar type of customer (children, teens, tweens and family).
With the acquisition of 42West, the Company has identified an additional operating segment meeting the criteria in ASC 280 for a separate reporting segment. The new segment is Entertainment Publicity and primarily provides talent, entertainment and targeted marketing, and strategic communications services. See Note 19 for Segment reporting for the three and nine months ended September 30, 2017.
NOTE 4— ACQUISITION OF 42WEST
On March 30, 2017, the “Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”“Socialyte Purchase”),
by and amongpursuant to a membership interest purchase agreement dated the Closing Date (the “Socialyte Purchase Agreement”) between the Company and
the Sellers. PursuantNSL Ventures, LLC (the “Socialyte Seller”). Socialyte is a New York and Los Angeles-based creative agency specializing in social media influencer marketing campaigns for brands.The total consideration paid to the Socialyte Seller in respect to the Socialyte Purchase Agreement, the Company acquired from the Sellers 100% of the membership interests of 42West and 42West becamewas $14,290,504, including a wholly-owned subsidiary of the Company. 42West is an entertainment public relations agency offering talent, entertainment and targeted marketing and strategic communications services.
The consideration paid by the Companyprovisional working capital adjustment in
connection with the 42West Acquisition was $18,666,666 (less, the amount of
42West’s transaction expenses paid by$2,103,668. The Purchase Agreement provided for the
Company and payments by the Company of certain 42West indebtedness) in shares of Common Stock, determined based on the Company’s 30-trading-day average stock price prior to the closing date of $9.22 per share, plus the potentialSocialyte Seller to earn up to an additional
$9.3 million (less payment of$5,000,000 upon meeting certain
taxes)financial targets in
2022 that were not met. On the Closing Date, the Company paid the Seller $5,053,827 cash, issued the Seller 1,346,257 shares of
Common Stock, determined based on $9.22 per share. Asits common stock and issued the Seller a
result, the Company (i) issued 615,140 shares of Common Stock to the Sellers on the closing date$3,000,000 unsecured promissory note (the
“Initial Consideration”“Socialyte Promissory Note”),
(ii) (a) issued 172,275 shares of Common Stock to certain current 42West employees and a former 42West employee on April 13, 2017, to settle change in control provisions in their pre-existing employment and termination agreements (the “Change in Control Provisions”), (b) issued 59,320 shares of restricted stock as employee stock bonuses (the “Employee Bonus Shares”) under the Company's 2017 equity Incentive Plan, and (c) will issue approximately 767,563 shares of Common Stock to the Sellers, and 213,348 shares of Common Stock to certain current and former 42West employees to settle the Change in Control Provisions, on January 2, 2018 (the “Post-Closing Consideration”), and (iii) potentially may issue up to approximately 856,414 shares of Common Stock to the Sellers, and 125,149 shares to certain current and former 42West employees in accordance with the Change in Control Provisions, based on the achievement of specified 42West financial performance targets over a three-year period beginning January 1, 2017 and ending December 31, 2019 as set forth in the Purchase Agreement (the “Earn-Out Consideration”, and together with the Initial Consideration and the Post-Closing Consideration, (the “Stock Consideration”). The Purchase Agreement allows for a working capital adjustmentwhich is to be
calculated withinrepaid in two equal installments on June 30,
days of the closing of the transaction. On April 13, 2017,2023 and September 30, 2023. In addition, the Company issued
50,000the Seller 685,234 shares of
Common Stock toits common stock in satisfaction of the
Sellers as a provisionalClosing Date working capital
adjustment,adjustment. The first installment on the Socialyte Promissory Note was not made pending agreement of the post-close working capital adjustment. The Company partially financed the cash portion of the consideration with a $3,000,000 five-year secured loan from Bank Prov with MidCo and
on August 30, 2017Socialyte as co-borrowers, which the Company
made a final cash payment to the Sellers of $185,031 to settle the working capital adjustment once all informationguaranteed. The common stock that was
agreed to between the Sellers and the Company. Noneissued as part of the
Common Stock included in the Stock Consideration have beenconsideration was not registered under the Securities
Act exceptAct.The condensed consolidated statement of operations includes revenues and net loss from Socialyte amounting to $1,285,718 and $(26,504), respectively, for the Employee Bonus Shares.
The Company also agreed to pay the Sellers’ transaction costs and assumed certain tax liabilities incurred or to be incurred by the Sellers based on the proceeds they receive.
The issuance of 59,320 Employee Bonus Shares and the potential issuance of 117,788 shares as part of the Earn-Out Consideration to current employees (the “Employee Earn-Out Shares”) are conditioned on the employees remaining employed by the Company up to the date the shares become issuable. If an employee does not remain employed for the requisite service period, the shares they forfeit will be allocated among and issued to the Sellers. The Employee Bonus Shares and Employee Earnout Shares are not considered part of the accounting consideration transferred to acquire 42West. The Employee Bonus Shares will be accounted for under ASC 718, Compensation Stock-Compensation, which will result in compensation expense in the Company’s consolidated statements of operations. On August 21, 2017, the Company granted 59,320 of nonvested restricted stock to current 42West employees, of which 58,205 shares remain outstanding at September 30, 2017.
The Purchase Agreement contains customary representations, warranties, covenants and indemnifications.
Also in connection with the 42West Acquisition, on March 30, 2017, the Company entered into put agreements (the “Put Agreements”) with each of the Sellers. Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Company has granted the Sellers the right, but not obligation, to cause the Company to purchase up to an aggregate of 1,187,094 of their shares of Common Stock received as Stock Consideration for a purchase price equal to $9.22 per share during certain specified exercise periods set forth in the Put Agreements up until December 2020 (the “Put Rights”). During the three months ended
SeptemberJune 30,
2017,2023 and $2,433,955 and $(337,183), respectively, for the
Sellers, in accordance withsix months ended June 30, 2023.The following table summarizes the Put Agreements, caused the Company to purchase 40,672 shares of Common Stock for an aggregate amount of $375,000.
Each of Leslee Dart, Amanda Lundberg and Allan Mayer (the “Principal Sellers”) has entered into employment agreements with the Company to continue as employees of the Company for a three-year term after the closing of the 42West Acquisition. Each of the employment agreements of the Principal Sellers contains lock-up provisions pursuant to which each Principal Seller has agreed not to transfer any shares of Common Stock in the first year, except pursuant to an effective registration statement on Form S-1 or Form S-3 promulgated under the Securities Act (an “Effective Registration Statement”) or upon exercise of the Put Rights pursuant to the Put Agreement, and, except pursuant to an Effective Registration Statement, no more than 1/3 of the Initial Consideration and Post-Closing Consideration received by such Principal Seller in the second year and no more than an additional 1/3 of the Initial Consideration and Post-Closing Consideration received by such Principal Seller in the third year, following the closing date. The non-executive employees of 42West were retained as well.
In addition, in connection with the 42West Acquisition, on March 30, 2017, the Company entered into a registration rights agreement with the Sellers (the “Registration Rights Agreement”) pursuant to which the Sellers are entitled to rights with respect to the registration under the Securities Act. All fees, costs and expenses of underwritten registrations under the Registration Rights Agreement will be borne by the Company. At any time after the one-year anniversary of the Registration Rights Agreement, the Company will be required, upon the request of such Sellers holding at least a majority of the Stock Consideration received by the Sellers, to file a registration statement on Form S-1 and use its reasonable efforts to affect a registration covering up to 25% of the Stock Consideration received by the Sellers. In addition, if the Company iseligible to file a registration statement on Form S-3, upon the request of such Sellers holding at least a majority of the Stock Consideration received by the Sellers, the Company will be required to use its reasonable efforts to affect a registration of such shares on Form S-3 covering up to an additional 25% of the Stock Consideration received by the Sellers. The Company is required to effect only one registration on Form S-1 and one registration statement on Form S-3, if eligible. The right to have the Stock Consideration received by the Sellers registered on Form S-1 or Form S-3 is subject to other specified conditions and limitations.The provisional acquisition-date fair value of the consideration transferred totaled $24,113,798, which consisted of the following:
Common Stock issued at closing and in April 2017 (787,415 shares) | $6,693,028
|
Common Stock issuable on January 2, 2018 (980,911 shares) | 8,337,739
|
Contingent Consideration | 3,627,000
|
Put Rights | 3,800,000
|
Sellers’ transaction costs paid at closing | 260,000
|
Sellers’ tax liabilities assumed | 786,000
|
Working capital adjustment (50,000 shares issued in April 2017 plus paid $185,031 in cash in August 2017) | 610,031
|
| $24,113,798
|
The fair values of the 787,415 shares of Common Stock issued at closing and in April 2017, the 50,000 share of Common Stock issued on April 13, 2917 and the 980,911 shares of Common Stock to be issued on January 2, 2018 were determined based on the closing market price of the Company’s Common Stock on the acquisition date of $8.50 per share.
The Earn-Out Consideration arrangement requires the Company to pay up to 863,776 shares of Common Stock to the Sellers and one former employee of 42West to settle a Change in Control Provision (the “Contingent Consideration”), on achievement of adjusted EBITDA targets based on the operations of 42West over the three-year period beginning January 1, 2017. The provisional fair value of the Contingent Consideration was estimated using a Monte Carlo Simulation model, which incorporated significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Contingent Consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the Contingent Consideration as of the acquisition date. The key assumptions as of the acquisition date used in applying the Monte Carlo Simulation model are as follows: estimated risk-adjusted EBITDA figures ranging between $3,750,000 and $3,900,000; discount rates ranging between 11.75% and 12.25% applied to the risk-adjusted EBITDA estimates to derive risk-neutral EBITDA estimates; risk-free discount rates ranging from 1.03% to 1.55%, based on U.S. government treasury obligations with terms similar to those of the Contingent Consideration arrangement, applied to the risk-neutral EBITDA estimates; and an annual asset volatility estimate of 72.5%.
The provisional fair value of the Put Rights at the acquisition date was estimated using Black-Scholes Option Pricing Model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Put Rights reflect management’s own assumptions about the assumptions that market participants would use in valuing the Put Rights as of the acquisition date. The key assumptions in applying the Black Scholes Option Pricing Model are as follows: a discount rate range of 0.12% to 1.70% based on U.S Treasury obligations with a term similar to the exercise period for each of the rights to put shares to the Company as set forth in the Put Option agreements, and an equity volatility estimate of 75% based on the stock price volatility of the Company and certain publicly traded companies operating in the advertising services industry.
The Sellers’ tax liabilities assumed relates to the New York City Unincorporated Business Tax the Sellers will incur on the Initial Consideration, Post-Closing Consideration and potential Earn-Out Consideration received or to be received by them in connection with the 42West Acquisition. The Company’s obligation to pay the Sellers’ tax liabilities is a mutually agreed upon amount of $786,000, which was based on the Sellers’ estimates at the closing date of the 42West Acquisition of the amount of taxes to be owed, based on a 4% tax rate and the Sellers’ estimated taxable income. The estimated fair value of the Sellers’ tax liabilities assumed may change during the measurement period, pending receipt by the Company from the Sellers of an updated tax liability accrual, and ultimately the Sellers’ preparation of the related income tax returns related to the Initial Consideration. Therefore, the estimated fair value of the Sellers’ tax liabilities assumed is provisional.
transferred:| Schedule of consideration transferred | | | |
| Closing common stock (Consideration) | | $ | 4,133,009 | |
| Common stock issued at Closing Date as working capital adjustment | | | 2,103,668 | |
| Cash consideration paid at closing | | | 5,053,827 | |
| Cash consideration paid subsequent to closing (Unsecured Promissory Note issued to Seller) | | | 3,000,000 | |
| Fair value of the consideration transferred | | $ | 14,290,504 | |
The following table summarizes the estimatedpreliminary fair values of the assets acquired and liabilities assumed atby the acquisition date, March 30, 2017.Socialyte Purchase on the Closing Date. Amounts in the table are provisional estimates that may change, as described below.
There were no measurement period adjustments during the three and six months ended June 30, 2023. The measurement period of the Socialyte Purchase concludes on November 14, 2023.| Schedule of assets acquired and liabilities assumed | | | |
| | | November 14, 2022 | |
| Cash | | $ | 314,752 | |
| Accounts receivable | | | 2,758,265 | |
| Accrued revenue | | | 1,040,902 | |
| Property, equipment and leasehold improvements | | | 30,826 | |
| Prepaid expenses | | | 351,253 | |
| Intangibles | | | 5,210,000 | |
| Total identifiable assets acquired | | | 9,705,998 | |
| | | | | |
| Accounts payable | | | (3,043,871 | ) |
| Accrued expenses and other current liabilities | | | (1,397,292 | ) |
| Deferred revenue | | | (1,173,394 | ) |
| Total liabilities assumed | | | (5,614,557 | ) |
| Net identifiable assets acquired | | | 4,091,441 | |
| Goodwill | | | 10,199,063 | |
| Fair value of the consideration transferred | | $ | 14,290,504 | |
Cash | $273,625
|
Accounts receivable | 1,706,644
|
Property, equipment and leasehold improvements | 1,087,962
|
Other assets | 265,563
|
Indemnification asset | 300,000
|
Intangible assets | 9,110,000
|
Total identifiable assets acquired | 12,743,794
|
| |
Accounts payable and accrued expenses | (731,475)
|
Line of credit and note payable | (1,025,000)
|
Settlement liability | (300,000)
|
Other liabilities | (902,889)
|
Tax liabilities | (22,000)
|
Total liabilities assumed | (2,981,364)
|
Net identifiable assets acquired | 9,762,430
|
Goodwill | 14,351,368
|
Net assets acquired | $24,113,798
|
OfDOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 — NOTES RECEIVABLE
The notes receivable held by the provisional fairCompany are unsecured convertible note receivables from JDDC Elemental LLC (“Midnight Theatre”) (the “Notes Receivable”). The Notes Receivable are recorded at their principal face amount plus accrued interest. Due to their short-term maturity and conversion terms, these have been recorded at the face value of the $9,110,000note and an allowance for credit losses has not been established.
As of acquired identifiable intangible assets, $5,980,000 was assignedJune 30, 2023, the Notes Receivable amount to customer relationships (10-year useful life)$4,630,416, $2,760,000 was assignedinclusive of $522,336 of interest receivable, and are convertible at the option of the Company into Class A and B Units of Midnight Theatre. The Notes Receivable each originally had maturity dates six months from their issuance date but the maturity date for all of the Notes Receivable has been extended to September 30, 2023. The Notes Receivable allow the Company to convert the principal and accrued interest into common interest of Midnight Theatre on the maturity date. In connection with the Notes Receivable, the Company recorded $103,104 and $68,454 of interest income for the three months ended June 30, 2023 and 2022, respectively, and $205,121 and $113,221 for the six months ended June 30, 2023 and 2022, respectively. On July 21, 2023, Midnight Theatre made an interest payment of $105,000 related to the trade name (10-year useful life),Notes Receivable.
NOTE 6 — EQUITY METHOD INVESTMENTS
The Company’s equity method investment consisted of: (i) Class A and $370,000 was assigned to non-competition agreements (3-year useful life), that were recognized at fair value on the acquisition date.
The estimated fair valueClass B units of
accounts receivable acquired is $1,706,644, with the gross contractual amount being $1,941,644. Midnight Theatre and (ii) Series 2 common interest of Stanton South LLC, which operates Crafthouse Cocktails (“Crafthouse Cocktails”).The Company expects $235,000 to be uncollectible. The estimated fair value of accounts receivable is provisional, pendingevaluated these investments under the Variable Interest Entity guidance and determined the Company obtaining additional evidenceis not the primary beneficiary of either Midnight Theatre or Crafthouse Cocktails, however it does exercise significant influence over Midnight Theatre and Crafthouse Cocktails; as a result, it accounts for these investments under the actual amounts which will be collected.
equity method of accounting. Equity method investments are included within other long-term assets in the condensed consolidated balance sheets.As of June 30, 2023, the investment in Midnight Theatre and Crafthouse Cocktails amounted to $732,654 and $273,748 respectively.
Midnight Theatre
As of June 30, 2023 and December 31, 2022, the investment in Midnight Theatre amounted to $732,654 and $891,494, respectively. The fair valuesCompany recorded losses of property$77,069 and equipment and leasehold improvements of $1,087,962, and other assets of $265,563, are based on 42West’s carrying values prior to the acquisition, which approximate their fair values.
The estimated fair value of the settlement liability of $300,000 relates to 42West’s contingent liability to the Motion Picture Industry Pension Individual Account and Health Plans (collectively the “Plans”)$158,841,
two multiemployer pension funds and one multiemployer welfare fund, respectively, that are governed by the Employee Retirement Income Security Act of 1974, as amended (the “Guild Dispute”). The Plans intend to conduct an audit of 42West’s books and records for the
periodthree and six months ended June
7, 2011 through August 20, 201630, 2023, respectively, in connection with
its equity method investment in Midnight Theatre. Midnight Theatre commenced operations in late June 2022. The equity in earnings or losses during the
alleged contribution obligationsthree and six months ended June 30, 2022 were negligible, and were recorded in subsequent periods of
42West2022.Crafthouse Cocktails
As of June 30, 2023 and December 31, 2022, the investment in Crafthouse Cocktails amounted to $273,748 and $361,717, respectively. The Company recorded losses in connection with its equity method investment in Crafthouse Cocktails amounting to $57,817 and $23,400 for the three months ended June 30, 2023 and 2022, respectively, and $87,970 and $43,400 for the six months ended June 30, 2023 and 2022, respectively.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
| Schedule of other liabilities | | | | | | |
| | | June 30, | | | December 31, | |
| | | 2023 | | | 2022 | |
| Accrued funding under Max Steel production agreement | | $ | 620,000 | | | $ | 620,000 | |
| Accrued audit, legal and other professional fees | | | 440,250 | | | | 573,049 | |
| Accrued commissions | | | 630,532 | | | | 702,410 | |
| Accrued bonuses | | | 474,192 | | | | 469,953 | |
| Talent liability | | | 2,588,542 | | | | 3,990,984 | |
| Accumulated customer deposits | | | 1,158,246 | | | | 550,930 | |
| Other | | | 685,916 | | | | 719,510 | |
| Total other current liabilities | | $ | 6,597,678 | | | $ | 7,626,836 | |
NOTE 8 — DEBT
Total debt of the Company was as follows as of June 30, 2023 and December 31, 2022:
| Schedule of debt | | | | | | |
| Debt Type | | June 30,
2023 | | | December 31,
2022 | |
| Convertible notes payable | | $ | 5,150,000 | | | $ | 5,050,000 | |
| Convertible note payable - fair value option | | | 350,000 | | | | 343,556 | |
| Non-convertible promissory notes | | | 3,525,960 | | | | 1,368,960 | |
| Non-convertible promissory notes – Socialyte | | | 3,000,000 | | | | 3,000,000 | |
| Loans from related party (see Note 9) | | | 1,107,873 | | | | 1,107,873 | |
| Term loan, net of debt issuance costs (see Note 12) | | | 2,658,140 | | | | 2,867,592 | |
| Total debt | | $ | 15,791,973 | | | $ | 13,737,981 | |
| Less current portion of debt | | | (3,820,192 | ) | | | (4,277,697 | ) |
| Noncurrent portion of debt | | $ | 11,971,781 | | | $ | 9,460,284 | |
The table below details the maturity dates of the principal amounts for the Company’s debt as of June 30, 2023:
| Schedule of future annual contractual principal payment commitments of debt | | | | | | | | | | | | | | | | | | | | |
| Debt Type | | Maturity Date | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | 2027 | | | Thereafter | |
| Convertible notes payable | | Ranging between October 2024 and March 2030 | | $ | — | | | $ | 1,300,000 | | | $ | 800,000 | | | $ | 450,000 | | | $ | 2,600,000 | | | $ | 500,000 | |
| Nonconvertible promissory notes | | Ranging between November 2023 and March 2028 | | | 410,960 | | | | 500,000 | | | | 400,000 | | | | — | | | | — | | | | 2,215,000 | |
| Nonconvertible promissory notes - Socialyte | | September 2023 | | | 3,000,000 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Term loan | | November 14, 2027 | | | 200,797 | | | | 408,233 | | | | 408,233 | | | | 408,233 | | | | 1,232,644 | | | | — | |
| Loans from related party | | December 2026 | | | — | | | | — | | | | — | | | | 1,107,873 | | | | — | | | | — | |
| | | | | $ | 3,611,757 | | | $ | 2,208,233 | | | $ | 1,608,233 | | | $ | 1,966,106 | | | $ | 3,832,644 | | | $ | 2,715,000 | |
Convertible Notes Payable
On January 9, 2023, January 13, 2023 and June 15, 2023, the Company issued three convertible notes payable in the aggregate amount of $1,000,000. The convertible notes payable bear interest at a rate of 10% per annum, with initial maturity dates on the second anniversary of their respective issuances. The balance of each convertible note payable and any accrued interest may be converted at the noteholder’s option at any time at a purchase price based on a 90-day average closing market price per share of the common stock. Five of the convertible notes payable may not be converted at a price less than $2.50 per share and six of the convertible notes payable may not be converted at a price less than $2.00 per share. As of June 30, 2023 and December 31, 2022, the principal balance of the convertible notes payable of $5,150,000 and $5,050,000, respectively, was recorded in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance sheets.
The Company recorded interest expense related to these convertible notes payable of $141,583 and $67,500 during the three months ended June 30, 2023 and 2022, respectively, and $286,139 and $135,000 during the six months ended June 30, 2023 and 2022, respectively. In addition, the Company made cash interest payments amounting to $305,573 and $135,000 during the six months ended June 30, 2023 and 2022, respectively, related to the Plans. Based onconvertible notes payable.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 8, 2023, the holder of two convertible notes converted the aggregate principal balance of $900,000 into 450,000 shares of common stock at a recent audit for periods priorconversion price of $2.00 per share. At the moment of conversion, accrued interest related to June 7, 2011, the Company estimates that the probable amount the Plan may seekthis note amounted to collect from 42West is approximately $300,000, as of the acquisition date,$9,500 and was paid in pension plan contributions, health and welfare plan contributions and union dues once the audit is completed. Accordingly, the Company has recorded a $300,000 settlement accrual liability for the probable amount of the liability it may incur due to the Motion Picture Industry Pension audit of the period from March 25, 2012 through August 20, 2016 (seecash.
Convertible Note 20). Payable at Fair Value
The Company has not recorded a liabilityone convertible promissory note outstanding with aggregate principal amount of $500,000 as of June 30, 2023 for which it elected the acquisition date for any exposure for additional settlement obligations related to the period from August 20, 2016 through March 30, 2017, as the Company has not reached a conclusion that a loss for that period is probable. Therefore, the ultimate amount related to the settlement liability as of March 30, 2017 may vary from the amount recorded, and asfair value option. As such, the estimated fair value of the settlement liability is provisional.
In accordance with the terms of the Purchase Agreement, the Sellers indemnifiednote was recorded on its issue date. At each balance sheet date, the Company with respect torecords the Guild Dispute for losses incurred related to the Company’s alleged contribution obligations to the Plans for the period between March 25, 2012 through March 26, 2016. The Company has recorded an indemnification asset related to the recorded settlement liability, measured at fair value on the same basis as the settlement liability. The indemnification asset represents the estimated fair value of the indemnification payment expected to be received from Sellers, related toconvertible promissory note with any changes in the indemnification by the Sellers of the estimated settlement liability. As the estimated fair value of the settlement liability is provisional, so too is the estimated fair value of the indemnification asset.
The deferred tax liability related to 42West is a provisional estimate pending the completion of an analysis of deferred income taxes.
Based on the provisional fair values related to certain assets acquired and liabilities assumed discussed above, the $14,351,368 of goodwill is also provisional. The goodwill was assigned to the Entertainment Publicity reporting unit, which is at the same level as the Entertainment Publicity segment (see Note 19). The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of 42West. The goodwill is expected to be deductible for income tax purposes.
The Company expensed $0 and $745,272 of acquisition related costs in the three and nine months ended September 30, 2017, respectively. These costs are includedrecorded in the condensed consolidated statements of operations in the line item entitled “acquisition costs.”
operations.The revenue and net income of 42West included in the consolidated amounts reported in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 are as follows:
| | For the three months ended September 30, 2017 | For the nine months ended September 30, 2017 |
| Revenue | $5,409,166 | $15,236,278 |
| Net income | $247,247 | $1,612,589 |
The following represents the pro forma consolidated operations for the three and nine months ended September 30, 2017 and September 30, 2016, respectively, as if 42West had been acquired on January 1, 2016 and its results had been included in the consolidated results of the Company beginning on that date:
Pro Forma Consolidated Statements of Operations
| | Three months ended September 30, | Nine months ended September 30, |
| | | | | |
| Revenues | $6,808,014
| $5,588,495
| $19,862,073
| $15,064,851
|
| Net income (loss) | 5,923,245 | (11,617,330) | 10,297,757
| (22,205,725) |
The pro forma amounts have been calculated after applying the Company’s accounting policies to the financial statements of 42West and adjusting the combined results of the Company and 42West to reflect (a) the amortization that would have been charged assuming the intangible assets had been recorded on January 1, 2006, (b) the reversal of 42West’s income taxes as if 42West had filed a consolidated income tax return with the Company beginning January 1, 2016, and (c) to exclude $207,564 and $795,272 of acquisition related costs that were originally expensed by the Company during the three months ended June 30, 2017 and by the Company and 42West on a combined basis during the six months ended June 30, 2017, respectively.
The following table summarizes the original and revised estimated fair values of the assets acquired and liabilities assumed at the acquisition date of March 30, 2017 and the related measurement period adjustments to the fair values recorded through September 30, 2017:
| March 31, 2017 (As initially reported) | Measurement Period Adjustments | September 30, 2017(As adjusted) |
| Cash | $273,625 | $— | $273,625 |
| Accounts receivable | 1,706,644 | — | 1,706,644 |
| Property, equipment and leasehold improvements | 1,087,962 | — | 1,087,962 |
| Other assets | 265,563 | — | 265,563 |
| Indemnification asset | — | 300,000 | 300,000 |
| Intangible assets | 9,110,000 | — | 9,110,000 |
| Total identifiable assets acquired | 12,443,794 | 300,000 | 12,743,794 |
| | | | |
| Accounts payable and accrued expenses | (731,475) | — | (731,475) |
| Line of credit and note payable | (1,025,000) | — | (1,025,000) |
| Settlement liability | (300,000) | — | (300,000) |
| Other liabilities | (902,889) | — | (902,889) |
| Tax liabilities | (22,000) | — | (22,000) |
| Total liabilities assumed | (2,981,364) | — | (2,981,364) |
| Net identifiable assets acquired | 9,462,430 | — | 9,762,430 |
| Goodwill | 13,996,337 | 355,031
| 14,351,368
|
| Net assets acquired | $23,458,767 | $655,031
| $24,113,798
|
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. As of March 31, 2017, the Company recorded the identifiable net assets acquired of $9,462,430 as shown in the table above in its condensed consolidated balance sheet. During the period from March 31, 2017 through September 30, 2017, the Company’s measurement period adjustments of $655,031 were made based on new information obtained after the acquisition date about facts and circumstances that existed as of the acquisition date, and, accordingly, the Company recognized these adjustments in its September 30, 2017 condensed consolidated balance sheet to reflect the adjusted identifiable net assets acquired of $9,762,430 as shown in the table above. The changes to the provisional amounts did not result in changes to the Company’s previously reported condensed consolidated income statement for the three months ended March 31, 2017.
The following is a reconciliation of the initially reported fair value to the adjusted fair value of goodwill:
Goodwill originally reported at March 31, 2017 | $13,996,337
|
Changes to estimated fair values: | |
Contingent Consideration | 86,000
|
Put Rights | (200,000)
|
Sellers’ tax liabilities assumed | 159,000
|
Working capital adjustment | 610,031
|
Indemnification asset | (300,000)
|
| 355,031
|
Adjusted goodwill | $14,351,368
|
The provisional estimated fair value of Contingent Consideration increased from the originally reported amount primarily due to changes in the estimated risk-adjusted EBITDA figures expected to be achieved during the earn-out period, changes to the risk-free discount rates and recalibration of the asset volatility estimate, which are inputs to the Monte Carlo simulation model used to calculate the fair value.
The provisional estimated fair value of the Put Rights decreased from the originally reported amount primarily due to a decrease in the annual asset volatility assumption.
The final working capital adjustment and provisional indemnification asset were initially determined subsequent to the issuance by the Company of its condensed consolidated financial statements for the three months ended March 31, 2017.
NOTE 5 — CAPITALIZED PRODUCTION COSTS, ACCOUNTS RECEIVABLES AND OTHER CURRENT ASSETS
Capitalized Production Costs
Capitalized production costs include the unamortized costs of completed motion pictures and digital projects which have been produced by the Company, costs of scripts for projects that have not been developed or produced and costs for projects that are in production. These costs include direct production costs and production overhead and are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in the proportion that current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the motion picture or web series.
Motion Pictures
For the three and nine months ended September 30, 2017, revenues earned from motion pictures were $1,398,839 and $4,625,801, respectively, mainly attributable to Max Steel, the motion picture released on October 14, 2016 and international sales of Believe, the motion picture released in December 2013. During the three and nine months ended September 30, 2016, the Company earned revenues of $1,140,000 and $1,144,157, respectively from the international sales of Max Steel and Believe. The Company amortized capitalized production costs (included as direct costs) in the condensed consolidated statements of operations using the individual film forecast computation method in the amount of $206,798 and $2,256,711, respectively during the three and nine months ended September 30, 2017 and $1,106,229 for each of the three and nine months ended September 30, 2016, related to Max Steel. All capitalized production costs for Believe were either amortized or impaired in prior years. Subsequent to the release of Max Steel, the Company used a discounted cash flow model and determined that the fair value of the capitalized production costs should be impaired by $2,000,000 due to a lower than expected domestic box office performance. As of September 30, 2017, and December 31, 2016, the Company had a balance of $1,933,219,$350,000 and $4,189,930, respectively recorded as capitalized production costs related to Max Steel.
The Company has purchased scripts, including one from a related party, for other motion picture productions and has capitalized $237,500 and $215,000$343,556 in capitalized production costsnoncurrent liabilities as of SeptemberJune 30, 20172023 and December 31, 2016 associated with these scripts. The Company intends to produce these projects but they were not yet in production as of September 30, 2017.
On November 17, 2015, the Company entered into a quitclaim agreement with a distributor for rights to a script owned by the Company. As part of the agreement the Company will receive $221,223 plus interest and a profit participation if the distributor decides to produce the motion picture within 24 months after the execution of the agreement. If the motion picture is not produced within the 24 months, all rights revert back to the Company. As per the terms of the agreement, the Company is entitled to co-finance the motion picture. As of September 30, 2017, the Company had not been notified by the distributor that it intends to produce the motion picture.
As of September 30, 2017, and December 31, 2016,2022, respectively, the Company has total capitalized production costs of $2,170,719 and $4,404,930, net of accumulated amortization, tax incentives and impairment charges, recorded on its condensed consolidated balance sheets related to motion pictures.
Digital Productions
During the
year ended December 31, 2016, the Company produced a new digital project showcasing favorite restaurants of NFL players throughout the country. convertible note payable measured at fair value.The Company entered intorecorded a co-production agreementgain in fair value of $4,000 and was responsible$244,022 for financing 50% of the project’s budget. Per the terms of the agreement, the Company is entitled to 50% of the profits of the project, net of any distribution fees. The show was produced throughout several cities in the U.S. The show was released on Destination America, a digital cable and satellite television channel, on September 9, 2017 and the Company does not expect to derive any revenues from this initial release.
During the three and nine months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and a loss in fair value of $6,444 and a gain in fair value of $531,880 for the Company did not earn any revenues related to digital productions. During the ninesix months ended SeptemberJune 30, 2016, the Company impaired $2,439 of capitalized production costs related to digital productions.
As of September 30, 2017,2023 and
December 31, 2016,2022, respectively,
the Company has total capitalized production costs of $266,444 and $249,083, recorded on its condensed consolidated
balance sheetstatements of operations related to this convertible promissory note at fair value.The Company recorded interest expense related to these convertible notes payable at fair value of $9,863 for both the three months ended June 30, 2023 and 2022, and $19,726 for both the six months ended June 30, 2023 and 2022, respectively. In addition, the Company made cash interest payments amounting to $19,726 for both the six months ended June 30, 2023 and 2022, related to the digital productions discussed above.
Theconvertible promissory notes at fair value.Nonconvertible Promissory Notes
On February 22, 2023, the Company issued an unsecured nonconvertible promissory note in the amount of $2,215,000 and received proceeds of $2,215,000. As of June 30, 2023, the Company has assessed eventsoutstanding unsecured nonconvertible promissory notes in the aggregate amount of $3,525,960, which bear interest at a rate of 10% per annum and changes in circumstances that would indicate that the Company should assess whether the fair value of the productions are less than the unamortized costs capitalizedmature between November 2023 and did not identify indicators of impairment, other than those noted above.
Accounts Receivables
The Company entered into various agreements with foreign distributors for the licensing rights of our motion picture, Max Steel, in certain international territories. The motion picture was delivered to the distributors and other stipulations, as required by the contracts were met. March 2028.As of SeptemberJune 30, 20172023 and December 31, 2016,2022, the Company had a balance of $2,025,160$410,960 and $3,668,646,$868,960, respectively, net of debt discounts recorded as current liabilities and $3,115,000 and $500,000 respectively, in accounts receivable related to the revenues of Max Steel.
The Company’s trade accounts receivable related to its entertainment publicity business are recorded at amounts billed to customers, and presented on the balance sheet, net of the allowance for doubtful accounts. The allowance is determined by various factors, including the age of the receivables, current economic conditions, historical losses and other information management obtains regarding the financial condition of customers. As of September 30, 2017, the Company had a balance of $1,951,504, net of $164,000 of allowance for doubtful accounts of accounts receivable related to the entertainment publicity business. (note 4)
Other Current Assets
The Company had a balance of $450,648 and $2,665,781 in other current assets on its condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, these amounts were primarily comprised of deferred offering costs and an indemnification asset related to the 42West Acquisition. (See note 4 for further discussion). As of December 31, 2016, these amounts were primarily comprised of tax incentive receivables and prepaid loan interest.
Indemnification asset – The Company recorded in other current assets on its condensed consolidated balance sheet, $300,000 related to certain indemnifications associated with the 42West Acquisition.
Tax Incentives– The Company has access to government programs that are designed to promote film production in the jurisdiction. As of September 30, 2017, and December 31, 2016, respectively, the Company had a balance of $0 and $2,060,883 from these tax incentives. Tax incentives earned with respect to expenditures on qualifying film productions are included as an offset to capitalized production costs when the qualifying expenditures have been incurred provided that there is reasonable assurance that the credits will be realized.
Deferred offering costs– The Company incurred legal and professional fees in the amount of $116,204 related to the filing of its S-1 Registration Statement. These costs have been deferred until the final S-1 is filed.
Prepaid Interest – The Company entered into a loan and security agreement to finance the distribution and marketing costs of Max Steel and prepaid interest related to the agreement. As of September 30, 2017, and December 31, 2016, there was a balance of $0 and $602,697 of prepaid interest.
NOTE 6 — PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvement consists of:
| | | |
| Furniture and fixtures | $539,715 | $65,311 |
| Computers and equipment | 408,058 | 41,656 |
| Leasehold improvements | 356,946 | 7,649 |
| | 1,304,719 | 114,616 |
| Less: accumulated depreciation | (192,820) | (79,428) |
| | $1,111,899 | $35,188 |
The Company depreciates furniture and fixtures over a useful life of between five and seven years, computer and equipment over a useful life of between three and five years and leasehold improvements over the remaining term of the related leases. On June 1, 2017, the Company entered into a sublease agreement for one of its offices in Los Angeles. As part of the sublease agreement, the Company agreed to allow the subtenant to acquire the fixed assets in the office. As a result, the Company wrote off $64,814 of property, equipment and leasehold improvements and $36,789 of accumulated depreciation. This resulted in a loss in the amount of $28,025 that was recorded on the condensed consolidated statement of operations for the nine months ended September 30, 2017 as loss on disposal of furniture, office equipment and leasehold improvements. The balances as of September 30, 2017 include the provisional amounts of the Company’s newly acquired subsidiary 42West. (See note 4)
NOTE 7 — INVESTMENT
Investments, at cost, consist of 344,980 shares of common stock of VRC. In exchange for services rendered by 42West to VRC during 2015, 42West received both cash consideration and a promissory note that was convertible into shares of common stock of VRC. On April 7, 2016, VRC closed an equity financing round resulting in common stock being issued to a third-party investor. This transaction triggered the conversion of all outstanding promissory notes into shares of common stock of VRC. The Company’s investment in VRC represents less than 1% noncontrolling ownership interest in VRC. The Company had a balance of $220,000 on its condensed consolidated balance sheet as of September 30, 2017, related to this investment.
NOTE 8 — DEBT
Loan and Security Agreements
First Group Film Funding
During the years ended December 31, 2013 and 2014, the Company entered into various loan and security agreements with individual noteholders (the “First Loan and Security Noteholders”) for notes with an aggregate principal amount of $11,945,219 to finance future motion picture projects (the “First Loan and Security Agreements”). During the year ended December 31, 2015, one of the First Loan and Security Noteholders increased its funding under its respective First Loan and Security Agreement for an additional $500,000 note and the Company used the proceeds to repay $405,219 to another First Loan and Security Noteholder. Pursuant to the terms of the First Loan and Security Agreements, the notes accrued interest at rates ranging from 11.25% to 12% per annum, payable monthly through June 30, 2015. During 2015, the Company exercised its option under the First Loan and Security Agreements, to extend the maturity date of these notes until December 31, 2016. In consideration for the Company’s exercise of the option to extend the maturity date, the Company was required to pay a higher interest rate, increasing by 1.25% resulting in rates ranging from 12.50% to 13.25%. The First Loan and Security Noteholders, as a group, were to receive the Company’s entire share of the proceeds from the motion picture productions funded under the First Loan and Security Agreements, on a prorata basis, until the principal investment was repaid. Thereafter, the First Loan and Security Noteholders, as a group, would have the right to participate in 15% of the Company’s future profits from these projects (defined as the Company’s 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 First Loan and Security 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, the Company entered into debt exchange agreements with certain First Loan and Security Noteholders on substantially similar terms to convert an aggregate of $11,340,000 of principal and $1,811,490 of accrued interest into shares of Common Stock. Pursuant to the terms of such debt exchange agreements, the Company agreed to convert the debt owed to certain First Loan and Security Noteholders into Common Stock at an exchange rate of $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, the Company recorded losses on the extinguishment of debt on its consolidated statement of operations of $3,328,366 for the nine months ended September 30, 2016 based on the difference between the fair value of the Common Stock issued and the carrying amount of outstanding balance of the exchanged notes on the date of the exchange. On December 29, 2016, as part of a global settlement agreement with an investor that was a noteholder under each of a First Loan and Security Agreement, a Web Series Agreement and a Second Loan and Security Agreement, the Company entered into a debt exchange agreement whereby the Company issued Warrant “J” that entitles the warrant holder to purchase shares of Common Stock at a price of $0.03 per share in settlement of $1,160,000 of debt from the note under the First Loan and Security Agreement. See Note 17 for further discussion of Warrant “J”.
The Company did not expense any interest during the three and nine months ended September 30, 2017 and expensed $38,741 and $1,358,585, respectively, in interest during the three and nine months ended September 30 2016, related to the First Loan and Security Agreements. The Company did not have any debt outstanding or accrued interest as of September 30, 2017 and December 31, 2016 related to the First Loan and Security Agreements on its condensed consolidated balance sheets.
Web Series Funding
During the years ended December 31, 2014 and 2015, the Company entered into various loan and security agreements with individual noteholders (the “Web Series Noteholders”) for an aggregate principal amount of notes of $4,090,000 which the Company used to finance production of its 2015 web series (the “Web Series Loan and Security Agreements”). Under the Web Series Loan and Security Agreements, the Company 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, the Company exercised its option under the Web Series Loan and Security Agreements to extend the maturity date of these notes to August 31, 2016. In consideration for the Company’s exercise of the option to extend the maturity date, the Company was required to pay a higher interest rate, increasing 1.25% resulting in interest rates ranging from 11.25% to 13.25%. Pursuant to the terms of the Web Series Loan and Security Agreements, the Web Series Noteholders, as a group, would have had the right to participate in 15% of the Company’s future profits generated by the series (defined as the Company’s 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 Web Series Noteholder’s loan commitment as a percentage of the total loan commitments received to fund the series.
During the nine months ended September 30, 2016, the Company entered into thirteen individual debt exchange agreements (the “Web Series Debt Exchange Agreements”) on substantially similar terms with the Web Series Noteholders. Pursuant to the terms of the Web Series Debt Exchange Agreements, the Company and each Web Series Noteholder agreed to convert an aggregate of $4,204,547 of principal and accrued interest under the Web Series Loan and Security Agreements into an aggregate of 420,455 shares of Common Stock at an exchange price of $10.00 per share as payment in full of each of the notes issued under the Web Series Loan and Security Agreements. Mr. Nicholas Stanham, director of the Company, was one of the Web Series Noteholders that converted his note into shares of Common Stock. For the nine months ended September 30, 2016, the Company recorded a loss on extinguishment of debt in the amount of $ $588,694 due to the market price of the Common Stock being between $12.00 and $12.16 per share on the dates of the exchange.
During 2016, the Company also entered into (i) substantially identical Subscription Agreements with two Web Series Noteholders to convert $1,265,530 of principal and interest into an aggregate of 126,554 shares of Common Stock at an exchange price of $10.00 per share as payment in full of each of the notes issued under the Web Series Loan and Security Agreements and (ii) a global settlement agreement with another investor that was a Noteholder of a First Loan and Security Agreement, a Web Series Agreement and a Second Loan and Security Agreement. As part of the global settlement agreement, the Company entered into a debt exchange agreement whereby the Company issued Warrant “J” that entitles the warrant holder to purchase shares of Common Stock at a price of $0.03 per share in settlement of $340,000 of debt from the Web Series Loan and Security Agreement. See Note 17 for further discussion of Warrant “J”.
The Company did not expense any interest during the three and nine months ended September 30, 2017 and expensed $39,091 and $323,670 respectively, in interest during the three and nine months ended September 30, 2016, related to the Web Series Loan and Security Agreements. The Company did not have any debt outstanding or accrued interest as of September 30, 2017 and December 31, 2016 related to the Web Series Loan and Security Agreements on its condensed consolidated balance sheets.
Second Group Film Funding
During the year ended December 31, 2015, the Company entered into various loan and security agreements with individual noteholders (the “Second Loan and Security Noteholders”) for notes with an aggregate principal amount of $9,274,327 to fund a new group of film projects (the “Second Loan and Security Agreements”). Of this total aggregate amount, notes with an aggregate principal amount of $8,774,327 were issued in exchange for debt that had originally been incurred by DE LLC, primarily related to the production and distribution of the motion picture, “Believe”. The remaining $500,000 of principal amount was related to a note issued in exchange for cash. The notes issued pursuant to the Second Loan and Security Agreements accrue interest at rates ranging from 11.25% to 12% per annum, payable monthly through December 31, 2016. The Company did not exercise its option to extend the maturity date of these notes until July 31, 2018. The Second Loan and Security Noteholders, as a group, were to receive the Company’s entire share of the proceeds from the related group of film projects, on a prorata basis, until the principal balance was repaid. Thereafter, the Second Loan and Security Noteholders, as a group, would have the right to participate in 15% of the Company’s future profits from such projects (defined as the Company’s 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 Second Loan and Security Noteholder’s loan principal as a percentage of the total loan proceeds received to fund the specific motion picture productions.
On May 31 and June 30, 2016, the Company entered into various debt exchange agreements on substantially similar terms with certain of the Second Loan and Security Noteholders to convert an aggregate of $4,344,350 of principal and accrued interest into shares of Common Stock. Pursuant to such debt exchange agreements, the Company agreed to convert the debt at an exchange price of $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, the Company recorded a loss on the extinguishment of debt of $1,312,059 on its consolidated statement of operations for nine months ended September 30, 2016, due to the difference between the exchange price and the market price of the Common Stock on the dates of exchange. During 2016, the Company repaid one of the Second Loan and Security Noteholders its principal investment of $300,000. On December 29, 2016, as part of a global settlement agreement with an investor that was a noteholder under each of a First Loan and Security Agreement, a Web Series Agreement and a Second Loan and Security Agreement, the Company entered into a debt exchange agreement whereby the Company issued Warrant “J” that entitles the warrant holder to purchase shares of Common Stock at a price of $0.03 per share in settlement of $4,970,990 of debt from the note under the Second Loan and Security Agreement. See Note 17 for further discussion of Warrant “J”.
During the three and nine months ended September 30, 2017, the Company did not record any interest expense related to the Second Loan and Security Agreements. The Company recorded $140,958 and $921,366, respectively during the three and nine months ended September 30, 2016 of interest expense related to the Second Loan and Security Agreements. The Company did not have any debt outstanding or accrued interest as of September 30, 2017 and December 31, 2016 related to the Second Loan and Security Agreements on its condensed consolidated balance sheets.
The Company accounts for the above agreements in accordance with ASC 470-10-25-2, which requires that cash received from an investor in exchange for the future payment of a specified percentage or amount of future revenue, shall be classified as debt.
Prints and Advertising Loan
During 2016, Dolphin Max Steel Holding, LLC, a Florida limited liability company (“Max Steel Holding”) and a wholly owned subsidiary of Dolphin Films, entered into a loan and security agreement (the “P&A Loan”) providing for up to $14,500,000 non-revolving credit facility that matures on August 25, 2017. Proceeds of the credit facility in the aggregate amount of $12,500,000 were used to pay a portion of the print and advertising expenses of the domestic distribution of Max Steel. To secure Max Steel Holding’s obligations under the P&A Loan, the Company granted to the lender a security interest in bank account funds totaling $1,250,000 pledged as collateral and recorded as restricted cash in the condensed consolidated balance sheet as of December 31, 2016, and rights to the assets of Max Steel Holdings. Repayment of the loan was intended to be made from revenues generated by Max Steel in the U.S. Max Steel did not generate sufficient funds to repay the loan prior to the maturity date. As a result, if the lender forecloses on the collateral securing the loan, the Company’s subsidiary will lose the copyright for Max Steel and, consequently, will no longer receive any revenues from the domestic distribution of Max Steel. In addition, the Company would impair the entire capitalized production costs of Max Steel included as an asset on its balance sheet, which as of September 30, 2017 was $1,933,219. The P&A Loan is also partially secured by a $4,500,000 corporate guaranty from a party associated with the film, of which Dolphin has backstopped $620,000. The lender had retained a reserve of $1,531,871 for loan fees and interest. Amounts borrowed under the credit facility accrue interest at either (i) a fluctuating per annum rate equal to the 5.5% plus a base rate or (ii) a per annum rate equal to 6.5% plus the LIBOR determined for the applicable interest period.
During the nine months ended September 30, 2017, the Company agreed to allow the lender to apply the balance held as restricted cash to the loan balance. On September 18, 2017, the party associated with the film paid the lender the guaranty of $4,500,000 and the Company recorded the $620,000 backstop in other current liabilities. As September 30, 2017 and December 31, 2016, the Company had an outstanding balance of $2,366,689 and $12,500,000, respectively, related to this agreement recorded on the condensed consolidated balance sheets. On its condensed consolidated statement of operations for the three and nine months ended September 30, 2017, the Company recorded (i) interest expense of $177,225 and $602,697, respectively, related to the P&A Loan and (ii) $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.
Production Service Agreement
During the year ended December 31, 2014, Dolphin Films entered into a financing agreement for the production of one of the Company’s feature films, Max Steel (the “Production Service Agreement”). The Production Service Agreement was for a total amount of $10,419,009 with the lender taking an $892,619 producer fee. The Production Service Agreement contained repayment milestones to be made during the year ended December 31, 2015, that if not met, accrued interest at a default rate of 8.5% per annum above the published base rate of HSBC Private Bank (UK) Limited until the maturity on January 31, 2016 or the release of the movie. Due to a delay in the release of Max Steel, the Company did not make the repayments as prescribed in the Production Service Agreement. As a result, the Company recorded accrued interest of $1,425,146 and $1,147,520, respectively, as of September 30, 2017 and December 31, 2016 in other currentnoncurrent liabilities on the Company’s condensed consolidated balance sheets. The loan was partially secured by international distribution agreements entered into by the Company prior to the commencement of principal photography and the receipt of tax incentives. As a condition to the Production Service Agreement, the Company acquired a completion guarantee from a bond company for the production of the motion picture. The funds for the loan were held by the bond company and disbursed as needed to complete the production in accordance with the approved production budget. The Company recorded debt as funds were transferred from the bond company for the production.
As of September 30, 2017, and December 31, 2016 the Company had outstanding balances of $2,697,157 and $6,243,069, respectively, related to this debt on its condensed consolidated balance sheets.
Line of Credit
The Company’s subsidiary, 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 and the Company is seeking to establish a new credit facility. The note bears interest at the prime rate of City National Bank plus 0.875% per annum and is payable monthly. Amounts outstanding under the note are secured by substantially all of 42West’s assets and are guaranteed by the Principal Sellers of 42West. The maximum amount that could be drawn on the line of credit was $1,750,000 prior to its expiration; however, upon maturity of the note the Company no longer has the ability to borrow additional amounts under the line of credit. Upon closing of the acquisition of 42West, the line of credit had a balance of $500,000. On April 27, 2017, the Company drew an additional $250,000 from the line of credit to be used for working capital. As a result, the balance as of September 30, 2017 was $750,000. As of the date of this filing, City National Bank has not called the outstanding principal of the revolving note; however, the Company has sufficient liquidity to satisfy all of its outstanding obligations under the revolving note in such event. Under the revolving note, an event of default will occur if we fail to pay any principal when due after five days’ notice and an opportunity to cure.
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 shall be payable immediately if 42West sells, assigns, transfers, or otherwise disposes all or substantially all of its assets and/or business prior to December 31, 2018. In connection with the Company’s acquisition of 42West, (note 4), payment of this redemption was accelerated, with $300,000 paid during April 2017, and the remaining $225,000 to be paid in January 2018. The outstanding balance at September 30, 2017 of $225,000 has been included in other current liabilities on the accompanying condensed consolidated balance sheet.
NOTE 9 — NOTES PAYABLE
Convertible Notes
2015 Convertible Debt
On December 7, 2015, the Company entered into a subscription agreement with an investor to sell up to $7,000,000 in convertible promissory notes of the Company. The promissory note would bear interest on the unpaid balance at a rate of 10% per annum, and became due and payable on December 7, 2016. The promissory note could have been prepaid at any time without a penalty. Pursuant to the subscription agreement, the Company issued a convertible note to the investor in the amount of $3,164,000. At any time prior to the maturity date, the investor had the right, at its option, to convert some or the entire convertible note into Common Stock. The convertible note had a conversion price of $10.00 per share. The outstanding principal amount and all accrued interest were mandatorily and automatically converted into Common Stock, at the conversion price, upon the average market price per share of Common Stock being greater than or equal to the conversion price for twenty trading days.
During the three months ended March 31, 2016, a triggering event occurred pursuant to the convertible note agreement. As such 316,400 shares of Common Stock were issued in satisfaction of the convertible note payable. For the nine months ended September 30, 2016, the Company recorded interest expense of $31,207 on its condensed consolidated statements of operations. No interest expense was recorded for the nine months ended September 30, 2017.
2017 Convertible Debt
On July 18, July 26, July 27, July 31, August 30, September 6, September 8 and September 22, 2017, the Company entered into subscription agreements pursuant to which it 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 from the date of issue, with the exception of one note in the amount of $75,000 which matures two years from the date of issue. The principal and any accrued interest of each of the convertible promissory notes are convertible by the respective holder at a price equal to either (i) the 90-trading day average price per share of common stock as of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as similarly defined in each of the convertible promissory notes) of common stock is made, 95% of the Public Offering Share price (as similarly defined in each of the convertible promissory notes).
Nonconvertible Notes
On September 20, 2017, the Company signed a promissory note in the amount of $150,000 with a maturity date of September 20, 2018. The promissory note bears interest at 10% per annum and may be repaid at any time without a penalty. The promissory note is held by an entity of which Allan Mayer, a director, shareholder and employee of the Company, is the trustee.
On June 14, 2017, the Company signed a promissory note in the amount of $400,000 with a two year term, expiring on June 14, 2019. The promissory note bears interest of 10% per annum and can be prepaid without a penalty after the initial six months.
On April 18, 2017, the Company signed a promissory note in the amount of $250,000 with an initial maturity date of October 18, 2017, bearing interest at 10% per annum. The maturity date of the promissory note has been extended to December 15, 2017 with an interest rate of 12%.
On April 10, 2017, the Company signed two promissory notes with an aggregate principal amount of $300,000 on substantially identical terms. Both promissory notes are held by one noteholder, and had an initial maturity date of October 10, 2017, bearing interest at 10% per annum. The maturity date of the promissory note has been extended to December 15, 2017 on substantially identical terms.
On July 5, 2012, the Company signed an unsecured promissory note in the amount of $300,000 bearing 10% interest per annum and payable on demand.
No principal payments were made on the promissory notes during the three and nine months ended September 30, 2017. The Company made interest payments in the aggregate amount of $26,459 and had a balance of $181,146 and $134,794 as of September 30, 2017 and December 31, 2016, respectively, of accrued interest recorded in other current liabilities in its condensed consolidated balance sheets related to these
unsecured nonconvertible promissory notes.
During the three and six months ended June 30, 2023, one unsecured nonconvertible promissory note amounting to $400,000 matured and was extended for an additional period of two years, now maturing on June 14, 2025.
The Company recorded interest expense related to these nonconvertible promissory notes of $153,468 and $23,393for the three and nine months ended June 30, 2023 and 2022, respectively, and $210,053 and $48,277 for the six months ended June 30, 2023 and 2022, respectively. The Company made interest payments of $127,211 and $50,249 during the six months ended June 30, 2023 and 2022, respectively, related to the nonconvertible promissory notes.
Nonconvertible unsecured promissory notes - Socialyte Promissory Note
As discussed in Note 4, as part of the Socialyte Purchase, the Company entered into the Socialyte Promissory Note amounting to $3,000,000. The Socialyte Promissory Note matures on September 30, 20172023 and is payable in two payments: $1,500,000 on June 30, 2023 and $1,500,000 on September 30, 2023. The Socialyte Promissory Note carries an interest of $41,9894% per annum, which accrues monthly, and $68,088, respectively,all accrued interest shall be due and $7,562payable on September 30, 2023.
The Socialyte Purchase Agreement allows the Company to offset a working capital deficit against the Socialyte Promissory Note. As such, on June 30, 2023, the Company deferred the payment of the first installment in the amount of $1,500,000 until the final post-closing working capital adjustment is agreed upon with the Socialyte Seller.
Credit and $22,521Security Agreement
In connection with the Socialyte Acquisition discussed in Note 4, Socialyte, with MidCo entered into a Credit and Security Agreement with BankProv (“Credit Agreement”), which includes a $3,000,000 secured term note (“Term Loan”) and $500,000 of a secured revolving line of credit (“Revolver”). The Credit Agreement carries an annual facility fee of $5,000 payable on the first anniversary of the Closing Date and of $875 on each one year anniversary thereafter.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Credit Agreement contains financial covenants that require the Socialyte to maintain: (1) a quarterly minimum debt service ratio of 1.25:1.00; (2) a quarterly senior funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 3.00:1.00 and (3) quarterly total funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 5.00:1.00, as well as the Company to maintain a minimum liquidity of $1,500,000. The Credit Agreement also contains covenants that limit Socialyte’s and MidCo’s ability to, among other things, grant liens, incur additional indebtedness, make acquisitions or investments, dispose of certain assets, change the nature of their businesses, enter into certain transactions with affiliates or amend the terms of material indebtedness.
Term Loan
The Term Loan has a term of five years, with a maturity date of November 14, 2027. The Company shall repay the Term Loan through 60 consecutive monthly payments of principal, based upon a straight-line amortization period of 84 months, based on the principal amount outstanding, plus interest at an annual rate of 7.37%, commencing on December 14, 2022, and continuing on the corresponding day of each month thereafter until it is paid in full. Any remaining unpaid principal balance, including accrued and unpaid interest and fees, if any shall be due and payable in full on November 14, 2027, its maturity date. Interest is calculated on the basis of actual days elapsed and a three hundred sixty (360) day year.
Interest on the Term Loan shall be payable on a monthly basis. Interest shall be computed on the basis of a three hundred sixty (360) day year, for the actual number of days elapsed. Default interest shall be charged in accordance with the terms of the Term Loan. During the six months ended June 30, 2023, the Company made a payment of $321,487, inclusive of $107,201 of interest. As of June 30, 2023, there was $2,658,140, net of debt origination fees, outstanding under the Term Loan.
Revolver
There is no amount drawn on the Revolver as of June 30, 2023 and no amounts were drawn during the three and ninesix months ended SeptemberJune 30, 2016, respectively, related to these promissory notes. As of September 30, 2017 and December 31, 2016,2023. When drawn, the Company had aoutstanding principal balance of $1,800,000 and $300,000, respectively, on its consolidated balance sheetsthe revolver shall accrue interest from the date of the draw of the greater of (i) 5.50% per annum, or (ii) the Prime Rate (as defined in current liabilities and $475,000 and $0, respectively, in noncurrent liabilities relating to these notes payable.
the Revolver) plus 0.75% per annum.
NOTE 109 — LOANS FROM RELATED PARTY
On December 31, 2011, theThe Company issued an unsecured revolving promissory note (the “DE Note”) to Dolphin Entertainment, LLC (“DE LLC,LLC”), an entity wholly owned by the Company’s CEO. The DE Note accrued interest atChief Executive Officer, William O’Dowd (the “CEO”), a ratepromissory note (the “DE LLC Note”) which matures on December 31, 2026.
As of 10% per annum. DE LLCboth June 30, 2023 and December 31, 2022, the Company had the right at any time to demand that all outstandinga principal balance of $1,107,873, and accrued interest be repaid with a ten-day noticeamounted to $221,574 and $166,637 as of June 30, 2023 and December 31, 2022, respectively. For both the Company. On March 4, 2016,six months ended June 30, 2023 and 2022, the Company entered into a subscription agreement (the “Subscription Agreement”) with DE LLC. Pursuant todid not repay any principal balance on the terms of the Subscription Agreement, the Company and DE LLC agreed to convert the $3,073,410 aggregate amount of principal and interest outstanding under the DE Note into 307,341 shares of Common Stock. Note.
The shares were converted at a price of $10.00 per share. On the date of the conversion that market price of the shares was $12.00 and as a result the Company recorded a loss on the extinguishment of the debt of $614,682 on the condensed consolidated statement of operations for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, the Company recorded interest expense inof $27,621 for both the amount of $32,008 on its condensed consolidated statement of operations.
In addition, DE LLC has previously advanced funds for working capital to Dolphin Films. During the year ended December 31, 2015, Dolphin Films agreed to enter into second Loan and Security Agreements with certain of DE LLC’s debtholders, pursuant to which the debtholders exchanged their DE Notes for notes issued by Dolphin Films totaling $8,774,327. See note 8 for more details. The amount of debt assumed by Dolphin Films was applied against amounts owed to DE LLC by Dolphin Films. During 2016, Dolphin Films entered into a promissory note with DE LLC (the “New DE Note”) in the principal amount of $1,009,624. The New DE Note is payable on demand and bears interest at 10% per annum. During the ninethree months ended SeptemberJune 30, 2017,2023 and 2022, and $54,938 for both the Company agreed to include certain script costs and other payables totaling $594,315 that were owed to DE LLC as part of the New DE Note. During the ninesix months ended SeptemberJune 30, 2017, the Company received proceeds2023 and 2022, respectively, related to this loan from related party. The Company did not make cash payments during both the New DE Note from DE LLC in the amount of $1,388,000 and repaid DE LLC $681,773. As of September 30, 2017, and December 31, 2016, Dolphin Films owed DE LLC $1,734,867 and $684,326, respectively, that was recorded on the condensed consolidated balance sheets. Dolphin Films recorded interest expense of $45,055 and $112,473 for the three and ninesix months ended SeptemberJune 30, 2017.
As discussed in Note 9, the Company signed a promissory note2023 and received $150,0002022, related to this loan from an entity, of which Allan Mayer, director, shareholder and employee of the Company, is the trustee.
related party.NOTE 1110 — FAIR VALUE MEASUREMENTS
Warrants
During 2016, the Company issued Series G, H, I, J and K Common Stock warrants (the “Warrants”) for which the Company determined that the Warrants should be accounted for as derivatives (see Note 17), for which a liability is recorded in the aggregate andThe Company’s non-financial assets measured at fair value inon a nonrecurring basis include goodwill and intangible assets. The determination of our intangible fair values includes several assumptions and inputs (Level 3) that are subject to various risks and uncertainties. Management believes it has made reasonable estimates and judgments concerning these risks and uncertainties. All other financial assets and liabilities are carried at amortized cost.
The Company’s cash balances are representative of their fair values, as these balances are comprised of deposits available on demand. The carrying amounts of accounts receivable, notes receivable, prepaid and other current assets, accounts payable and other non-current liabilities approximate their fair values because of the short turnover of these instruments.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Disclosures about Fair Value of Financial Instruments
The tables below set forth information related to the Company’s consolidated balance sheetsfinancial instruments:
| Schedule of consolidated financial instruments | | | | | | | | | | | | | | | |
| | | Level in | | | June 30, 2023 | | | December 31, 2022 | |
| | | Fair Value | | | Carrying | | | Fair | | | Carrying | | | Fair | |
| | | Hierarchy | | | Amount | | | Value | | | Amount | | | Value | |
| Assets: | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | 1 | | | $ | 7,001,403 | | | $ | 7,001,403 | | | $ | 6,069,889 | | | $ | 6,069,889 | |
| Restricted cash | | 1 | | | | 1,127,960 | | | | 1,127,960 | | | | 1,127,960 | | | | 1,127,960 | |
| | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | |
| Convertible notes payable | | 3 | | | $ | 5,150,000 | | | $ | 4,780,000 | | | $ | 5,050,000 | | | $ | 4,865,000 | |
| Convertible note payable at fair value | | 3 | | | | 350,000 | | | | 350,000 | | | | 343,556 | | | | 343,556 | |
| Warrant liability | | 3 | | | | 10,000 | | | | 10,000 | | | | 15,000 | | | | 15,000 | |
| Contingent consideration | | 3 | | | | — | | | | — | | | | 738,821 | | | | 738,821 | |
Convertible notes payable
As of June 30, 2023, the Company has eleven outstanding convertible notes payable with aggregate principal amount of $5,150,000. See Note 8 for further information on the terms of these convertible notes.
| Schedule of convertible notes payable | | | | | | | | | | | | | | | |
| | | | | | June 30, 2023 | | | December 31, 2022 | |
| | | Level | | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| | | | | | | | | | | | | | | | |
| 10% convertible notes due in October 2024 | | 3 | | | $ | 800,000 | | | $ | 806,000 | | | $ | 800,000 | | | $ | 817,000 | |
| 10% convertible notes due in November 2024 | | 3 | | | | — | | | | — | | | | 500,000 | | | $ | 513,000 | |
| 10% convertible notes due in December 2024 | | 3 | | | | 500,000 | | | | 499,000 | | | | 900,000 | | | $ | 912,000 | |
| 10% convertible notes due in January 2025 | | 3 | | | | 800,000 | | | | 806,000 | | | | — | | | $ | — | |
| 10% convertible notes due in November 2026 | | 3 | | | | 300,000 | | | | 277,000 | | | | 300,000 | | | $ | 285,000 | |
| 10% convertible notes due in December 2026 | | 3 | | | | 150,000 | | | | 138,000 | | | | 150,000 | | | $ | 143,000 | |
| 10% convertible notes due in June 2027 | | 3 | | | | 200,000 | | | | 179,000 | | | | — | | | | — | |
| 10% convertible notes due in August 2027 | | 3 | | | | 2,000,000 | | | | 1,735,000 | | | | 2,000,000 | | | $ | 1,834,000 | |
| 10% convertible notes due in September 2027 | | 3 | | | | 400,000 | | | | 340,000 | | | | 400,000 | | | $ | 361,000 | |
| | | | | | $ | 5,150,000 | | | $ | 4,780,000 | | | $ | 5,050,000 | | | $ | 4,865,000 | |
The estimated fair value of the convertible notes was computed using a Monte Carlo Simulation, using the following assumptions:
| Schedule of estimated fair value | | | | | | |
| Fair Value Assumption – Convertible Debt | | June 30, 2023 | | | December 31, 2022 | |
| Stock Price | $ | 1.72 | | $ | 1.81 | |
| Minimum Conversion Price | $ | 2.00 - 2.50 | | $ | 2.00 - 2.50 | |
| Annual Asset Volatility Estimate | | 100 | % | | 100 | % |
| Risk Free Discount Rate (based on U.S. government treasury obligation with a term similar to that of the convertible note) | | 4.27% - 5.26 | % | | 4.02% - 4.49 | % |
Fair Value Option (“FVO”) Election – Convertible note payable and freestanding warrants
Convertible note payable, at fair value
As of June 30, 2023, the Company has one outstanding convertible note payable with a face value of $500,000 (the “March 4th Note”), which is accounted for under the Accounting Standards Codification (“ASC”) 825-10-15-4 FVO election. Under the FVO election, the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis andat each reporting period date. The estimated fair value adjustment is presented as a single line item within other (expenses) income in the changeaccompanying condensed consolidated statements of operations under the caption “Change in fair value of convertible notes.”
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The March 4th Note is measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from one reporting periodDecember 31, 2022 to June 30, 2023:
| Schedule of fair value categorized within level 3 | | March 4th Note | |
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2022 | | $ | 343,556 | |
| Loss on the change in fair value reported in the condensed consolidated statements of operations | | | 6,444 | |
| Ending fair value balance reported on the condensed consolidated balance sheet at June 30, 2023 | | $ | 350,000 | |
The estimated fair value of the nextMarch 4th Note as of June 30, 2023 and December 31, 2022, was computed using a Black-Scholes simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:
| Schedule of estimated fair value | | | | | | |
| | | June 30, 2023 | | | December 31, 2022 | |
| Face value principal payable | | $ | 500,000 | | | $ | 500,000 | |
| Original conversion price | | $ | 3.91 | | | $ | 3.91 | |
| Value of common stock | | $ | 1.72 | | | $ | 1.81 | |
| Expected term (years) | | | 6.68 | | | | 7.18 | |
| Volatility | | | 100 | % | | | 100 | % |
| Risk free rate | | | 4.00 | % | | | 3.96 | % |
Warrants
In connection with the March 4th Note, the Company issued the Series I Warrants. The Series I Warrants are measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is reported as income or expense ina reconciliation of the consolidated statementsfair values from December 31, 2022 to June 30, 2023:
| Schedule of fair value categorized within level 3 | | | |
| Fair Value: | | Series I | |
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2022 | | $ | 15,000 | |
| Gain on the change in fair value reported in the condensed consolidated statements of operations | | | 5,000 | |
| Ending fair value balance reported on the condensed consolidated balance sheet at June 30, 2023 | | $ | 10,000 | |
The estimated fair value of operations. On March 31, 2017,the Series “I” Warrants J and K were exercised.
was computed using a Black-Scholes valuation model, using the following assumptions:| Schedule of estimated fair value | | | | | | |
| Fair Value Assumption - Series “I” Warrants | | June 30, 2023 | | | December 31, 2022 | |
| Exercise Price per share | | $ | 3.91 | | | $ | 3.91 | |
| Value of common stock | | $ | 1.72 | | | $ | 1.81 | |
| Expected term (years) | | | 2.17 | | | | 2.67 | |
| Volatility | | | 80 | % | | | 100 | % |
| Dividend yield | | | 0 | % | | | 0 | % |
| Risk free rate | | | 4.80 | % | | | 4.28 | % |
Contingent consideration
The Company records the fair value of the contingent consideration liability in the condensed consolidated balance sheets under the caption “Warrant liability”“Contingent consideration” and records changes to the liability against earnings or loss under the caption “Changes“Change in fair value of warrant liability”contingent consideration” in the condensed consolidated statements of operations. The carrying amount at fair valueAs of June 30, 2023, the aggregate liability for the Warrants recorded on the condensed consolidated balance sheet at September 30, 2017 and December 31, 2016 is $2,774,583 and $20,405,190. DueCompany had paid off all contingent consideration related to the change in the fair valueacquisition of the Warrant Liability for the period in which the Warrants were outstanding during the three and nine months ended September 30, 2017, the Company recorded a gain on the change in fair value of the warrant liability of $1,396,094 and $7,685,607, respectively, for the three and nine months ended September 30, 2017, in the condensed consolidated statement of operations.
The Warrants outstanding at September 30, 2017 have the following terms:
| | Issuance Date | | | | Expiration Date |
| Series G Warrants | | November 4, 2016 | 750,000 | $9.22 | 4 | January 31, 2018 |
| Series H Warrants | | November 4, 2016 | 250,000 | $9.22 | 16 | January 31, 2019 |
| Series I Warrants | | November 4, 2016 | 250,000 | $9.22 | 28 | January 31, 2020 |
The Warrants have an adjustable exercise price due to a full ratchet down round provision, which would result in a downward adjustment to the exercise price in the event the Company completes a financing in which the price per share of the financing is lower than the exercise price of the Warrants in effect immediately prior to the financing.
Due to the existence of the full ratchet down round provision, which creates a path-dependent nature of the exercise prices of the Warrants, the Company concluded it is necessary to measure the fair value of the Warrants using a Monte Carlo Simulation model, which incorporates inputs classified as “level 3” according to the fair value hierarchy in ASC 820, Fair Value. In general, level 3 assumptions utilize unobservable inputs that are supported by little or no market activity in the subject instrument and that are significant to the fair value of the liabilities. The unobservable inputs the Company utilizes for measuring the fair value of the Warrant liability reflects management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.
The Company determined the fair values of the Warrants by using the following key inputs to the Monte Carlo Simulation model at September 30, 2017:
| | |
| Inputs | | | |
Volatility (1) | 71.2% | 67.0% | 76.3% |
| Expected term (years) | 0.33 | 1.33 | 2.33 |
| Risk free interest rate | 1.107% | 1.363% | 1.520% |
| Common stock price | $8.40 | $8.40 | $8.44 |
| Exercise price | $9.22 | $9.22 | $9.22 |
(1)“Level 3” input.
The stock volatility assumption represents the range of the volatility curves used in the valuation analysis that the Company has determined market participants would use based on comparison with similar entities. The risk-free interest rate is interpolated where appropriate, and is based on treasury yields. The valuation model also included a level 3 assumption as to dates of potential future financings by the Company that may cause a reset of the exercise price.
Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s income or loss will reflect the volatility in changes to these estimates and assumptions. The fair value is most sensitive to changes at each valuation date in the Company’s Common Stock price, the volatility rate assumption, and the exercise price, which could change if the Company were to do a dilutive future financing.
Be Social.For the Warrants,contingent consideration, which is measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 20162022 to SeptemberJune 30, 2017:
2023:| Schedule of reconciliation of the fair values | | | |
| | | Be Social | |
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2022 | | $ | 738,821 | |
| Loss on change of fair value reported in the condensed consolidated statements of operations | | | 33,226 | |
| Settlement of contingent consideration(1) | | | (772,047 | ) |
| Ending fair value balance reported in the condensed consolidated balance sheet at June 30, 2023 | | $ | — | |
| (1) | On April 25, 2023, the Company settled the contingent consideration liability related to Be Social through payment of $500,000 in cash and 148,687 shares of the Company’s common stock, with a value of $272,047. |
| | | | |
| Beginning fair value balance reported in the consolidated balance sheet at December 31, 2016 | $6,393,936 | $14,011,254 | $20,405,190 |
| Change in fair value (gain) reported in the statements of operations | (3,619,353) | (4,066,254) | (7,685,607) |
| Exercise of “J” and “K�� Warrants | — | (9,945,000) | (9,945,000) |
| Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2017 | $2,774,583 | $— | $2,774,583 |
Put Rights
In connection with the 42West Acquisition (note 4), on March 30, 2017, the Company entered into Put Agreements with each of the Sellers. Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Company has granted the Sellers the right, but not obligation, to cause the Company to purchase up to an aggregate of 1,187,094 of their shares of Common Stock received as Stock Consideration for a purchase price equal to $9.22 per share during certain specified exercise periods set forth in the Put Agreements up until December 2020 (the “Put Rights”). During the nine months ended September 30, 2017, the Sellers, in accordance with the Put Agreements, caused the Company to purchase 116,591 shares of Common Stock for an aggregate amount of $1,075,000.
The Company records the fair value of the liability in the condensed consolidated balance sheets under the caption “Put Rights” and records changes to the liability against earnings or loss under the caption “Changes in fair value of put rights and contingent consideration” in the condensed consolidated statements of operations. The fair value of the Put Rights on the date of acquisition was $3,800,000. The carrying amount at fair value of the aggregate liability for the Put Rights recorded on the condensed consolidated balance sheet at September 30, 2017 is $3,700,000. Due to the change in the fair value of the Put Rights for the period in which the Put Rights were outstanding during the three and nine months ended September 30, 2017, the Company recorded a gain on the put rights of $200,000 and $100,000, respectively, in the condensed consolidated statement of operations. The Company measured the fair value of the Put Rights as of the date of the acquisition.
The Company utilized the Black-Scholes Option Pricing Model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Put Rights reflect management’s own assumptions about the assumptions that market participants would use in valuing the Put Rights as of the acquisition date and September 30, 2017.
The Company determined the fair value by using the following key inputs to the Black-Scholes Option Pricing Model:
| On the date of Acquisition (March 30, 2017) | |
| Equity Volatility estimate | 75% | 82.5% |
Discount rate based on US Treasury obligations
| 0.12%-1.70% | 1.04%-1.62% |
For the Put Rights, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from the date of acquisition (March 30, 2017) to September 30, 2017:
Beginning fair value balance on the Acquisition Date (March 30, 2017) | $3,800,000
|
Change in fair value (loss) reported in the statements of operations | (100,000)
|
Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2017 | $3,700,000
|
Contingent Consideration
In connection with the 42West acquisition (note 4), the Sellers have the potential to earn up to $9,333,333 (1,727,551 shares of Common Stock) on achievement of adjusted EBITDA targets based on the operations of 42West over the three-year period beginning January 1, 2017 (the “Contingent Consideration”).
The Company records the fair value of the liability in the condensed consolidated balance sheets under the caption “Contingent Consideration” and records changes to the liability against earnings or loss under the caption “Changes in fair value of put rights and contingent consideration” in the condensed consolidated statements of operations. The fair value of the Contingent Consideration on the date of acquisition was $3,627,000. The carrying amount at fair value of the aggregate liability for the Contingent Consideration recorded on the condensed consolidated balance sheet at September 30, 2017 is $3,973,000. Due to the change in the fair value of the Contingent Consideration for the period in which the Contingent Consideration was outstanding during the three and nine months ended September 30, 2017, the Company recorded a loss on the contingent consideration of $230,000 and $346,000, respectively in the condensed consolidated statement of operations. The Company measured the fair value of the Contingent Consideration as of the date of the acquisition.
The Company utilized a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Contingent Consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the Contingent Consideration as of the acquisition date.
The Company determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:
| Inputs | On the date of Acquisition (March 30, 2017) | |
| Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration) | 1.03%-1.55% | 1.31% -1.62% |
| Annual Asset Volatility Estimate | 72.5% | 80% |
| Estimated EBITDA | $3,600,000- $3,900,000 | $3,600,000- $3,900,000 |
For the Contingent Consideration, which measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from the date of acquisition (March 30, 2017) to September 30, 2017:
Beginning fair value balance on the Acquisition Date (March 30, 2017) | $3,627,000
|
Change in fair value reported in the statements of operations | 346,000
|
Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2017 | $3,973,000
|
There were no assets or liabilities carried at fair value on a recurring basis at September 30, 2016.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1211 — LICENSING AGREEMENT - RELATED PARTY
During 2008,STOCKHOLDERS’ EQUITY2021 Lincoln Park Transaction
On December 29, 2021, the Company entered into a ten-year licensingpurchase agreement (the “LP 2021 Purchase Agreement”) and a registration rights agreement (the “LP 2021 Registration Rights Agreement”) with DELincoln Park Capital Fund, LLC a related party. Under the license,(“Lincoln Park”), pursuant to which Lincoln Park agreed to purchase from the Company is authorizedup to use DE LLC’s brand properties in connection with$25,000,000 of the creation, promotion and operationCompany’s common stock (subject to certain limitations) from time to time during the term of subscription based Internet social networking websites for children and young adults. The license requires thatthe LP 2021 Purchase Agreement. Pursuant to the terms of the LP 2021 Purchase Agreement, at the time the Company pays to DE LLC royalties atsigned the rate of fifteen percent of net sales from performanceLP 2021 Purchase Agreement and the LP 2021 Registration Rights Agreement, the Company issued 51,827 shares of the licensed activities. The Company did not use anyCompany’s common stock to Lincoln Park as consideration for its commitment (“2021 LP commitment shares”) to purchase shares of the brand properties relatedCompany’s common stock under the LP 2021 Purchase Agreement. Pursuant to this agreement and as such, there was no royalty expense forthe LP 2021 Purchase Agreement, the Company issued an additional 37,019 LP commitment shares on March 7, 2022.
During the three and ninesix months ended SeptemberJune 30, 2017 and 2016.
NOTE 13 — DEFERRED REVENUE
During2022, excluding the year ended December 31, 2014,additional commitment shares disclosed above, the Company entered into agreements with various entities for the international distribution rights of a motion picture that was in production. As required by the distribution agreements, the Company received $1,418,368 of deposits for these rights that was recorded as deferred revenue on its condensed consolidated balance sheet. During the year ended December 31, 2016, the Company delivered the motion picture to various international distributorssold 450,000 and recorded $1,371,687 of revenue from production from these deposits. As of September 30, 2017 and December 31, 2016, respectively, the Company has a balance of $20,303 and $46,681 as deferred revenue on its condensed consolidated balance sheets.
NOTE 14 — VARIABLE INTEREST ENTITIES
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses or the right to receive the residual returns of the entity. The most common type of VIE is a special-purpose entity (“SPE”). SPEs are commonly used in securitization transactions in order to isolate certain assets, and distribute the cash flows from those assets to investors. The legal documents that govern the transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and other parties that have rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPE’s, assets by creditors of other entities, including the creditors of the seller of the assets.
The primary beneficiary of a VIE is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities.
To assess whether the Company has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and derivative or other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.
The Company performs ongoing reassessments of (1) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain triggering events, and therefore would be subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding the Company’s involvement with a VIE cause the Company’s consolidation conclusion to change. The consolidation status of the VIEs with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively with assets and liabilities of a newly consolidated VIE initially recorded at fair value unless the VIE is an entity which was previously under common control, which in that case is consolidated based historical cost. A gain or loss may be recognized upon deconsolidation of a VIE depending on the carrying amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
The Company evaluated certain entities of which it did not have a majority voting interest and determined that it had (1) the power to direct the activities of the entities that most significantly impact their economic performance and (2) had the obligation to absorb losses or the right to receive benefits from these entities. As such the financial statements of Max Steel Productions, LLC and JB Believe, LLC are consolidated in the balance sheets as of September 30, 2017 and December 31, 2016, and in the statements of operations and statements of cash flows presented herein for the three and nine months ended September 30, 2017 and 2016. These entities were previously under common control and have been accounted for at historical costs for all periods presented.
Following is summary financial information for the VIE’s:
| | Max Steel Productions LLC | |
| (in USD) | As of and for the nine months ended September 30, 2017 | As of and for the three months ended September 30, 2017 | | As of and for the nine months ended September 30, 2016 | As of and for the three months ended September 30, 2016 | As of and for the nine months ended September 30, 2017 | As of and for the three months ended September 30, 2017 | | As of and for the nine months ended September 30, 2016 | As of and for the three months ended September 30, 2016 |
| Assets | 9,597,807 | 9,597,807 | 12,327,887 | n/a | n/a | — | — | 240,269 | n/a | n/a |
| Liabilities | (12,578,388) | (12,578,411) | (15,922,552) | n/a | n/a | (6,752,271) | (6,752,271) | (7,014,098) | n/a | n/a |
| Revenues | 4,572,665 | 1,398,839 | n/a | 1,140,000 | 1,140,000 | 53,136 | — | n/a | 3,786 | — |
| Expenses | (3,958,581) | (575,366) | n/a | (2,253,056) | (1,711,325) | (31,578) | (27,786) | n/a | (392,416) | (131,825) |
NOTE 15 — STOCKHOLDERS’ EQUITY (DEFICIT)
The Company’s Amended and Restated Articles of Incorporation authorize the issuance of 10,000,000 shares of preferred stock. The Board of Directors has the power to designate the rights and preferences of the preferred stock and issue the preferred stock in one or more series.
On February 23, 2016, the Company amended its Articles of Incorporation to designate 1,000,000 preferred shares as “Series C Convertible Preferred Stock” with a $0.001 par value which may be issued only to an “Eligible Series C Preferred Stock Holder”. On May 9, 2017, the Board of Directors of the Company approved the amendment of the Company’s articles of incorporation to reduce the designation of Series C Convertible Preferred Stock to 50,000 shares with a $0.001 par value. The amendment was approved by the Company’s shareholders on June 29, 2017 and the Company filed Amended and Restated Articles of Incorporation with the State of Florida (‘the Second Amended and Restated Articles of Incorporation”) on July 6, 2017. Pursuant to the Second Amended and Restated Articles of Incorporation, each share of Series C Convertible Preferred Stock will be convertible into one share of common stock (one half of a share post-split), subject to adjustment for each issuance of common stock (but not upon issuance of common stock equivalents) that occurred, or occurs, from the date of issuance of the Series C Convertible Preferred Stock (the “issue date”) until the fifth (5th) anniversary of the issue date (i) upon the conversion or exercise of any instrument issued on the issued date or thereafter issued (but not upon the conversion of the Series C Convertible Preferred Stock), (ii) upon the exchange of debt for1,035,000 shares of common stock, or (iii) in a private placement, such that the total number of shares of common stock held by an “Eligible Class C Preferred Stock Holder” (based on the number of shares of common stock held as of the date of issuance) will be preservedrespectively, at the same percentage of shares of common stock outstanding held by such Eligible Class C Preferred Stock Holder on such date. An Eligible Class C Preferred Stock Holder means any of (i) DE LLC for so long as Mr. O’Dowd continues to beneficially own at least 90%prices ranging between $3.47 and serves on the board of directors or other governing entity, (ii) any other entity in which Mr. O’Dowd beneficially owns more than 90%, or a trust for the benefit of others, for which Mr. O’Dowd serves as trustee and (iii) Mr. O’Dowd individually. Series C Convertible Preferred Stock will only be convertible by the Eligible Class C Preferred Stock Holder upon the Company satisfying one of the “optional conversion thresholds”. Specifically, a majority of the independent directors of the Board, in its sole discretion, must have determined that the Company accomplished any of the following (i) EBITDA of more than $3.0 million in any calendar year, (ii) production of two feature films, (iii) production and distribution of at least three web series, (iv) theatrical distribution in the United States of one feature film, or (v) any combination thereof that is subsequently approved by a majority of the independent directors of the Board based on the strategic plan approved by the Board. While certain events may have occurred that could be deemed to have satisfied this criteria, the independent directors of the Board have not yet determined that an optional conversion threshold has occurred. Except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred. Only upon such determination, will the Series C Convertible Preferred Stock be entitled or permitted to vote on all matters required or permitted to be voted on by the holders of common stock and will be entitled to that number of votes equal to three votes for the number of Conversion Shares (as defined in the Certificate of Designation) into which such Holder’s shares of the Series C Convertible Preferred Stock could then be converted.
The Certificate of Designation also provides for a liquidation value of $0.001 per share and dividend rights of the Series C Convertible Preferred Stock on parity with the Company’s Common Stock.
Effective July 6, 2017, the Company amended its Articles of Incorporation to among other things cancel previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock.
The Company’s Articles of Incorporation previously authorized the issuance of 200,000,000 shares of Common Stock. 250,000 shares had been designated for the 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”). Shares issuable under the 2012 Plan were not registered$5.15 pursuant to
a registration statement on Form S-8the LP 2021 Purchase Agreement and
consequently, no awards were granted under the 2012 Plan. On June 29, 2017, the shareholdersreceived proceeds of
the Company approved the 2017 Plan that replaced the 2012 Plan. $1,852,290 and $4,367,640, respectively.The LP 2021 Purchase Agreement was terminated effective August 12, 2022.
2022 Lincoln Park Transaction
On August 7, 2017, the Company filed a registration statement on Form S-8 to register 1,000,000 shares of Common Stock issuable under the Plan. As of September 30, 2017, 59,320 shares of restricted stock were issued under the 2017 Plan. The shares of restricted stock were issued on August 21, 2017 and have a vesting period of six months (February 21, 2018). Employees that received the awards must remain employed by the Company until the vesting date or they risk the forfeiture of the award.
Effective February 23, 2016, the Company amended its Amended Articles of Incorporation to increase the number of authorized shares of its Common Stock from 200,000,000 to 400,000,000. Effective September 14, 2017, the Company amended its Amended and Restated Articles of Incorporation to effectuate a 1:2 reverse stock split. As a result, the number of authorized shares of Common Stock was reduced from 400,000,000 to 200,000,000 shares.
On February 16, 2017,10, 2022, the Company entered into a
subscriptionnew purchase agreement
(the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park, pursuant to which the Company
issuedcould sell and
soldissue to
an investorLincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of the Company’s common stock from time to time over a 36-month period.The Company may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of Common Stock atits common stock on any business day (a “Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances up to 75,000 shares if the closing price ofis not below $7.50 and up to 100,000 shares if the closing price is not below $10.00, per share. This transaction provided $500,000 in proceedsthat Lincoln Park’s committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the Company.
On March 30, 2017,event we purchase the Company entered intofull amount allowed for a Membership InterestRegular Purchase Agreement to acquire a 100% membership interest in 42West. The Company issued 615,140 shares of Common Stock at a price of $9.22 per share related to this transaction. See note 4 for further details on the acquisition.
On March 30, 2017, KCF Investments LLC and BBCF 2011 LLC exercised Warrants J and Kany given business day, we may also direct Lincoln Park to purchase 1,085,000additional amounts as accelerated and 85,000, respectively,additional accelerated purchases. The purchase price of shares of Common Stock at a purchase price of $0.03 per share. This transaction provided $35,100 in proceeds for the Company. See note 17 for further discussion.
On March 30, 2017, the Principal Sellers of 42West, exercised put options in the aggregate amount of 43,381 shares of Common Stock and were paid an aggregate total of $400,000 on April 10, 2017.
On April 13, 2017, the Company issued the following shares of Common Stock as per the 42West Acquisition agreement; (i) 172,275 to certain designated employees and (ii) 50,000 shares as an estimate for the Purchase Consideration withheld on the date of closingCompany’s common stock related to the working capital.
On April 13, 2017,future funding will be based on the Company issued 3,254then prevailing market prices of such shares at the time of Common Stock to a consultant for services rendered during the month ended March 31, 2017. The shares were issued at a purchase price of $9.22 per share.
On April 13, 2017, T Squared partially exercised Class E Warrants and acquired 162,885 shares of our common stock pursuant to the cashless exercise provisionsales as described in the related warrant agreement. T Squared had previously paid down $1,675,000 for these shares.
On May 5, 2017, the Principal Sellers of 42West exercised put options in the aggregate amount of 32,538 shares of Common Stock and were paid an aggregate total of $300,000 on June 2, 2017.
On June 22, 2017, one of the Principal Sellers of 42West exercised a put option for 8,134 shares of Common Stock and was paid $75,000 on July 10, 2017.
On August 2, 2017, the Company issued 2,886 shares of Common StockLP 2022 Purchase Agreement.Pursuant to a consultant for services rendered during the second quarter of 2017. The shares were issued at a purchase price of $10.00 per share.
On August 12 and August 15, 2017 the Principal Sellers of 42West exercised put options in the aggregate amount of 32,538 shares of Common Stock and were paid an aggregate total of $300,000 on September 1, 2017.
On August 21, 2017, the Company issued 59,320 shares of restricted stock to certain employees pursuant to the 2017 Plan (see further discussion of the 2017 Plan above).
On September 19 and September 20, 2017, two of the Principal Sellers of 42West exercised put options in the aggregate amount of 16,268 shares of Common Stock and were paid an aggregate of $150,000 on October 10, 2017.
As of September 30, 2017, and December 31, 2016, the Company had 9,367,057 and 7,197,761 shares of Common Stock issued and outstanding, respectively.
C.
Noncontrolling Interest
On May 21, 2012, the Company entered into an agreement with a note holder to form Dolphin Kids Clubs, LLC (“Dolphin Kids Clubs”). Under the terms of the
agreement, Dolphin converted an aggregate amount of $1,500,000 in notes payable and received an additional $1,500,000 duringLP 2022 Purchase Agreement, at the
year ended December 31, 2012 for a 25% membership interest in the newly formed entity. The Company holds the remaining 75% and thus controlling interest in Dolphin Kids Clubs. The purpose of Dolphin Kids Clubs is to create and operate online kids clubs for selected charitable, educational and civic organizations. The agreement encompasses kids clubs created between January 1, 2012 and December 31, 2016. It was a “gross revenue agreement” andtime the Company
was responsible for paying all associated operating expenses. On December 29, 2016, as part of a global agreement withsigned the
25% member of Dolphin Kids Clubs, the Company entered into aLP 2022 Purchase Agreement and
acquired the
25% noncontrolling interest of Dolphin Kids Clubs. In exchange for the 25% interest,LP 2022 Registration Rights Agreement, the Company issued
Warrant “J”57,313 shares of its common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of its common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period expense and included within selling, general and administrative expenses in the consolidated statements of operations.During the three and six months ended June 30, 2023, the Company sold 600,000 and 850,000 shares of its common stock, respectively, at prices ranging between $1.65 and $2.27 pursuant to the LP 2022 Purchase Agreement and received proceeds of $1,081,850 and $1,611,300, respectively. Subsequent to June 30, 2023, the Company sold 300,000 shares of its common stock at prices ranging between $1.70 and $1.98 pursuant to the LP 2022 Purchase Agreement and received proceeds of $550,850.
The Company evaluated the contract that entitlesincludes the warrant holderright to require Lincoln Park to purchase shares of its common stock in the future (“put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it has insignificant value as of June 30, 2023.
NOTE 12 — SHARE-BASED COMPENSATION
Shares issued related to employment agreements
Pursuant to the employment agreement between the Company and Mr. Anthony Francisco, he is entitled to receive share awards amounting to $25,000 at each of certain dates in 2023 and 2024, in the aggregate amounting to $100,000. Relating to this agreement, on January 11, 2023, the Company issued to Mr. Francisco 6,366 shares of common stock at a price of $0.03$2.24 per share, the 30-day trailing closing sale price for the common stock on the date the shares were issued. On July 28, 2023, the Company issued to Mr. Francisco 7,966 shares of common stock at a price of $2.01 per share. See notes 11
During the three and 17 for further discussionsix months ended June 30, 2023, the Company paid the salary of Warrant “J”.certain employees at one if its subsidiaries in fully vested shares of the Company’s common stock. During the three and six months ended June 30, 2023, the Company issued an aggregate of 45,245 and 75,551 shares, respectively, amounting to $90,559 and $150,930, respectively, in the aggregate on different dates though the six months ended June 30, 2023, following the normal payroll cycle.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1613 — EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income (loss) earnings per share:
| Three months ended September 30, | Nine months ended September 30, |
| | | | |
| Numerator: | | | | |
| Net income (loss) | $6,172,578 | $(11,540,729) | $9,575,304 | $(22,799,765) |
| Preferred stock deemed dividend | — | — | — | (5,227,247) |
| Numerator for basic income (loss) per share | 6,172,578 | (11,540,729) | 9,575,304 | (28,027,012) |
Change in fair value of Warrants “J” and “K” (note 11) | (1,396,094) | — | (7,685,607) | — |
| Change in fair value of Put rights | (200,000) | — | — | — |
| Numerator for diluted income (loss) per share | $4,576,484 | $(11,540,729) | $1,889,697
| $(28,027,012) |
| Denominator: | | | | |
| Denominator for basic EPS — weighted–average shares | 9,336,826 | 5,337,108 | 8,640,543 | 3,801,626 |
| Effect of dilutive securities: | | | | |
| Warrants | 3,704 | — | 501,918 | — |
Employee nonvested stock awards | 25,556 | — | 8,612 | — |
Shares issuable in January 2018 in connection with the 42West acquisition (Note 4) | 980,911 | — | 328,767 | — |
| Put rights in connection with the 42West acquisition (Note 4) | 35,821
| — | — | — |
| Denominator for diluted EPS — adjusted weighted-average shares assuming exercise of warrants | 10,382,818
| 5,337,108 | 9,479,840 | 3,801,626 |
| Basic income (loss) per share | $0.66 | $(2.16) | $1.11 | $(7.37) |
| Diluted Income (loss) per share | $0.44
| $(2.16) | $0.20 | $(7.37) |
| Schedule of basic and diluted income (loss) per share | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Numerator | | | | | | | | | | | | |
| Net (loss) income | | $ | (7,959,244 | ) | | $ | 178,687 | | | $ | (10,928,564 | ) | | $ | (1,539,145 | ) |
| Net income attributable to participating securities | | | — | | | | 3,647 | | | | — | | | | — | |
| Net (loss) income attributable to Dolphin Entertainment common stock shareholders and numerator for basic (loss) earnings per share | | | (7,959,244 | ) | | | 175,040 | | | | (10,928,564 | ) | | | (1,539,145 | ) |
| Undistributed earnings for the three months ended June 30, 2022 attributable to participating securities | | | — | | | | 3,647 | | | | — | | | | — | |
| Change in fair value of convertible notes payable | | | — | | | | (244,022 | ) | | | — | | | | (531,880 | ) |
| Change in fair value of warrants | | | — | | | | — | | | | — | | | | (95,000 | ) |
| Interest expense | | | — | | | | 9,863 | | | | — | | | | 19,726 | |
| Numerator for diluted loss per share | | $ | (7,959,244 | ) | | $ | (55,472 | ) | | $ | (10,928,564 | ) | | $ | (2,146,299 | ) |
| | | | | | | | | | | | | | | | | |
| Denominator | | | | | | | | | | | | | | | | |
| Denominator for basic EPS - weighted-average shares | | | 13,212,311 | | | | 9,498,266 | | | | 12,926,273 | | | | 9,113,252 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | |
| Warrants | | | — | | | | — | | | | — | | | | 2,555 | |
| Convertible notes payable | | | — | | | | 127,877 | | | | — | | | | 127,877 | |
| Denominator for diluted EPS - adjusted weighted-average shares | | | 13,212,311 | | | | 9,626,143 | | | | 12,926,273 | | | | 9,243,684 | |
| | | | | | | | | | | | | | | | | |
| Basic (loss) earnings per share | | $ | (0.60 | ) | | $ | 0.02 | | | $ | (0.85 | ) | | $ | (0.17 | ) |
| Diluted loss per share | | $ | (0.60 | ) | | $ | (0.01 | ) | | $ | (0.85 | ) | | $ | (0.23 | ) |
Basic income (loss) earnings per share is computed by dividing income or loss attributable to the shareholders of Common Stockcommon stock (the numerator) by the weighted-average number of shares of Common Stockcommon stock outstanding (the denominator) for the period. The denominator for diluted incomeDiluted (loss) earnings per share assumesassume that any dilutive equity instruments, convertible into Common Stock such as warrants, convertible securities,notes payable and any other Common Stock equivalents, if dilutive,warrants were exercised and outstanding common stock adjusted accordingly, if their effect is dilutive.
One of the Company’s convertible notes payable, the warrants and the Series C Preferred Stock have clauses that entitle the holder to participate if dividends are declared to the common stockholders as if the instruments had been converted into shares of common stock. As such, the Company uses the two-class method to compute earnings per share and attributes a portion of the Company’s net income to these participating securities. These securities do not contractually participate in losses. For the three months ended June 30, 2022, the Company attributed $3,647 of the Company’s net income to these participating securities and reduced the net income available to common shareholders by that amount when calculating basic earnings per share. For the three months ended June 30, 2023 and the six months ended June 30, 2023 and 2022, the Company had a net loss and as such the two-class method is not presented.
For the three and six months ended June 30, 2023 potentially dilutive instruments including 2,653,993 shares and 2,993,588 shares, respectively, of common stock issuable upon conversion of convertible notes payable were not included outstanding shares duringin the period. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share, as the inclusion of any other potential shares outstanding wouldwas considered to be anti-dilutive.
The denominator for calculating diluted income per share for the three and nine months ended September 30, 2017 assumes that dilutive warrants were exercised at the beginning of the period and that nonvested stock granted to employees had been included in outstanding shares since the beginning of the period, or the grant date if later. The denominator for diluted income per share for the three and nine months ended September 30, 2017 assumes that the shares issuable in January 2018 in connection with the 42West acquisition had been outstanding since the beginning of the periods, and for the three months ended September 30, 2017 the denominator assumes that dilutive put rights issued to the Sellers in connection with the 42West acquisition had been settled by the Company at the beginning of the period.
For warrants that are carried as liabilities at fair value, when exercise is assumed in the denominator for diluted earnings per share, the related change in the fair value of the warrants recognized in the consolidated statements of operations for the period, is added back or subtracted from net income during the period.antidilutive. For the three and
ninesix months ended
SeptemberJune 30,
2017, dilutive warrant shares outstanding2023, the warrants were
assumed to have been exercised andnot included in
the denominator for diluted loss per share
because the warrants were not “in the money”.For the three and six months ended June 30, 2022, the related gains recorded inconvertible promissory notes, except for the condensed consolidated statements of operations due to recording the decrease inconvertible notes carried at fair value, of the warrant liabilities during the three- and nine-month periods was subtracted from net income to arrive at the numerator for basic andwere not included in diluted income (loss) per share.
In periods whenshare because inclusion was considered to be anti-dilutive. For the put rights are assumed to have been settled atsix months ended June 30, 2022, the beginning of the periodwarrants were included in calculating the denominator for diluted incomeloss per share the related changebut were not included in the fair value of put right liability recognized in the consolidated statements of operations for the period, is added back or subtracted from net income during the period. The denominator for calculating diluted income per share for the three months ended SeptemberJune 30, 2016 assumes2022 because the put rights had been settled at the beginning of the period, and therefore, the related income due to the decrease in the fair value of the put right liability during the three months ended September 30, 2017 is subtracted from net income. The put rights were not assumed to have been settled during the nine months ended September 30, 2017, as the effect on diluted income per share would have been antidilutive.
For the three and nine months ended September 30, 2017, the Common Stock that is issuable in January 2018 in connection with the 42West Acquisition was assumed to have been issued during the period in arriving at the denominator for diluted loss per share.
Due to the net losses reported for the three and nine months ended September 30, 2016, common equivalent shares such as warrants were
excluded from“in the
computation of diluted loss per share, as inclusion would be anti-dilutive for the periods presented.money”.For the nine months ended September 30, 2016, the Company reflected the preferred stock deemed dividend of $5,227,247 (note 15) related to exchange of Series A for Series B Preferred Stock in the numerator for calculating basic and diluted loss per share, as the loss for holders of Common Stock would be increased by that amount. Due to the net losses reported, dilutive common equivalent shares were excluded from the computation of diluted loss per share.DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1714 — WARRANTS
A summary of warrants outstanding at December 31, 2016 and issued exercised and expired during the nine months ended September 30, 2017 is as follows:
| | Weighted Avg. Exercise Price |
| Balance at December 31, 2016 | 2,945,000 | $5.98 |
| Issued | — | — |
| Exercised | 1,332,885 | 1.28 |
| Expired | — | — |
| Balance at September 30, 2017 | 1,612,115 | $9.28 |
On March 10, 2010, T Squared Investments, LLC (“T Squared”) was issued Warrant “E” for 175,000 shares of the Company at an exercise price of $10.00 per share with an expiration date of December 31, 2012. T Squared can continually pay the Company an amount of money to reduce the exercise price of Warrant “E” until such time as the exercise price of Warrant “E” is effectively $0.004 per share. Each time a payment by T Squared is made to Dolphin, a side letter will be executed by both parties that state the new effective exercise price of Warrant “E” at that time. At such time when T Squared has paid down Warrant “E” to an exercise price of $0.004 per share or less, T Squared shall have the right to exercise Warrant “E” via a cashless provision and hold for six months to remove the legend under Rule 144 of the Securities Act. During the years ended December 31, 2010 and 2011, T Squared paid down a total of $1,625,000. During the year ended December 31, 2016, T Squared paid $50,000 for the issuance of Warrants G, H and I as described below. Per the provisions of the Warrant Purchase Agreement, the $50,000 was to reduce the exercise price of Warrant “E”. On April 13, 2017, T Squared exercised 162,885 warrants using the cashless exercise provision, in the warrant agreement and received 162,885 shares of the Common Stock. Since T Squared applied the $1,675,000 that it had previously paid the Company to pay down the exercise price of the warrants, the exercise price for the remaining 12,115 warrants was recalculated and is currently $6.20 per share of Common Stock. T Squared did not make any payments during the nine months ended September 30, 2017 to reduce the exercise price of the warrants.
During the year ended December 31, 2012, T Squared agreed to amend a provision in a preferred stock purchase agreement (the “Preferred Stock Purchase Agreement”) dated May 2011 that required the Company to obtain consent from T Squared before issuing any Common Stock below the existing conversion price as defined in the Preferred Stock Purchase Agreement. As a result, the Company has extended the expiration date of Warrant “E” (described above) to September 13, 2015 and on September 13, 2012, the Company issued 175,000 warrants to T Squared (“Warrant “F”) with an exercise price of $10.00 per share. Under the terms of Warrant “F”, T Squared has the option to continually pay the Company an amount of money to reduce the exercise price of Warrant “F” until such time as the exercise price of Warrant “F” is effectively $0.004 per share. At such time, T Squared will have the right to exercise Warrant “F” via a cashless provision and hold for six months to remove the legend under Rule 144 of the Securities Act. The Company agreed to extend both warrants until December 31, 2018 with substantially the same terms as herein discussed. T Squared did not make any payments during the nine months ended September 30, 2017 to reduce the exercise price of the warrants.
On September 13, 2012, the Company sold 175,000 warrants with an exercise price of $10.00 per share and an expiration date of September 13, 2015 for $35,000. Under the terms of these warrants, the holder has the option to continually pay the Company an amount of money to reduce the exercise price of the warrants until such time as the exercise price is effectively $0.004 per share. At such time, the holder will have the right to exercise the warrants via a cashless provision and hold for six months to remove the legend under Rule 144 of the Securities Act. The Company recorded the $35,000 as additional paid in capital. The Company agreed to extend the warrants until December 31, 2018 with substantially the same terms as herein discussed. The holder of the warrants did not make any payments during the nine months ended September 30, 2017 to reduce the exercise price of the warrants.
On November 4, 2016, the Company issued a Warrant “G”, a Warrant “H” and a Warrant “I” to T Squared (“Warrants “G”, “H” and “I”). A summary of Warrants “G”, “H” and “I” issued to T Squared is as follows:
Warrants: | | Exercise price at September 30, 2017 | | Fair Value as of September 30, 2017 | Fair Value as of December 31, 2016 | Expiration Date |
| Warrant “G” | 750,000 | $9.22 | $10.00 | $1,043,761 | $3,300,671 | January 31, 2018 |
| Warrant “H” | 250,000 | $9.22 | $12.00 | 715,215 | 1,524,805 | January 31, 2019 |
| Warrant “I” | 250,000 | $9.22 | $14.00 | 1,015,607 | 1,568,460 | January 31, 2020 |
| | 1,250,000 | | | $2,774,583 | $6,393,936 | |
The Warrants “G”, “H” and “I” each contain an antidilution provision which in the event the Company sells grants or issues any shares, options, warrants, or any instrument convertible into shares or equity in any form below the then current exercise price per share of the Warrants “G”, “H” and “I”, then the then current exercise price per share for the warrants that are outstanding will be reduced to such lower price per share. Under the terms of the Warrants “G”, “H” and “I”, T Squared has the option to continually pay the Company an amount of money to reduce the exercise price of any of Warrants “G”, “H” and “I” until such time as the exercise price of Warrant “G”, “H” and/or “I” is effectively $0.02 per share. The Common Stock issuable upon exercise of Warrants “G”, “H” and “I” are not registered and will contain a restrictive legend as required by the Securities Act. At such time when the T Squared has paid down the warrants to an exercise price of $0.02 per share or less T Squared will have the right to exercise the Warrants “G”, “H” and “I” via a cashless provision and hold for six months to remove the legend under Rule 144 of the Securities Act.
On March 30, 2016, the Company issued shares of Common Stock at a purchase price of $9.22 per share related to the acquisition of 42West (note 4). As a result, the exercise price of each of Warrants “G”, “H” and “I” were reduced to $9.22.
Due to the existence of the antidilution provision, the Warrants “G”, “H” and “I” are carried in the condensed consolidated financial statements as of September 30, 2017 and December 31, 2016 as derivative liabilities at fair value (see note 11).
On December 29, 2016, in connection with the purchase by the Company of 25% of the outstanding membership interests of Dolphin Kids Club, LLC, the termination of an Equity Finance Agreement and the debt exchange of First Loan and Security Notes, Web Series Notes and Second Loan and Security Notes (See note 8), the Company issued Warrant “J” and Warrant “K” (Warrants “J” and “K”) to the seller. Each of the Warrants “J” and “K” had an exercise price of $0.03 per share and an expiration date of December 29, 2020.
The Warrants “J” and “K” each contained an antidilution provision that in the event the Company sells grants or issues any shares, options, warrants, or any instrument convertible into shares or equity in any form below the current exercise price per share of Warrants “J” and “K”, then the current exercise price per share for the Warrants “J” and “K” that are outstanding will be reduced to such lower price per share. The Common Stock issuable upon exercise of Warrants “J” and “K” are not registered and will contain a restrictive legend as required by the Securities Act. At such time as the exercise price is $0.01 per share or less, the holder will have the right to exercise the Warrants “J” and “K” via a cashless provision and hold for six months to remove the legend under Rule 144 of the Securities Act.
Due to the existence of the antidilution provision, the Warrants “J” and “K” were carried in the condensed consolidated balance sheet as of December 31, 2016 as derivative liabilities at a fair value of $12,993,342 for Warrant “J” and $1,017,912 for Warrant “K” (see note 11). On March 30, 2017, the holders of Warrants J and K exercised their warrants and were issued 1,170,000 shares of Common Stock. The Company received $35,100 of proceeds from the transaction.
NOTE 18 — OTHER RELATED PARTY TRANSACTIONS
On December 31, 2014, the Company and its CEO renewed his employment agreement for a period of two years commencing January 1, 2015. The agreement stated that the CEO was to receive annual compensation of $250,000 plus bonus. In addition, the CEO was entitled to an annual discretionary bonus as determined by the Company’s Board of Directors. The CEO was eligible to participate in all of the Company’s benefit plans offered to its employees. As part of histhe employment agreement he receivedwith its CEO, the Company provided a $1,000,000$1,000,000 signing bonus in 2012, thatwhich has not been paid and is recorded in accrued compensation on the condensed consolidated balance sheets.sheets, along with unpaid base salary of $1,625,000 in aggregate attributable for the period from 2012 through 2018. Any unpaid and accrued compensation due to the CEO under thishis employment agreement will accrue interest on the principal amount at a rate of 10%10% per annum from the date of thishis employment agreement until it is paid. TheEven though the employment agreement included provisions for disability, termination for causeexpired and without cause byhas not been renewed, the Company voluntary termination by executivehas an obligation under the agreement to continue to accrue interest on the unpaid balance.
As of June 30, 2023 and a non-compete clause. TheDecember 31, 2022, the Company had accrued $2,437,500 and $2,250,000$2,625,000 of compensation as accrued compensation and $909,834has balances of $1,308,257 and $735,211 of$ 1,578,088, respectively, in accrued interest in other current liabilities on its condensed consolidated balance sheets, as of September 30, 2017 and December 31, 2016, respectively, in relationrelated to Mr. O’Dowd’s employment.the CEO’s employment agreement. Amounts owed under this arrangement are payable on demand. The Company recorded interest expense related to the accrued compensation of $60,388 and $174,623, respectively, for the three and nine months ended September 30, 2017 and $54,081 and $156,404, respectively, for the three and nine months ended September 30, 2016, onin the condensed consolidated statements of operations.
On October 14, 2015,operations amounting to $65,445 for both the three months ended June 30, 2023 and 2022 and $130,171 for both the six months ended June 30, 2023 and 2022. During the six months ended June 30, 2023, the Company and Merger Subsidiary, a wholly owned subsidiarymade interest payments in the amount of the Company, entered into a merger agreement with Dolphin Films and DE LLC, both entities owned by a related party. Pursuant to the Merger Agreement, Merger Subsidiary agreed to merge with and into Dolphin Films with Dolphin Films surviving the Merger. As a result, during the nine months ended September 30, 2016, the Company acquired Dolphin Films. As consideration for the Merger, the Company issued 2,300,000 shares of Series B Convertible Preferred Stock (“Series B”), par value $0.10 per share, and 50,000 shares of Series C Convertible Preferred Stock, par value $0.001 per share to DE LLC.
On March 30, 2017,$400,000 in connection with the
42West Acquisition,accrued compensation to the
CEO.The Company and Mr. O’Dowd, as personal guarantor, entered into four separate Put Agreementsthe DE LLC Note with each of the Sellers of 42West, pursuant to which thean entity wholly owned by our CEO. See Note 9 for further discussion.
NOTE 15 — SEGMENT INFORMATION
The Company has granted each of the Sellers the right to cause the Company to purchase up to an aggregate of 1,187,094 of their shares of Common Stock received as Consideration for a purchase price equal to $9.22 per share during certain specified exercise periods up until December 2020. Pursuant to the terms of one such Put Agreement between Mr. Allan Mayer, a member of the board of directors of the Company, and the Company, Mr. Mayer exercised Put Rights and caused the Company to purchase 32,537 shares of Common Stock at a purchase price of $9.22 for an aggregate amount of $300,000, during the period between March 30, 2017 (42West Acquisition date) and September 30, 2017.
On March 30, 2017, KCF Investments LLC and BBCF 2011 LLC, entities under the common control of Mr. Stephen L Perrone, an affiliate of the Company, exercised Warrants “J” and “K” and were issued an aggregate of 1,170,000 shares of the Company’s Common Stock at an exercise price of $0.03 per share.
NOTE 19 — SEGMENT INFORMATION
As a result of the 42West Acquisition (note 4), the Company has determined that as of the second quarter of 2017, it operates in two reportable segments, the Entertainment Publicity Divisionand Marketing Segment (“EPD”EPM”) and the Content Production DivisionSegment (“CPD”). The EPD segment is comprised of 42West and provides clients with diversified services, including public relations, entertainment content marketing and strategic marketing consulting. CPD is comprised of Dolphin Entertainment, Dolphin Films, and Dolphin Digital Studios and specializes in the production and distribution of digital content and feature films.
| · | The Entertainment Publicity and Marketing segment is composed of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte. This segment primarily provides clients with diversified marketing services, including public relations, entertainment and hospitality content marketing, strategic marketing consulting and content production of marketing materials. |
| · | The Content Production segment is composed of Dolphin Entertainment and Dolphin Films. This segment engages in the production and distribution of digital content and feature films. The activities of our Content Production segment also include all corporate overhead activities. |
The profitability measure employed by our chief operating decision maker for allocating resources to operating divisionssegments and assessing operating divisionsegment performance is operating income (loss). All segments follow which is the same accounting policies as those described in Note 3.
(Loss) income from operations on the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022. Salaries and related expenses include salaries, bonus, commissionbonuses, commissions and other incentive related expenses. Legal and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees.
In connection with All segments follow the 42West Acquisition, the Company assigned $9,110,000 of intangible assets, less the amortization during the six months between the 42West Acquisition date (March 30, 2017) and September 30, 2017 of $498,666, and Goodwill of $14,351,368 to the EPD segment. Information presented for the EPD segment is for the period between the 42West Acquisition date (March 30, 2017) and September 30, 2017.
| | Three months ended September 30, | Nine months ended September 30, |
| | |
| Revenue: | | |
| EPD | $5,409,175 | $10,546,716 |
| CPD | 1,398,839 | 4,625,801 |
| Total | $6,808,014 | $15,172,517 |
| Segment operating income (loss): | | |
| EPD | $1,432,148 | $2,200,996 |
| CPD | 308,054 | (1,161,828) |
| Total | 1,740,202 | 1,039,168 |
| Interest expense | (424,187) | (1,273,166) |
Other income, net | 4,856,563 | 9,809,302 |
| Income before income taxes | $6,172,578
| $9,575,304 |
| |
Total assets: | |
EPD | $27,682,381
|
CPD | 6,079,839
|
Total | $33,762,220
|
NOTE 20 — COMMITMENTS AND CONTINGENCIES
Litigation
On or about January 25, 2010, an action was filed by Tom David against Winterman Group Limited, Dolphin Digital Media (Canada) Ltd., Malcolm Stockdale and Sara Stockdalesame accounting policies as those described in the Superior Court of Justice in Ontario (Canada) alleging breach of a commercial lease and breach of a personal guaranty. On or about March 18, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Statement of Defense and Crossclaim. In the Statement of Defense, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale denied any liability under the lease and guaranty. In the Crossclaim filed against Dolphin Digital Media (Canada) Ltd., Winterman Group Limited, Malcolm Stockdale and Sara Stockdale seek contribution or indemnity against Dolphin Digital Media (Canada) Ltd. alleging that Dolphin Digital Media (Canada) agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. On or about March 19, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Third-Party Claim against the Company seeking contribution or indemnity against the Company, formerly known as Logica Holdings, Inc., alleging that the Company agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. The Third-Party Claim was servedAnnual Report on the Company on April 6, 2010. On or about April 1, 2010, Dolphin Digital Media (Canada) filed a Statement of Defense and Crossclaim. In the Statement of Defense, Dolphin Digital Media (Canada) denied any liability under the lease and in the Crossclaim against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale, Dolphin Digital Media (Canada) seeks contribution or indemnity against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale alleging that the leased premises were used by Winterman Group Limited, Malcolm Stockdale and Sara Stockdale for their own use. On or about April 1, 2010, Dolphin Digital Media (Canada) also filed a Statement of Defense to the Crossclaim denying any liability to indemnify Winterman Group Limited, Malcolm Stockdale and Sara Stockdale. The ultimate results of these proceedings against the Company cannot be predicted with certainty. On or about March 12, 2012, the Court served a Status Notice on all the parties indicating that since more than (2) years had passed since a defense in the action had been filed, the case had not been set for trial and the case had not been terminated, the case would be dismissed for delay unless action was taken within ninety (90) days of the date of service of the notice. The Company has not filed for a motion to dismiss and no further action has been taken in the case. The ultimate results of these proceedings against the Company could result in a loss ranging from 0 to $325,000. On March 23, 2012, Dolphin Digital Media (Canada) Ltd filed for bankruptcy in Canada. The bankruptcy will not protect the Company from the Third-Party Claim filed against it. However, the Company has not accrued for this loss because it believes that the claims against it are without substance and it is not probable that they will result in loss. As of September 30, 2017, the Company has not received any other notifications related to this action.
A putative class action was filed on May 5, 2017, in the United States District Court for the Southern District of Florida by Kenneth and Emily Reel on behalf of a purported nationwide class of individuals who attended the Fyre Music Festival, or the Fyre Festival, in the Bahamas on April 28-30, 2017. The complaint names several defendants, including 42West, along with the organizers of the Fyre Festival, Fyre Media Inc. and Fyre Festival LLC, individuals related to Fyre and another entity called Matte Projects LLC. The complaint alleges that the Fyre Festival was promoted by Fyre as a luxurious experience through an extensive marketing campaign orchestrated by Fyre and executed with the assistance of outside marketing companies, 42West and Matte, but that the reality of the festival did not live up to the luxury experience that it was represented to be. The plaintiffs assert claims for fraud, negligent misrepresentation and for violation of several states’ consumer protection laws. The plaintiffs seek to certify a nationwide class action comprised of “All persons or entities that purchased a Fyre Festival 2017 ticket or package or that attended, or planned to attend, Fyre Festival 2017” and seek damages in excess of $5,000,000 on behalf of themselves and the class. The plaintiffs sought to consolidate this action with five other class actions also arising out of the Fyre Festival (to which 42West is not a party) in a Multi District Litigation proceeding, which request was denied by the panel. We believe the claims against 42West are without merit and that we have strong defenses to the claims.
Tax Filings
The Company accrued $120,000 for estimated penalties associated with not filing certain information returns. The penalties per return are $10,000 per entity per year. The Company received notification from the Internal Revenue Service concerning information returnsForm 10-K for the year ended December 31,
2009. 2022.In connection with the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte, the Company assigned $8,875,139 of intangible assets, net of accumulated amortization of $9,804,861, and goodwill of $22,796,683, net of impairment of $6,517,400, as of June 30, 2023 to the EPM segment. Equity method investments are included within the EPM segment.
| Schedule of revenue and assets by segment | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Revenues: | | | | | | | | | | | | |
| EPM | | $ | 11,024,935 | | | $ | 10,290,626 | | | $ | 20,916,356 | | | $ | 19,467,735 | |
| CPD | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 11,024,935 | | | $ | 10,290,626 | | | $ | 20,916,356 | | | $ | 19,467,735 | |
| | | | | | | | | | | | | | | | | |
| Segment Operating Income (Loss): | | | | | | | | | | | | | | | | |
| EPM | | $ | 254,502 | | | $ | 1,783,722 | | | $ | (9,174,979 | ) | | $ | 1,373,178 | |
| CPD | | | (7,705,241 | ) | | | (1,728,085 | ) | | | (841,760 | ) | | | (3,206,618 | ) |
| Total operating (loss) income | | | (7,450,739 | ) | | | 55,637 | | | | (10,016,739 | ) | | | (1,833,440 | ) |
| Interest expense, net | | | (349,533 | ) | | | (125,348 | ) | | | (603,386 | ) | | | (274,737 | ) |
| Other income (expenses), net | | | 9,000 | | | | 279,022 | | | | (1,444 | ) | | | 626,880 | |
| (Loss) income before income taxes and equity in losses of unconsolidated affiliates | | $ | (7,791,272 | ) | | $ | 209,311 | | | $ | (10,621,569 | ) | | $ | (1,481,297 | ) |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | As of
June 30,
2023 | | | As of
December 31,
2022 | |
| Total assets: | | | | | | | | |
| EPM | | $ | 58,601,457 | | | $ | 68,678,335 | |
| CPD | | | 7,218,160 | | | | 6,698,497 | |
| Total | | $ | 65,819,617 | | | $ | 75,376,832 | |
NOTE 16 — LEASES
The Company respondedand its subsidiaries are party to various office leases with a letter stating reasonable cause forterms expiring at different dates through November 2027. The amortizable life of the noncompliance and requested that penalties be abated. During 2012,right-of-use asset is limited by the expected lease term. Although certain leases include options to extend the Company received a notice statingdid not include these in the right-of-use asset or lease liability calculations because it is not reasonably certain that the reasonable cause had been denied. options will be executed.
| Schedule of right of use asset or lease liability calculations | | | | | | |
| Operating Leases | | As of
June 30,
2023 | | | As of
December 31,
2022 | |
| Assets | | | | | | | | |
| Right-of-use asset | | $ | 6,342,200 | | | $ | 7,341,045 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Current | | | | | | | | |
| Lease liability | | $ | 2,021,359 | | | $ | 2,073,547 | |
| | | | | | | | | |
| Noncurrent | | | | | | | | |
| Lease liability | | $ | 5,001,239 | | | $ | 6,012,049 | |
| | | | | | | | | |
| Total operating lease liability | | $ | 7,022,598 | | | $ | 8,085,596 | |
| Schedule of finance lease | | | | | | |
| Finance Lease | | As of
June 30,
2023 | | | As of
December 31,
2022 | |
| Assets | | | | | | | | |
| Right-of-use asset | | $ | 59,515 | | | $ | — | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Current | | | | | | | | |
| Lease liability | | $ | 19,559 | | | $ | — | |
| | | | | | | | | |
| Noncurrent | | | | | | | | |
| Lease liability | | $ | 40,350 | | | $ | — | |
| | | | | | | | | |
| Total finance lease liability | | $ | 59,909 | | | $ | — | |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company decided to paytable below shows the penaltieslease income and not appealexpenses recorded in the decision forcondensed consolidated statements of operations incurred during the 2009 Internal Revenue Service notification. There is no associated interest expense asthree and six months ended June 30, 2023 and 2022.
| Schedule of lease income and expenses | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| Lease costs | | Classification | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Operating lease costs | | Selling, general and administrative expenses | | $ | 706,140 | | | $ | 590,072 | | | $ | 1,409,593 | | | $ | 1,166,611 | |
| Sublease income | | Selling, general and administrative expenses | | | (107,270 | ) | | | (76,568 | ) | | | (220,382 | ) | | | (121,983 | ) |
| Net operating lease costs | | | | $ | 598,870 | | | $ | 513,504 | | | $ | 1,189,211 | | | $ | 1,044,628 | |
| | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| Lease costs | | Classification | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Amortization of right-of-use assets | | Selling, general and administrative expenses | | | 3,501 | | | | — | | | | 3,501 | | | | — | |
| Interest on lease liability | | Selling, general and administrative expenses | | | 834 | | | | — | | | | 834 | | | | — | |
| Total finance lease costs | | | | $ | 4,335 | | | $ | — | | | $ | 4,335 | | | $ | — | |
Lease Payments
For the tax filings are for information purposes onlysix months ended June 30, 2023 and would not result in further income taxes to be paid by2022, the Company. The Company made payments in the amount of $40,000 during the year ended December 31, 2012cash related to these penalties. At each of September 30, 2017 and December 31, 2016, the Company had a remainder of $40,000 in accruals related to these late filing penalties which is presented as a component of other current liabilities.
Kids Club
Effective February 1, 2017, the Company notified US Youth Soccer Association, Inc., with whom it had entered into an agreement to create, design and host the US Youth Soccer Clubhouse website, that it would not renew the agreement. The Company did not record any revenues or expenses related to this website for the three and nine months ended September 30, 2017 and 2016.
On July 1, 2016, the Company and United Way Worldwide mutually agreed to terminate the agreement and agreement create and host an online kids club to promote United Way’s philanthropic philosophy and encourage literacy programs. Pursuant to the terms of the agreement the Company was responsible for the creation and marketing of the website, developing and managing the sponsorship package, and hiring of certain employees to administer the program. Each school sponsorship package was $10,000 with the Company earning $1,250. The remaining funds were used for program materials and the costs of other partners. During the nine months ended September 30, 2017, management decided to discontinue the online kids clubs at the end of 2017.
The Company recorded revenues of $6,225 and $27,253 related to the online kids clubs during the three and nine months ended September 30, 2016. There were no revenues generated by the online kids clubs during the three and nine months ended September 30, 2017.
Incentive Compensation Plan
On June 29, 2017, the shareholders of the Company approved the 2017 Plan which replaced the 2012 Plan. The 2017 Plan was adopted as a flexible incentive compensation plan that would allow us to use different forms of compensation awards to attract new employees, executives and directors, to further the goal of retaining and motivating existing personnel and directors and to further align such individuals’ interests with those of the Company’s shareholders. Under the 2017 Plan, the total number of shares of Common Stock reserved and available for delivery under the 2017 Plan (the “Awards”), at any time during the term of the 2017 Plan, will be 1,000,000 shares of Common Stock. The 2017 Plan imposes individual limitations on the amount of certain Awards, in part with the intention to comply with Section 162(m) of the Code. Under these limitations, in any fiscal year of the Company during any part of which the 2017 Plan is in effect, no participant may be granted (i) stock options or stock appreciation rights with respect to more than 300,000 Shares, or (ii) performance shares (including shares of restricted stock, restricted stock units, and other stock based-awards that are subject to satisfaction of performance goals) that the Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to more than 300,000 Shares, in each case, subject to adjustment in certain circumstances. The maximum amount that may be paid out to any one participant as performance units that the Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to any 12-month performance period is $1,000,000 (pro-rated for any performance period that is less than 12 months), and with respect to any performance period that is more than 12 months, $2,000,000. Through August 21, 2017, the Company issued 59,320 Shares as Awards to certain employees. There is a vesting period of six months. Through September 30, 2017, the Company recorded compensation expense of $103,760 on its condensed consolidated statement of operations.
Employee Benefit Plan
The Company’s wholly owned subsidiary, 42West, has a 401(K) profit sharing plan that covers substantially all employees of 42West. Contributions to the plan are at discretion of management. The Company’s contributions were approximately $58,848 and $206,916 for the three and nine months ended September 30, 2017, respectively.
Employment Contracts
During 2015, 42West entered into seven separate three-year employment contracts with senior level management employees. The contracts define each individual’s compensation, along with specific salary increases mid-way through the term of each contract. Each individual was also guaranteed a percentage of proceeds if 42West was sold during the term of their contract. The percentages vary by executive. Termination for cause, death or by the employee would terminate the Company’s commitment on each of the contracts. During the six months between the 42West Acquisition date (March 30, 2017) and September 30, 2017, one of the seven senior level management employees left the Company. On July 11, 2017, the Company entered into a three-year employment agreement with a senior level management employee. Per the terms of the employment agreement, the employee is entitled to a base salary with a guaranteed increase of at least 7.5% of the base salary after 18 months of employment and periodic reviews throughout the term of the employment agreement. The employment agreement contains provisions for termination as a result of death or disability and entitles the employee to bonuses, commission, vacations and to participate in all employee benefit plans offered by the Company.
As a condition to the closing of the 42West Acquisition described in note 4, each of the three Principal Sellers has entered into employment agreements (the “Employment Agreements”) with the Company and will continue as employees of the Company for a three-year term. Each of the Employment Agreements provides for a base salary with annual increases and bonuses if certain performance targets are met. In addition, the Employment Agreements grant each Principal Seller an annual stock bonus of $200,000 to be calculated using the 30-day trading average of the Company’s Common Stock. The Employment Agreements also contain provisions for termination and as a result of death or disability. During the term of the Employment Agreement, the Principal Sellers shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company as well as are entitled to paid vacation in accordance with the Company’s policy. Each of the Employment Agreements contains lock-up provisions pursuant to which each Principal Seller has agreed not to transfer any shares of Common Stockoperating leases in the first year, no more than 1/3amounts of the Initial Consideration$1,386,214 and Post-Closing Consideration received by such Seller in the second year and no more than an additional 1/3 of the Initial Consideration and Post-Closing Consideration received by such Seller in the third year, following the closing date of the 42West Acquisition.
Talent, Director, Producer and Other Participations
Per agreements with talent, directors and producers on certain projects, the Company will be responsible$1,063,972, respectively.Future minimum lease payments for bonus and back end payments upon release of a motion picture and achieving certain box office performance as determined by the individual agreements. The Company cannot estimate the amounts that will be due as these are based on future box office performance.
In addition, payments may be due to the guarantor of the P&A loan of Max Steel from future domestic distribution revenues of the film. However, based on the information provided by our distributor, the motion picture is not expected to generate sufficient domestic distribution revenues to trigger these payments.As of September 30, 2017 and December 31, 2016, the Company had not recorded any liability related to these participations.Leases
42West is obligated under an operating lease agreement for office space in New York, expiring in December 2026. The lease is secured by a standby letter of credit amounting to $677,354, and provides for increases in rent for real estate taxes and building operating costs. The lease also contains a renewal option for an additional five years.
42West is obligated under an operating lease agreement for office space in California, expiring in December 2021. The lease is secured by a cash security deposit of $44,788 and a standby letter of credit amounting to $100,000 at September 30, 2017. The lease also provides for increases in rent for real estate taxes and operating expenses, and contains a renewal option for an additional five years, as well as an early termination option effective as of February 1, 2019. Should the early termination option be executed, the Company will be subject to a termination fee in the amount of approximately $637,000. The Company does not expect to execute such option.
On November 1, 2011, the Company entered into a 60 month lease agreement for office space in Miami with an unrelated party. The lease expired on October 31, 2016 and the Company extended the lease until December 31, 2017 with substantially the same terms as the original lease.
On June 1, 2014, the Company entered into a 62 month lease agreement for office space in Los Angeles, California. The monthly rent is $13,746 with annual increases of 3% for years 1-3 and 3.5%leases for the remainder of
2023 and thereafter, were as follows:| Schedule of future minimum payments under operating lease agreements | | | | | |
| Year | | Operating Leases | | Finance Leases | |
| 2023 | | $ | 1,253,949 | | $ | 13,787 | |
| 2024 | | | 2,531,307 | | | 23,635 | |
| 2025 | | | 1,979,589 | | | 23,635 | |
| 2026 | | | 1,782,057 | | | 5,910 | |
| 2027 | | | 719,795 | | | — | |
| Total lease payments | | $ | 8,266,697 | | $ | 66,967 | |
| Less: Imputed interest | | | (1,244,099 | ) | | (7,058 | ) |
| Present value of lease liabilities | | $ | 7,022,598 | | $ | 59,909 | |
As of June 30, 2023, the lease. The CompanyCompany’s weighted average remaining lease term on its operating leases is also entitled3.4 years and the Company’s weighted average discount rate is 8.71% related to four half monthsits operating leases. As of free rent overJune 30, 2023, the life ofCompany’s weighted average remaining lease term on its finance leases is 2.8 years and the agreement. Company’s weighted average discount rate is 8.6% related to its finance leases.
NOTE 17 — COLLABORATIVE ARRANGEMENT
IMAX Co-Production Agreement
On June 1, 2017,24, 2022, the Company entered into an agreement with IMAX Corporation (“IMAX”) to subleaseco-produce and co-finance a documentary motion picture on the office space in Los Angeles, California.flight demonstration squadron of the United States Navy, called The sublease is effective June 1, 2017 through JulyBlue Angels (“Blue Angels Agreement”). IMAX and Dolphin have each agreed to fund 50% of the production budget. As of December 31, 2019 and2022, the Company will receive (i) $14,891.50 per month forhad paid $1,500,000 pursuant to the first twelve months, withBlue Angels Agreement, which were recorded as capitalized production costs. On April 26, 2023, the first two months of rent abated and (ii) $15,338.25 per month forCompany paid the remainderremaining $500,000 pursuant to the Blue Angels Agreement.
As production of the sublease.
Future minimum annual rent payments are as follows:
| Period ended September 30, 2017 | |
| October 1, 2017 – December 31, 2017 | $345,403 |
| 2018 | 1306,473 |
| 2019 | 1,329,613 |
| 2020 | 1,433,403 |
| 2021 | 1,449,019 |
| Thereafter | 4,675,844 |
| | $10,539,756 |
Rentdocumentary motion picture is not complete, no income or expense including escalation charges, amounted to approximately $292,415 and $924,389, respectively, for the three and nine months ended September 30, 2017.
Motion Picture Industry Pension Accrual
42West is a contributing employer to the Motion Picture Industry Pension Individual Account and Health Plans (collectively the “Plans”), two multiemployer pension funds and one multiemployer welfare fund, respectively, that are governed by the Employee Retirement Income Security Act of 1974, as amended. The Plans intend to conduct an audit of 42West’s books and records for the period June 7, 2011 through August 20, 2016has been recorded in connection with the
alleged contribution obligationsBlue Angels Agreement during the three and six months ended June 30, 2023.We have evaluated the Blue Angels Agreement and have determined that it is a collaborative arrangement under FASB ASC Topic 808 “Collaborative Arrangements”. We will reevaluate whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the Plans. Based on a recent auditroles of the participants or the participants’ exposure to significant risks and rewards, dependent upon the ultimate commercial success of documentary motion picture.
On April 25, 2023, IMAX entered into an acquisition agreement with Amazon Content Services, LLC for periods prior to June 7, 2011, 42Westthe distribution rights of Blue Angels. The Company estimates that it will derive approximately $3.5 million from the acquisition agreement and it expects that the Plan may seek to collect approximately $300,000documentary motion picture will be released in pension plan contributions, health and welfare plan contributions and union once the audit is completed. first quarter of 2024.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 18 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company believesmay be subject to legal proceedings, claims, and liabilities that arise in the exposure to be probable and has recognized this liability in other current liabilities on the condensed consolidated balance sheetsordinary course of business. The Company is not aware of any pending litigation as of September 30, 2017.
NOTE 21 – SUBSEQUENT EVENTS
On September 19the date of this report and,
September 20, 2017, two of the Principal Sellers of 42West exercised put optionstherefore, in the
aggregate amountopinion of
16,268 sharesmanagement and based upon the advice of
Common Stockits outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and
were paid an aggregate of $150,000cash flows.IMAX Co-Production Agreement
As discussed in Note 17, on October 10, 2017.
On October 10 and 18, 2017,June 24, 2022, the Company entered into
agreementsthe Blue Angels Agreement with
two note holders to extendIMAX. Under the
maturity dateterms of
each of their promissory notes until December 15, 2017. The interest rate for onethis agreement, on April 26, 2023, the Company funded the remaining $500,000 commitment and through June 30, 2023 has now funded its full $2,000,000 commitment of the
promissory notes increased from 10% to 12%.production budget.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a leading independent entertainment marketing and premium content developmentproduction company. Through our recent acquisition ofsubsidiaries, 42West, The Door, Shore Fire, Viewpoint, Be Social and Socialyte, 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, hospitality and music industries. 42West, The Door and Shore Fire are each recognized global leaders in the PR services for hundredsthe industries they serve. Viewpoint adds full-service creative branding and production capabilities and Be Social and Socialyte provide influencer-marketing capabilities through their roster of A-list celebrity talent, including actors, directors, producers, recording artists, athletes and authors. The strategic acquisition of 42West brings together premium marketing services with premium content production, creating significant opportunities to serve our respective constituents more strategically and to grow and diversify our business. Ourhighly engaged social media influencers. 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 our 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, we acquired 42West, an entertainment public relations agency offering talent, entertainment and targeted marketing, and strategic communications services. As consideration for the 42West acquisition, we paid approximately $18.7 million in shares of Our common stock par value $0.015, basedtrades on our company’s 30-trading-day average stock price prior toThe Nasdaq Capital Market under the closing date of $9.22 per share, as adjusted for the 1-to-2 reverse stock split, (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. As a result, we (i) issued 615,140 shares of common stock on the closing date, 172,275 shares of common stock to certain 42West employees on April 13, 2017 and 59,320 shares ofrestricted stock as employee stock bonuses on August 21, 2017 and (ii) will issue 980,911 shares of common stock on January 2, 2018. In addition, we may issue up to 981,563 shares of common stock based on the achievement of specified financial performance targets over a three-year period as set forth in the membership interest purchase agreement.
Prior to its acquisition, 42West grew to become one of the largest independently-owned public-relations firms 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.
The principal sellers have each entered into employment agreements with us and will continue as employees of our company until March 2020. The nonexecutive employees of 42West were retained as well. 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 of their shares of common stock received as consideration for a purchase price equal to $9.22 per share, as adjusted for the 1-to-2 reverse stock split, during certain specified exercise periods up until December 2020. During the nine months ended September 30, 2017, we purchased 116,591 shares of our common stockfrom certain of the sellers in accordance with the put agreements; for an aggregate purchase price of $1,075,000. Subsequent to the nine months ended September 30, 2017, we purchased an additional 16,268 shares of our common stock for $150,000 from certain of the sellersin accordance with the put agreements.
In connection with the 42West acquisition, we acquired an estimated $9.1 million of intangible assets and recorded approximately $14 million of goodwill. The purchase price allocation and related consideration for the intangible assets and goodwill are provisional and subject to completion and adjustment. We amortize our intangible assets over useful lives of between 3 and 10 years. symbol “DLPN.”We have recorded amortization in the amount of approximately $0.5 million during the nine months ended September 30, 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,live event production, 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 have also established an investment strategy, “Dolphin 2.0,” based upon identifying opportunities to develop internally owned assets, or acquire ownership stakes in others’ assets, in the categories of entertainment content, live events and consumer products. We believe these categories represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various stages of internal development and outside conversations on a wide range of opportunities within Dolphin 2.0. We intend to complete at least one acquisition over the next year, althoughenter into additional investments during 2023, but there is no assurance that we will be successful in doing so.
Effective May 10, 2016, we amended our Articles of Incorporation to effectuate a 1-to-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) outstandingso, whether in light of our 1-to-20 reverse stock split from 1,000,000 to 50,000 shares; and (iv) clarify the voting rights of the Series C Convertible Preferred Stock that, except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred.
Effective September 14, 2017, we amended our Amended and Restated Articles of Incorporation to effectuate a 1-to-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, we have determined that we2023 or at all.We operate in two reportable segments, thesegments: our entertainment publicity division and themarketing segment and our content production division.segment. The entertainment publicity divisionand marketing segment is comprisedcomposed of 42West, The Door, Shore Fire, Viewpoint, Be Social, B/HI and Socialyte and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, social media marketing, creative branding, and strategic marketing consulting.the production of promotional video content. The content production divisionsegment is comprisedcomposed of Dolphin Films, Inc. (“Dolphin Films”) and Dolphin Digital Studios, which produce and specializesdistribute feature films and digital content. The activities of our Content Production segment also include all corporate overhead activities.
Dolphin 2.0
We believe our ability to engage a broad consumer base through our best-in-class pop culture marketing assets provides us an opportunity to make investments in products or companies which would benefit from our collective marketing power. We call these investments “Dolphin 2.0” (with “Dolphin 1.0” being the underlying businesses of each of our subsidiaries mentioned above). Simply put, we seek to own an interest in some of the assets we are marketing. Specifically, we want to own an interest in assets where our experience, industry relationships and marketing power will most influence the likelihood of success. This leads us to seek investments in the following categories of assets: 1) Content; 2) Live Events; and 3) Consumer Products.
The first of our Dolphin 2.0 investments has been in the new world of Non-Fungible Tokens (“NFTs”). On October 2, 2022, we minted (offered for sale) our first collection, “Creature Chronicles: Exiled Aliens”, a generative art collection of 7,777 unique avatars designed by Anthony Francisco, former Marvel Studio artist. The collection generated approximately 13,175 SOL, equaling approximately $435,000.
Our second Dolphin 2.0 investment was made in October, 2021, when we acquired an ownership interest in Midnight Theatre, a state-of-the-art contemporary variety theater and restaurant in the heart of Manhattan. An anchor of Brookfield Properties’ recently opened $4.5 billion Manhattan West development, the Midnight Theatre opened on September 21, 2022. The restaurant, Hidden Leaf, opened on July 6, 2022.
Our third Dolphin 2.0 investment was made in December, 2021, when we acquired an ownership interest in Crafthouse Cocktails, a pioneering brand of ready-to-drink, all-natural classic cocktails. During the third quarter of 2022, Crafthouse Cocktails began its first international operations, with distribution in London, United Kingdom.
We have also made our first content investment under Dolphin 2.0. See Note 17 above for details regarding our Collaborative Arrangement with IMAX for production and distribution of digital content andthe documentary feature films.
Going Concern
In the audit opinion for our financial statements as of and for the year ended December 31, 2016, our independent auditors included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern based upon our net loss for the year ended December 31, 2016, our accumulated deficit as of December 31, 2016 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 loans or capital. Such issuances of additional securities would further dilute the equity interests of our existing shareholders, perhaps substantially. With the acquisition of 42West, we are currently exploring opportunities to expand the services currently being offered by 42West to the entertainment community and reducing expenses by identifying certain costs that can be combined. There can be no assurance that we will be successful in selling these services to clients or reducing expenses.
“The Blue Angels.”Revenues
DuringFor the three and ninesix months ended SeptemberJune 30, 2016,2023 and 2022, we derived revenues from a portion of fees obtained from the sale of memberships to online kids clubs and international distribution rights of our motion pictures, Believe and Max Steel. During the three and nine months ended September 30, 2017, we derived the majorityall of our revenues from our recently acquired subsidiary 42West. 42Westentertainment publicity and marketing segment. The entertainment publicity and marketing segment derives its revenues from providing talent,public relations services for celebrities and musicians, as well as for entertainment and targeted content marketing for film and television series, strategic communications services. Duringservices for corporations and public relations, marketing services and brand strategies for hotels and restaurants and digital marketing through its roster of social media influencers. We expect to generate income in our content production segment over the three and ninenext eighteen months ended September 30, 2017, revenues from production and distribution were derived fromwith the release of our“The Blue Angels” documentary motion picture, Max Steel. The table below sets forthdiscussed in the components of revenue for the three“Project Development and nine months ended September 30, 2017Related Services.”
Entertainment Publicity and 2016:
| | For the three months ended September 30, | For the nine months ended September 30, |
| | | | | |
Revenues: | | | | |
| Entertainment publicity | 79.5% | 0.0% | 69.5% | 0.0% |
| Production and distribution | 20.5% | 99.5% | 30.5% | 97.7% |
| Membership | 0.0% | 0.5% | 0.0% | 2.3% |
| Total revenue | 100.0% | 100.0% | 100.0% | 100.0% |
Entertainment Publicity
MarketingOur revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and continuewe have continued to grow organically through referrals and by actively soliciting new business. We earn revenues primarily from three sources. We providethe following sources: (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. We have numerous projects per year per clientfees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months. We providemonths; (iv) strategic communications services in exchangeservices; (v) engagements for monthly fees ranging from $10,000 to $30,000 per client.
●
Talent – We earn fees from creatingmarketing of special events such as food and implementingwine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic communication campaigns for performersmarketing agreements between brands and entertainers, including televisionsocial media influencers and film stars, 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. Our services in this area include ongoing strategic counsel, media relations, studio, network, charity, corporate liaison and event and tour support. Many(viii) content production of our clients have been with 42West since it was founded in 2004. Our services may be ongoing or related tomarketing materials on a specific project that our talent is associated with.
In the Talent division, 42West experienced approximately 20%contract basis. For these revenue growth during the nine months ended September 30, 2017 as compared to the prior year period 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,streams, 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 significant growth through the hiring of additional individuals or teams.
●
Entertainment and Targeted Marketing – We earn fees from providing 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. In addition, we provide entertainment marketing services in connection with film festivals, awards campaigns, event publicity and red carpet management. As part of our services we offer marketing and publicity services that are tailored to reach diverse audiences. Our clients for this type of service may include major studios and independent producers for whom they create strategic multicultural marketing campaigns and provide strategic guidance aimed at reaching diverse audiences.
We expect that increased movie marketing budgets at several large key clients will drive growth of revenue and profit in 42West’s Entertainment and Targeted Marketing division over the next several years.
●
Strategic Communications – We earncollect fees through our strategic communications team by advising high-profile individuals and companies faced with sensitive situations or looking to raise, reposition, or rehabilitate their public profiles. We also help studios and filmmakers deal with controversial movies. 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 sectors. We expect that this growth trend will continue for the next three to five years. 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
In April 2016, we entered into a co-production agreement to produce Jack of all Tastes, a digital project that showcases favorite restaurants of NFL players. The show was produced during 2016 throughout several cities in the U.S. The show was released on Destination America, a digital cable and satellite television channel, on September 9, 2017 and we do not expect to derive any revenues from this initial release. 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 revenue solely through the following:
●
Producer’s Fees – We earneither fixed fee monthly retainer agreements, fees for producing each web series, as included in the production budget for each project. We either recognize producer’s feesbased on a percentage of completioncontracts or a completed contract basis depending on the terms of the producer agreements, which we negotiate on a project by project basis.
●
Initial Distribution/Advertising Revenue – project-based fees.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 domesticentertainment publicity 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 have been derived during the three and nine months ended September 30, 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 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. No revenues from this source were derived for the three and nine months ended September 30, 2017 and 2016.
Dolphin Films
During the three and nine months ended September 30, 2016 we derived revenues from Dolphin Films primarily through the international distribution of our motion pictures, Believe and Max Steel. During the three and nine months ended September 30, 2017, we derivedmarketing revenues primarily through the domestic and international distribution of Max Steel.following: | ● | Talent – We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs and Grammy winning recording artists. Our services in this area include ongoing strategic counsel, media relations, studio and/or network liaison work, and event and tour support. We believe that the proliferation of content, both traditional and on social media, will lead to an increasing number of individuals seeking such services, which will drive growth and revenue in our Talent departments for several years to come. |
| ● | Entertainment Marketing and Brand Strategy – We earn fees from providing marketing direction, public relations counsel and media strategy for entertainment content (including theatrical films, television programs, DVD and VOD releases, and online series) from virtually all the major studios and streaming services, as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. In addition, we provide entertainment marketing services in connection with film festivals, food and wine festivals, awards campaigns, event publicity and red-carpet management. As part of our services, we offer marketing and publicity services tailored to reach diverse audiences. We also provide marketing direction targeted to the ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups. We expect that increased digital streaming marketing budgets at several large key clients will drive growth of revenue and profit in 42West’s Entertainment Marketing division over the next several years. |
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. Unamortized film costs are to be tested for impairment whenever events or changes in circumstances indicate that the fair value of the film may be less than its unamortized costs. We determined that Max Steel’s domestic performance was an indicator that the capitalized production costs may need to be impaired. We used a discounted cash flow model to help determine the fair value of the capitalized production costs and determined that the carrying value of the capitalized production costs were below the fair value and recorded an impairment of $2 million during 2016.
Revenues from the motion picture, Max Steel, were generated from the following sources:
●
Theatrical – Theatrical revenues were derived from the domestic theatrical release of motion pictures licensed to a U.S. theatrical distributor that had agreements with theatrical exhibitors. The financial terms negotiated with the U.S. theatrical distributor provided that we receive a percentage of the box office results, after related distribution fees.
●
International – International revenues were derived 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 were contingent on a domestic wide release that occurred on October 14, 2016.
●
Other – Dolphin Films’ U.S. theatrical distributor 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 three and nine months ended September 30, 2017, we began to derive revenue from these channels and anticipate that the remaining revenues from these channels will be received in 2017 and thereafter.
Our ability to receive additional revenues from Max Steel depends on the ability to repay our loans under our production service agreement and prints and advertising loan agreement from the profits of Max Steel. Max Steel did not generate sufficient funds to repay either of these loans prior to the maturity date. As a result, if the lenders foreclose on the collateral securing the loans, our subsidiary and the Max Steel VIE will lose the copyright for Max Steel and, consequently, will no longer receive any revenues from Max Steel. In addition, we would impair the entire capitalized production costs and accounts receivable related to the foreign sales of Max Steel included as assets on our balance sheet, which as of September 30, 2017 were $1.9 million and $1.4 million, respectively. 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 backstop to the guarantor of the prints and advertising loan. For a discussion of the terms of such agreements and the $620,000 backstop, see “Liquidity and Capital Resources” below.
| ● | Strategic Communications – We earn fees by advising companies looking to create, raise or reposition their public profiles, primarily in the entertainment industry. We also help studios and filmmakers deal with controversial movies, as well as high-profile individuals address sensitive situations. We believe that growth in the Strategic Communications division will be driven by increasing demand for these varied services by traditional and non-traditional media clients who are expanding their activities in the content production, branding, and consumer products PR sectors. |
| ● | Creative Branding and Production – We offer clients creative branding and production services from concept creation to final delivery. Our services include brand strategy, concept and creative development, design and art direction, script and copyrighting, live action production and photography, digital development, video editing and composite, animation, audio mixing and engineering, project management and technical support. We expect that our ability to offer these services to our existing clients in the entertainment and consumer products industries will be accretive to our revenue. |
| ● | Digital Media Influencer Marketing Campaigns – We arrange strategic marketing agreements between brands and social media influencers, for both organic and paid campaigns. We also offer services for social media activations at events. Our services extend beyond our own captive influencer network, and we manage custom campaigns targeting specific demographics and locations, from ideation to delivery of results reports. We expect that our relationship with social media influencers will provide us the ability to offer these services to our existing clients in the entertainment and consumer products industries and will be accretive to our revenue. |
Content Production
Project Development and Related Services
We have a development team that dedicates a portion of its time to identifying scripts, story treatments and resources to sourcing scriptsnovels for future developments.acquisition, development and production. The scripts can be for either digital, television or motion picture productions. During 2015 and 2016, weWe have acquired the rights to certain scripts one that we intend to produce and release in the second quarter of 2018. During the nine months ended September 30, 2017, we acquired the rightsfuture, subject to a book from which we intend to develop a script and produce in 2018. We intend to release the projects starting in early 2019.obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical distribution.
Membership
Online Kids Clubs
We partnered with US Youth Soccer in 2012, and with United Way Worldwide in 2013, to create online kids clubs. Our online kids clubs derive revenue from the sale of memberships in the online kids clubs to various individuals 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 Worldwide. We have retained the trademark to the online kids club and will continue to operate the site. Pursuant to the termscompleted development of our agreement with US Youth Soccer, we notified themseveral feature films, which means that we did not intend to renew our agreement that terminated on February 1, 2017.have completed the script and can begin pre-production once financing is obtained. We operate 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 purchase 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.
For the nine months ended September 30, 2016, we recorded $0.03 million of revenues from the online kids clubs. For the nine months ended September 30, 2017, we did not derive any revenues from the online kids clubs. During the nine months ended September 30, 2017, management decided to discontinue the online kids clubs at the end of this year to dedicate its time and resources to our entertainment publicity and content production businesses.
Expenses
Our expenses consist primarily of (1) direct costs; (2) distribution and marketing; (3) selling, general and administrative expenses; (4) payroll expenses; and (5) legal and professional fees.
Direct costs include certain cost of services related to our entertainment publicity business, amortization of deferred production costs, impairment of deferred production costs, residuals and other costs associated with production. 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 digital production 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 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 and legal and professional fees that are reported as a separate expense item.
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
During the three and nine months ended September 30, 2017 and 2016, other income and expenses consisted primarily of (1) amortization and depreciation; (2) gains on extinguishment of debt; (3) acquisition costs; (4) changes in the fair value of warrant liabilities; (5) changes in the fair value of put rights and contingent consideration; and (6) interest expense.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2017 as compared to three and nine months ended September 30, 2016
Revenues
For the three and nine months ended September 30, 2017, our revenues were as follows:
| | For the three months ended September 30, | For the nine months ended September 30, |
| Revenues: | | | | |
| Entertainment publicity | $5,409,175
| $n/a
| $10,546,716
| $n/a
|
Production and distribution
| 1,398,839 | 1,140,000 | 4,625,801 | 1,144,157 |
Membership
| - | 6,225 | - | 27,253 |
| Total revenues (in USD) | $6,808,014 | $1,146,225 | $15,172,517 | $1,171,410 |
Revenues from entertainment publicity increased during the three and nine months ended September 30, 2017, as compared to the same periods in the prior years, due to the acquisition of 42West on March 30, 2017, as discussed above.
Revenues from production and distribution increased by $0.3 million and $3.5 million, respectively, for the three and nine months ended September 30, 2017, as compared to the same periods in the prior year primarily due to the revenue generated by the domestic and international distribution of Max Steel.
Expenses
For the three and nine months ended September 30, 2017 and 2016, our primary operating expenses were as follows:
| | For the three months ended September 30, | For the nine months ended September 30, |
| Expenses: | | | | |
| $427,926 | $1,375,734 | $2,927,817 | $1,378,173 |
Distribution and marketing
| 320,439 | 9,237,873 | 950,812 | 9,237,873 |
Selling, general and administrative
| 628,564 | 370,984 | 1,871,258 | 1,019,641 |
| 208,637 | 689,523 | 1,098,728 | 1,576,963 |
| 3,482,246 | 350,264 | 7,284,734 | 1,101,465 |
| Total expenses | $5,067,812 | $12,024,378 | $14,133,349 | $14,314,115 |
Direct costs decreased by approximately $0.9 million for the three months ended September 30, 2017 as compared to the same period in the prior year, mainly due to the amortization of capitalized production costs related to the revenues earned from our motion picture, Max Steel. Direct costs increased by approximately $1.5 million for the nine months ended September 30, 2017 as compared to the same period in the prior year, mainly due to (i) the amortization of capitalized production costs related to the revenues earned from our motion picture, Max Steel and (ii) approximately $0.7 million attributable to 42West.Capitalized production costs are amortized based on revenues recorded during the period over the estimated ultimate revenues of the film. Since Max Steel was released in October of 2016, revenues were greater in the first two quarters of 2017, than in the third quarter of 2017.
Distribution and marketing expenses decreased by approximately $8.9 million and $8.3 million, respectively, for the three and nine months ended September 30, 2017, as compared to the same periods in the prior year due to P&A expenses and distributor fees and residuals, related to the distribution of Max Steel during 2016.
Selling, general and administrative expenses increased by approximately $0.2 million and $0.8 million, respectively for the three and nine months ended September 30, 2017 as compared to the same periods in the prior year. The September 30, 2016 amounts do not include 42West and approximately $0.5 million and $1.3 million, respectively, of selling, general and administrative expenses incurred during the three and nine months ended September 30, 2017 are attributable to 42West. We had a decrease in selling, general and administrative expense related to the content production business of approximately $0.2 million for the three months ended September 30, 2017 as compared to the same period in the prior year primarily attributable to (i) sublease of one of our LA offices and (ii) payments made to writer’s pension for the writer of one of our scripts. We had a decrease in selling, general and administrative expense related to the content production business of approximately $0.4 million for the nine months ended September 30, 2017 as compared to the same period in the prior year primarily attributable to (i) a charitable contribution of $0.1 million made during the nine months ended September 30, 2016, (ii) selling costs for Max Steel of $0.2 million prior to its release in 2016, and (iii) the sublease of one of our LA offices.
Legal and professional fees for the three and nine months ended September 30, 2016 do not include 42West and approximately $0.1 million of such fees for each of the three and nine months ended September 30, 2017 are atributable to 42 West. Legal and professional expenses related to the content production business decreased by approximately $0.5 million for each of the three and nine months ended September 30, 2017, as compared to the same periods in the prior year primarily due to legal and consulting fees paid in 2016 related to the P&A financing for Max Steel.
Payroll expenses increased by approximately $3.1 million and $6.2 million, respectively, for the three and nine months ended September 30, 2017 as compared to the same periods in the prior year. For the three and nine months ended September 30, 2017, approximately $3.2 million and $6.3 million, respectively of payroll expenses are attributable to 42West, which were offset by a decrease of approximately $0.1 million in payroll expenses in each of the three and nine months ended September 30, 2017, as compared to the same periods in the prior year, primarily due to a reduction of headcount during the second quarter of 2017.
Other Income and Expenses
For the three and nine months ended September 30, 2017, other income and expenses consisted primarily of the following:
| | For the three months ended September 30, | For the nine months ended September 30, |
| Other (Income) Expense: | | | | |
Amortization and depreciation
| $321,538 | $47,369 | $648,848 | $47,369 |
| Extinguishment of debt | (3,881,444) | - | (3,877,277) | 5,843,811 |
Acquisition costs
| - | - | 745,272 | - |
Bad debt
| 69,437 | - | 85,437 | - |
Loss on disposal of furniture, office equipment and leasehold improvements
| - | - | 28,025 | - |
Change in fair value of warrant liability
| (1,396,094) | - | (7,685,607) | - |
Change in fair value of put and contingent consideration | 30,000 | - | 246,000 | - |
Interest expense
| 424,187 | 613,651 | 1,273,166 | 3,768,727 |
| Other Income/expense | $(4,432,376) | $661,020 | $(8,536,136) | $9,659,907 |
Amortization and depreciation increased by approximately $0.3 million and $0.6 million for the three and nine months ended September 30, 2017 as compared to the same periods in the prior year primarily due to the amortization of intangible assets.
During each of the three and nine months ended September 30, 2017, we recorded a gain on the extinguishment of debt of $3.8 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 is offset by our backstop to the third party guarantor of $0.6 million. By contrast, during the nine months ended September 30, 2016, we recorded a loss on extinguishment of debt of $5.8 million as a result of exchanging certain debt instruments for shares of our common stock. The debt was exchanged at a purchase price of $10.00 per share on dates when the market price of our common stock was between $12.00 and $13.98 per share resulting in a loss on extinguishment of debt.
We incurred approximately $0.7 million of legal, consulting and auditing costs related to our acquisition of 42West during the nine months ended September 30, 2017.
The fair value of the warrant liability decreased by approximately $1.4 million and $7.7 million for the three and nine months ended September 30, 2017, resulting in a gain on the change in fair value. During 2016, certain warrants were issued that required derivative liability classification. We recorded the warrants at their fair value on the date of issuance and record any changes to fair value at each balance sheet date on our consolidated statements of operation.
The fair value of the put rights and contingent consideration increased by approximately $0.03 million and $0.2 million for the three and nine months ended September 30, 2017, resulting in a loss on the change in fair value. The fair value of put right agreements 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 liabilities is measured at every balance sheet date and any changes are recorded on our consolidated statements of operations.
Interest expense decreased by approximately $0.2 million and $2.5 million for the three and nine months ended September 30, 2017, 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”.
Net Income (Loss)
Net income was approximately $6.2 million or $0.66 per share based on 9,336,826 weighted average shares outstanding and $0.44 per share on a fully diluted basis based on 10,382,818 weighted average shares for the three months ended September 30, 2017 and $9.6 million or $1.11 per share based on 8,640,543 weighted average shares outstanding and $0.20 per share on a fully diluted basis based on 9,479,840 weighted average shares for the nine months ended September 30, 2017. Net loss for the three and nine months ended September 30, 2016 was approximately $11.5 million or $(2.16) per share and $22.8 million or $(7.37) per share based on 5,337,108 and 3,801,626, respectively, weighted average shares for the three and nine months ended September 30, 2016. Net income and losses for the three and nine months ended September 30, 2017 and 2016 were related to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows provided by operating activities increased by approximately $22.3 million from approximately $(15.6) million used for operating activities during the nine months ended September 30, 2016 to approximately $6.7 million provided by operating activities during the nine months ended September 30, 2017, primarily due to a decrease in expenses of approximately $11.0 million related to the release of our motion picture Max Steel. In addition, during the nine months ended September 30, 2017, we collected approximately $1.3 million from accounts receivable and received approximately $2.5 million in production tax incentives related to Max Steel. We also increased our cash flows provided by operating activities through the acquisition of 42West.
Cash flows provided by investing activities increased by approximately $0.9 million during the nine months ended September 30, 2017 as compared to the same period in the prior year primarily 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 $0.2 million and payment of a working capital adjustment in the amount of $0.2 million related to the 42West acquisition.
Cash flows used for financing activities increased by approximately $20.5 million during the nine months ended September 30, 2017 from approximately $14.2 million provided by financing activities during the nine months ended September 30, 2016 to approximately $6.3 million used for financing activities during the nine months ended September 30, 2017 mainly due to (i) approximately $9.2 million used to repay the debt related to the production, distribution and marketing loans for Max Steel and (ii) $1.1 million used topurchase shares of common stock from the sellers of 42West pursuant to the put agreements. In addition, we raised a net of $11.1 million more through the sale of our common stock, loan and security agreements and advances from our CEO during the nine months ended September 30, 2016 than through various financing activities during the nine months ended September 30, 2017.
As previously discussed, in connection with the 42West acquisition, we may be required to purchase from the sellers up to an aggregate of 1,187,094 of their shares of common stock at a price equal to $9.22 per share, as adjusted for the 1-to-2 reverse stock split, during certain specified exercise periods up until December 2020. Of that amount we may be required to purchase up to 227,766 shares in 2017, for an aggregate of up to $3.1 million. On April 10, 2017, June 2, 2017, July 10, 2017, September 1, 2017 and October 10, 2017,we purchased from the sellers of 42West, an aggregate amount of 132,859 shares of common stock and paidto the sellersan aggregate total of approximately $1.2 million.
As of September 30, 2017 and 2016, we had cash available for working capital of approximately $2.0 million and approximately $1.0 million, respectively, and a working capital deficit of approximately $13.4 million and approximately $32.9 million, respectively.
These factors, along with an accumulated deficit of $90.2 million as of September 30, 2017, raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to
raise anyfund these projects through third-party financing arrangements, domestic distribution advances, pre-sales, and location-based tax credits, and if necessary,
additional funds through loans and additional issuancessales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing
alternatives. Therealternatives; however, there is no assurance that we will be
successful in raising additional capital. Such issuancesable to obtain the financing necessary to produce any of
additional securities would further dilutethese feature films. In June 2022, we entered into an agreement with IMAX Corporation (“IMAX”) to co-produce and co-finance a documentary motion picture on the equity interestsflight demonstration squadron of our existing shareholders, perhaps substantially.the United States Navy called the Blue Angels. IMAX and Dolphin have each agreed to fund 50% of the production budget which is estimated at approximately $4 million. In April of 2023, IMAX entered into an agreement with Amazon Content Services LLC for the distribution rights of the Blue Angels. We currently have the rights to several scriptsestimate that we intend to obtain financing to produce during 2018will derive approximately $3.5 million from the acquisition agreement and release starting in early 2019. We will potentially earn a producer and overhead fee for each of these productions. There can be no assurancesexpect that such productionsthe documentary motion picture will be released or fees will be realized in future periods.early 2024.
Expenses
Our expenses consist primarily of:
| (1) | Direct costs – includes certain costs of services, as well as certain production costs, related to our entertainment publicity and marketing business. Included within direct costs are immaterial impairments for any of our content production projects. |
| (2) | Payroll and benefits expenses – includes wages, stock-based compensation, payroll taxes and employee benefits. |
| (3) | Selling, general and administrative expenses – includes all overhead costs except for payroll, depreciation and amortization and legal and professional fees that are reported as a separate expense item. |
| (4) | Depreciation and amortization – includes the depreciation of our property and equipment and amortization of intangible assets and leasehold improvements. |
| (5) | Impairment of goodwill – includes an impairment charge as a result of triggering events identified during the second quarter of 2023. |
| (6) | Change in fair value of contingent consideration – includes changes in the fair value of the contingent earn-out payment obligations for the Company’s acquisitions. The fair value of the related contingent consideration is measured at every balance sheet date and any changes recorded on our consolidated statements of operations. |
| (7) | Legal and professional fees – includes fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants. |
Other Income and Expenses
For the three and six months ended June 30, 2023, other income and expenses consisted primarily of: (1) changes in fair value of convertible notes; (2) interest income; and (3) interest expense. For the three and six months ended June 30, 2022 other income and expenses consisted primarily of: (1) changes in fair value of convertible notes; (2) changes in fair value of warrants; and (3) interest expense.
RESULTS OF OPERATIONS
Three and six months ended June 30, 2023 as compared to three and six months ended June 30, 2022
Revenues
For the three and six months ended June 30, 2023 and 2022 revenues were as follows:
| | | For the three months ended
June 30, | | | For the six months ended June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Revenues: | | | | | | | | | | | | |
| Entertainment publicity and marketing | | $ | 11,024,935 | | | $ | 10,290,626 | | | $ | 20,916,356 | | | $ | 19,467,735 | |
| Total revenue | | $ | 11,024,935 | | | $ | 10,290,626 | | | $ | 20,916,356 | | | $ | 19,467,735 | |
Revenues from entertainment publicity and marketing increased by approximately $0.7 million and $1.4 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in the prior year. The increase is primarily driven by inclusion of Socialyte revenues for 2023, which were not present in 2022.
We did not derive any revenues from the content production segment as we have not produced and distributed any of the projects discussed above and the projects that were produced and distributed in 2013 and 2016 have mostly completed their normal revenue cycles. We expect to begin to generate cash flows fromgenerating income in our other sourcescontent production segment in the early 2024 with the release of revenue, including the distribution of at least one web series that,Blue Angels documentary film.
Expenses
For the three and six months ended June 30, 2023 and 2022, our expenses were as discussed earlier has completed production. Withfollows:
| | | For the three months ended
June 30, | | | For the six months ended June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Expenses: | | | | | | | | | | | | |
| Direct costs | | $ | 217,245 | | | $ | 939,389 | | | $ | 436,141 | | | $ | 2,022,279 | |
| Payroll and benefits | | | 8,677,493 | | | | 6,983,804 | | | | 17,732,223 | | | | 13,930,426 | |
| Selling, general and administrative | | | 2,005,286 | | | | 1,519,835 | | | | 3,877,223 | | | | 3,039,605 | |
| Depreciation and amortization | | | 543,939 | | | | 415,547 | | | | 1,077,035 | | | | 832,785 | |
| Impairment of goodwill | | | 6,517,400 | | | | — | | | | 6,517,400 | | | | — | |
| Change in fair value of contingent consideration | | | 17,741 | | | | (237,557 | ) | | | 33,226 | | | | (76,106 | ) |
| Legal and professional | | | 496,570 | | | | 613,971 | | | | 1,259,847 | | | | 1,552,186 | |
| Total expenses | | $ | 18,475,674 | | | $ | 10,234,989 | | | $ | 30,933,095 | | | $ | 21,301,175 | |
Direct costs decreased by approximately $0.7 million for the acquisition of 42West, we are currently exploring opportunities to expandthree months ended June 30, 2023 and $1.6 million for the services currently being offered by 42Westsix months ended June 30, 2023, as compared to the entertainment community. There can be no assurancethree and six months ended June 30, 2022. The decrease in direct costs is partially driven by $0.2 million and $0.7 million of NFT production and marketing costs for the three and six months ended June 30, 2022, respectively, that were not present in the same periods in 2023. The decrease in direct costs is also partially attributable to the decrease in certain subsidiaries revenues as compared with the same periods in the prior year.
Payroll and benefits expenses increased by approximately $1.7 million and $3.8 million, respectively, for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, primarily due to the following:
| · | Inclusion of $1.1 million and $2.3 million for the three and six months ended June 30, 2023, respectively, of Socialyte expenses; |
| · | $0.4 million and $0.7 million of salaries of the employees of one of our subsidiaries included in direct costs for the three and six months ended June 30, 2022, respectively, as these salaries were directly related to projects of that subsidiary. During the three and six months ended June 30, 2023, the revenues of that subsidiary have decreased substantially and the salaries are included in payroll expense; |
| · | The remaining increase of $0.2 million and $0.8 million for the three and six months ended June 30, 2023, respectively, is related to salary increases and an increase in headcount to support revenue growth. |
Depreciation and amortization increased by $0.1 million and $0.2 million for the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, related to the amortization of Socialyte intangible assets in 2023.
Selling, general and administrative expenses increased by approximately $0.5 million and $0.8 million for the three and six months ended June 30, 2023, respectively, as compared to the three and six months ended June 30, 2022, mainly due to costs our Los Angeles office that was opened in July of 2022 of $0.2 million and $0.8 million for the three and six months ended June 30, 2023, respectively and inclusion of Socialyte selling, general and administrative expenses for the three months ended June 30, 2023, respectively, of $0.2 million and $0.3 million.
Impairment of goodwill was $6.5 million for the three and six months ended June 30, 2023. As discussed in Note 3 – Goodwill and Intangibles Assets in the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, we will be successfulperformed a quantitative assessment driven by triggering events related to declines in selling these servicesour market capitalization combined with the lack of positive response from the market to clients.
In addition, we have a substantialpositive information related to future projects. The quantitative assessment resulted in the impairment of goodwill in the 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 September 30, 2017, our total debt was $13.5 million and our total stockholders’ equity was approximately $2.7 million. Approximately $3.7$6.5 million of one of our reporting units. No such charges were recorded in the total debt as of Septemberthree and six months ended June 30, 2017 represents the fair value of put options2022.Change in connection with the 42West acquisition, which may or may not be exercised by the sellers
and approximately $4.0 million represents the fair value of the contingent consideration was $17.7 thousand and $33.2 thousand for the three and six months ended June 30, 2023, compared to the sellerschange in fair value of 42Westthe contingent consideration of $(0.2) million and is dependent on 42West achieving certain$(76.1) thousand for the three and six months ended June 30, 2022. The main components of the change in fair value of contingent consideration were the following: | · | The Door: This contingent consideration was settled in June 2022, therefore no changes were recorded in the three and six months ended June 30, 2023. The Company recorded $0.4 million gain and $1.4 million gain, respectively, for the three and six months ended June 30, 2022. |
| | |
| · | B/HI: this contingent consideration was settled in June 2022, therefore no changes were recorded in the three and six months ended June 30, 2023. The Company recorded loss of $0.2 million and $76.1 thousand for the three and six months ended June 30, 2022, up through the date of settlement. |
| | |
| · | Be Social: losses of $17.7 thousand and $33.2 thousand for the three and six months ended June 30, 2023, respectively, compared to $20.0 thousand for the three and six months ended June 30, 2022. The Company settled this contingent consideration on April 25, 2023 through a combination of $500 thousand in cash and 148,687 shares of the Company’s stock, with a value of $272 thousand. |
Legal and professional fees decreased by approximately $0.1 million and $0.3 million for the three and six months ended June 30, 2023, respectively, as compared to the three and six months ended June 30, 2022 due to legal, consulting and audit fees incurred during the first quarter of 2022 related to our restatement of the financial targets over a three year period which may or may not be achieved.
Approximately $5.1 million of our indebtednessstatements as of, September 30, 2017 ($2.4 million outstanding under the prints and advertising loan agreement plus $2.7 million outstanding under the production service agreement) was incurred by our Max Steel subsidiary and the Max Steel VIE. Repayment of these loans was intended to be made from revenues generated by Max Steel in the U.S. and outside of the U.S. Max Steel did not generate sufficient funds to repay either of these loans prior to the maturity date. As a result, if the lenders foreclose on the collateral securing the loans, our subsidiary will lose the copyright for Max Steel and, consequently, will no longer receive any revenues from Max Steel. In addition, we would impair the entire capitalized production costs and accounts receivable related to the foreign sales of Max Steel included as assets on our balance sheet, which as of September 30, 2017 were $1.9 million and $1.4 million, respectively.
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 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.
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 secured by any other Dolphin entity and the only asset held by Max Steel Holdings is the copyright for the motion picture. 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 thethree nine months ended September 30, 2017, we agreed to allow the lender to apply the $1,250,000 to the loan balance. The loan is partially secured by a $4,500,000 corporate guaranty from a party associated with the motion picture, of which we have agreed to backstop $620,000. As a condition precedent to closing the loan, Dolphin Max Steel Holdings LLC delivered to the lender clear chain-of-title to the rights2021 included in Form 10-Q for that period, and revisions of the motion picture Max Steel. The lender has retained a reservefinancial statements as 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. Asthree months ended March 31, 2021 and as of Septemberand for the three and six months ended June 30, 20172021, respectively, which were included in our Forms 10-Q for March 31, 2021 and December 31, 2016, weJune 30, 2021 included our Form 10-K filed on May 26, 2022.Other Income and Expenses
| | | For the three months ended
June 30, | | | For the six months ended June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Other Income and expenses: | | | | | | | | | | | | | | | | |
| Change in fair value of convertible notes | | $ | 4,000 | | | $ | 244,022 | | | $ | (6,444 | ) | | $ | 531,880 | |
| Change in fair value of warrants | | | 5,000 | | | | 35,000 | | | | 5,000 | | | | 95,000 | |
| Interest income | | | 103,104 | | | | 68,454 | | | | 205,121 | | | | 113,221 | |
| Interest expense | | | (452,637 | ) | | | (193,802 | ) | | | (808,507 | ) | | | (387,958 | ) |
| Total other (expenses) income, net | | $ | (340,533 | ) | | $ | 153,674 | | | $ | (604,830 | ) | | $ | 352,143 | |
We elected the fair value option for one convertible note issued in 2020. The fair value of this convertible note is remeasured at every balance sheet date and any changes are recorded $2,366,689 and $12,500,000, respectively, including the reserve, related to this agreement on our condensed consolidated balance sheets. Onstatements of operations. For the three months ended June 30, 2023 and 2022, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a $4.0 thousand and $0.2 million loss, respectively. For the six months ended June 30, 2023 and 2022, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a gain of $6.4 thousand and a loss of $0.5 million, respectively. None of the decrease in the value of the convertible notes was attributable to instrument specific credit risk and as such all of the gain in the change in fair value was recorded within net (loss) income.
Warrants issued with convertible notes payable issued in 2020, were initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant liability recognized as other income or expense. The fair value of the 2020 warrants that were not exercised decreased by approximately $5.0 thousand during both the three and six months ended June 30, 2023; therefore we recorded a change in the fair value of the warrants for the three and six months ended June 30, 2023 for that amount on our condensed consolidated statement of operations. For the three and six months ended June 30, 2022, the fair value of the 2020 warrants that were not exercised decreased by approximately $35.0 thousand and $95.0 thousand; therefore we recorded a change in the fair value of the warrants for the three and six months ended June 30, 2022 for those amounts, respectively, on our condensed consolidated statement of operations.
Interest income increased by $34.7 thousand and $91.9 thousand for the three and six months ended June 30, 2023 as compared to the same periods in the prior year, primarily due to increased notes receivable outstanding during 2023 as compared to the same periods in the prior year.
Interest expense increased by $0.3 million and $0.4 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in the prior year, primarily due to increased convertible and nonconvertible notes and the term loan outstanding during 2023 as compared to the same period in the prior year.
Equity in losses of unconsolidated affiliates
Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investees.
For the three and six months ended June 30, 2023, we recorded losses of $57.8 thousand and $88.0 thousand, respectively, from our equity investment in Crafthouse Cocktails, compared to losses of $23.4 thousand and $43.4 thousand for the three and six months ended June 30, 2022, respectively.
For the three and six months ended June 30, 2023, we recorded losses of $77.1 thousand and $158.8 thousand, respectively, from our equity investment in Midnight Theatre. Midnight Theatre commenced operations at the end of the second quarter of 2022; therefore no equity gains or losses had been recorded during the three or six months ended June 30, 2022.
Income Taxes
We recorded an income tax expense of approximately $33.1 thousand and $60.2 thousand for the three and six months ended June 30, 2023, respectively, and approximately $7.2 thousand and $14.4 thousand for the three and six months ended June 30, 2022, respectively, which reflects the accrual of a valuation allowance in connection with the limitations of our indefinite lived tax assets to offset our indefinite lived tax liabilities. To the extent the tax assets are unable to offset the tax liabilities, we have recorded a deferred expense for the tax liability (a “naked credit”).
Net (Loss) Income
Net loss was approximately $8.0 million or $(0.60) per share based on 13,212,311 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the three months ended SeptemberJune 30, 2017, we recorded interest expense2023. Net income was approximately $0.2 million or $0.02 per share based on 9,498,266 weighted average shares outstanding for basic loss per share and a loss of $177,225 and$(0.1) million, or $(0.01) per share based on 9,626,143 weighted average shares on a fully diluted basis for the ninethree months ended SeptemberJune 30, 2017, we recorded (i) interest expense of $602,697 and, (ii) $500,0002022. The change in direct costs from loan proceeds that were not used by the distributornet income for the marketingthree months ended June 30, 2023 as compared to the three months ended June 30, 2022, is related to the factors discussed above.
Net loss was approximately $10.9 million or $(0.85) per share based on 12,926,273 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the six months ended June 30, 2023. Net loss was approximately $1.5 million or $(0.17) per share based on 9,113,252 weighted average shares outstanding for basic loss per share and $(0.23) per share based on 9,890,621 weighted average shares on a fully diluted basis for the six months ended June 30, 2022. The change in net income for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, is related to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
| | | Six Months Ended
June 30, | |
| | | 2023 | | | 2022 | |
| Statement of Cash Flows Data: | | | | | | |
| Net cash used in operating activities | | $ | (3,106,462 | ) | | $ | (1,719,551 | ) |
| Net cash used in investing activities | | | (9,451 | ) | | | (2,298,702 | ) |
| Net cash provided by financing activities | | | 4,047,427 | | | | 3,515,138 | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | | | 931,514 | | | | (503,115 | ) |
| | | | | | | | | |
| Cash and cash equivalents and restricted cash, beginning of period | | | 7,197,849 | | | | 8,230,626 | |
| Cash and cash equivalents and restricted cash, end of period | | $ | 8,129,363 | | | $ | 7,727,511 | |
Operating Activities
Cash used in operating activities was $3.1 million for six months ended June 30, 2023, a change of $1.4 million from cash used in operating activities of $1.7 million for six months ended June 30, 2022. The decrease in cash flows from operations was primarily as a result a $0.6 million net change in working capital and $9.4 million of increased net loss for the period, offset by $7.7 million non-cash items such as depreciation and amortization, bad debt expense, share-based compensation, impairment of capitalized production costs, impairment of goodwill and other non-cash losses.
Investing Activities
There were no significant cash flows used in investing activities for the six months ended June 30, 2023. Net cash flows used in investing activities for the six months ended June 30, 2022 were $2.3 million related primarily to the issuance of notes receivable.
Financing Activities
Cash flows provided by financing activities for the six months ended June 30, 2023 were $4.0 million, which mainly related to:
Inflows:
| · | $2.2 million of proceeds from notes payable. |
| · | $1.0 million of proceeds from convertible notes payable. |
| · | $1.6 million of proceeds from the Lincoln Park equity line of credit described below. |
Outflows:
| · | $0.3 million of repayment of notes payable and the term loan. |
| · | $0.5 million of settlement of cash portion of contingent consideration for Be Social. |
Cash flows provided by financing activities for the six months ended June 30, 2022 were $3.5 million, which mainly related to:
Inflows:
| · | $4.4 million of proceeds from the Lincoln Park equity line of credit described below. |
Outflows:
| · | $0.6 million of settlement of cash portion of contingent consideration for B/HI. |
| · | $0.3 million of repayment of notes payable. |
Debt and Financing Arrangements
Total debt amounted to $15.8 million as of June 30, 2023 compared to $13.7 million as of December 31, 2022, an increase of $2.1 million.
Our debt obligations in the next twelve months from June 30, 2023 increased by $0.7 million from December 31, 2022. The current portion of the filmlong-term debt decreased from $4.3 million to $3.8 million. We expect our current cash position, cash expected to be generated from our operations and returnedother availability of funds, as detailed below, to be sufficient to meet our debt requirements.
2022 Lincoln Park Transaction
On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of common stock from time to time over a 36-month period.
The Company may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of common stock on any business day (a “Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances up to 75,000 shares if the closing price is not below $7.50 and up to 100,000 shares if the closing price is not below $10.00, provided that Lincoln Park’s committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the event we purchase the full amount allowed for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as accelerated and additional accelerated purchases. The purchase price of shares of common stock related to the lender. In September 2017,future funding will be based on the third party guarantor paid $4.5 millionthen prevailing market prices of such shares at the time of sales as described in the LP 2022 Purchase Agreement.
Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, the Company issued 57,313 shares of common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of our common stock under the LP 2022 Purchase Agreement. The LP 2022 commitment shares were recorded as a period expense and included within selling, general and administrative expenses in the consolidated statements of operations.
During the three and six months ended June 30, 2023, the Company sold 600,000 and 850,000 shares of common stock, respectively, at prices ranging between $1.65 and $2.27 pursuant to the guaranteeLP 2022 Purchase Agreement and received proceeds of $1,081,850 and $1,611,300, respectively. Subsequent to June 30, 2023, the Company sold 300,000 shares of common stock at prices ranging between $1.70 and $1.98 pursuant to the LP 2022 Purchase Agreement and received proceeds of $550,850.
The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of common stock in the future (“put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the loan, reducingfreestanding put right and has concluded that it has insignificant value as of June 30, 2023.
Convertible Notes Payable
During the six months ended June 30, 2023, the Company issued four convertible notes payable in the aggregate amount of $1,000,000. As of June 30, 2023, the Company has eleven outstanding convertible promissory notes in the aggregate principal amount of $5,150,000. The convertible promissory notes bear interest at a rate of 10% per annum, with initial maturity dates on the second anniversary of their respective issuances. The balance by such amountof each convertible promissory note and increasingany accrued interest may be converted at the noteholder’s option at any time at a purchase price based on a 90-day average closing market price per share of our accounts payable bycommon stock. Five of the $620,000 backstopconvertible notes may not be converted at a price less than $2.50 per share and six of the convertible notes may not be converted at a price less than $2.00 per share.
The Company made cash interest payments amounting to $285,847 and $135,000 during the six months ended June 30, 2023 and 2022, respectively, related to the guarantee. We haveconvertible promissory notes.
On June 8, 2023, the holder of two convertible notes converted the aggregate principal balance of $900,000 into 450,000 shares of common stock at a conversion price of $2.00 per share. At the moment of conversion, accrued interest related to this note amounted to $9,500 and was paid in cash.
As of June 30, 2023, the principal balance of the convertible promissory notes of $5,150,000 was recorded in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance sheets.
Convertible Note Payable at Fair Value
The Company had one convertible promissory note outstanding with aggregate principal amount of $500,000 as of June 30, 2023 for which it elected the fair value option. As such, the estimated fair value of the note was recorded on its issue date. At each balance sheet date, the Company records the fair value of the convertible promissory notes with any changes in the fair value recorded in the condensed consolidated statements of operations.
The Company had a balance of $350,000 and $343,556 in noncurrent liabilities as of June 30, 2023 and December 31, 2022, respectively, on its condensed consolidated balance sheets related to the convertible promissory note measured at fair value.
The Company recorded a gain onfrom the extinguishmentchange in fair value of debt on our consolidated statement$4,000 for the three months ended June 30, 2023 and a loss from the change in fair value of operations$6,444 for the six months ended June 30, 2023 and losses in fair value of approximately $3.9$0.2 million and $0.5 million for the three and ninesix months ended SeptemberJune 30, 2017. Repayment2022, respectively, on its condensed consolidated statements of the loan was intended to be made from revenues generated by Max Steel in the U.S. Max Steel did not generate sufficient funds to repay the loan prior to the maturity date. As a result, if the lender forecloses on the collateral securing the loan, our subsidiary will lose the copyright for Max Steel and, consequently, will no longer receive any revenues from the domestic distribution of Max Steel. In addition, we would impair the entire capitalized production costs of Max Steel included as an asset on our balance sheet, which as of September 30, 2017 was $1.9 million.
Production Service Agreement
During 2014, the Max Steel VIE, a variable interest entity (or VIE) created in connection with the financing and production of Max Steel entered into a financing deal in the amount of $10.4 million to produce Max 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, that 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, Dolphin Max Steel Holdings LLC delivered to the lender clear chain-of-title to the rights of the motion picture Max 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 $1.4 million of interest at the default rate. The film was released October 14, 2016 and delivery to the international distributors has begun. As of December 31, 2016 and September 30, 2017, we had outstanding balances of $6.2 million and $2.7 million, respectively,operations related to this debt on our condensed consolidated balance sheets. Repayment of the loan was intended to be made from revenues generated by Max Steel outside of the U.S. Max Steel did not generate sufficient funds to repay the loan prior to the maturity date. As a result, if the lender forecloses on the collateral securing the loan, Max Steel VIE will lose the copyright for Max Steel and, consequently, our consolidated financial statements will no longer reflect any revenues from the distribution of Max Steel in 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 September 30, 2017 was $1.4 million.
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 and we are seeking to establish a new credit facility. The note bears interest at the prime rate of City National Bank plus 0.875% per annum and is payable monthly. Amounts outstanding under the note are secured by substantially all of 42West’s assets and are guaranteed by the Principal Sellers of 42West. The maximum amount that could be drawn on the line of credit was $1,750,000 prior to its expiration; however, upon maturity of the note we no longer have the ability to borrow additional amounts under the line of credit. 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. As a result, the balance as of September 30, 2017 was $750,000. As of the date of this filing, City National Bank has not called the outstanding principal of the revolving note; however, we have sufficient liquidity to satisfy all our outstanding obligations under the revolving note in such event. Under the revolving note, an event of default will occur if we fail to pay any principal when due after five days’ notice and an opportunity to cure.
Promissory Notes
On September 20, 2017, we issued aconvertible promissory note maturing one year after issuance, to an entity related to one of our directors, Allan Mayer, and received $150,000. at fair value.Nonconvertible Promissory Notes
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 bear interest at 10% per annum and can be prepaid without any penalty. On October 10 and October 18, 2017, these three promissory notes matured. The lenders agreed to extendFebruary 22, 2023, the maturity date of these three promissory notes until December 15, 2017. The interest rate of one of the promissory notes in the amount of $250,000 will increase for the period between October 18, 2017 and December 15, 2017, from 10% to 12%. All other provisions of the promissory notes remain unchanged. On July 5, 2012, weCompany issued an unsecured promissory note in the amount of $300,000 bearing$2,215,000 and received proceeds of $2,215,000. As of June 30, 2023, the Company has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $3,525,962, which bear interest at a rate of 10% per annum and payable on demand. The proceeds frommature between November 2023 and March 2028.
As of June 30, 2023 and December 31, 2022, the notes were used for working capital. We haveCompany had a balance of $1,000,000 in410,960 and $868,960, respectively, net of debt discounts recorded as current liabilities
, a balance of $400,000 and $3,115,000 and $500,000 respectively, in noncurrent liabilities and accrued interest of $171,105 in other current liabilities on its condensed consolidated balance sheets related to these unsecured nonconvertible promissory notes payablenotes. During the three and six months ended June 30, 2023, one unsecured nonconvertible promissory note amounting to $400,000 matured and was extended for an additional period of two years, now maturing on June 14, 2025.The Company made interest payments of $127,211 and $50,249 during the six months ended June 30, 2023 and 2022, respectively, related to the nonconvertible promissory notes.
Nonconvertible Promissory Notes – Socialyte
As discussed in Note 4 and Note 8 to our condensed consolidated financial statements, as part of the acquisition of Socialyte, we entered into an unsecured promissory note amounting to $3.0 million (“Socialyte Promissory Note”). The Socialyte Promissory Note matures on September 30, 2017.
On2023 and is payable in two payments: $1.5 million on June
14, 2017, we issued a promissory note that matures two years after issuance, to a lender30, 2023 and
received $400,000. We may prepay this promissory note with no penalty after the initial six months.$1.5 million on September 30, 2023, its maturity date. The
promissory noteSocialyte Promissory Note bears interest at a rate of
10%4% per
annum. We have a balance of $400,000 in noncurrent liabilitiesannum, which accrues monthly and
all accrued interest
of $1,778 related to this promissory noteshall be due and payable
as ofon September 30,
2017.2023, its maturity date.On June 30, 2023, we deferred the payment of the first installment in the amount of $1,500,000 until the final post-closing working capital adjustment is agreed upon with the Socialyte Seller.
Kids Club Agreements
During February 2011, weCredit and Security Agreement
In connection with the Socialyte Acquisition discussed in Note 4, Socialyte, with MidCo entered into two kids clubs agreementsa Credit and Security Agreement with individual parties, for the developmentBankProv (“Credit Agreement”), which includes a $3,000,000 secured term note (“Term Loan”) and $0.5 million of a child fan club forsecured revolving line of credit (“Revolver”). The Credit Agreement carries an annual facility fee of $5,000 payable on the promotionfirst anniversary of the Closing Date and of $875 on each one year anniversary thereafter.
The Credit Agreement contains financial covenants that require the Socialyte to maintain: (1) a local universityquarterly minimum debt service ratio of 1.25:1.00; (2) a quarterly senior funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 3.00:1.00 and its collegiate athletic program, which we refer(3) quarterly total funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 5.00:1.00, as well as the Company to maintain a Group Kids Club. Under each kids club agreement, each party paid us $50,000 in return forminimum liquidity of $1,500,000. The Credit Agreement also contains covenants that limit Socialyte’s and MidCo’s ability to, among other things, grant liens, incur additional indebtedness, make acquisitions or investments, dispose of certain assets, change the participationnature of future revenue generated by the Group Kids Club. Pursuant totheir businesses, enter into certain transactions with affiliates or amend the terms of material indebtedness.
Term Loan
The Term Loan has a term of five years, with a maturity date of November 14, 2027. The Company shall repay the Term Loan through 60 consecutive monthly payments of principal (based upon a straight-line amortization period of 84 months, based on the principal amount outstanding, plus interest at an annual rate of 7.37%, commencing on December 14, 2022, and continuing on the corresponding day of each month thereafter until it is paid in full. Any remaining unpaid principal balance, including accrued and unpaid interest and fees, if any) shall be due and payable in full on November 14, 2027, its maturity date. Interest is calculated on the basis of actual days elapsed and a three hundred sixty (360) day year.
Interest on the Term Loan shall be payable on a monthly basis. Interest shall be computed on the basis of a three hundred sixty (360) day year, for the actual number of days elapsed. Default interest shall be charged in accordance with the terms of the kids club agreements,Term Loan. During the six months ended June 30, 2023, the Company made a payment of $321,487, inclusive of $107,201 of interest. As of June 30, 2023, there was $2,658,140, net or debt origination fees, outstanding under the Term Loan.
Revolver
There is no amount invested bydrawn on the individual investor was to be repaid byRevolver as of June 30, 2023 and no amounts were drawn during the Group Kids Club, with a specified percentagethree and six months ended June 30, 2023. When drawn, the outstanding principal balance 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. Onrevolver shall accrue interest from the date of the exchange agreement,draw of the market pricegreater of our common stock was $13.50 and we recorded a loss on extinguishment of debt(i) 5.50% per annum, or (ii) the Prime Rate (as defined in the amount of $21,000Revolver) plus 0.75% per annum.
IMAX Agreement
As discussed in Note 17, on our consolidated statement of operations.
Equity Finance Agreements
During the years ended December 31, 2012 and 2011,June 24, 2022, we entered into equity finance agreements, for the future productionBlue Angels Agreement with IMAX. Under the terms 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 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 recordedthis agreement, as of December 31, 2015.
On June 23, 2016,2022, 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.
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 September 30, 2017 and December 31, 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our condensed 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 September 30, 2017 and December 31, 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our condensed 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 September 30, 2017 and December 31, 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our condensed 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:
Notes: | |
First Group Film Funding note | $1,160,000
|
Web Series Funding note | 340,000
|
Second Group Film Funding note | 4,970,990
|
| $6,470,990
|
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 payable on December 7, 2016. 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$1,500,000 pursuant to the convertible 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 toBlue Angels Agreement, 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 condensed consolidated balance sheet. Undercapitalized production costs. On April 26, 2023, we paid the
remaining $500,000 pursuant to the Blue Angels Agreement.On April 25, 2023, IMAX entered into an acquisition agreement with Amazon Content Services, LLC for the distribution rights of Blue Angels. We estimate that we will derive approximately $3.5 million from the acquisition agreement and we expect that the documentary motion picture will be released in early 2024.
Convertible Notes Receivable
As of June 30, 2023, we hold convertible notes receivable from JDDC Elemental LLC which operates Midnight Theatre. These convertible notes receivable are recorded at their principal face amount plus accrued interest. Due to their short-term maturity and conversion terms (described below), these have been recorded at the face value of the April 2016 subscription agreements, each investor had the option to purchase additional shares of common stock at the purchase price,note and an allowance for credit losses has 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 eachbeen established.
As of June 28, 2016 and October 13, 2016 and we issued (i) 50,000 shares for an aggregate purchase price30, 2023, the Midnight Theatre notes amount to $4.6 million, inclusive accrued interest receivable 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 toare convertible at the
termsoption of the
subscription agreements, we sold an aggregateCompany into Class A and B Units of
35,000 sharesMidnight Theatre.Critical Accounting Estimates
The preparation 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 agreementsfinancial statements in accordance 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 from the date of issue, with the exception of one noteaccounting principles generally accepted in the amount of $75,000 which matures two years from the date of issue. The principalUnited States (“U.S. GAAP”) requires management to make estimates and any accrued interest of the each of the convertible promissory notes are convertible by the respective holder at a price of either (i) the 90 trading day average price per share of common stock as of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as definedassumptions about future events that affect amounts reported in each of the convertible promissory notes) of common stock is made, 95% of the Public Offering Share price (as defined in each of the convertible promissory notes).
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 shall be payable immediately if 42West sells, assigns, transfers, or otherwise disposes 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 during April 2017, and the remaining $225,000 to be paid in January 2018.
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, andrelated notes, as well as the related disclosure of contingent assets and liabilities. We base ourliabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and on various other assumptionsfactors that we believe are believed to be 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.circumstances. Actual results may differ from these estimates.
estimates under different assumptions and conditions. Our significant accounting policies are discussed in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022.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 thatconsider the followingfair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most 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.
We are responsible for certain contingent compensation, known as participations, paid to certain creative participants such as writers, directors and actors. Generally, these payments are dependent on the performance of the web series and are based on factors such as total revenue as defined per each of the participation agreements. We are also responsible for residuals, which are payments based on revenue generated from secondary markets that are generally paid to third parties pursuant to a collective bargaining, union or guild agreement. These costs are accrued to direct operating expenses as the revenues, as defined in the participation agreements, are achieved and as sales to the secondary markets are made triggering the residual payment.
Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates are likely to differ to some extent in the future from actual results. Our management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized deferred production costs to its estimated fair value. Our management estimates the ultimate revenue based on existing contract negotiations with domestic distributors and international buyers as well as management’s experience with similar productions in the past.
An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, less amortization expense of deferred productions costs, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher amortization expense of capitalized production costs. Our management evaluates unamortized production costs for impairment whenever there is an event that may signal that the fair value of the unamortized production costs are below their carrying value. One example that may trigger this type of analysis is the under-performance in the domestic box office of a feature film. For digital productions this analysis may occur if we are unable to secure sufficient advertising revenue for our web series. We typically perform an impairment analysis using a discounted cash flow method. Any write-down resulting from an impairment analysis is included in direct costs within our consolidated statements of operations.
Revenue Recognition
Revenue from web series and feature films is recognized in accordance with guidance of FASB ASC 926-60 “Revenue Recognition – Entertainment-Films”. Revenue is recorded when a contract with a buyer for the web series or feature film exists, the web series or feature film is complete in accordance with the terms of the contract, the customer can begin exhibiting or selling the web series or feature film, the fee is determinable and collection of the fee is reasonable. Revenues from licensing agreements for distribution in foreign territories typically include a minimum guarantee with the possibility of sharing in additional revenues depending on the performance of the web series or feature film in that territory. Revenue for these types of arrangements are recorded when the web series or motion picture has been delivered and our obligations under the contract have been satisfied.
On occasion, we may enter into agreements with third parties for the co-production or distribution of a web series. We may also enter into agreements for the sponsorship or integration of a product in a web series production. Revenue from these agreements will be recognized when the web series is complete and ready to be exploited. In addition, the advertising revenue is recognized at the time advertisements are shown when a web series is aired. Cash received and amounts billed in advance of meeting the criteria for revenue recognition is classified as deferred revenue.
Revenue from public relations consists of fees from the performance of professional services and billings for direct costs reimbursed by clients. Fees are generally recognized on a straight-line or monthly basis which approximates the proportional performance on such contracts. Direct costs reimbursed by clients are billed as pass-through revenue with no mark-up.
Deferred revenue represents customer advances or amounts allowed to be billed under the contracts for work that has not yet been performed or expenses that have not yet been incurred.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Observable inputs are based on market data obtained from sources independent of our company. Unobservable inputs reflect our own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, defined as follows:
| Level 1 | — | Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date. |
| Level 2
| —
| Inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data. |
| Level 3
| —
| Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. Unobservable inputs for the asset or liability that reflect management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date. |
We carry certain derivative financial instruments using inputs classified as “Level 3” in the fair value hierarchy on our balance sheets.
Warrants
When we issue warrants, we evaluate the proper balance sheet classification of the warrant to determine whether the warrant should be classified as equity or as a derivative liability on the consolidated balance sheets. In accordance with ASC 815-40, Derivatives and Hedging-Contracts in the Entity’s Own Equity (ASC 815-40), we classify a warrant as equity so long as it is “indexed to the company’s equity” and several specific conditions for equity classification are met. A warrant is not considered indexed to the company’s equity, in general, when it contains certain types of exercise contingencies or contains certain provisions that may alter either the number of shares issuable under the warrant or the exercise price of the warrant, including, among other things, a provision that could require a reduction to the then current exercise price each time we subsequently issues equity or convertible instruments at a per share price that is less than the current conversion price (also known as a “full ratchet down round provision”). If a warrant is not indexed to the company’s equity, it is classified as a derivative liability which is carried on the consolidated balance sheets at fair value with any changes in its fair value recognized currently in the statements of operations.
We classified the G, H, I, J and K warrants issued during 2016 as derivative liabilities, because they contain full-ratchet down round provisions and report the warrants on our consolidated balance sheets at fair value under the caption “warrant liability” and report changes in the fair value of the warrant liability on the consolidated statements of operations under the caption “change in fair value of warrant liability”. Warrants J and K were exercised during 2017.
We measured the Series G, H, and I warrants we issued in 2016 at fair value in the consolidated financial statements as of and for the nine months ended September 30, 2017, using inputs classified as “level 3” of the fair value hierarchy. We develop unobservable “level 3” inputs using the best information available in the circumstances, which might include our own data, or when we believe inputs based on external data better reflect the data that market participants would use, we base our inputs on comparison with similar entities.
We select a valuation technique to measure “level 3” fair values that we believe is appropriate in the circumstances. In the case of measuring the fair value of the Series G, H, and I warrants at September 30, 2017 and for the nine months then ended, duethey are important to the existence of the full ratchet down round provision, which creates a path-dependent nature of the exercise prices of the warrants, we decided a Monte Carlo Simulation model, which incorporates inputs classified as “level 3” was appropriate.
Key inputs used in the Monte Carlo Simulation model to determine the fair value of the Series G, H, and I warrants at September 30, 2017 are as follows:
| | |
| Inputs | | | |
Volatility(1) | 71.2% | 67.0% | 76.3% |
| Expected term (years) | 0.33 | 1.33 | 2.33 |
| Risk free interest rate | 1.107% | 1.363% | 1.520% |
| Common stock price | $8.40 | $8.40 | $8.44 |
| Exercise price | $9.22 | $9.22 | $9.22 |
(1)“Level 3” input.
The “level 3” stock volatility assumption represents the range of the volatility curves used in the valuation analysis that we determined market participants would use based on comparison with similar entities. The risk-free interest rate is interpolated where appropriate, and is based on treasury yields. The valuation model also included a “level 3” assumption we developed as to dates of potential future financings by us that may cause a reset of the exercise price of the warrants.
Put Rights
In connection with the 42West acquisition, we entered into put agreements with each of the sellers of 42West granting them the right, but not the obligation, to cause us to purchase up to an aggregate of 1,187,094 of their shares received as consideration for their membership interest of 42West. We have agreed to purchase the shares at $9.22 per share during certain specified exercise periods as set forth in the put agreements, up until December 2020. During the nine months ended September 30, 2017, we purchased 116,591 shares of common stock for an aggregate amount of $1,075,000 from the sellers.
We use a Black-Scholes Option Pricing model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC820. The unobservable inputs utilized for measuring the fair value of the put rights reflects management’s own assumptions that market participants would use in valuing the put rights. The put rights were initially measured as of the acquisition date (March 30, 2017) and are subsequently measured at each balance sheet date with changes in the fair value between balance sheet dates, being recorded as a gain or loss in the statement of operations.
We determined the fair value by using the following key inputs to the Black-Scholes Option Pricing Model:
| Inputs | On the date of Acquisition (March 30, 2017) | |
| Equity Volatility estimate | 75% | 82.5% |
| Discount rate based on US Treasury obligations | 0.12% - 1.70% | 1.04% - 1.65% |
Contingent Consideration
The sellers of 42West have the potential to earn up to approximately $9.3 million (1,727,551 sharesportrayal of our common stock) on achievement of adjusted EBITDA targets based on operations of 42West over the three year period beginning January 1, 2017.
To value the contingent consideration, we used a Monte Carlo Simulation Model, which incorporatesfinancial condition and require significant inputs that are not observable in the market,or complex judgment and thus represents Level 3 measurement as defined in ASC820. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the contingent consideration. The contingent consideration was initially measured as of the acquisition date (March 30, 2017) and is subsequently measured at each balance sheet date with changes in the fair value between balance sheet dates, being recorded as a gain or loss in the statement of operations.
We determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:
| Inputs | On the date of Acquisition (March 30, 2017) | |
| Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration) | 1.03% -1.55% | 1.31%- 1.62% |
| Annual Asset Volatility Estimate | 72.5% | 80% |
| Estimated EBITDA | $3,600,000 - $3,900,000 | $3,600,000 - $3,900,000 |
Since derivative financial instruments, such as the Series G, H, and I warrants, and the put rights and contingent consideration are initially and subsequently carried at fair values, our income or loss will reflect the volatility in changes to these estimates and assumptions. The fair value of these derivative financial instruments is sensitive to changes at each valuation date in our common stock price, the volatility rate assumption, the exercise price and discount rates, which could change if we were to do a dilutive future financing.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using tax rates in effect for the years in which the differences are expected to reverse. The effects of changes in tax laws on deferred tax balances are recognized in the period the new legislation is enacted. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income. We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical meritspart of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.
management.Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 31 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of September 30, 2017, we did not have any off-balance sheet arrangements.
Special Note Regarding Forward-Looking Statements
Certain statements in thisSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q constitute “forward-looking”contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements for purposes of federal and state securities laws. Thesemay include, but are not limited to, statements concern expectations, beliefs, projections,relating to our objectives, plans and strategies, anticipatedas well as statements, other than historical facts, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. These statements are often characterized by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” ‘intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “goal” or “continue” or the negative of these terms or other similar expressions.
Forward-looking statements are based on assumptions and assessments made in light of our experience and perception of historical trends, current conditions, expected and similar expressions concerning matters thatfuture developments and other factors believed to be appropriate. Forward-looking statements are not historical facts. Such forward-looking statements include:
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our expectations regarding the potential benefits and synergies we can derive from our acquisitions;
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our expectations regarding increased movie marketing budgets at several large key clients and the impact of such increased budgets on revenue and profit in 42West’s Entertainment and Targeted Marketing division over the next several years;
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our intention to hire new individuals or teams whose existing books of business and talent rosters can be accretive to revenues and profits of the business and our expectations regarding the impact of such additional hires on the growth of our revenues and profits;
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our beliefs regarding the drivers of growth in 42West’s Strategic Communications division, the timing of such anticipated growth trend and its resulting impact on the overall revenue mix of 42West;
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our intention to grow and diversify our portfolio of film and digital content and our beliefs regarding our strategies to accomplish such growth and diversification;
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our intention to selectively pursue complementary acquisitions to enforce our competitive advantages, scale and grow, our belief that such acquisitions will create synergistic opportunities and increased profits and cash flows, and our expectation regarding the timing of such acquisitions;
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our expectations concerning our ability to derive future cash flows and revenues from the production, release and advertisingguarantees of future web series on online platforms, and the timing of receipt of such cash flows and revenues;
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our expectations concerning the timing of production and release of future feature films and digital projects, and our intention to obtain financing for such projects;
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our intention to source potential distribution partners for our web series, South Beach – Fever, and to enter into distribution agreements for future digital productions;
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our expectation that we will continue to receive revenues from our motion picture, Max Steel from (i) international revenues expected to be derived through license agreements with international distributors and (ii) other secondary distribution revenues;
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our intention to use our purchased scripts for future motion picture and digital productions;
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our expectations to raise funds through loans, additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of financing alternatives;
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our beliefs regarding the merits of claims asserted in the class action against 42West and other defendants and our defenses against such claims; and
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our intention to implement improvements to address material weaknesses in internal control over financial reporting.
These forward-looking statements reflect our current views about future eventsperformance and are subject to risks
and uncertainties,
many of which are outside of our control. You should not place undue reliance on these forward-looking statements, which reflect our views only as of the date of this Quarterly Report on Form 10-Q, and
assumptions. We wishwe undertake no obligation to
caution readers that certain important factors may have affected and couldupdate these forward-looking statements in the future,
affect our actual results andexcept as required by applicable law.Risks that could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or impliedindicated by thosethe forward-looking statements include but are not limited to,those described as “Risk Factors” in our Annual Report on Form 10-K for the following:
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fiscal year ended December 31, 2022, as updated by our ability to realize the anticipated benefits of acquisitions;
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our ability to profitably exploit the transferability of 42West’s skillssubsequently filed Quarterly Reports on Forms 10-Q and experience to related business sectors;
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our ability to successfully identify and complete acquisitions in line with our growth strategy and anticipated timeline, and to realize the anticipated benefits of those acquisitions;
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our ability to accurately interpret trends and predict future demand in the digital media and film industries;
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our ability to repay our prints and advertising loan in accordance with the terms of the agreement so that we will be able to continue to receive revenues from Max Steel;
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adverse events, trends and changes in the entertainment or entertainment marketing industries that could negatively impact 42West’s operations and ability to generate revenues;
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loss of a significant number of 42West clients;
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the ability of key 42West clients to increase their movie marketing budgets as anticipated;
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our ability to continue to successfully identify and hire new individuals or teams who will provide growth opportunities;
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uncertainty that our strategy of hiring of new individuals or teams will positively impact our revenues and profits;
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lack of demand for strategic communications services by traditional and non-traditional media clients who are expanding their activities in the content production, branding and consumer products sectors;
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unpredictability of the commercial success of our current and future web series and motion pictures;
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economic factors that adversely impact the entertainment industry, as well as advertising, production and distribution revenue in the online and motion picture industries;
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our ability to identify, produce and develop online digital entertainment and motion pictures that meet industry and customer demand;
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competition for talent and other resources within the industry and our ability to enter into agreements with talent under favorable terms;
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our ability to attract and/or retain the highly specialized services of the 42West executives and employees and our CEO;
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availability of financing from our CEO and other investors under favorable terms;
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our ability to adequately address material weaknesses in internal control over financial reporting;
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uncertainties regarding the outcome of pending litigation; and
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our ability to accurately predict the impact of recent Accounting Standards UpdatesCurrent Reports on our financial position or results of operations.
Any forward-looking statements, which we make in this Form 10-Q, speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Forms 8-K.ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on the Effectiveness of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of SeptemberJune 30, 2017.2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses disclosed in our annual reportAnnual Report on Form 10-K for the year ended December 31, 2016,2022, filed with the Securities and Exchange Commission (the “SEC”)SEC on April 17, 2017,March 31, 2023, which have not been fully remediated as of the date of the filing of this report.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
In orderWe have begun the process of designing and implementing effective internal controls measures to remediate the other material weaknesses inimprove our internal control over financial reporting we areand remediate the material weaknesses. Our internal control remediation efforts include the following:
| · | Developing formal policies and procedures over the Company’s fraud risk assessment and risk management function; |
| · | Developing policies and procedures to enhance the precision of management review of financial statement information and control impact of changes in the external environment; |
| · | We have entered into an agreement with a third-party consultant that assists us in analyzing complex transactions and the appropriate accounting treatment; |
| · | We are enhancing our policies, procedures and documentation of period end closing procedures; |
| · | Implementing policies and procedures to enhance independent review and documentation of journal entries, including segregation of duties; and |
| · | Reevaluating our monitoring activities for relevant controls. |
Management is beginning the process of finalizing aimplementing and monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Management believes our planned remedial efforts will effectively remediate the identified material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address control deficiencies or determine it necessary to modify the remediation plan under the direction of our Board of Directors, and intend to implement improvements during fiscal year 2017 as follows:
● | Our Board of Directors will review the COSO “Internal Control over Financial Reporting - Guidance for Smaller Public Companies” that was published in 2006 including the control environment, risk assessment, control activities, information and communication and monitoring. Based on this framework, the Board of Directors will implement controls as needed assuming a cost benefit relationship. In addition, our Board of Directors will also evaluate the key concepts of the updated 2013 COSO “Internal Control – Integrated Framework” as it provides a means to apply internal control to any type of entity |
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| Document all significant accounting policies and ensure that the accounting policies are in accordance with accounting principles generally accepted in the U.S. and that internal controls are designed effectively to ensure that the financial information is properly reported. Management will engage independent accounting specialists, if necessary, to ensure that there is an independent verification of the accounting positions taken.
We will implement a higher standard for document retention and support for all items related to revenue recognition. All revenue arrangements that are entered into by us will be evaluated under the applicable revenue guidance and management should document their position based on the facts and circumstances of each agreement.
|
● | In connection with the reported inadequately documented review and approval of certain aspects of the accounting process, management has plans to assess the current review and approval processes and implement changes to ensure that all material agreements, accounting reconciliations and journal entries are reviewed and approved on a timely basis and that this review process is documented by a member of management separate from the preparer. A documented quarter end close procedure will be established whereby management will review and approve reconciliations and journal entries. Management will formally approve new vendors that are added to the master vendor file. |
● | In connection with the reported inadequate segregation of duties, management intends to hire additional personnel in the Accounting and Finance area. This will allow for adequate segregation of duties in performing the accounting processes. |
described above.Changes in Internal Control over Financial Reporting
During our lastthe most recently completed fiscal quarter, there werehave been no changes in our internal controlscontrol over financial reporting that havehas materially affected, or areis reasonably likely to materially affect, suchour internal controlscontrol over financial reporting.reporting for the fiscal quarter covered by this report.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A putative class action was filed on May 5, 2017,The Company may be subject to legal proceedings, claims, and liabilities that arise in the United States District Court forordinary course of business. In the Southern Districtopinion of Florida by Kennethmanagement and Emily Reel on behalfbased upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a purported nationwide class of individuals who attended the Fyre Music Festival, or the Fyre Festival,material effect in the Bahamas on April 28-30, 2017.Company’s financial position, results of operations and cash flows. The complaint names several defendants, including 42West, along with the organizersCompany is not aware of any pending litigation as of the Fyre Festival, Fyre Media Inc. and Fyre Festival LLC, individuals related to Fyre, and another entity called Matte Projects LLC. The complaint alleges that the Fyre Festival was promoted by Fyre as a luxurious experience through an extensive marketing campaign orchestrated by Fyre and executed with the assistancedate of outside marketing companies, 42West and Matte, but that the reality of the festival did not live up to the luxury experience that it was represented to be. The plaintiffs assert claims for fraud, negligent misrepresentation and for violation of several states’ consumer protection laws. The plaintiffs seek to certify a nationwide class action comprised of “All persons or entities that purchased a Fyre Festival 2017 ticket or package or that attended, or planned to attend, Fyre Festival 2017” and seek damages in excess of $5,000,000 on behalf of themselves and the class. The plaintiffs sought to consolidate this action with five other class actions also arising out of the Fyre Festival (to which 42West is not a party) in a Multi District Litigation proceeding, or MDL, which request was denied by the Judicial Panel on Multi District Litigation. On September 10, 2017, one of the defendants filed a cross-claim against all other named defendants seeking indemnity and contribution. On October 2, 2017, 42West filed a motion to dismiss the cross-claim. We believe the claims against 42West are without merit and that we have strong defenses to the claims.
A description ofThere have been no material changes to the risk factors associated with our business is containeddisclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162022 filed with the SEC on April 17, 2017 (the “Form 10-K”) and below:
Risks Related to our Business and Financial Condition
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 DecemberMarch 31, 2016 and September 30, 2017. Approximately $3.7 million of the total debt as of September 30, 2017 represents the fair value of the put options in connection with the 42West acquisition, which may or may not be exercised by the sellers. Approximately $5.1 million of our indebtedness as of September 30, 2017 ($2.4 million outstanding under the prints and advertising loan agreement plus $2.7 million outstanding under the production service agreement) was incurred by our subsidiary Dolphin Max Steel Holdings LLC and Max Steel Productions, LLC, a variable interest entity (or VIE) created in connection with the financing and production of Max Steel (the “Max Steel VIE”). The prints and advertising loan is partially secured by a $4.5 million corporate guaranty from a party associated with the motion picture, of which we have agreed to backstop $620,000. As a condition precedent to closing the loans, Dolphin Max Steel Holdings LLC delivered to the lenders clear chain-of-title to the rights of the motion picture Max Steel. Repayment of these loans was intended to be made from revenues generated by Max Steel in the U.S. and outside of the U.S. Max Steel did not generate sufficient funds to repay either of these loans prior to the maturity date. As a result, if the lenders foreclose on the collateral securing the loans, our subsidiary will lose the copyright for Max Steel and, consequently, will no longer receive any revenues from Max Steel. In addition, we would impair the entire capitalized production costs and accounts receivable related to the foreign sales of Max Steel included as assets on our balance sheet, which as of September 30, 2017 were $1.9 million and $1.4 million, respectively. We are not parties to either of the loan agreements and have not guaranteed to the lenders any of the amounts outstanding, although we have provided a $620,000 backstop to the guarantor of the prints and advertising loan, as described above. However, if a lender were to successfully assert that we are liable to the lenders for the payment of our subsidiary’s or the Max Steel VIE’s debt despite the lack of contractual obligation, we do not have sufficient funds to repay these loans, which would have a material adverse effect on our liquidity and financial condition.
| | | |
| Related party debt | $684,326 | $1,734,867 |
| Max Steel debt | $18,743,069
| $5,063,846 |
| Total Debt (including related party debt) | $19,727,395 | $13,523,713
|
| Total Stockholders’ Equity (Deficit) | $(31,867,797)
| $2,733,694
|
Our indebtedness could have important negative consequences, including:
●
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;
●
we may have to pay higher interest rates upon obtaining future financing, thereby reducing our cash flows; and
●
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 businesses and other factors contained in these Risk 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, 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.
Litigation or legal proceedings could expose us to significant liabilities.
We are, and in the future may become, party to litigation claims and legal proceedings. For example, 42West was named as one of the defendants in a putative class action alleging fraudulent misrepresentation, negligent misrepresentation, fraud in the inducement, breach of contract, and violation of various state consumer protection laws. The putative class action, which was filed in the U.S. District Court for the Southern District of Florida on May 5, 2017, alleged that 42West and the other defendants made false and misleading representations in promoting the “Fyre Festival”, which did not live up to the luxury experience that it was represented to be. The plaintiffs seek to certify a nationwide class action and seek damages in excess of $5,000,000 on behalf of themselves and the class. A class action lawsuit would require significant management time and attention and would result in significant legal expenses. While we believe the claims against 42West are without merit, regardless of the merit or ultimate results of any litigation, such claims could divert management’s attention and resources from our business, which could harm our financial condition and results of operations.
The operation of our business could be adversely affected if Max Steel VIE goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
Max Steel VIE holds certain of our intellectual property and film distribution rights which are security for certain of the Max Steel VIE’s debt obligations. Max Steel VIE is currently in default on all or a portion of those debt obligations. If Max Steel VIE is unable to repay such debts and the debt holders foreclose on such debts and take control of the intellectual property and film distribution rights, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. In addition, if Max Steel VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our future revenue from such film.
Risks Related to our Common Stock
Changes in the fair value of warrants to purchase shares of our common stock may have a material impact on, and result in significant volatility in, our reported operating results.
We have determined that our Series G Warrants, Series H Warrants and Series I Warrants to purchase shares of our common stock should be accounted for as derivatives. These warrants require us to “mark to market” (i.e., record the derivatives at fair value) based on the price as of the end of each reporting period as liabilities on our balance sheet and to record the change in fair value during each period as income or expense in our current period consolidated statements of operations. The fair value is most sensitive to changes, at each valuation date, in our common stock price, the volatility rate assumption, and the exercise price, which could change if we were to do a dilutive future financing. This accounting treatment could have a material impact on, and could significantly increase the volatility of, our reported operating results, even though there is no related cash flow impact to us.
Accounting for the put rights 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 1,187,094 of their shares of common stock received as consideration for a purchase price equal to $9.22 per share during certain specified exercise periods set forth in the put agreements up until December 2020. As of the date of this filing, we have repurchased an aggregate of 116,591 shares of common stock from the sellers pursuant to the put rights. The put rights are an embedded equity derivative within our common stock requiring certain fair value measurements at each reporting period. We record the fair value of the 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 are inherently difficult to value. Additionally, derivative accounting for the put rights also affects the accounting for other items in our financial statements, including our exercisable warrants, and these effects are inherently difficult to determine, require difficult estimates and are very subjective. 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.
2023.ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
UnregisteredPROCEEDSRecent Sales of EquityUnregistered Securities
On July 18, 2017, the Company entered into a convertible promissory note agreement with an unrelated third party and received $250,000. The note bears interest at 10% per annum and matures on July 19, 2018. The holder of the convertible note has the right to convert all or a portion of the Principal and any accrued interest into shares of common stock of the Company at price which is (i) the 90 trading-day average price per share as of the date of the Notice of Conversion or (ii) if an Eligible Offering, as defined in the agreement has occurred, 95% of the public offering share price.
On July 26, 2017,June 15, 2023, the Company entered into a subscription agreement to sell(the “Subscription Agreement”) with an individual for a convertible promissory note (each a “Note”) in the principal amount of $250,000 to an unrelated party.$200,000 and received cash proceeds of $200,000. The convertible promissory note (the “Note”) matures one year from the date of issuance andNote bears interest at a rate of 10% per annum.annum and mature four years from its issuance date. The noteholder may convert the principal balance of the Note and any accrued interest thereon at any time before the maturity date of the Note are convertible byinto common stock of the holder at a price of either (i) 90 dayCompany using the 90-day trailing average trading price of the stock or (ii) if an Eligible Offering of the Company’s stock (as defined in the Note)common stock. The floor on such conversion price is made, 95% of the Public Offering Share price as defined in the Note.
On July 27, 2017, the Company entered into a subscription agreement to sell a convertible promissory note in the amount of $25,000 to an unrelated party. $2.00.The convertible promissory note (the “Note”) matures one year from the date of issuance and bears interest at 10% per annum. The principal and any accrued interestsale of the Note, are convertibleand any shares of common stock to be issued upon conversion thereof will be issued by the holder at a price of either (i) 90 day trailing trading price of the stock or (ii) if an Eligible Offering of the Company’s stock (as defined in the Note) is made, 95% of the Public Offering Share price as defined in the Note.
On July 31, 2017, the Company entered into a subscription agreement to sell a convertible promissory note in the amount of $50,000 to an unrelated party. The convertible promissory note (the “Note”) matures one year from the date of issuance and bears interest at 10% per annum. The principal and any accrued interest of the Note are convertible by the holder at a price of either (i) 90 day trailing trading price of the stock or (ii) if an Eligible Offering of the Company’s stock (as defined in the Note) is made, 95% of the Public Offering Share price as defined in the Note.
On August 2, 2017, the Company agreed to pay an invoice in the amount of $28,856 using 2,886 shares of Common Stock at a price of $10.00 per share.
On August 30, 2017, the Company entered into a subscription agreement to sell a convertible promissory note in the amount of $50,000 to an unrelated party. The convertible promissory note (the “Note”) matures one year from the date of issuance and bears interest at 10% per annum. The principal and any accrued interest of the Note are convertible by the holder at a price of either (i) 90 day trailing trading price of the stock or (ii) if an Eligible Offering of the Company’s stock (as defined in the Note) is made, 95% of the Public Offering Share price as defined in the Note.
On September 6, 2017, the Company entered into a subscription agreement to sell a convertible promissory note in the amount of $50,000 to an unrelated party. The convertible promissory note (the “Note”) matures one year from the date of issuance and bears interest at 10% per annum. The principal and any accrued interest of the Note are convertible by the holder at a price of either (i) 90 day trailing trading price of the stock or (ii) if an Eligible Offering of the Company’s stock (as defined in the Note) is made, 95% of the Public Offering Share price as defined in the Note.
On September 8, 2017, the Company entered into a subscription agreement to sell a convertible promissory note in the amount of $50,000 to an unrelated party. The convertible promissory note (the “Note”) matures one year from the date of issuance and bears interest at 10% per annum. The principal and any accrued interest of the Note are convertible by the holder at a price of either (i) 90 day trailing trading price of the stock or (ii) if an Eligible Offering of the Company’s stock (as defined in the Note) is made, 95% of the Public Offering Share price as defined in the Note.
On September 22, 2017, the Company entered into two subscription agreements to sell convertible promissory notes (the “Notes”) in the aggregate amount of $150,000 to the same unrelated party. One of the Notes matures one year from the date of issuance and the other matures two years from the date of issuance. Each note bears interest at 10% per annum. The principal and any accrued interest of the Notes are convertible by the holder at a price of either (i) 90 day trailing trading price of the stock or (ii) if an Eligible Offering of the Company’s stock (as defined in the Notes) is made, 95% of the Public Offering Share price as defined in the Notes.
All of the foregoing issuances were made in private placements in reliance upon the exemption from registration
underprovided by Section 4(a)(2) of the Securities
Act of 1933, as amended (the “Securities Act”), and/or Rule 506 of Regulation D promulgated thereunder. Each of the investors represented to us that such investor was an accredited investor as defined in Rule 501(a) under the Securities Act and that such investor’s shares were being acquired for investment purposes.Act.ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
Company Purchases of Equity Securities
The following table presents information related to our repurchases of our shares of common stock during the quarter ended September 30, 2017:
| Period | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | |
| 7/1/2017 – 7/31/2017 | 8,134 | $9.22
| — | — |
| 8/1/2017 – 8/31/2017 | — | — | — | — |
| 9/1/2017 – 9/30/2017 | 32,538
| $9.22
| — | — |
| Total | 40,672
| $9.22
| — | — |
(1)
Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Sellers exercised their Put Rights and caused the Company to purchase 40,672 shares of Common Stock for an aggregate amount of $375,000. See Note 4 — Acquisition of 42West for further discussion of the Put Agreements.
Exhibit No. | | Description |
| |
| | Amended and Restated Articles of Incorporation of Dolphin Entertainment, Inc. (conformed copy incorporating all amendments through September 14, 2017). |
| | | |
| 31.1* | | Certification of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-OxleySarbanes Oxley Act of 2002.2002 |
| 31.2* | | |
| | Certification of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1# | | |
| | Certification of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002 |
| 32.2# | | |
| | Certification of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002 |
| 101.INS | | |
101.INS | | Inline XBRL Instance Document
(the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.SCH101.CAL | | XBRL Taxonomy Extensions Schema |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase
Document |
| 101.PRE | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized November 17, 2017.
August 14, 2023.| | Dolphin Entertainment, Inc. | |
| By: | /s/ William O’Dowd IV | |
| | Name: William O’Dowd IV | |
| | | Chief Executive Officer | |
| Dolphin Entertainment, Inc.
| |
| | By: | /s/ Mirta A Negrini | William O’Dowd IV |
| | | Name: Mirta A Negrini | William O’Dowd IV |
| | | Chief Executive Officer |
| By: | /s/ Mirta A Negrini |
| | Name: Mirta A Negrini |
| | Chief Financial Officer |