| MERGERS AND ACQUISITIONS | NOTE 3 MERGERS AND ACQUISITIONS Viewpoint On October 31, 2018, (the Viewpoint Closing Date) the Company acquired all of the issued and outstanding capital stock of Viewpoint, a Massachusetts corporation (the Viewpoint Purchase), pursuant to a share purchase agreement (the Viewpoint Purchase Agreement), among the Company and the former holders of Viewpoints outstanding capital stock (the Viewpoint Shareholders). Viewpoint is a full-service creative branding and production house that has earned a reputation as one of the top producers of promotional and brand-support videos for a wide variety of leading cable networks, media companies and consumer-product brands. The total consideration payable to the Viewpoint Shareholders in respect of the Viewpoint Purchase comprises the following: (i) $500,000 in shares of Common Stock, based on a price per share of Common Stock of $2.29 and (ii) $1.5 million in cash (as adjusted for certain working capital and closing adjustments and transaction expenses). On the Viewpoint Closing Date, the Company issued to the Viewpoint Shareholders 218,088 shares of Common Stock and paid the Viewpoint Shareholders an aggregate of $750,000 in cash (the Initial Consideration), adjusted for working capital, indebtedness and certain transaction expenses. Pursuant to the Viewpoint Purchase Agreement, the Company paid to the Viewpoint Shareholders an additional $230,076 in cash ($250,000 less a working capital adjustment) on April 30, 2019 and has agreed to pay $250,000 on each of October 31, 2019 and April 30, 2020 for a total of $750,000, less any adjustments for working capital (the Post Closing Consideration and, together with the Initial Consideration, the Viewpoint Purchase Consideration). The Viewpoint Purchase Agreement contains customary representations, warranties and covenants of the parties thereto. The Common Stock issued as part of the Initial Consideration has not been registered for resale under the Securities Act of 1933, as amended (the Securities Act). As a condition to the Viewpoint Purchase, two of the Viewpoint Shareholders, Carlo DiPersio and David Shilale have entered into employment agreements with the Company to continue as employees after the closing of the Viewpoint Purchase. Mr. DiPersios employment agreement is through December 31, 2020 and the contract defines base compensation and a bonus structure based on Viewpoint achieving certain financial targets. Mr. Shilales employment agreement is for a period of three years from the Viewpoint Closing Date and the contract defines the base compensation and a commission structure based on Viewpoint achieving certain financial targets. The bonus for Mr. Shilale is determined at the sole discretion of the Companys Board of Directors and management. Neither agreement provides for guaranteed increases to the base salary. The employment agreements contain provisions for termination and as a result of death or disability and entitles the employee to vacations and to participate in all employee benefit plans offered by the Company. The acquisition-date fair value of the consideration transferred totaled $1,960,165, which consisted of the following: Common Stock issued at closing (218,088 shares) $ 427,452 Cash Consideration paid at closing 750,000 Working capital adjustment, net 32,713 Cash Installment paid on April 30, 2019 250,000 Cash Installment to be paid on October 31, 2019 (included in other current liabilities) 250,000 Cash Installment to be paid on April 30, 2020 (included in other current liabilities) 250,000 $ 1,960,165 The Company has engaged an independent third-party valuation expert to determine the fair values of the various forms of consideration transferred. The fair value of the 218,088 shares of Common Stock issued on the Viewpoint Closing Date was determined based on the closing market price of the Common Stock on the Viewpoint Closing Date of $1.96 per share. The following table summarizes the fair values of the assets acquired and liabilities assumed at the Viewpoint Closing Date (as adjusted): Cash $ 206,950 Accounts receivable 503,906 Other current assets 102,411 Property, equipment and leasehold improvements 183,877 Prepaid expenses 32,067 Intangible assets 450,000 Total identifiable assets acquired 1,479,211 Accrued expenses (165,284 ) Accounts payable (77,394 ) Deferred tax liability (182,416 ) Contract liability (190,854 ) Total liabilities assumed (615,948 ) Net identifiable assets acquired 863,263 Goodwill 1,096,902 Net assets acquired $ 1,960,165 Of the calculation of $450,000 of acquired identifiable intangible assets, $220,000
was assigned to customer relationships (5 years useful life) and $100,000 was assigned to the trade name (5-year useful
life), that were recognized at fair value on the acquisition date. The customer relationships will be amortized using an
accelerated method, and the trade name will be amortized using the straight-line method. In addition, the Company recognized
a favorable lease intangible asset from the Companys Massachusetts office lease in the amount of $130,000. The
favorable lease intangible asset was amortized using the straight-line method over the remaining lease term of 26 months. On
January 1, 2019, the Company adopted ASU 2016-02 and reclassified the favorable lease asset recognized at the date of
acquisition to right-of-use asset. The unamortized balance of the favorable lease asset on January 1, 2019 was $120,000. The fair value of accounts receivable acquired is $503,906, with the gross contractual amount being $509,406. The Company expects $5,500 to be uncollectible. The fair values of property and equipment and leasehold improvements of $183,877, and other assets of $102,411, are based on Viewpoints carrying values prior to the acquisition, which approximate their assigned fair values. The $1,096,902 of goodwill was assigned to the entertainment publicity and marketing segment. The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of Viewpoint. The following table summarizes the original and revised fair values of the assets acquired and liabilities assumed at the acquisition date of October 31, 2018 and the related measurement period adjustments to the fair values: October 31, 2018 Measurement Period Adjustments September 30, Cash $ 206,950 $ $ 206,950 Accounts receivable 503,906 503,906 Other current assets 102,411 102,411 Property, equipment and leasehold improvements 183,877 183,877 Prepaid expenses 32,067 32,067 Intangible assets 450,000 450,000 Total identifiable assets acquired 1,479,211 1,479,211 Accrued expenses (165,284 ) (165,284 ) Accounts payable (77,394 ) (77,394 ) Contract liability (190,854 ) (190,854 ) Deferred tax liability (206,636 ) 24,220 (182,416 ) Total liabilities assumed (640,168 ) 24,220 (615,948 ) Net identifiable assets acquired 839,043 24,220 863,263 Goodwill 1,141,046 (44,144 ) 1,096,902 Net assets acquired $ 1,980,089 $ (19,924 ) $ 1,960,165 The above fair values of assets acquired and liabilities assumed are based on the information that was available as of the Viewpoint Closing Date to estimate the fair value of assets acquired and liabilities assumed. As of October 31, 2018, the Company recorded the identifiable net assets acquired of $839,043 as shown in the table above in its consolidated balance sheet. During the nine months ended September 30, 2019, the Companys measurement period adjustments of $24,220 were made and, accordingly, the Company recognized these adjustments in its September 30, 2019 condensed consolidated balance sheet to reflect the adjusted identifiable net assets acquired of $863,263 as shown in the table above. The Company also made a working capital adjustment of $19,924 that was deducted from the second installment paid to the Viewpoint Shareholders on April 30, 2019. The following is a reconciliation of the initially reported fair value to the adjusted fair value of goodwill: Goodwill originally reported at October 31, 2018 $ 1,141,046 Changes to estimated fair values Deferred tax liability (24,220 ) Working capital adjustment (19,924 ) Adjusted goodwill reported at September 30, 2019 $ 1,096,902 The estimated fair value of the deferred tax liability decreased by $24,220 primarily due to the estimated expected future tax rate applied. The Door On July 5, 2018 (the “Door Closing Date”), the Company, entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with the former members of The Door (“collectively, the “Door Members”), in respect of
its acquisition of The Door. On the Door Closing Date, The Door merged with and into Window Merger Sub, LLC, a wholly owned
subsidiary of the Company (“Merger Sub”), with Merger Sub surviving the merger and continuing as a wholly owned
subsidiary of the Company. Upon consummation of the merger, Merger Sub changed its name to The Door Marketing Group, LLC.
The Door is an entertainment public relations agency, offering talent publicity, strategic communications and entertainment
content marketing primarily in the hospitality sector. The total consideration payable to the Door Members in respect of the merger comprises the following: (i) $2.0 million in shares of the Common Stock, based on a price per share of Common Stock of $3.25, (ii) $2.0 million in cash (as adjusted for certain working capital and closing adjustments and transaction expenses) and (iii) up to an additional $7.0 million of contingent consideration in a combination of cash and shares of Common Stock upon the achievement of specified financial performance targets over a four-year period as set forth in the Merger Agreement (the Contingent Consideration). On the Door Closing Date, the Company issued to the Door Members 307,692 shares of Common Stock and paid the Door Members an aggregate of $1.0 million in cash (the Initial Consideration). In October of 2018, the Company agreed to advance $274,500 of the second installment due January 3, 2019 to the Door Members so they could meet their tax obligations. Pursuant to the Merger Agreement, on January 3, 2019, the Company paid an aggregate of $725,500 and issued 307,692 shares of Common Stock to the Door Members (the Post-Closing Consideration and, together with the Initial Consideration and the Contingent Consideration, the Merger Consideration). The Merger Agreement contains customary representations, warranties and covenants of the parties thereto. The Common Stock issued as Stock Consideration has not been registered for resale under the Securities Act. Each of the Door Members has entered into a four-year employment agreement with The Door, pursuant to which each Member has agreed not to transfer any shares of Common Stock received as consideration for the merger (the Share Consideration) in the first year following the closing date of the merger, no more than 1/3 of such Share Consideration in the second year and no more than an additional 1/3 of such Share Consideration in the third year. On the Door Closing Date, the Company entered into a registration rights agreement with the Door Members (the Registration Rights Agreement), pursuant to which the Door Members are entitled to rights with respect to the registration for resale of the Share Consideration under the Securities Act. All fees, costs and expenses of underwritten registrations under the Registration Rights Agreement will be borne by the Company, other than underwriting discounts and commissions. At any time after July 5, 2019, the Company will be required, upon the request of such Door Members holding at least a majority of the Share Consideration received by the Door Members, to file up to two registration statements on Form S-3 covering up to 25% of the Share Consideration. The acquisition-date fair value of the consideration transferred totaled $5,999,323, which consisted of the following: Common Stock issued on Door Closing Date (307,692 shares) $ 1,123,077 Common Stock issued on January 3, 2019 (307,692 shares) 1,123,077 Cash paid to Members on Door Closing Date 882,695 Members transaction costs paid on Door Closing Date 117,305 Cash paid October 2018 274,500 Cash paid on January 3, 2019 725,500 Contingent Consideration 1,620,000 Working capital adjustment ($46,000 paid in cash on March 12, 2019. $87,169 will be issued in shares of stock at a later date) 133,169 $ 5,999,323 The Company engaged an independent third-party valuation expert
to determine the fair values of the various forms of consideration transferred. The fair values of the 307,692 shares of
Common Stock issued on the Door Closing Date and the 307,692 shares of Common Stock issued on January 3, 2019 were determined
based on the closing market price of the Common Stock on the Door Closing Date of $3.65 per share. The Contingent Consideration arrangement requires that the Company
issue up to 1,538,462 shares of Common Stock and up to $2 million in cash to the Door Members on achievement of adjusted net income
targets, (as set forth in the Merger Agreement), based on the operations of The Door over the four-year period beginning January
1, 2018. The fair value of the Contingent Consideration at the Door Closing Date was $1,620,000. The fair value of the Contingent
Consideration was estimated using a Monte Carlo Simulation model, which incorporates significant inputs that are not observable
in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring
the fair value of the Contingent Consideration reflect management’s own assumptions about the assumptions that market participants
would use in valuing the Contingent Consideration as of the Door Closing Date. The key assumptions in applying the Monte Carlo
Simulation model are as follows: a risk-free discount rate of between 1.61% and 1.88% based on the U.S government treasury obligation
with a term similar to that of the contingent consideration, a discount rate of between 16.5%, and an annual asset volatility
estimate of 42.5%. Changes in the fair value on the Contingent Consideration are recorded at each balance sheet date with changes
reflected as gains or losses on the condensed consolidated statement of operations. See Note 10 (Fair Value Measurements) for
further discussion on the fair value as of September 30, 2019. The following table summarizes the fair values of the assets acquired and liabilities assumed at the Door Closing Date. Cash $ 89,287 Accounts receivable 469,344 Property, equipment and leasehold improvements 105,488 Prepaid expense 31,858 Other assets 30,667 Intangible assets 2,110,000 Total identifiable assets acquired 2,836,644 Accrued expenses (203,110 ) Accounts payable (1,064 ) Unearned income (15,500 ) Other liabilities (1,913 ) Deferred tax liabilities (593,949 ) Total liabilities assumed (815,536 ) Net identifiable assets acquired 2,021,108 Goodwill 3,978,215 Net assets acquired $ 5,999,323 Of the calculation of $2,110,000 of acquired intangible assets, $1,010,000 was assigned to customer relationships (10-year useful life), $670,000 was assigned to the trade name (10-year useful life), $260,000 was assigned to non-competition agreements (2-year useful life) and $170,000 was assigned to a favorable lease from the New York City location (26 months useful life), that were recognized at fair value on the Door Closing Date. On January 1, 2019, the Company adopted ASU 2016-02 and reclassified the favorable lease asset recognized at the date of acquisition to right-of-use asset. The unamortized balance of the favorable lease asset on January 1, 2019 was $130,769. The fair value of accounts receivable acquired is $469,344. The fair values of property and equipment and leasehold improvements of $105,488, and other assets of $62,525, are based on The Doors carrying values prior to the merger, which approximate their fair values. The amount of $3,978,215 of goodwill was assigned to the entertainment publicity and marketing segment. The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain new customers, buyer specific synergies and the assembled workforce of The Door. The following table summarizes the original and revised estimated fair values of the assets acquired and liabilities assumed at the Door Closing Date and the related measurement period adjustments to the fair values: July 5, 2018 Measurement Period Adjustments September 30, 2019 (As adjusted) Cash $ 89,287 $ $ 89,287 Accounts receivable 469,344 469,344 Property, equipment and leasehold improvements 105,488 105,488 Prepaid expenses 31,858 31,858 Other assets 30,667 30,667 Intangible assets 2,110,000 2,110,000 Total identifiable assets acquired 2,836,644 2,836,644 Accrued expenses (203,110 ) (203,110 ) Accounts payable (1,064 ) (1,064 ) Unearned income (15,500 ) (15,500 ) Other liabilities (1,913 ) (1,913 ) Deferred tax liability (584,378 ) (9,571 ) (593,949 ) Total liabilities assumed (805,965 ) (9,571 ) (815,536 ) Net identifiable assets acquired 2,030,679 (9,571 ) 2,021,108 Goodwill 3,835,475 142,740 3,978,215 Net assets acquired $ 5,866,154 $ 133,169 $ 5,999,323 The above fair values of assets acquired and liabilities assumed are based on the information that was available as of the Door Closing Date to estimate the fair value of assets acquired and liabilities assumed. As of the Door Closing Date, the Company recorded the identifiable net assets acquired of $2,030,679 as shown in the table above in its condensed consolidated balance sheet. The Company has reflected adjustments of $142,740 made during the Companys measurement period on its September 30, 2019 condensed consolidated balance sheet to reflect the adjusted identifiable net assets acquired of $2,021,108 as shown in the table above. The following is a reconciliation of the initially reported fair value to the adjusted fair value of goodwill: Goodwill originally reported at July 5, 2018 $ 3,835,475 Changes to estimated fair values Working capital adjustment 133,169 Deferred tax liability 9,571 Adjusted goodwill at September 30, 2019 $ 3,978,215 The estimated fair value of the deferred tax liability increased by $9,571 primarily due to the estimated expected future tax rate applied. Unaudited Pro Forma Consolidated Statements of Operations The following presents the Companys pro forma consolidated operations after giving effect to the Viewpoint and The Door acquisition as if the Company had completed both acquisitions on January 1, 2018 and its results had been included in the consolidated results of the Company for the three and nine months ending September 30, 2018: For the three months ended September 30, For the nine months ended September 30, Revenue $ 6,588,679 $ 24,167,118 Net (loss) income $ (33,574 ) $ 513,120 These amounts have been calculated after applying the Companys accounting policies and adjusting the results of the acquisitions to reflect (a) the amortization that would have been charged, assuming the intangible assets had been recorded on January 1, 2018 and (b) interest expense from the Pinnacle Note (as defined below) used to partially pay the consideration for The Door, calculated as if the Pinnacle Note was outstanding as of January 1, 2018. See Note 8 (Notes Payable) for more information regarding the Pinnacle Note. The impact of the acquisition of The Door and Viewpoint on the Companys
actual results for periods following the acquisitions may differ significantly from that reflected in this unaudited pro forma
information for a number of reasons. As a result, this unaudited pro forma information is not necessarily indicative of what
the combined companys financial condition or results of operations would have been had the acquisitions been completed
on January 1, 2018, as provided in this pro forma financial information. In addition, the pro forma financial information
does not purport to project the future financial condition and results of operations of the combined company. 42West On March 30, 2017 (the 42West Closing Date), the Company entered into a purchase agreement with the former members of 42West (collectively, the 42West Members) (the 42West Purchase Agreement) pursuant to which the Company acquired 100% of the membership interests of 42West and 42West became a wholly owned subsidiary of the Company. 42West is an entertainment public relations agency offering talent, entertainment and targeted marketing, and strategic communication services. On January 1, 2019, the Company adopted ASU 2016-02 and reclassified the favorable lease asset recognized at the date of acquisition to right-of-use asset. The unamortized balance of the favorable lease asset on January 1, 2019 was $277,878. The consideration paid by the Company to the 42West Members in connection with the 42West acquisition was approximately $18.7 million in shares of Common Stock, based on a 30-day trading-day average stock price prior to the 42West Closing Date of $9.22 per share, (less certain working capital and closing adjustments, transaction expenses and payments of indebtedness), plus the potential to earn up to $9.3 million shares of Common Stock at a price of $9.22 per share, upon achievement of certain financial targets that were achieved during 2017 (the Earn-Out Consideration). As a result, the Company has issued 1,906,011 shares of Common Stock and will issue an additional 934,269 shares of Common Stock a price of $9.22 related to the Earn Out Consideration and closing adjustments. In connection with the 42West acquisition, the Company agreed to settle change of control provisions with certain 42West employees and former employees by offering cash payments in lieu of shares of Common Stock. As a result, the Company made payments in the aggregate amount of (i) $20,000 on February 23, 2018; (ii) $292,112 on March 30, 2018 and (iii) $361,760 of March 29, 2019 related to the change of control provisions. The Company entered into Put Agreements with three separate 42West employees with change of control provisions in their employment agreements. The Company agreed to purchase up to 50% of the shares of Common Stock to be received by the employees in satisfaction of the change of control provision in their employment agreements. The employees have the right, but not the obligation, to cause the Company to purchase up to an additional 20,246 shares of Common Stock in respect of the Earn Out Consideration. Also, in connection with the 42West acquisition, on March 30, 2017, the Company entered into put agreements (the Put Agreements) with each of the 42West Members. Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Company has granted the 42West Members the right, but not the obligation, to cause the Company to purchase up to an aggregate of 1,187,087 of their respective shares of Common Stock received as consideration for the Companys acquisition of 42West for a purchase price equal to $9.22 per share during certain specified exercise periods set forth in the Put Agreements up until December 2020 (the Put Rights). During the three and nine months ended September 30, 2019, respectively, the 42West Members exercised Put Rights with respect to an aggregate of 90,835 and 293,437 shares of Common Stock. The Company paid $65,000 on February 2, 2019, $35,000 on March 13, 2019, $300,000 on April 1, 2019, $75,000 on April 10, 2019, $50,000 on May 6, 2019, $350,000 on June 3, 2019, $115,500 on June 28, 2019, $75,000 on July 10, 2019, $100,000 on July 15, 2019, $100,000 on August 23, 2019 and $250,000 on September 3, 2019 related to these Put Rights. As of September 30, 2019, an additional $75,000 was due from the exercise of these Put Rights and was paid on October 10, 2019. On August 12, 2019, the Company entered into an Amendment, Waiver and Exchange Agreement with one of the holders of the Put Rights and exchanged 44,740 Put Rights for 385,514 shares of Common Stock at a purchase price of $1.08 per share. On August 12, 2019, the Company entered into an Amendment, Waiver and Exchange Agreement (Exchange Agreement) with another holder of Put Rights that had previously exercised 76,194 Put Rights that remained unpaid for an aggregate amount of $702,500. Pursuant to the Exchange Agreement, the Company issued a convertible note to such holder of Put Rights in the amount of $702,500 that bears interest at a rate of 10% per annum and matures on August 12, 2020. The noteholder may convert the principal and accrued interest at any time during the term of the convertible note for shares of Common Stock at a purchase price based on the 30-day trailing average closing price of the Common Stock. As of September 30, 2019, the Company had purchased an aggregate of 822,442 shares of Common Stock from the 42West Members for an aggregate purchase price of $7,583,000, of which $75,000 was paid on October 10, 2019, $412,500 was exchanged for 385,514 shares of Common Stock and $702,500 was exchanged for a convertible note payable as described above. |
