Attached files
| file | filename |
|---|---|
| EX-23.2 - CONSENTS OF EXPERTS AND COUNSEL - Dolphin Entertainment, Inc. | dpdm_232.htm |
| EX-23.1 - CONSENTS OF EXPERTS AND COUNSEL - Dolphin Entertainment, Inc. | dpdm_231.htm |
As
filed with the Securities and Exchange Commission on June 28,
2017
Registration
No. 333-
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT
OF 1933
DOLPHIN
DIGITAL MEDIA, INC.
(Exact name of
registrant as specified in its charter)
|
Florida
|
000-50621
|
86-0787790
|
|
(State or other
jurisdiction of incorporation or organization)
|
(Primary Standard
Industrial Classification Code Number)
|
(I.R.S. Employer
Identification Number)
|
2151
LeJeune Road, Suite 150-Mezzanine
Coral
Gables, FL 33134
(305)
774-0407
(Address, including
zip code, and telephone number, including area code, of
registrant’s principal executive offices)
(Name, address,
including zip code, and telephone number, including area code, of
agent for service)
Copies
to:
Kara L.
MacCullough, Esq.
Laurie L. Green,
Esq.
Greenberg Traurig,
P.A.
401 East Las Olas
Boulevard, Suite 2000
Fort Lauderdale,
FL 33301
(954)
765-0500
Approximate date of
commencement of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the
securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.
☐
If this Form is
filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration Statement
number of the earlier effective registration statement for the same
offering. ☐
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
If this Form is a
post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated
filer
|
☐
|
Accelerated
filer
|
☐
|
|
Non-accelerated
filer
|
☐
|
Smaller reporting
company
|
☒
|
|
|
|
Emerging growth
company
|
☐
|
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act.
☐
|
Title
of Each Class of Securities to be Registered
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount
of
Registration Fee
(2)
|
|
Common stock, par
value $0.015
|
$
|
$
|
|
Warrants to
purchase shares of common stock
|
—
|
—
|
|
Shares of common
stock issuable upon exercise of the Warrants (1)
|
$
|
$
|
|
Total:
|
$25,000,000
|
$2,897.50
|
(1)
In the
event of a stock split, stock dividend or other similar transaction
involving the registrant’s common stock, in order to prevent
dilution, the number of shares of common stock registered hereby
shall be automatically increased to cover the additional shares of
common stock in accordance with Rule 416(a) under the Securities
Act of 1933, as amended.
(2)
Calculated
pursuant to Rule 457(o) under the Securities Act, on the basis of
the maximum aggregate offering price of all of the securities to be
registered. Includes offering price of securities which the
underwriter has the option to purchase to cover over-allotments, if
any.
The
Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act of 1933 or
until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
|
|
|
|
|
|
The
information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is declared
effective. This preliminary prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted
|
|
|
|
|
|
PROSPECTUS
Subject to completion, dated June 28, 2017
Shares of Common Stock
Consisting of:
Shares of Common Stock
Warrants to Purchase
Shares of Common Stock
Shares of Common Stock Underlying the Warrants
of
DOLPHIN DIGITAL MEDIA, INC.
________________________
We are
offering shares of our common stock, consisting
of shares of common stock,
warrants to purchase shares of
our common stock and shares of common stock
underlying such warrants. Each share of common stock we sell in the
offering will be accompanied by a warrant to purchase
of a share of
common stock. Each share of common stock and warrant will be sold
at a combined price of $ . The common stock
and warrants will be issued separately. All costs associated with
the registration will be borne by us.
Our
common stock is listed on the OTC Pink Marketplace under the symbol
“DPDM.” We do not intend to apply for listing of the
warrants on any securities exchange and we do not expect that the
warrants will be quoted on the OTC Pink Marketplace. The last
reported sale price of our common stock on the OTC Pink Marketplace
on June 27, 2017 was $5.00 per share.
|
|
Per Share
(1)
|
Total
|
|
Public Offering
Price
|
$
|
$
|
|
Underwriting
Discounts and Commissions (2)
|
$
|
$
|
|
Offering Proceeds,
Before Expenses
|
$
|
$
|
______________________
|
|
(1)
|
Per
share price represents the offering price for a share of common
stock and a warrant to purchase of a
share of common stock.
|
|
|
(2)
|
In
addition, we have agreed to reimburse the underwriter for certain
expenses. See “Underwriting” beginning on page 65 for a
description of the compensation payable to the
underwriter.
|
We have
granted a -day option to the
underwriter to purchase up
to additional
shares of common stock solely to cover over-allotments, if
any.
The
underwriter expects to deliver our securities to purchasers in the
offering on or
about ,
2017.
Investing
in our common stock involves a high degree of risk. These risks are
described under the caption “Risk Factors” that begins
on page 5 of this prospectus.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus
is ,
2017.
TABLE OF CONTENTS
|
|
|
Page
|
|
|
1
|
|
|
|
5
|
|
|
|
17
|
|
|
|
18
|
|
|
|
18
|
|
|
|
20
|
|
|
|
21
|
|
|
|
22
|
|
|
|
27
|
|
|
|
29
|
|
|
|
46
|
|
|
|
52
|
|
|
|
52
|
|
|
|
53
|
|
|
|
56
|
|
|
|
57
|
|
|
|
59
|
|
|
|
61
|
|
|
|
65
|
|
|
|
68
|
|
|
|
68
|
|
|
|
68
|
|
|
|
F-1
|
|
|
|
|
|
You
should rely only on the information contained in this prospectus
that we have authorized for use in connection with this offering.
Neither we nor the underwriter has authorized any other person to
provide you with additional or different information. If anyone
provides you with different or inconsistent information, you should
not rely on it. Neither we nor the underwriter is making an offer
to sell these securities in any jurisdiction where an offer or sale
is not permitted. You should assume that the information in this
prospectus is accurate only as of the date on the front cover of
this prospectus, regardless of the time of delivery of this
prospectus or any sale of our securities. Our business, financial
condition, results of operations and prospects may have changed
since that date.
Industry and Market Data
We
obtained the industry, market and competitive position data
described or referred to in this prospectus from our own internal
estimates and research as well as from industry and general
publications and research, surveys and studies conducted by third
parties. These data involve a number of assumptions and
limitations, and you are cautioned not to give undue weight to such
estimates.
Information that is
based on estimates, forecasts, projections, market research or
similar methodologies is inherently subject to uncertainties and
actual events or circumstances may differ materially from events
and circumstances that are assumed in this information. In some
cases, we do not expressly refer to the sources from which this
data is derived. In that regard, when we refer to one or more
sources of this type of data in any paragraph, you should assume
that other data of this type appearing in the same paragraph is
derived from the same sources, unless otherwise expressly stated or
the context otherwise requires.
|
|
|
|
|
|
This summary highlights selected information contained elsewhere in
this prospectus. This summary does not contain all the
information that you should consider before investing in the common
stock. You should carefully read the entire prospectus,
including “Risk Factors”, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and the financial statements, before making an
investment decision. In this prospectus, the terms
“company,” “we,” “us” and
“our” refer to Dolphin Digital Media,
Inc.
Our Business
We are
a leading independent entertainment marketing and premium content
development company. Through our recent acquisition of 42West, we
provide expert strategic marketing and publicity services to all of
the major film studios, and many of the leading independent and
digital content providers, as well as for hundreds 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
development, creating significant opportunities to serve our
respective constituents more strategically and to grow and
diversify our business.
Our Market Opportunity
We
believe the market for premium content marketing and content
development and production is large, growing and rapidly evolving.
Drivers of growth in our markets include:
●
Global
proliferation of high speed data networks and devices among
consumers creating more frequent engagement and on demand access to
media and content
●
Increasing demand
for more, engaging and original video content
●
Success and growth
of new platforms such as Netflix, Amazon, Facebook and
more
●
Multibillion dollar
strategic initiatives by new these new platforms to develop
original video content
●
Increasing
complexity and fragmentation of the media ecosystem driving
increased emphasis on and requirements for expert marketing
capabilites
Entertainment Marketing and Public Relations
On
March 30, 2017, we acquired 42West, LLC, one of the leading
full-service marketing and public-relations firms in the
entertainment industry, offering clients unparalleled experience,
contacts, and expertise. The name 42West symbolizes the
agency’s position in the nation’s largest entertainment
markets: from Manhattan’s 42nd Street (where the firm got its
start) to the West Coast (which it serves from its offices in Los
Angeles). 42West’s professional capabilities are equally
broad, encompassing talent publicity and strategic communications
as well as entertainment, digital, and targeted
marketing.
42West
grew out of The Dart Group, which was launched by Leslee Dart in
2004. Amanda Lundberg teamed up with Dart a few months later. In
2006, after Allan Mayer joined the partnership, the company was
rechristened 42West. Over the next ten years, 42West grew to become
the largest independently-owned public-relations firm in the
entertainment industry. This past December, the New York Observer
listed 42West as one of the six most powerful PR firms of any kind
in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Production
In
addition to 42West’s leading entertainment marketing
business, our Dolphin Digital Media business is a long established,
leading independent producer, committed to distributing premium,
best-in-class film and digital entertainment. We produce original
feature films and digital programming primarily aimed at family and
young adult markets. We also intend to expand into television
production in the near future. Our CEO, William O’Dowd, is an
Emmy-nominated producer and recognized leader in family
entertainment, with previous productions available in over 300
million homes in more than 100 countries around the world. Mr.
O’Dowd received 2017’s prestigious worldwide KidScreen
Award for Best New Tween/Teen Series as Executive Producer of
sitcom “Raising Expectations,” starring Molly Ringwald
and Jason Priestley.
Films rated
PG or PG-13 constituted 22 of the top 25 domestic grossing films in
2016 and family films are consistently the highest grossing
category at the box office. We have developed a production pipeline
of feature films and television series aimed at the family market.
Furthermore, we have had a dedicated division servicing the digital
video market for over 6 years, during which time we have worked
with most major ad-supported online distribution channels,
including Facebook, Yahoo!, Hulu and AOL. Our digital productions
have been recognized for their quality and creativity, earning
various awards including two Streamy Awards.
Competitive Advantages
We have a long and loyal
list of marquee clients. 42West’s list of active
clients is both long (upwards of 400 in 2016) and distinguished
(including many of the world’s most famous and acclaimed
screen and pop stars, its most honored directors and producers,
every major movie studio, and virtually every digital platform and
content distributor, along with a host of production companies and
media firms as well as consumer-product marketers). The extensive
A-list nature of 42West’s client list is a huge competitive
advantage in an industry where the first question following a
new-business pitch is invariably: “Who else is
involved?” The firm’s client roster is also unusually
stable; in an industry notable for fickleness and impulsive
behavior, the churn rate among 42West’s clients is low; many
of them have been with the firm for years.
A stable and experienced
work force, led by an exceptional management team. Our CEO,
Mr. O’Dowd, has a 20-year history of producing and delivering
high-quality family entertainment. In addition, 42West’s
three co-CEO’s, Leslee Dart, Amanda Lundberg, and Allan
Mayer, are all longtime PR practitioners, with decades of
experience, widely regarded as being among the top communications
strategists in the entertainment industry. They lead a staff of
roughly 100 PR professionals that is known for both its skill and
its longevity. Staff turnover is far below industry norms, and
every one of the firm’s six managing directors has been there
for more than nine years.
We believe that we are one
of the only entertainment companies that can offer clients a broad
array of interrelated services. We believe that the ability
to create content for our 42West clients and the ability to
internally develop and execute marketing campaigns for our digital
and film productions will allow us to expand and grow each of our
business lines. For our 42West clients, celebrities and marketers,
the ability to control the content and quality of their digital
persona is critical in today’s digital world. Adding content
creation to 42West’s menu of capabilities provides a great
opportunity for immediate growth, as it will allow us to both
attract new clients and broaden our offering of billable services
to existing ones. Furthermore, bringing marketing expertise
in-house will allow us to review a prospective digital or film
project’s marketing potential prior to making a production
commitment, thus allowing our marketing strategy to be a driver of
our creative content. In addition, for each project greenlit for
production, we can potentially create a comprehensive marketing
plan before the start of principal photography, allowing for
relevant marketing assets to be created while filming.
Growth Opportunities
We are
focused on driving growth through the following:
Expand and grow 42West to
serve more clients with more services. As a result of its
acquisition by Dolphin, 42West now has the ability to create
promotional and marketing content for clients—a critical
service for celebrities and marketers alike in today’s
digital world. We expect that by adding content creation to
42West’s menu of capabilities, it will provide a great
opportunity for immediate growth, as it will allow us to both
attract new clients and broaden our offering of billable services
to existing ones. We also believe that the skills and experience of
our 42West business in entertainment PR are readily transferable to
related business sectors—such as sports or fashion. The
growing involvement in non-entertainment businesses by many of our
existing entertainment clients has allowed 42West to establish a
presence and develop expertise outside its traditional footprint
with little risk or expense. Using this as a foundation, we are now
working to expand our involvement in these new areas.
Opportunistically grow
through more complementary acquisitions. We plan to
selectively pursue acquisitions in the future, to further enforce
our competitive advantages, scale and grow our business and
increase profitability. Our acquisition strategy is based on
identifying and acquiring companies that complement our existing
content and entertainment marketing services businesses. We believe
that complementary businesses, such as data analytics and digital
marketing, can create synergistic opportunities and bolster profits
and cash flow.
Build a portfolio of
premium film, television and digital content. We intend to
grow and diversify our portfolio of film and digital content by
capitalizing on demand for high quality digital media and film
content throughout the world marketplace. We plan to balance our
financial risks against the probability of commercial success for
each project. We believe that our strategic focus on content and
creation of innovative content distribution strategies will enhance
our competitive position in the industry, ensure optimal use of our
capital, build a diversified foundation for future growth and
generate long-term value for our shareholders. Finally, we expect
that marketing strategies that will be developed by 42West will
drive our creative content, thus creating greater potential for
profitability.
Our Company Background
Dolphin
Digital Media, Inc. was first incorporated in the State of Nevada
on March 7, 1995 and was domesticated in the State of Florida on
December 3, 2014. Our principal executive offices are located
at 2151 Le Jeune Road, Suite 150-Mezzanine, Coral Gables, Florida
33134. We also have an office located at 10866 Wilshire Boulevard,
Suite 800, Los Angeles, California, 90024. 42West, LLC has offices
located at 600 3rd Avenue, 23rd Floor, New York, New York, 10016
and 1840 Century Park East, Suite 700, Los Angeles, California
90067. Our telephone number is (305) 774-0407 and our website
address is www.dolphindigitalmedia.com. Neither our website nor any
information contained on our website is part of this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Offering
The following summary contains basic information about the offering
and the securities we are offering and is not intended to be
complete. It does not contain all the information that is important
to you. For a more complete understanding of the securities we are
offering, please refer to the section of this prospectus titled
“Description of Securities.”
|
|
|||
|
|
Securities
offered
|
shares of common stock,
(or shares if the
underwriter exercises its over-allotment option in full) consisting
of:
shares of common
stock
warrants to
purchase of
a share of common stock
shares of common
stock issuable upon exercise of warrants.
|
|
||
|
|
|
|
|
||
|
|
Over-allotment
option
|
We
have granted the underwriter an option for a period of up to
days to purchase up to
additional shares of
common stock to cover over-allotments, if any.
|
|
||
|
|
Common
stock outstanding before this
offering
|
18,690,792 shares
of common stock. (1)
|
|
||
|
|
|
|
|
||
|
|
Common
stock outstanding after this offering
|
shares of common stock (or shares if the underwriter
exercises its over-allotment option in full).
(2)
|
|
||
|
|
|
|
|
||
|
|
Common
stock underlying the warrants
|
shares of common stock.
|
|
||
|
|
|
|
|
||
|
|
Use of
proceeds
|
We
intend to use part of the net proceeds from this offering to pay an
aggregate of $550,000 in principal, plus accrued interest, to
redeem three promissory notes issued in April 2017 which were used
for working capital. The promissory notes have maturity dates of
October 10, 2017 and October 18, 2017 and each accrues interest at
a rate of 10% per annum. The remainder of the net proceeds will be
available for general corporate purposes, including working
capital. See "Use of Proceeds" for additional
information.
|
|
||
|
|
|
|
|
||
|
|
Risk
factors
|
Investing in our
common stock involves risks. You should read carefully the
“Risk Factors” section of this prospectus for a
discussion of factors that you should carefully consider before
deciding to invest in shares of our common stock.
|
|
||
|
|
|
|
|
||
|
|
OTC
Pink Marketplace ticker symbol
|
“DPDM”
|
|
||
|
|
|
|
|
||
|
|
No
market for the warrants
|
We
do not intend to apply for listing of the warrants on any
securities exchange and we do not expect that the warrants will be
quoted on the OTC Pink Marketplace.
|
|
||
|
|
|
|
|
|
|
|
|
(1)
|
The number of
shares of our common stock outstanding is based on 18,690,792
shares outstanding as of June 23, 2017, which
excludes:
|
|
||
|
|
|
|
|
|
|
|
|
|
●
|
3,224,230
shares of our common stock issuable upon the exercise of
outstanding warrants having exercise prices ranging from $3.10 to
$7.00 per share;
|
|
|
|
|
|
|
|
|
|
|
|
|
●
|
shares of our common stock issuable upon the
conversion of 1,000,000 shares of Series C Convertible Preferred
Stock outstanding. For a discussion of the conditions upon
which the shares of Series C Convertible Preferred Stock become
convertible, and the number of shares of common stock into which
such preferred stock would be convertible upon satisfaction of such
conditions, see “Description of Securities—Series C
Convertible Preferred Stock”;
and
|
|
|
|
|
|
|
|
|
|
|
|
|
●
|
shares issuable in connection with the 42West acquisition as follows: (i) up to 118,655 shares of our common stock that we may issue as employee stock bonuses during 2017; (ii) 1,961,821 shares of our common stock that we will issue to the sellers on January 2, 2018; and (iii) up to 1,963,126 shares of our common stock that we may issue to the sellers based on the achievement of specified financial performance targets over a three-year period as set forth in the membership interest purchase agreement. |
|
|
|
|
|
|
|
|
|
|
|
In addition, we
may be required to purchase up to 2,222,350 shares of our common
stock from the sellers during certain specified exercise periods up
until December 2020, pursuant to put agreements. For a
discussion of the terms of the put agreements, see
“Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.”
|
|
|||
|
|
|
|
|||
|
|
(2)
|
Assumes
the sale of all shares of our common stock covered by this
prospectus, except shares of common stock that could be issued upon
exercise of the warrants sold as part of this
offering.
|
|
||
|
|
Except
as otherwise stated herein, the information in this prospectus
assumes no exercise by the underwriter of its option to
purchase up to an additional shares of common stock to cover
over-allotments, if any.
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
Consolidated Financial Data and Operational Metrics
The
following table includes our summary historical financial data. The
historical financial data as of December 31, 2016 and 2015 and for
the years ended December 31, 2016 and 2015 have been derived from
our audited financial statements, which are included elsewhere in
this prospectus. The historical financial data as of December 31,
2014 and for the year ended December 31, 2014 have been derived
from our audited financial statements, which are not included in
this prospectus. The historical financial data as of March 31, 2017
and for the three months ended March 31, 2017 and 2016 have been
derived from our unaudited financial statements, which are included
elsewhere in this prospectus. Certain items have been reclassified
for presentation purposes. Our financial statements are prepared
and presented in accordance with generally accepted accounting
principles in the United States. The results indicated below are
not necessarily indicative of our future performance.
The
following table also includes summary unaudited pro forma financial
data reflecting our acquisition of 42 West that was completed on
March 30, 2017. The unaudited pro forma financial data for the year
ended December 31, 2016 and the three months ended March 31, 2017
have been derived from the unaudited pro forma combined financial
information included elsewhere in this prospectus. The unaudited
pro forma financial data for the year ended December 31, 2016 gives
effect to the transaction as if it had occurred on January 1, 2016.
The unaudited pro forma financial data for the three months ended
March 31, 2017 gives effect to the transaction as if it had
occurred on January 1, 2017.
The
financial information set forth below is only a summary. You should
read this information together with our
“Capitalization”, “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations”, “Selected Financial Data,”
“Unaudited Pro Forma Combined Financial Information,”
and our consolidated financial statements and related notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
Historical
|
Pro
Forma
|
Historical
|
Pro
Forma
|
|||
|
|
For the year
ended
December 31,
|
For the year ended
December 31,
|
For the
three months ended
March 31,
|
For the three
months ended March 31,
|
|||
|
|
2014
|
2015(1)
|
2016
|
2016
|
2016
|
2017
|
2017
|
|
|
(audited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||
|
Revenues:
|
|
|
|
|
|
|
|
|
Production and
distribution
|
$51,192
|
$3,031,073
|
$9,367,222
|
$9,367,222
|
$—
|
$532,866
|
$532,866
|
|
Service
|
2,000,000
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Membership
|
19,002
|
69,761
|
28,403
|
28,403
|
17,278
|
—
|
—
|
|
42West
revenues
|
|
|
|
18,563,749
|
|
|
4,689,556
|
|
Total
Revenue
|
2,070,194
|
3,100,834
|
9,395,625
|
27,959,374
|
17,278
|
532,866
|
5,222,422
|
|
Loss before other income
(expense)
|
(1,252,925)
|
(5,373,132)
|
(17,702,264)
|
(14,989,692)
|
(985,185)
|
(871,692)
|
(154,421)
|
|
Net Income
(Loss)
|
$(1,873,505)
|
$(8,836,362)
|
$(37,189,679)
|
$(35,769,543)
|
$(3,448,848)
|
$4,961,788
|
$5,844,434
|
|
Net Income (Loss) attributable to
common shareholders
|
$(1,873,505)
|
$(8,836,362)
|
$(42,436,906)
|
$(41,016,770)
|
$(8,696,075)
|
$$4,961,788
|
$5,844,434
|
|
Income (Loss) Per
Share
|
|
|
|
|
|
|
|
|
Basic
|
$(0.02)
|
$(2.16)
|
$(4.83)
|
$(3.33)
|
$(1.85)
|
$0.34
|
$0.32
|
|
Diluted
|
$(0.02)
|
$(2.16)
|
$(4.83)
|
$(3.33)
|
$(1.85)
|
$0.05
|
$0.09
|
|
Weighted average number of shares
used in per share calculation:
|
|
|
|
|
|
|
|
|
Basic
|
81,892,352
|
4,094,618
|
8,778,193
|
12,314,850
|
4,678,469
|
14,477,413
|
18,014,070
|
|
Diluted
|
81,892,352
|
4,094,618
|
8,778,193
|
12,314,850
|
4,678,469
|
17,305,617
|
20,771,141
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
As of March
31,
|
|||
|
|
2014
|
2015(1)
|
2016
|
2017
|
|
|
|
(audited)
|
(unaudited)
|
|||
|
|
|
|
|
Actual
|
Adjusted(2)
|
|
Cash and cash
equivalents
|
$198,470
|
$2,392,685
|
$662,546
|
$585,343
|
|
|
Intangible
assets
|
—
|
—
|
—
|
9,110,000
|
|
|
Goodwill
|
—
|
—
|
—
|
13,996,337
|
|
|
|
|
|
|
|
|
|
Total Assets
|
$1,493,240
|
$21,369,113
|
$14,197,241
|
$34,279,389
|
|
|
Total
Liabilities
|
10,285,083
|
54,233,031
|
46,065,038
|
35,674,531
|
|
|
Total Stockholders’
Deficit
|
(8,791,843)
|
(32,863,918)
|
(31,867,797)
|
(1,395,142)
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
|
||||
|
|
|
|
|
|
|
(1)
|
Financial
information has been retrospectively adjusted for the acquisition
of Dolphin Films. See Notes 1 and 4 to our consolidated financial
statements included elsewhere in this prospectus.
|
|
|
|
(2)
|
The as adjusted
balance sheet data give effect to our issuance and sale of shares
of our common stock in this offering at an offering price of $
per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable
by us.
|
|
|
|
|
|
|
RISK FACTORS
An investment in our securities involves a high degree of risk. You
should carefully consider the risks described below before deciding
to purchase our securities. If any of the events, contingencies,
circumstances or conditions described in the risks below actually
occur, our business, financial condition or results of operations
could be seriously harmed. The trading price of our securities
could, in turn, decline and you could lose all or part of your
investment.
Risks Related to our Business and Financial Condition
Our independent auditors have expressed substantial doubt about our
ability to continue as a going concern.
For
each of the years ended December 31, 2016 and 2015, our
independent auditors issued an explanatory paragraph in their audit
report expressing substantial doubt about our ability to continue
as a going concern based upon our net losses and negative cash
flows from operations for the years ended December 31, 2016
and 2015 and our levels of working capital as of December 31,
2016 and 2015. 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 to fund our operating expenses through loans and
additional sales of our common stock, securities convertible into
our common stock, debt securities or a combination of such
financing alternatives, including the proceeds from this offering;
however, there can be no assurance that we will be successful in
raising any necessary additional capital. If we are not successful
in raising additional capital, we may not have enough financial
resources to support our business and operations and, as a result,
may not be able to continue as a going concern and could be forced
to liquidate.
We have a history of net losses and may continue to incur net
losses.
We have
a history of net losses and may be unable to generate sufficient
revenue to achieve profitability in the future. For the fiscal year
ended December 31, 2016, our net loss was $37,189,679.
Although we had net income of $4,961,788 for the quarter ended
March 31, 2017, it was primarily due to a change in the fair value
of the warrant liability. Our accumulated deficit was $94,850,416
and $99,812,204 at March 31, 2017 and December 31, 2016,
respectively. Our ability to generate net profit in the future will
depend on our ability to successfully produce and commercialize
multiple web series and films, as no single project is likely to
generate sufficient revenue to cover our operating expenses, and to
realize the financial benefits from the operations of 42West. If we
are unable to generate net profit at some point, we will not be
able to meet our debt service requirements or our working capital
requirements. As a result we may need to (i) issue additional
equity, which could dilute the value of your share holdings, (ii)
sell a portion or all of our assets, including any project rights
which might have otherwise generated revenue, or (iii) cease
operations.
We currently have substantial indebtedness which may adversely
affect our cash flow and business operations and may affect our
ability to continue to operate as a going concern.
We
currently have a substantial amount of debt. We do not
currently have sufficient assets to repay such debt in full when
due, and our available cash flow may not be adequate to maintain
our current operations if we are unable to repay, extend or
refinance such indebtedness. The table below sets forth our
total principal amount of debt and stockholders’ equity as of
December 31, 2016 and March 31, 2017. Approximately $4
million of the total debt as of March 31, 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. Although there is
no recourse to our company other than the copyright of our film,
Max Steel, with respect to
approximately $12.9 million of our current indebtedness ($9.7
outstanding under the prints and advertising loan agreement plus
$3.2 million outstanding under the production service agreement),
we will no longer receive any revenues from Max Steel if we lose the
copyright.
|
|
As
of
|
As
of
|
|
|
December
31,
2016
|
March
31,
2017
|
|
Related party
debt
|
$(684,326)
|
$(1,244,310)
|
|
Total Debt
(including related party debt)
|
$(19,727,395)
|
$(19,469,552)
|
|
Total
Stockholders’ Deficit
|
$(31,867,797)
|
$(1,395,142)
|
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
entertainment production and entertainment marketing and public
relations 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 and
jeopardize our ability to continue as a going
concern.
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.
If the defendants are found liable for the alleged violations,
42West could be required to pay substantial amounts towards such
damages. In addition, a class action lawsuit would require
significant management time and attention and would result in
significant legal expenses. Although we have insurance in
case such claims arise, it may not apply to or fully cover any
liabilities we may incur as a result of such claims.
Furthermore, the plaintiffs have 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, if permitted, would further exacerbate any or all
of the aforementioned risks. 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, and
would result in substantial costs, which could harm our financial
condition and results of operations and jeopardize our ability to
continue as a going concern.
Our management has determined that our disclosure controls and
procedures are not effective and we have identified material
weaknesses in our internal control over financial
reporting.
In
connection with the preparation of our financial statements for the
years ended December 31, 2016 and 2015, our management
concluded that our internal control
over financial reporting was not effective and we identified
several material weaknesses. A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements
will not be prevented or detected on a timely basis. In addition,
as of December 31, 2016 and March 31, 2017, our management
concluded that our disclosure controls and procedures were not
effective due to the material weaknesses in our internal control
over financial reporting. The material weaknesses result from the
following:
●
Design deficiencies
related to the entity level control environment, including risk
assessment, information and communication and monitoring
controls:
o
There is no
documented fraud risk assessment or risk management oversight
function.
o
There are no
documented procedures related to financial reporting matters (both
internal and external) to the appropriate parties.
o
There is no budget
prepared and therefore monitoring controls are not designed
effectively as current results cannot be compared to
expectations.
o
There is no
documented process to monitor and remediate deficiencies in
internal controls.
●
Inadequate
documented review and approval of certain aspects of the accounting
process including the documented review of accounting
reconciliations and journal entries that they considered to be a
material weakness in internal control. Specifically:
o
There is no
documented period end closing procedures, specifically the
individuals that are responsible for preparation, review and
approval of period end close functions.
o
Reconciliations are
performed on all balance sheet accounts, including noncontrolling
interest on at least a quarterly basis; however there is no
documented review and approval by a member of management that is
segregated from the period end financial reporting
process.
o
There is no review
and approval for the posting of journal entries.
●
Inadequate
segregation of duties within the accounting process, including the
following:
o
One individual has
the ability to add vendors to the master vendor file. This
individual also has access to the company checkbook that is
maintained in a secured location.
o
One individual has
sole access to our information technology system to initiate,
process and record financial information. We have not developed any
internal controls related to information technology systems
including change management, physical security, access or program
development.
Entertainment
Production Business
Our entertainment production business requires a substantial
investment of capital and failure to access sufficient capital
while awaiting delayed revenues will have a material adverse effect
on our results of operation.
The
production, acquisition and distribution of film or digital media
content require a significant amount of capital. The budget for the
projects we plan to produce will require between $6 and $8 million
to produce. In addition, if a distributor does not provide the
funds for the distribution and marketing of our film, we will
require additional capital to distribute and market the film. We
estimate distribution and marketing fees to be approximately
$10,000 per theatrical screen. A significant amount of time may
elapse between our expenditure of funds and the receipt of revenues
from our productions. Our digital and film production business does
not have a traditional credit facility with a financial institution
on which to depend for our liquidity needs and a time lapse may
require us to fund a significant portion of our capital
requirements through related party transactions with our CEO or
other financing sources. There can be no assurance that any
additional financing resources will be available to us as and when
required, or on terms that will be acceptable to us. Our inability
to raise capital necessary to sustain our operations while awaiting
delayed revenues would have a material adverse effect on our
liquidity and results of operations.
Our success is highly dependent on audience acceptance of our films
and digital media productions, which is extremely difficult to
predict and, therefore, inherently risky.
We
cannot predict the economic success of any of our films because the
revenue derived from the distribution of a film (which does not
necessarily directly correlate with the production or distribution
costs incurred) depends primarily upon its acceptance by the
public, which cannot be accurately predicted. The economic success
of a film also depends upon the public’s acceptance of
competing films, the availability of alternative forms of
entertainment and leisure-time activities, general economic
conditions and other tangible and intangible factors, all of which
can change and cannot be predicted with certainty.
The
economic success of a film is largely determined by our ability to
produce content and develop stories and characters that appeal to a
broad audience and by the effective marketing of the film. The
theatrical performance of a film is a key factor in predicting
revenue from post-theatrical markets. If we are unable to
accurately judge audience acceptance of our film content or to have
the film effectively marketed, the commercial success of the film
will be in doubt, which could result in costs not being recouped or
anticipated profits not being realized. Moreover, we cannot assure
you that any particular feature film will generate enough revenue
to offset its distribution, fulfillment services and marketing
costs, in which case we would not receive any revenues for such
film from our distributors.
In
addition, changing consumer tastes affect our ability to predict
which digital media productions will be popular with web audiences.
As we invest in various digital projects, stars and directors, it
is highly likely that at least some of the digital projects in
which we invest will not appeal to our target audiences. If we are
unable to produce web content that appeals to our target audiences
the costs of such digital media productions could exceed revenues
generated and anticipated profits may not be realized. Our failure
to realize anticipated profits could have a material adverse effect
on our results of operations.
We may incur significant write-offs if our feature films and other
projects do not perform well enough to recoup production,
marketing, distribution and other costs.
We are
required to amortize capitalized production costs over the expected
revenue streams as we recognize revenue from our films or other
projects. The amount of production costs that will be amortized
each quarter depends on, among other things, how much future
revenue we expect to receive from each project. Unamortized
production costs are evaluated for impairment each reporting period
on a project-by-project basis. If estimated remaining revenue is
not sufficient to recover the unamortized production costs, the
unamortized production costs will be written down to fair value. In
any given quarter, if we lower our previous forecast with respect
to total anticipated revenue from any individual feature film or
other project, we may be required to accelerate amortization or
record impairment charges with respect to the unamortized costs,
even if we have previously recorded impairment charges for such
film or other project. For example, in the year ended
December 31, 2016, we recorded a $2 million impairment of the
capitalized production costs for our feature film, Max Steel. Such impairment charges have
had and in the future could have, a material adverse impact on our
business, operating results and financial condition.
In the
past, we purchased several scripts and project ideas for our
digital media productions totaling approximately $0.6 million that
failed to generate interest among distributors or advertisers. As a
result of the write off of the costs incurred in purchasing such
scripts and project ideas, our operating results were negatively
impacted.
Our entertainment production business is currently substantially
dependent upon the success of a limited number of film releases and
digital media productions each year and the unexpected delay or
commercial failure of any one of them could have a material adverse
effect on our financial results and cash flows.
We
generally expect to release one to two feature films and one
digital production in the next year. The unexpected delay in
release or commercial failure of just one of these films or digital
media productions could have a significant adverse impact on our
results of operations and cash flows in both the year of release
and in the future. Historically, feature films that are successful
in the domestic theatrical market are generally also successful in
the international theatrical and ancillary markets, although each
film is different and there is no way to guarantee such results. If
our films fail to achieve domestic box office success, their
success in the international box office and ancillary markets and
our business, results of operations and financial condition could
be adversely affected. Further, we can make no assurances that the
historical correlation between results in the domestic box office
and results in the international box office and ancillary markets
will continue in the future. If our feature films do not perform
well in the domestic or international theatrical markets and
ancillary markets, or our digital media productions do not perform
as anticipated, the failure of any one of these could a material
adverse effect on our financial results and cash
flows.
Delays, cost overruns, cancellation or abandonment of the
completion or release of our web series or films may have an
adverse effect on our business.
There
are substantial financial risks relating to production, completion
and release of web series and films. Actual costs may exceed their
budgets due to factors such as labor
disputes, unavailability of a star performer, equipment shortages,
disputes with production teams or adverse weather conditions, any
of which may cause cost overruns and delay or hamper film
completion. We are typically responsible for paying all production
costs in accordance with a budget and receive a fixed
producer’s fee for our services plus a portion of any project
income. However to the extent that delays or cost overruns result
in us not completing the web series or film within budget, there
may not be enough funds left to pay us our producer’s fee, to
generate any project income or complete the project at all. If this
were to occur, it would significantly and adversely affect our
revenue and results of operations.
We rely on third party distributors to distribute our films and
their failure to perform or promote our films could negatively
impact our ability to generate revenues and have a material adverse
effect on our operating results.
Our
films are primarily distributed and marketed by third party
distributors. If any of these third party distributors fails to
perform under their respective arrangements, such failure could
negatively impact the success of our films and have a material
adverse effect on our business, reputation and ability to generate
revenues.
We
generally do not control the timing and manner in which our
distributors distribute our films; their decisions regarding the
timing of release and promotional support are important in
determining success. Any decision by those distributors not to
distribute or promote one of our films or to promote our
competitors’ films or related products to a greater extent
than they promote ours could have a material adverse effect on our
business, cash flows and operating results.
We rely on third party relationships with online digital platforms
for our advertising revenue and we may be unable to secure such
relationships.
We
anticipate entering into distribution agreements containing revenue
share provisions with online digital platforms to distribute our
digital media productions. Pursuant to these revenue share
provisions, we will earn a portion of advertising revenues once our
digital media productions are distributed online. If we fail to
secure such relationships with online digital platforms, we will
not be able to earn advertising revenues from our digital projects,
which could have a material adverse effect on our liquidity and
results of operations. In addition, some of our distributors have
moved from an advertisement-based model to a subscription-based
model which makes it more difficult for us to use our funding and
distribution methods.
We may be unable to attract or retain advertisers, which could
negatively impact our results of operation.
Typically, online
digital platforms are responsible for securing advertisers and, as
such, our ability to earn advertising revenues would depend on
their success in doing so. However, at times we have, and may
continue to, proactively secure advertising commitments against
anticipated web series. Our ability to retain advertisers is
contingent on our ability to successfully complete and deliver
online projects which are commercially successful, which we may
fail to do. Advertising revenues could also be adversely impacted
by factors outside our control such as failure of our digital media
productions to attract our target viewer audiences, lack of future
demand for our digital media productions, the inability of third
party online digital platforms to deliver ads in an effective
manner, competition for advertising revenue from existing
competitors or new digital media companies, declines in advertising
rates, adverse legal developments relating to online advertising,
including legislative and regulatory developments and developments
in litigation. The existence of any of these factors could result
in a decrease of our anticipated advertising revenues.
Our success depends on the services of our CEO.
Our
success greatly depends on the skills, experience and efforts of
our CEO, Mr. O’Dowd. We do not have an employment agreement
with Mr. O’Dowd. If Mr. O’Dowd resigns
or becomes unable to continue in his present role and is not
adequately replaced, the loss of his services could have a material
adverse effect on our business, operating results or financial
condition.
Our kids clubs depend on sponsorship donations to generate
revenue.
We
generate revenues from our online kids clubs through a portion of
the sale of memberships to various donors. Donors typically sponsor
a school for $10,000 which entitles each child in the school to
receive an annual online kids club membership and entitles the
school to receive a Reading Oasis. Receipt of sponsorship donations
are unpredictable and depend on a number of factors such as our
ability to successfully brand, market and implement the online kids
clubs as well as local and international business and economic
conditions.
Entertainment Marketing and Public Relations Business
Our business could be adversely affected if we fail to retain the
principal sellers, and other key employees of 42West and the
clients they serve.
The
success of our 42West business substantially depends on our ability
to retain the services of Leslee Dart, Amanda Lundberg and Allan
Mayer, each a former owner of 42West, who we refer to as the
principal sellers. If we lose the services of one or more of these
individuals, our ability to successfully implement our business
plan with respect to our entertainment marketing business and the
value of our common stock could be materially adversely affected.
Although we entered into three-year employment agreements with each
of the principal sellers in connection with the 42West acquisition,
there can be no assurance that they will serve the term of their
employment agreements or choose to remain with us following the
expiration of such terms. In addition, the employees of 42West, and
their skills and relationships with clients, are among our most
valuable assets. An important aspect of the business’
competitiveness is its ability to retain these key employees. If
42West fails to hire and retain a sufficient number of these key
employees, it may have a material adverse effect on our overall
business and results of operations.
42West’s
talent roster currently includes some of the best known and most
highly respected members of the entertainment community in addition
to major studios and networks, corporations and well-known consumer
brands. These clients often form highly loyal relationships with
certain public relations and marketing professionals rather than
with a particular firm. The employment agreements with the
principal sellers currently contain non-competition provisions that
will prevent the principal sellers from continuing to provide
services to such clients should they leave our company, however,
clients are free to engage other public relations and marketing
professionals and there can be no assurance that they will choose
to remain with our company. The success of the 42West acquisition,
therefore, depends on our ability to continue to successfully
maintain such client relationships should the principal sellers or
other key employees leave our company. If we are unable to retain
the current 42West clients or attract new clients, we may lose all
of the benefits of the acquisition which would materially adversely
affect our business and results of operations.
42West operates in a highly competitive industry.
The
entertainment marketing business is highly competitive. Through
42West, we must compete with other agencies, and with other
providers of entertainment marketing services, in order to maintain
existing client relationships and to win new clients. The
client’s perception of the quality of an agency’s
creative work and the agency’s reputation are critical
factors in determining its competitive position.
The success of our 42West business depends on its ability to
consistently and effectively deliver marketing and public relations
services to its clients.
42West’s
success depends on its ability to effectively and consistently
staff and execute client engagements to achieve the clients’
unique personal or professional goals. 42West works to design
customized communications or publicity campaigns tailored to the
particular needs and objectives of particular projects. In some of
its engagements, 42West relies on other third parties to provide
some of the services to its clients, and we cannot guarantee that
these third parties will effectively deliver their services or that
we will have adequate recourse against these third parties in the
event they fail to effectively deliver their services. Other
contingencies and events outside of our control may also impact
42West’s ability to provide its services. 42West’s
failure to effectively and timely staff, coordinate and execute its
client engagements may adversely impact existing client
relationships, the amount or timing of payments from clients, its
reputation in the marketplace and ability to secure additional
business and our resulting financial performance. In addition, our
contractual arrangements with our clients may not provide us with
sufficient protections against claims for lost profits or other
claims for damages.
If we are unable to adapt to changing client demands, social and
cultural trends or emerging technologies, we may not remain
competitive and our business, revenues and operating results could
suffer.
We
operate in an industry characterized by rapidly changing client
expectations, marketing technologies, and social mores and cultural
trends that impact our target audiences. The entertainment industry
continues to undergo significant developments as advances in
technologies and new methods of message delivery and consumption
emerge. These developments drive changes in our target
audiences’ behavior to which we must adapt in order to reach
our target audiences. In addition, our success depends on our
ability to anticipate and respond to changing social mores and
cultural trends that impact the entertainment industry and our
target audiences. We must adapt our business to these trends, as
well as shifting patterns of content consumption and changing
behaviors and preferences of our target audiences, through the
adoption and exploitation of new technologies. If we cannot
successfully exploit emerging technologies or if the marketing
strategies we choose misinterpret cultural or social trends and
prove to be incorrect or ineffective, any of these could
have a material
adverse effect on our business, financial condition, operating
results, liquidity and prospects.
A significant labor dispute in our clients’ industries could
have a material adverse effect on our business.
An
industry-wide strike or other job action by or affecting the
Writers Guild, Screen Actors Guild or other major entertainment
industry union could reduce the supply of original entertainment
content, which would in turn reduce the demand for our talent and
entertainment marketing services. An extensive work stoppage would
affect feature film production as well as television and commercial
production and could have a material adverse effect on our clients
and the motion picture production industry in general. For example,
on November 5, 2007, the Writers Guild declared a strike affecting
the script writing for television shows and films. The strike,
which lasted until February 12, 2008, significantly affected the
entertainment industry which consequently, had a material adverse
impact on revenue generated by public relations and entertainment
marketing agencies. Contracts between entertainment industry unions
and the Alliance of Motion Picture and Television Producers, which
we refer to as AMPTP, expire from time to time. The failure to
finalize and ratify a new agreement with the AMPTP or the failure
to enter into new commercial contracts upon expiration of the
current contracts could lead to a strike or other job action. Any
such severe or prolonged work stoppage could have an adverse effect
on the television and/or motion picture production industries and
could severely impair our clients’ prospects. Any resulting
decrease in demand for our talent and entertainment marketing and
other public relations services would have a material adverse
effect on our cash flows and results of operations.
Clients may terminate or reduce their relationships with us on
short notice.
42West’s
entertainment clients may choose to reduce their relationships with
us, on a relatively short time frame and for any reason and can
terminate their contracts with us with 30 days’ notice. If a
significant number of the 42West clients were to terminate their
relationships with us, this could have a material adverse effect
upon our business and results of operations.
42West’s ability to generate new business from new and
existing clients may be limited.
To
increase its revenues, 42West needs to obtain additional clients or
generate demand for additional services from existing clients.
42West’s ability to generate initial demand for its services
from new clients and additional demand from existing clients is
subject to such clients’ and potential clients’ needs,
trends in the entertainment industry, financial conditions,
strategic plans and internal resources of corporate clients, as
well as the quality of 42West’s employees, services and
reputation. To the extent 42West cannot generate new business from
new or existing clients due to these limitations, the ability of
42West to grow its business, and our ability to increase our
revenues, will be limited.
42West’s revenues are susceptible to declines as a result of
unfavorable economic conditions.
Economic downturns
often severely affect the marketing services industry. Some of our
corporate clients may respond to weak economic performance by
reducing their marketing budgets, which are generally discretionary
in nature and easier to reduce in the short-term than other
expenses related to operations. In addition, economic downturns
could lead to reduced public demand for varying forms of
entertainment for which we are engaged to provide public relations
and media strategy and promotional services. Such reduced demand
for our services could have a material adverse effect on our
revenues and results of operations.
42West relies on information technology systems and could face
cybersecurity risks.
42West
relies on information technologies and infrastructure to manage its
business, including digital storage of marketing strategies and
client information and delivery of digital marketing services. The
incidence of malicious technology-related events, such as
cyberattacks, computer hacking, computer viruses, worms or other
destructive or disruptive software, denial of service attacks or
other malicious activities is on the rise worldwide. Power outages,
equipment failure, natural disasters (including extreme weather),
terrorist activities or human error may also affect our systems and
result in disruption of our services or loss or improper disclosure
of personal data, business information or other confidential
information.
Likewise, data
privacy breaches, as well as improper use of social media, by
employees and others may pose a risk that sensitive data, such as
personally identifiable information, strategic plans and trade
secrets, could be exposed to third parties or to the general
public. 42West also utilizes third parties, including third-party
“cloud” computing services, to store, transfer or
process data, and system failures or network disruptions or
breaches in the systems of such third parties could adversely
affect its reputation or business. Any such breaches or breakdowns
could expose us to legal liability, be expensive to remedy, result
in a loss of clients or clients’ proprietary information and
damage our reputation. Efforts to develop, implement and maintain
security measures are costly, may not be successful in preventing
these events from occurring and require ongoing monitoring and
updating as technologies change and efforts to overcome security
measures become more sophisticated.
Risks Related to our Industry
The popularity and commercial success of our digital media
productions and films are subject to numerous factors, over which
we may have limited or no control.
The
popularity and commercial success of our digital media productions
and films depends on many factors including, but not limited to,
the key talent involved, the timing of release, the promotion and
marketing of the digital media production or film, the quality and
acceptance of other competing productions released into the
marketplace at or near the same time, the availability of
alternative forms of entertainment, general economic conditions,
the genre and specific subject matter of the digital media
production or film, its critical acclaim and the breadth, timing
and format of its initial release. We cannot predict the impact of
such factors on any digital media production or film, and many are
factors that are beyond our control. As a result of these factors
and many others, our digital media productions and films may not be
as successful as we anticipate, and as a result, our results of
operations may suffer.
The creation of content for the entertainment industry is highly
competitive and we will be competing with companies with much
greater resources than we have.
The
business in which we engage is highly competitive. Our primary
business operations are subject to competition from companies
which, in many instances, have greater development, production and
distribution and capital resources than us. We compete for the
services of writers, producers, directors, actors and other artists
to produce our digital media and motion picture content, as well as
for advertisement dollars. Larger companies have a broader and more
diverse selection of scripts than we do, which translates to a
greater probability that they will be able to more closely fit the
demands and interests of advertisers than we can.
As a
small independent producer, we compete with major U.S. and
international studios. Most of the major U.S. studios are part of
large diversified corporate groups with a variety of other
operations that can provide both the means of distributing their
products and stable sources of earnings that may allow them better
to offset fluctuations in the financial performance of their film
and other operations. In addition, the major studios have more
resources with which to compete for ideas, storylines and scripts
created by third parties, as well as for actors, directors and
other personnel required for production. Such competition for the
industry’s talent and resources may negatively affect our
ability to acquire, develop, produce, advertise and distribute
digital media and motion picture content.
We must successfully respond to rapid technological changes and
alternative forms of delivery or storage to remain
competitive.
The
entertainment industry continues to undergo significant
developments as advances in technologies and new methods of product
delivery and storage, and certain changes in consumer behavior
driven by these developments emerge. New technologies affect the
demand for our content, the manner in which our content is
distributed to consumers, the sources and nature of competing
content offerings and the time and manner in which consumers
acquire and view our content. We and our distributors must adapt
our businesses to shifting patterns of content consumption and
changing consumer behavior and preferences through the adoption and
exploitation of new technologies. If we cannot successfully exploit
these and other emerging technologies, it could have a material
adverse effect on our business, financial condition, operating
results, liquidity and prospects.
We have and may in the future be adversely affected by union
activity.
We
retain the services of actors who are covered by collective
bargaining agreements with Screen Actors Guild – American
Federation of Television and Radio Artists, which we refer to as
SAG-AFTRA, and we may also become signatories to certain guilds
such as Directors Guild of America and Writers Guild of America in
order to allow us to hire directors and talent for our productions.
Collective bargaining agreements are industry-wide agreements, and
we lack practical control over the negotiations and terms of these
agreements. In addition, our digital projects fall within
SAG-AFTRA’s definition of “new media”, which is
an emerging category covered by its New Media and Interactive Media
Agreements for actors. As such, our ability to retain actors is
subject to uncertainties that arise from SAG-AFTRA’s
administration of this relatively new category of collective
bargaining agreements. Such uncertainties have resulted and may
continue to result in delays in production of our digital
projects.
In
addition, if negotiations to renew expiring collective bargaining
agreements are not successful or become unproductive, the union
could take actions such as strikes, work slowdowns or work
stoppages. Strikes, work slowdowns or work stoppages or the
possibility of such actions could result in delays in production of
our digital projects. We could also incur higher costs from such
actions, new collective bargaining agreements or the renewal of
collective bargaining agreements on less favorable terms. Depending
on their duration, union activity or labor disputes could have an
adverse effect on our results of operations.
Others may assert intellectual property infringement claims or
liability claims for digital media or film content against us which
may force us to incur substantial legal expenses.
There
is a possibility that others may claim that our productions and
production techniques misappropriate or infringe the intellectual
property rights of third parties with respect to their previously
developed web series, films, stories, characters, other
entertainment or intellectual property. In addition, as
distributors of digital media and film content, we may face
potential liability for such claims as defamation, invasion of
privacy, negligence, copyright or trademark infringement or other
claims based on the nature and content of the materials
distributed. If successfully asserted, our insurance may not be
adequate to cover any of the foregoing claims. Irrespective of the
validity or the successful assertion of such claims, we could incur
significant costs and diversion of resources in defending against
them, which could have a material adverse effect on our operating
results.
If we fail to protect our intellectual property and proprietary
rights adequately, our business could be adversely
affected.
Our
ability to compete depends, in part, upon successful protection of
our intellectual property. We attempt to protect proprietary and
intellectual property rights to our productions through available
copyright and trademark laws and distribution arrangements with
companies for limited durations. Unauthorized parties may attempt
to copy aspects of our intellectual property or to obtain and use
property that we regard as proprietary. We cannot assure you that
our means of protecting our proprietary rights will be adequate. In
addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as the laws of the United
States. Intellectual property protections may also be unavailable,
limited or difficult to enforce in some countries, which could make
it easier for competitors to steal our intellectual property. Our
failure to protect adequately our intellectual property and
proprietary rights could adversely affect our business and results
of operations.
Our online activities are subject to a variety of laws and
regulations relating to privacy and child protection, which, if
violated, could subject us to an increased risk of litigation and
regulatory actions.
In
addition to our company websites and applications, we use
third-party applications, websites, and social media platforms to
promote our digital media productions and engage consumers, as well
as monitor and collect certain information about users of our
online forums. A variety of laws and regulations have been adopted
in recent years aimed at protecting children using the internet
such as the Children’s Online Privacy and Protection Act of
1998, which we refer to as COPPA. COPPA sets forth, among other
things, a number of restrictions on what website operators can
present to children under the age of 13 and what information can be
collected from them. There are also a variety of laws and
regulations governing individual privacy and the protection and use
of information collected from such individuals, particularly in
relation to an individual’s personally identifiable
information (e.g., credit card numbers). Many foreign countries
have adopted similar laws governing individual privacy, including
safeguards which relate to the interaction with children. If our
online activities were to violate any applicable current or future
laws and regulations, we could be subject to litigation and
regulatory actions, including fines and other
penalties.
Risks Related to Acquisitions
We are subject to risks associated with acquisitions and we may not
realize the anticipated benefits of such acquisitions.
We have
in the past completed acquisitions, and may in the future engage in
discussions and activities with respect to possible acquisitions,
intended to complement or expand our business, some of which may be
significant transactions for us. For example, in March 2016, we
acquired Dolphin Films, a content producer of motion pictures, and
on March 30, 2017, we acquired 42West, a full-service
entertainment marketing agency. Identifying suitable acquisition
candidates can be difficult, time-consuming and costly, and we may
not be able to identify suitable candidates or complete
acquisitions in a timely manner, on a cost-effective basis or at
all.
Even if
we complete an acquisition, we may not realize the anticipated
benefits of such transaction. Our recent acquisitions have
required, and any similar future transactions may also require,
significant efforts and expenditures, including with respect to
integrating the acquired business with our historical business. We
may encounter unexpected difficulties, or incur unexpected costs,
in connection with acquisition activities and integration efforts,
which include:
●
diversion of
management attention from managing our historical core
business;
●
potential
disruption of our historical core business or of the acquired
business;
●
the strain on, and
need to continue to expand, our existing operational, technical,
financial and administrative infrastructure;
●
inability to
achieve synergies as planned;
●
challenges in
controlling additional costs and expenses in connection with and as
a result of the acquisition;
●
dilution to
existing shareholders from the issuance of equity
securities;
●
becoming subject to
adverse tax consequences or substantial depreciation;
●
difficulties in
assimilating employees and corporate cultures or in integrating
systems and controls;
●
difficulties in
anticipating and responding to actions that may be taken by
competitors;
●
difficulties in
realizing the anticipated benefits of the transaction;
●
inability to
generate sufficient revenue from acquisitions to offset the
associated acquisition costs;
●
potential loss of
key employees, key clients or other partners of the acquired
business as a result of the change of ownership; and
●
the assumption of
and exposure to unknown or contingent liabilities of the acquired
businesses.
If any
of our acquisitions do not perform as anticipated for any of the
reasons noted above or otherwise, there could be a negative impact
on our results of operations and financial condition.
Any due diligence by us in connection with potential future
acquisition may not reveal all relevant considerations or
liabilities of the target business, which could have a material
adverse effect on our financial condition or results of
operations.
We
intend to conduct such due diligence as we deem reasonably
practicable and appropriate based on the facts and circumstances
applicable to any potential acquisition. The objective of the due
diligence process will be to identify material issues which may
affect the decision to proceed with any one particular acquisition
target or the consideration payable for an acquisition. We also
intend to use information revealed during the due diligence process
to formulate our business and operational planning for, and our
valuation of, any target company or business. While conducting due
diligence and assessing a potential acquisition, we may rely on
publicly available information, if any, information provided by the
relevant target company to the extent such company is willing or
able to provide such information and, in some circumstances, third
party investigations.
There
can be no assurance that the due diligence undertaken with respect
to an acquisition, including the Dolphin Films acquisition or the
42West acquisition, will reveal all relevant facts that may be
necessary to evaluate such acquisition including the determination
of the price we may pay for an acquisition target or to formulate a
business strategy. Furthermore, the information provided during due
diligence may be incomplete, inadequate or inaccurate. As part of
the due diligence process, we will also make subjective judgments
regarding the results of operations, financial condition and
prospects of a potential target. For example, the due diligence we
conducted in connection with the Dolphin Films acquisition and the
42West acquisition may not have been complete, adequate or accurate
and may not have uncovered all material issues and liabilities to
which we are now subject. If the due diligence investigation fails
to correctly identify material issues and liabilities that may be
present in a target company or business, or if we consider such
material risks to be commercially acceptable relative to the
opportunity, and we proceed with an acquisition, we may
subsequently incur substantial impairment charges or other
losses.
In
addition, following an acquisition, including the Dolphin Films
acquisition and the 42West acquisition, we may be subject to
significant, previously undisclosed liabilities of the acquired
business that were not identified during due diligence and which
could contribute to poor operational performance, undermine any
attempt to restructure the acquired company or business in line
with our business plan and have a material adverse effect on our
financial condition and results of operations.
Claims against us relating to any acquisition may necessitate our
seeking claims against the seller for which the seller may not
indemnify us or that may exceed the seller’s indemnification
obligations.
As
discussed above, there may be liabilities assumed in any
acquisition that we did not discover or that we underestimated in
the course of performing our due diligence. Although a seller
generally will have indemnification obligations to us under an
acquisition or merger agreement, these obligations usually will be
subject to financial limitations, such as general deductibles and
maximum recovery amounts, as well as time limitations, as was the
case in the 42West acquisition. We cannot assure you that our right
to indemnification from any seller will be enforceable, collectible
or sufficient in amount, scope or duration to fully offset the
amount of any undiscovered or underestimated liabilities that we
may incur. Any such liabilities, individually or in the aggregate,
could have a material adverse effect on our business, financial
condition and operating results.
Risks Related to our Common Stock and Preferred Stock
We have recently issued, and may in the future issue, a significant
amount of equity securities and, as a result, your ownership
interest in our company has been, and may in the future be,
substantially diluted and your investment in our common stock could
suffer a material decline in value.
From
January 1, 2016 to June 23, 2017, the number of shares of our
common stock issued and outstanding has increased from 4,094,618
(adjusted for a 1-to-20 reverse stock split on May 10, 2016) to
18,690,792 shares. Of this amount, approximately 5,665,760 shares
of common stock have been issued in private placements as payment
to certain holders of our Company’s debt pursuant to debt
exchange agreements. Consequently, we have not received any cash
proceeds in connection with such issuances of common stock. In
addition, 1,525,000 shares of common stock were issued in private
placements pursuant to subscription agreements. Generally, these
subscription agreements and debt exchange agreements provide for
past or future purchases of, or exchanges of debt for, our common
stock at a price of $5.00 per share which, upon each exercise or
exchange thus far, has been below the market price of our common
stock. In addition, during 2016, we issued Warrants G, H, I, J and
K. Warrants G, H and I are exercisable for an aggregate of
2,500,000 shares of common stock at exercise prices ranging from
$5.00 to $7.00 per share. Warrants J and K were issued in exchange
for debt, and to purchase the remaining membership interests in
Dolphin Kids Club, and were exercised for an aggregate of 2,340,000
shares of common stock at an exercise price of $0.15 per share.
Furthermore, as consideration for our 42West acquisition, we (i)
issued 1,230,280 shares of common stock on the closing date and
344,550 shares of common stock to certain 42West employees on April
13, 2017, (ii) may issue up to 118,655 shares of common stock as
employee stock bonuses during 2017 and (iii) will issue 1,961,821
shares of common stock on January 2, 2018. In addition, we may
issue up to 1,963,126 shares of common stock based on the
achievement of specified financial performance targets over a
three-year period. As a result of these issuances, your ownership
interest in our company has been, and may in the future be,
substantially diluted. The market price for our common stock has
been volatile in the past, and these issuances could cause the
price of our common stock to fluctuate substantially in the future.
In addition, we have historically experienced significantly low
trading volumes. Once restricted stock issued in the private
placements and in the 42West acquisition becomes freely tradable,
these current or future shareholders may decide to trade their
shares of common stock and, if our stock is thinly traded, this
could have a material adverse effect on its market
price.
In the
near term, we will need to raise additional capital and may seek to
do so by conducting one or more private placements of equity
securities, securities convertible into equity securities or debt
securities, selling additional securities in a registered public
offering, or through a combination of one or more of such financing
alternatives, including the proceeds from this offering. Such
issuances of additional securities would further dilute the equity
interests of our existing shareholders, perhaps substantially, and
may further exacerbate any or all of the above risks.
The Series C Convertible Preferred Stock has anti-dilution
protections and super voting rights that may adversely affect our
shareholders.
For a
period of five years from March 7, 2016, the date of issuance, the
Series C Convertible Preferred Stock, which are all held by Mr.
O’Dowd, will have certain anti-dilution protections. Upon
triggers specified in the Series C Certificate of Designation, the
number of shares of common stock into which Series C Convertible
Preferred Stock held by Mr. O’Dowd (or any entity
directly or indirectly controlled by Mr. O’Dowd) can be
converted will be increased, such that the total number of shares
of common stock held by Mr. O’Dowd (or any entity
directly or indirectly controlled by Mr. O’Dowd) (based
on the number of shares of common stock held as of the date of
issuance) will be preserved at the same percentage of shares of
common stock outstanding held by such persons on such date. As a
result, your ownership interests may be further
diluted.
Except
as required by law, holders of Series C Convertible Preferred Stock
will only have voting rights once the independent directors of the
Board of Directors, or the Board, determine that an optional
conversion threshold (as defined in the Series C Certificate of
Designation) has occurred. Upon such determination by the Board, a
holder of Series C Convertible Preferred Stock
(Mr. O’Dowd) will be entitled to super voting rights of
three votes for each share of common stock into which such
holder’s shares of Series C Convertible Preferred Stock could
then be converted. Holders of Series C Convertible Preferred Stock
will be entitled to vote together as a single class on all matters
upon which common stock holders are entitled to vote. Your voting
rights will be diluted as a result of these super voting rights. In
addition, the anti-dilution protections may result in an increase
in the number of shares of common stock into which Series C
Convertible Preferred Stock held by Mr. O’Dowd and
certain eligible persons can be converted, which could further
dilute your percentage of voting rights.
As long as we are an issuer of “penny stock,” we are
subject to penny stock regulations and the protection provided by
the federal securities laws relating to forward-looking statements
does not apply to us, which could subject us to potentially costly
legal action.
Broker-dealer
practices in connection with transactions in penny stocks are
regulated by certain penny stock rules adopted by the SEC. Penny
stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system). The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information
about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the
transaction, and, if the broker-dealer is the sole market-maker,
the broker-dealer must disclose this fact and the
broker-dealer’s presumed control over the market and monthly
account statements showing the market value of each penny stock
held in the customer’s account. In addition, broker-dealers
who sell these securities to persons other than established
customers and accredited investors (generally, those persons with
assets in excess of $1,000,000 or annual income exceeding $200,000
to $300,000 together with their spouse), must make a special
written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written
agreement to the transaction. Consequently, these requirements may
have the effect of reducing the level of trading activity, if any,
in the secondary market for a security that is or becomes subject
to the penny stock rules. To the extent our stock price falls below
$5.00 per share, we are subject to the penny stock rules, and
consequently, our shareholders will find it more difficult to sell
their shares. Consequently, the penny stock regulations could have
a material adverse effect on our business prospects, financial
condition and results of operation. In addition, although federal
securities laws provide a safe harbor for forward-looking
statements made by a public company that files reports under the
federal securities laws, this safe harbor is not available to
issuers of penny stocks. As a result, for as long as we are a penny
stock, we will not have the benefit of this safe harbor protection
in the event of any legal action based upon a claim that the
material provided by us contained a material misstatement of fact
or was misleading in any material respect because of our failure to
include any statements necessary to make the statements not
misleading.
Our common stock is quoted only on the OTC Pink Marketplace, which
may have an unfavorable impact on our stock price and
liquidity.
Our
common stock is quoted on the OTC Pink Marketplace. The OTC Pink
Marketplace is a significantly more limited market than the New
York Stock Exchange or NASDAQ system. The quotation of our shares
on the OTC Pink Marketplace may result in an illiquid market
available for existing and potential shareholders to trade shares
of our common stock and depress the trading price of our common
stock, and may have a long-term adverse impact on our ability to
raise capital in the future.
Risks Related to the Offering
We will have broad discretion as to the use of the net proceeds
from this offering, and we may not use the proceeds
effectively.
Our
management will have broad discretion as to the application of the
net proceeds. Our shareholders may not agree with the manner in
which our management chooses to allocate and spend the net
proceeds. Moreover, our management may use some of the net proceeds
for corporate purposes that may not increase our market value or
profitability.
Our use of the offering proceeds may not yield a favorable return
on your investment.
We
currently intend to use the net proceeds received from the sale of
the securities for general corporate purposes, including working
capital. Our management has broad discretion over how these
proceeds are used and could spend the proceeds in ways with which
you may not agree. Pending the use of the proceeds in this
offering, we will invest them. However, the proceeds may not be
invested in a manner that yields a favorable or any
return.
You will experience immediate and substantial dilution in the book
value of the shares you purchase in this offering.
The
offering price is substantially higher than the net tangible book
value per share of our outstanding common stock. As a result, based
on our capitalization as of March 31, 2017, you will incur
immediate dilution in the book value of the shares you purchase in
the offering. Based upon the issuance and sale of the shares of
common stock on an assumed closing date of ,
2017 at an assumed public offering price of $ per
share, you will incur immediate dilution of approximately
$ in the net tangible book value per
share if you purchase shares in this offering. In addition to this
offering, subject to market conditions and other factors, we may
pursue additional financings in the future, as we continue to build
our business, which may result in further dilution to
you.
Future sales of our common stock by our existing shareholders may
negatively impact the trading price of our common
stock.
If a
substantial number of our existing shareholders decide to sell
shares of their common stock in the public market following the
completion of this offering, the price at which our common stock
trades could decline. Additionally, the public market’s
perception that such sales might occur may also depress the price
of our common stock.
There is no active market for trading of the warrants, which will
limit the liquidity of the warrants.
There
is no established public trading market for the warrants, and we do
not expect a market to develop. We do not intend to apply for
listing of the warrants on any securities exchange and we do not
expect that the warrants will be quoted on the OTC Pink
Marketplace. Without an active market, the liquidity of the
warrants will be limited.
The warrants may not have any value.
The
warrants will be exercisable for years from the date of the closing
of the offering at an initial exercise price per share equal to $ .
In the event that the price of a share does not exceed the exercise
price of the warrants during the period when the warrants are
exercisable, the warrants may not have any value.
Holders of the warrants will have no rights as a shareholder until
they acquire our common stock.
Until
you acquire shares upon exercise of your warrants, you will have no
rights with respect to our common stock. Upon exercise of your
warrants, you will be entitled to exercise the rights of a common
shareholder only as to matters for which the record date occurs
after the exercise date.
An effective registration statement may not be in place when an
investor desires to exercise warrants, thus precluding such
investor from being able to exercise his, her or its warrants at
that time.
No
warrant held by an investor will be exercisable and we will not be
obligated to issue common stock unless at the time such holder
seeks to exercise such warrant, a prospectus relating to the common
stock issuable upon exercise of the warrant is current (or an
exemption from registration is available) and the common stock has
been registered or qualified or deemed to be exempt under the
securities laws of the state of residence of the holder of the
warrants. Under the terms of the warrant agreement, we have agreed
to use our best efforts to meet these conditions and to maintain a
current prospectus relating to the common stock issuable upon
exercise of the warrants until the expiration of the warrants.
However, we cannot assure you that we will be able to do so, and if
we do not maintain a current prospectus related to the common stock
issuable upon exercise of the warrants (and an exemption from
registration is not available), holders will be unable to exercise
their warrants and we will not be required to net cash settle any
such warrant exercise. If we are unable to issue the shares upon
exercise of the warrants by an investor because there is no current
prospectus relating to the common stock issuable upon exercise of
the warrant (and an exemption from registration is not available)
or the common stock has not been registered or qualified or deemed
to be exempt under the securities laws of the state of residence of
the holder of the warrants, the warrants will not expire until ten
days after the date we are first able to issue the shares.
Nevertheless, because an investor may not be able to exercise the
warrants at the most advantageous time, the warrants held by an
investor may have no value, the market for such warrants may be
limited and such warrants may expire worthless.
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This
prospectus may contain “forward-looking statements”
that involve certain risks and uncertainties. These forward-looking
statements include, but are not limited to, statements about our
plans, objectives, representations and intentions and are not
historical facts and typically are identified by use of terms such
as “may,” “should,” “could,”
“expect,” “plan,” “anticipate,”
“believe,” “estimate,”
“predict,” “potential,”
“continue” and similar words, although some
forward-looking statements are expressed differently. You should be
aware that the forward-looking statements included herein represent
management’s current judgment and expectations, but our
actual results, events and performance could differ materially from
those in the forward-looking statements. Specifically, this
prospectus contain forward-looking statements
regarding:
●
our expectations
regarding the potential benefits and synergies we can derive from
our acquisitions;
●
our expectations to
offer clients a broad array of interrelated services, the impact of
such strategy on our future profitability and growth and our belief
regarding our resulting market position;
●
our expectations
regarding the growth potential of the content marketing,
development and production markets;
●
our intention to
expand into television production in the near
future;
●
our belief
regarding the transferability of 42West’s skills and
experience to related business sectors and our intention to expand
our involvement in those areas;
●
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;
●
our beliefs
regarding the impact of our strategic focus on content and creation
of innovative content distribution strategies on our competitive
position in the industry, use of capital, growth and long-term
shareholder value;
●
our plan to balance
our financial risks against the probability of commercial success
for each project;
●
our intention to
selectively pursue complementary acquisitions to enforce our
competitive advantages, scale and grow and our belief that such
acquisitions will create synergistic opportunities and increased
profits and cash flows;
●
our expectations
concerning our ability to derive future cash flows and revenues
from the production, release and advertising of future web series
on online platforms, and the timing of receipt of such cash flows
and revenues;
●
our expectations
concerning the timing of production and distribution of a digital
project showcasing favorite restaurants of NFL players, as well as
future feature films and digital projects;
●
our intention to
source potential distribution partners for our web series,
South Beach – Fever,
and to enter into distribution agreements for future digital
productions;
●
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;
●
our intention to
use our purchased scripts for future motion picture and digital
productions;
●
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, including the proceeds from
this offering;
●
our expectations
regarding the marketing potential and other benefits of our online
kids clubs;
●
our beliefs
regarding the merits of claims asserted in the class action against
42West and other defendants and our defenses against such
claims;
●
our intention to
implement improvements to address material weaknesses in internal
control over financial reporting; and
●
our expectations
concerning the impact of recent Accounting Standards Updates on our
financial position or results of operations.
These
forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We
wish to caution readers that certain important factors may have
affected and could in the future affect our actual results and
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
implied by those forward-looking statements include, but are not
limited to, the following:
●
our ability to
realize the anticipated benefits of the 42West acquisition,
including synergies, expanded interrelated service offerings,
growth and increased revenues;
●
our ability to
accurately predict 42West’s clients’ acceptance of our
differentiated business model that offers interrelated
services;
●
our ability to
profitably exploit the transferability of 42West’s skills and
experience to related business sectors;
●
our ability to
successfully identify and complete acquisitions in line with our
growth strategy, and to realize the anticipated benefits of those
acquisitions;
●
our ability to
accurately interpret trends and predict future demand in the
digital media and film industries;
●
our ability to
repay our P&A Loan in accordance with the terms of the
agreement so that we will be able to continue to receive revenues
from Max
Steel;
●
adverse trends and
changes in the entertainment or entertainment marketing industries
that could negatively impact 42West’s operations and ability
to generate revenues;
●
unpredictability of
the commercial success of our current and future web series and
motion pictures;
●
economic factors
that adversely impact the entertainment industry, as well as
advertising, production and distribution revenue in the online and
motion picture industries;
●
our ability to
identify, produce and develop online digital entertainment and
motion pictures that meet industry and customer
demand;
●
competition for
talent and other resources within the industry and our ability to
enter into agreements with talent under favorable
terms;
●
our ability to
attract and/or retain the highly specialized services of the 42West
executives and employees and our CEO;
●
availability of
financing from our CEO and other investors under favorable
terms;
●
our ability to
adequately address material weaknesses in internal control over
financial reporting;
●
the ability of our
online kids clubs to serve as a platform for sponsorship and other
marketing opportunities thereby generating
revenue;
●
uncertainties
regarding the outcome of pending litigation;
●
our ability to
accurately predict the impact of recent Accounting Standards
Updates on our financial position or results of operations;
and
●
the factors
included under "Risk factors" in this
prospectus.
Any
forward-looking statement speaks only as to the date on which that
statement is made. We assume no obligation to update any
forward-looking statement to reflect events or circumstances that
occur after the date on which the statement is made.
USE OF
PROCEEDS
We
estimate that the net proceeds from our sale of the securities in
this offering, assuming a public offering price of $
per share and all securities are sold, after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us, will be approximately
$ million. If the
underwriter exercises its over-allotment option in full, we
estimate that the net proceeds from this offering will be
approximately $ million. This
amount does not include the proceeds which we may receive in
connection with the exercise of the warrants. We cannot predict
when or if the warrants will be exercised, and it is possible that
the warrants may expire and never be exercised. The principal
reason for this offering is to raise capital for general corporate
purposes, including working capital.
We
intend to use part of the net proceeds from this offering to pay an
aggregate of $550,000 in principal, plus accrued interest, to
redeem three promissory notes issued in April 2017 which were used
for working capital. The promissory notes have maturity dates of
October 10, 2017 and October 18, 2017 and each accrues interest at
a rate of 10% per annum. The remainder of the net proceeds will be
available for general corporate purposes, including working
capital.
A $0.25
increase or decrease in the assumed public offering price of $
per share would increase or decrease the net
proceeds from this offering by approximately
$ million, assuming that the number of
securities offered by us, as set forth on the cover page of this
prospectus, and the assumed public offering price remain the same
and after deducting the estimated underwriting discounts and
commissions.
We will
have broad discretion over the manner in which the net proceeds of
the offering will be applied, and we may not use these proceeds in
a manner desired by our shareholders. Although we have no present
intention of doing so, future events may require us to reallocate
the offering proceeds.
MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market for our Common Stock
Our
common stock currently trades on the over-the-counter market and is
quoted on the OTC Pink Marketplace under the symbol
“DPDM”. The high and low bid information for each
quarter since January 1, 2015, as quoted on the OTC Pink
Marketplace, is as follows:
|
Quarter
|
High
Bid
|
Low
Bid
|
|
2017:
|
|
|
|
April 1 to June 27
|
$5.25
|
$3.00
|
|
First
Quarter
|
$6.00
|
$3.50
|
|
2016:
|
|
|
|
Fourth
Quarter
|
$6.75
|
$2.00
|
|
Third
Quarter
|
$7.25
|
$4.00
|
|
Second
Quarter
|
$8.27
|
$5.40
|
|
First
Quarter
|
$7.60
|
$1.60
|
|
2015:
|
|
|
|
Fourth
Quarter
|
$6.00
|
$0.60
|
|
Third
Quarter
|
$1.00
|
$0.60
|
|
Second
Quarter
|
$1.20
|
$0.80
|
|
First
Quarter
|
$1.80
|
$0.80
|
The
over-the-counter quotations above reflect inter-dealer prices,
without retail mark-up, markdown or commissions and may not reflect
actual transactions. Such quotes are not necessarily representative
of actual transactions or of the value of our securities, and are,
in all likelihood, not based upon any recognized criteria of
securities valuation as used in the investment banking
community.
The
trading volume for our common stock is relatively limited. There is
no assurance that an active trading market will continue to provide
adequate liquidity for our existing shareholders or for persons who
may acquire our common stock in the future.
The
closing price per share of our common stock on June 27, 2017 was
$5.00, as reported by the OTC Pink Marketplace.
Holders of our Common Stock
As of
June 23, 2017, an aggregate of 18,690,792 shares of our common
stock were issued and outstanding and were owned by approximately
298 shareholders of record, based on information provided by our
transfer agent.
Dividends
We have
never paid dividends on our common stock and do not anticipate that
we will do so in the near future.
Determination of Offering Price
In
determining the offering price for the shares of common stock and
warrants, and the exercise price of the warrants, we will consider
a number of factors including, but not limited to, the current
market price of our common stock, trading prices of our common
stock over a period of time, the illiquidity and volatility of our
common stock, prevailing market conditions, our historical
performance, our future prospects and the future prospects of our
industry in general, our capital structure, estimates of our
business potential and earnings prospects, the present state of our
development and an assessment of our management and the
consideration of the above factors in relation to market valuation
of companies engaged in businesses and activities similar to
ours.
It is
also possible that after the offering, the shares of common stock
will not trade in the public market at or above the offering
price.
CAPITALIZATION
The following table
summarizes our capitalization and cash and cash equivalents as of
March 31, 2017:
●
on an actual basis;
and
●
on an as adjusted
basis to reflect (i) the sale by us of securities in this offering
on an assumed closing date
of , 2017, based on
an assumed public offering price of
$ per share, assuming no
exercise of the underwriters’ option to purchase additional
shares, and (ii) the deduction of estimated underwriting discounts
and commissions and estimated offering expenses payable by
us.
You should read
this table together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operation,” as
well as our financial statements and related notes and the other
financial information, appearing elsewhere in this
prospectus.
|
|
As of March 31,
2017
|
|
|
|
(Unaudited)
|
|
|
|
Actual
|
As
Adjusted
|
|
Cash and cash
equivalents
|
$585,343
|
$
|
|
Debt:
|
|
|
|
Current line of
credit
|
$500,000
|
$500,000
|
|
Current
debt(1)
|
12,900,242
|
12,900,242
|
|
Current loan from
related party
|
1,244,310
|
1,244,310
|
|
Current note
payable
|
825,000
|
825,000
|
|
Current put
rights(2)
|
750,343
|
750,343
|
|
Non-current put
rights(2)
|
3,249,657
|
3,249,657
|
|
Total
debt
|
$19,469,552
|
$19,469,552
|
|
|
|
|
|
Common stock,
$0.015 par value, 400,000,000 shares authorized, 18,065,801 issued
and outstanding, actual, and , issued and outstanding, as
adjusted
|
$270,988
|
|
|
Series C
Convertible Preferred stock, $0.001 par value, 1,000,000 shares
authorized, 1,000,000 issued and outstanding
|
1,000
|
1,000
|
|
Additional paid in
capital
|
93,183,286
|
|
|
Accumulated
deficit
|
(94,850,416)
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
(1,395,142)
|
|
|
Total
capitalization
|
$18,074,410
|
$
|
_________
(1)
Consists of debt of
our subsidiaries used to produce and pay the print and advertising
expenses of Max
Steel.
(2)
Consists of our
obligation to purchase up to 2,222,350 shares of our common stock
from the sellers of 42West during certain specified exercise
periods up until December 2020, pursuant to put agreements. For a
discussion of the terms of the put agreements, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
The number of
shares of our outstanding common stock, actual and as adjusted,
excludes:
●
3,224,230 shares of
our common stock issuable upon the exercise of outstanding warrants
having exercise prices ranging from $3.10 to $7.00 per
share;
●
shares of our
common stock issuable upon the conversion of 1,000,000 shares of
Series C Convertible Preferred Stock outstanding. For a discussion
of the conditions upon which the shares of Series C Convertible
Preferred Stock become convertible, and the number of shares of
common stock into which such preferred stock would be convertible
upon satisfaction of such conditions, see “Description of
Securities—Series C Convertible Preferred Stock”;
and
●
shares issuable in
connection with the 42West acquisition as follows: (i) up to
118,655 shares of our common stock that we may issue as employee
stock bonuses during 2017; (ii) 1,961,821 shares of our common
stock that we will issue to the sellers on January 2, 2018; and
(iii) up to 1,963,126 shares of our common stock that we may issue
to the sellers based on the achievement of specified financial
performance targets over a three-year period as set forth in the
membership interest purchase agreement.
DILUTION
If you
invest in the securities being offered by this prospectus, you will
suffer immediate and substantial dilution in the net tangible book
value per share of common stock. Our net tangible deficit as of
March 31, 2017 was approximately $(24.5) million, or
approximately $(1.36) per share. Net tangible deficit per share
represents our total tangible assets less total tangible
liabilities, divided by the number of shares of common stock
outstanding as of March 31, 2017.
Dilution in net
tangible book value per share represents the difference between the
public offering price per share of common stock paid by purchasers
in this offering, attributing no value to the warrants offered
hereby, and the net tangible book value per share of our common
stock immediately after this offering. After giving effect to the
sale by us of shares in this offering, assuming all securities are
sold, at a public offering price of $ per share
and attributing no value to the warrants, after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our net tangible book value as of
March 31, 2017 would have been approximately $
million, or approximately $ per share of common stock.
This represents an immediate increase of $ in net
tangible book value per share to our existing shareholders and an
immediate dilution of $ per share to purchasers of
securities in this offering. The following table illustrates this
per share dilution:
|
Assumed public
offering price per share
|
$
|
|
Net tangible book
value deficit per share as of March 31, 2017
|
$(1.36)
|
|
Increase in net
tangible book value per share attributable to new
investors
|
$
|
|
Adjusted net
tangible book value deficit per share as of March 31, 2017, after
giving effect to the offering
|
$
|
|
Dilution per share
to new investors in the offering
|
$
|
If the
underwriter exercises its over-allotment option in full, the
adjusted net tangible book value will increase to
$ per share, representing an immediate
dilution of $ per share to new
investors, assuming that the assumed public offering price remains
the same and after deducting underwriting discounts and commissions
and the estimated offering expenses payable by us. Investors
exercising their warrants may experience additional
dilution.
The
above discussion and tables do not include the
following:
●
shares
of common stock issuable upon the exercise of the warrants offered
hereby;
●
3,224,230
shares of our common stock issuable upon the exercise of
outstanding warrants having exercise prices ranging from $3.10 to
$7.00 per share;
●
shares of
our common stock issuable upon the conversion of 1,000,000 shares
of Series C Convertible Preferred Stock outstanding. For a
discussion of the conditions upon which the shares of Series C
Convertible Preferred Stock become convertible, and the number of
shares of common stock into which such preferred stock would be
convertible upon satisfaction of such conditions, see
“Description of Securities—Series C Convertible
Preferred Stock”; and
●
shares
issuable in connection with the 42West acquisition as follows: (i)
up to 118,655 shares of our common stock that we may issue as
employee stock bonuses during 2017; (ii) 1,961,821 shares of our
common stock that we will issue to the sellers on January 2, 2018;
and (iii) up to 1,963,126 shares of our common stock that we may
issue to the sellers based on the achievement of specified
financial performance targets over a three-year period as set forth
in the membership interest purchase agreement.
In addition,
we may be required to purchase up to 2,222,350 shares of our common
stock from the sellers during certain specified exercise periods up
until December 2020, pursuant to put agreements. For a
discussion of the terms of the put agreements, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
The following unaudited pro forma combined statements of
operations and related notes present our
historical combined statements of
operations with that of 42West, after giving effect to our
acquisition of 42West that was completed on March 30,
2017. The pro forma adjustments are based upon available
information and assumptions that we believe are
reasonable.
The
unaudited pro forma combined statements of operations for the year
ended December 31, 2016 are presented as if the acquisition had
occurred on January 1, 2016. The unaudited pro forma condensed
combined statements of operations for the three months ended March
31, 2017 are presented as if the acquisition had occurred on
January 1, 2017. The historical statements of operations
are adjusted in the unaudited pro forma combined
statements of operations to give effect to pro forma events
that are (1) directly attributable to the proposed acquisition, (2)
factually supportable, and (3) expected to have a continuing impact
of the combined results.
Dolphin has not
completed the detailed valuations necessary to estimate the fair
value of the assets acquired and the liabilities assumed from
42West and the related allocations of purchase price, nor has
Dolphin identified all adjustments necessary to conform
42West’s accounting policies to Dolphin’s accounting
policies. Although the unaudited pro forma financial information
presented herein do not contain a pro forma balance sheet, the
preliminary estimated fair value of intangible assets was used to
prepare certain adjustments to the combined statements of
operations presented herein. Dolphin’s preliminary estimates
of the fair value of 42West’s assets and liabilities is
based on discussions with 42West’s management, due diligence
and preliminary work performed by third-party valuation
specialists. As the final valuations are being performed,
increases or decreases in fair value of relevant balance sheet
amounts will result in adjustments, some of which may affect the
statement of operations, and may result in material differences
from the information presented herein.
The
unaudited pro forma adjustments are not necessarily indicative of
or intended to represent the results that would have been achieved
had the transaction been consummated as of the dates indicated or
that may be achieved in the future. The actual results
reported by the combined company in periods following the
acquisition may differ significantly from those reflected in these
unaudited pro forma combined financial information for a number of
reasons, including cost saving synergies from operating
efficiencies and the effect of incremental costs incurred to
integrate the two companies.
The
unaudited pro forma combined financial information should be read
in conjunction with our historical consolidated financial
statements and accompanying notes and the historical financial
statements of 42West as of and for the years ended December 31,
2016 and 2015 included elsewhere in this prospectus.
Unaudited Pro Forma Combined Statements of Operations
For the year ended December 31, 2016
|
|
Dolphin Digital
Media, Inc. (Historical)
|
42West - Acquiree
(Historical)
|
Pro Forma
Adjustments
|
Notes
|
Pro Forma
Combined
|
|
Revenues
|
$9,395,625
|
$18,563,749
|
$—
|
|
$27,959,374
|
|
Operating expenses
exclusive of depreciation and amortization
|
27,097,889
|
15,851,177
|
—
|
|
42,949,066
|
|
Operating (loss)
income
|
(17,702,264)
|
2,712,572
|
—
|
|
(14,989,692) |
|
Depreciation and
amortization(1)
|
(476,250)
|
(213,846)
|
(997,333)
|
(A)
|
(1,687,429)
|
|
Interest
expense
|
(4,241,841)
|
(21,505)
|
|
|
(4,263,346)
|
|
Change in fair
value of warrant liability
|
2,195,542
|
—
|
—
|
|
2,195,542
|
|
Warrant issuance
expense
|
(7,372,593)
|
—
|
—
|
|
(7,372,593)
|
|
Loss on
extinguishment of debt
|
(9,601,933)
|
—
|
—
|
|
(9,601,933)
|
|
Other income
(expense)
|
9,660
|
(59,752)
|
—
|
|
(50,092)
|
|
Net (loss)
income
|
$(37,189,679)
|
$2,417,469
|
$(997,333)
|
|
$(35,769,543)
|
|
Deemed dividend on
preferred stock
|
5,247,227
|
—
|
—
|
|
5,247,227
|
|
Net loss
attributable to commonshareholders
|
$(42,436,906)
|
$2,417,469
|
$(997,333)
|
|
$(41,016,770)
|
|
Basic and Diluted
Loss per Share
|
$(4.83)
|
—
|
—
|
|
$(3.33)
|
|
Weighted average
number of shares used in share calculation
|
8,778,193
|
—
|
—
|
(B1)
|
12,314,850
|
(1) Depreciation and
amortization have been reclassified from operating (loss) income
for presentation purposes.
See accompanying
notes to the Unaudited Pro Forma Combined Statements of
Operations
Unaudited Pro Forma Condensed Combined Statements of
Operations
For the three months ended March 31, 2017
|
|
Dolphin Digital
Media, Inc. (Historical)
|
42West -
Acquiree (Historical)
|
Pro Forma
Adjustments
|
Notes
|
Pro Forma
Combined
|
|
Revenues
|
$532,866
|
$4,689,556
|
$—
|
|
$5,222,422
|
|
|
|
|
|
|
|
|
Operating
expenses exclusive of depreciation and amortization
|
1,399,923
|
3,976,920
|
—
|
|
5,376,843
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
(867,057)
|
712,636
|
—
|
|
(154,421)
|
|
|
|
|
|
|
|
|
Depreciation
and amortization(1)
|
(4,635)
|
(67,656)
|
(249,333)
|
(A)
|
(321,624)
|
|
Interest
expense
|
(452,137)
|
(3,559)
|
—
|
|
(455,696)
|
|
Change
in fair value of warrantliability
|
6,823,325
|
—
|
—
|
|
6,823,325
|
|
Acquisition
related expense
|
(537,708)
|
—
|
537,708
|
(B2)
|
—
|
|
Other
expense
|
—
|
$(47,150)
|
—
|
|
(47,150)
|
|
Net
income
|
$4,961,788
|
$594,271
|
$288,375
|
|
$5,844,434
|
|
|
|
|
|
|
|
|
Income
Per Share:
|
|
|
|
|
|
|
Basic
|
$0.34
|
|
|
(C)
|
$0.32
|
|
Diluted
|
$0.05
|
|
|
|
$0.09
|
|
|
|
|
|
|
|
|
Weighted
average number of share used in per share calculation:
|
|
|
|
|
|
|
Basic
|
14,477,413
|
|
|
(B1)
|
18,014,070
|
|
Diluted
|
17,305,617
|
|
|
|
20,771,141
|
(1) Depreciation and
amortization have been reclassified from operating (loss) income
for presentation purposes.
See accompanying
notes to the Unaudited Pro Forma Condensed Combined Statements of
Operations
NOTES
TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF
OPERATIONS
NOTE 1 – DESCRIPTION OF THE TRANSACTION
On March 30,
2017, we completed our acquisition of 42West. Pursuant
to the terms of the purchase agreement we acquired from the members
of 42West, 100% of the membership interests of 42West and 42West
became our wholly-owned subsidiary. The consideration paid by us in
connection with the 42West acquisition was approximately $18.7
million in shares of common stock, based on our 30-trading-day
average stock price prior to the closing date of $4.61 per share
(less certain working capital and closing adjustments, transaction
expenses and payments of indebtedness), plus the potential to earn
up to an additional $9.3 million in shares of common stock based on
achieving certain financial targets.
Also in
connection with the 42West acquisition, on March 30, 2017, we
entered into put agreements with each of the sellers. Pursuant to
the terms and subject to the conditions set forth in the put
agreements, we granted the sellers the right, but not obligation,
to cause us to purchase up to an aggregate of 2,374,187 of the
shares of common stock received as consideration for a purchase
price equal to $4.61 per share during certain specified exercise
periods set forth in the put agreements up until December
2020.
NOTE 2 –BASIS OF PRO FORMA PRESENTATION
The
unaudited pro forma combined statement of operations for the year
ended December 31, 2016 and the unaudited pro forma condensed
combined statement of operations for the three months ended March
31, 2017 combine our historical statement of operations with the
historical statement of operations of 42West and (i) for the year
ended December 31, 2016, was prepared as if the acquisition
occurred on January 1, 2016 and (ii) for the three months ended
March 31, 2017, was prepared as if the acquisition occurred on
January 1, 2017. The historical statements of operations
are adjusted in the unaudited pro forma combined statements of
operations to give effect to pro forma events that are (1) directly
attributable to the proposed acquisition, (2) factually
supportable, and (3) expected to have a continuing impact on the
combined results.
We accounted for the acquisition in the unaudited pro forma
combined statements of operations using the acquisition method of
accounting in accordance with Financial Accounting Standards Board
Accounting Standards Codification Topic 805 “Business
Combinations” or “ASC 805”. In
accordance with ASC 805, we used our best estimates and assumptions
to assign fair value to the tangible and intangible assets acquired
and liabilities assumed at the acquisition
date. Goodwill as of the acquisition date is measured as
the excess of purchase consideration over the fair value of the net
tangible and identifiable assets acquired.
The pro
forma adjustments described below were developed based on
management’s assumptions and estimates, including assumptions
relating to the consideration paid and the allocation thereof to
the assets acquired and liabilities assumed from 42West based on
preliminary estimates to fair value. The final purchase
consideration and allocation of the purchase consideration will
differ from that reflected in the unaudited pro forma combined
statements of operations after the final valuation procedures are
performed and the amounts are finalized.
The
unaudited pro forma combined statements of operations are provided
for illustrative purposes only and do not purport to represent what
the actual consolidated results of operations of the combined
company would have been had the acquisition occurred on the dates
assumed, nor are they necessarily indicative of future consolidated
results of operations.
We expect to incur costs and realize benefits associated with
integrating our operations and those of 42West. The
unaudited pro forma combined statements of operations do not
reflect the costs of any integration activities or any benefits
that may result from operating efficiencies or revenue
synergies. The unaudited pro forma combined statement of
operations for the year ended December 31, 2016 and the unaudited
pro forma condensed combined statement of operations for the three
months ended March 31, 2017 do not reflect any non-recurring
charges directly related to the acquisition that the combined
companies incurred upon completion of the 42West
acquisition.
NOTE 3 – PRO FORMA ADJUSTMENTS
The following is a description of the unaudited pro forma
adjustments reflected in the unaudited pro forma combined
statements of operations:
(A)
The amortization of
the acquired intangible assets pro forma adjustments are as
follows:
|
|
Acquisition Date
Opening Balance
|
Useful
Live(Years)
|
AnnualAmortization
|
Quarterly
Amortization
|
|
Intangible
assets:
|
|
|
|
|
|
Customer
relationships
|
$5,980,000
|
10
|
$598,000
|
$149,500
|
|
Trade
name
|
2,760,000
|
10
|
276,000
|
$69,000
|
|
Non-competition
agreements
|
370,000
|
3
|
123,333
|
$30,833
|
|
|
$9,110,000
|
|
$977,333
|
$249,333
|
(B1)
Per the terms of
the purchase agreement, (i) 1,230,280 shares of common stock were
issued on March 30, 2017, (ii) 344,550 shares of common stock
were issued on April 13, 2017 and up to 118,655 shares of common
stock may be issued during 2017, and (iii) 1,961,827 shares of
common stock will be issued on January 2, 2018. We
recalculated the weighted average shares as of December 31, 2016,
as if the shares of common stock had been issued on January 1, 2016
and as of March 31, 2017, as if the shares of common stock had been
issued on January 1, 2017.
(B2)
We adjusted the pro
forma statement of operations to eliminate $537,708 of acquisition
related costs since they are not expected to have a continuing
impact on the operating results of the combined
entities.
(C)
We recalculated
income per share to give effect to the acquisition as if it had
occurred on January 1, 2017.
|
|
Historical
3/31/2017
|
Pro
Forma
3/31/2017
|
|
Numerator
|
|
|
|
Net
income
|
$4,961,788
|
$5,844,434
|
|
Numerator for basic
earnings per share
|
4,961,788
|
5,844,434
|
|
Change in fair
value of Warrants that were exercised
|
(4,066,254)
|
(4,066,254)
|
|
Numerator for
diluted income per share
|
895,534
|
1,778,180
|
|
|
|
|
|
Denominator
|
|
|
|
Denominator for
basic EPS - weighted-average shares
|
14,477,413
|
14,477,413
|
|
Shares issued or
issuable due to the acquisition
|
—
|
3,536,657
|
|
Denominator for
basic EPS - weighted-average shares including shares issued or
issuable for acquisition
|
14,477,413
|
18,014,070
|
|
|
|
|
|
Effect of dilutive
securities:
|
|
|
|
Warrants
|
2,757,071
|
2,757,071
|
|
Shares issuable in
January 2018 and Employee Bonus Shares issuable in connection with
42West acquisition
|
71,133
|
—
|
|
Denominator for
diluted EPS - adjusted weighted-average shares assuming exercise of
warrants
|
31,783,030
|
20,771,141
|
|
|
|
|
|
Basic income per
share
|
0.34
|
0.32
|
|
Diluted income per
share
|
0.03
|
0.09
|
SELECTED FINANCIAL
DATA
The
following table includes our selected historical financial data.
The historical financial data as of December 31, 2016 and 2015 and
for the years ended December 31, 2016 and 2015 have been derived
from our audited financial statements, which are included elsewhere
in this prospectus. The historical financial data as of December
31, 2014 and for the year ended December 31, 2014 have been derived
from our audited financial statements, which are not included in
this prospectus. The historical financial data as of March 31, 2017
and for the three months ended March 31, 2017 and 2016 have been
derived from our unaudited financial statements, which are included
elsewhere in this prospectus. Our financial statements are prepared
and presented in accordance with generally accepted accounting
principles in the United States. The results indicated below are
not necessarily indicative of our future performance.
|
|
For the year ended
December 31,
|
For the three
months ended March 31,
|
|||
|
|
2014
|
2015(1)
|
2016
|
2016
|
2017
|
|
|
(audited)
|
(unaudited)
|
|||
|
Revenues:
|
|
|
|
|
|
|
Production and
distribution
|
51,192
|
$3,031,073
|
$9,367,222
|
$—
|
$532,866
|
|
Service
|
2,000,000
|
—
|
—
|
—
|
—
|
|
Membership
|
19,002
|
69,761
|
28,403
|
17,278
|
—
|
|
Total
Revenue
|
2,070,194
|
3,100,834
|
9,395,625
|
17,278
|
532,866
|
|
Expenses:
|
|
|
|
|
|
|
Direct
costs
|
159,539
|
2,587,257
|
10,661,241
|
2,282
|
500,526
|
|
Distribution and
marketing
|
—
|
213,300
|
11,322,616
|
—
|
—
|
|
Selling, general
and administrative
|
1,533,211
|
1,845,088
|
1,245,689
|
268,000
|
192,409
|
|
Legal and
professional
|
—
|
2,392,556
|
2,405,754
|
344,735
|
375,269
|
|
Payroll
|
1,630,369
|
1,435,765
|
1,462,589
|
387,446
|
336,354
|
|
Loss before other
income (expense)
|
(1,252,925)
|
(5,373,132)
|
(17,702,264)
|
(985,185)
|
(871,692)
|
|
Other
Income(Expense)
|
|
|
|
|
|
|
Other
income
|
40,000
|
96,302
|
9,660
|
9,660
|
—
|
|
Amortization of
loan fees
|
—
|
—
|
(476,250)
|
—
|
—
|
|
Change in fair
value of warrant liability
|
—
|
—
|
2,195,542
|
—
|
6,823,325
|
|
Warrant issuance
expense
|
—
|
—
|
(7,372,593)
|
—
|
—
|
|
Loss on
extinguishment of debt
|
—
|
—
|
(9,601,933)
|
(1,191,358)
|
—
|
|
Acquisition related
costs
|
—
|
—
|
—
|
—
|
(537,708)
|
|
Interest
expense
|
(660,580)
|
(3,559,532)
|
(4,241,841)
|
(1,281,965)
|
(452,137)
|
|
Total Other
Income(Expense)
|
(620,580)
|
(3,463,230)
|
(19,487,415)
|
(2,463,663)
|
5,833,480
|
|
Net Income
(Loss)
|
$(1,873,505)
|
$(8,836,362)
|
$(37,189,679)
|
$(3,448,848)
|
$4,961,788
|
|
Net Income
attributable to noncontrolling interest
|
4,750
|
17,440
|
—
|
—
|
—
|
|
Net Loss
attributable to Dolphin Films, Inc.
|
—
|
(4,786,341)
|
—
|
—
|
—
|
|
Net Loss
attributable to Dolphin Digital Media, Inc.
|
(1,878,255)
|
(4,067,461)
|
(37,189,679)
|
—
|
—
|
|
|
$(1,873,505)
|
$(8,836,362)
|
$(37,189,679)
|
$—
|
$—
|
|
Deemed dividend on
preferred stock
|
—
|
—
|
5,247,227
|
(5,247,227)
|
—
|
|
Net loss
attributable to common shareholders
|
$(1,873,505)
|
$(8,836,362)
|
$(42,436,906)
|
$(8,696,075)
|
$4,961,788
|
|
Income (Loss) Per
Share
|
|
|
|
|
|
|
Basic
|
$(0.02)
|
$(2.16)
|
$(4.83)
|
$(1.85)
|
$0.34
|
|
Diluted
|
$(0.02)
|
$(2.16)
|
$(4.83)
|
$(1.85)
|
$0.05
|
|
Weighted average
number of shares used in per share calculation:
|
|
|
|
|
|
|
Basic
|
81,892,352
|
4,094,618
|
8,778,193
|
4,678,469
|
14,477,413
|
|
Diluted
|
81,892,352
|
4,094,618
|
8,778,193
|
4,678,469
|
17,305,617
|
|
|
As
of December 31,
|
As
of March 31,
|
||
|
|
2014
|
2015(1)
|
2016
|
2017
|
|
|
(audited)
|
(unaudited)
|
||
|
Balance
Sheet Data:
|
|
|
|
|
|
Cash and cash
equivalents
|
$198,470
|
$2,392,685
|
$662,546
|
585,343
|
|
Restricted
cash
|
—
|
—
|
1,250,000
|
—
|
|
Capitalized
production costs
|
693,526
|
15,170,768
|
4,654,013
|
4,242,096
|
|
Intangible
assets
|
—
|
—
|
—
|
9,110,000
|
|
Goodwill
|
—
|
—
|
—
|
13,996,337
|
|
Total
Assets
|
$1,493,240
|
$21,369,113
|
$14,197,241
|
$34,279,389
|
|
Total
Liabilities
|
10,285,083
|
54,233,031
|
46,065,038
|
35,674,531
|
|
Total
Stockholders’ Deficit
|
(8,791,843)
|
(32,863,918)
|
(31,867,797)
|
(1,395,142)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
(1)
Financial
information has been retrospectively adjusted for our acquisition
of Dolphin Films. See Notes 1 and 4 to the consolidated financial
statements included elsewhere in this prospectus.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our historical
consolidated financial statements and the notes thereto, which are
included elsewhere in this prospectus. The following discussion
includes forward-looking statements that involve certain risks and
uncertainties, including, but not limited to, those described in
“Risk Factors”. Our actual results may differ
materially from those discussed below. See “Special Note
Regarding Forward-Looking Statements” and “Risk
Factors”.
Overview
We are
a leading independent entertainment marketing and premium content
development company. Through our recent acquisition of 42West, we
provide expert strategic marketing and publicity services to all of
the major film studios, and many of the leading independent and
digital content providers, as well as for hundreds 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
development, creating significant opportunities to serve our
respective constituents more strategically and to grow and
diversify our business.
On
March 7, 2016, we acquired Dolphin Films from Dolphin
Entertainment, 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.
On
March 30, 2017, we acquired 42West, an entertainment public
relations agency offering talent publicity, strategic
communications and entertainment content marketing. As
consideration for the 42West acquisition, we paid approximately
$18.7 million in shares of common stock, par value $0.015, based on
our company’s 30-trading-day average stock price prior to the
closing date of $4.61 per share (less certain working capital and
closing adjustments, transaction expenses and payments of
indebtedness), plus the potential to earn up to an additional $9.3
million in shares of common stock. As a result, we (i) issued
1,230,280 shares of common stock on the closing date and 344,550
shares of common stock to certain 42West employees on April 13,
2017, (ii) may issue up to 118,655 shares of common stock as
employee stock bonuses during 2017, and (iii) will issue 1,961,821
shares of common stock on January 2, 2018. In addition, we may
issue up to 1,963,126 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. Because the 42West acquisition was completed during
2017, the financial condition and results of operations presented
herein are those of us and our subsidiaries prior to the completion
of the acquisition, and do not include the financial condition and
results of operations of 42West.
Prior
to its acquisition, 42West was the largest independently-owned
public relations firm in the entertainment industry. Among other
benefits, we anticipate that the 42West acquisition will strengthen
and complement our current digital and motion picture business,
while expanding and diversifying our operations. Having marketing
expertise in-house will allow us to review any prospective
project’s marketing potential prior to making a production
commitment.
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 have been retained as well. In
connection with the 42West acquisition, we granted the sellers the
right, but not the obligation, to cause us to purchase up to an
aggregate of 2,374,187 of their shares of common stock received as
consideration for a purchase price equal to $4.61 per share during
certain specified exercise periods up until December
2020.
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.
Effective May 10,
2016, we amended our Articles of Incorporation to effectuate a
1-to-20 reverse stock split. Shares of common stock have been
retrospectively adjusted to reflect the reverse stock split in the
following management discussion.
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, including the proceeds from this offering;
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.
Revenues
During
the year ended December 31, 2015, we derived revenue through (1)
the online distribution rights of our web series, South Beach – Fever and
international distribution rights to our motion picture,
Believe; and (2) a portion
of fees obtained from the sale of memberships to online kids clubs.
During the year ended December 31, 2016, our primary source of
revenue was from the release of our motion picture, Max Steel. During the three months
ended March 31, 2016, we derived revenues from a portion of
fees obtained from the sale of memberships to online kids clubs.
During the three months ended March 31, 2017, we derived
revenues from the release of our motion picture, Max Steel. The table below sets forth
the components of revenue for the years ended December 31,
2015 and 2016 and for the three months ended March 31, 2016
and 2017:
|
|
For the year
ended
December
31,
|
For the three
months ended
March
31,
|
||
|
Revenues:
|
2015
|
2016
|
2016
|
2017
|
|
Production and
distribution
|
98.0%
|
99.7%
|
0.0%
|
100.0%
|
|
Membership
|
2.0%
|
0.3%
|
100.0%
|
0.0%
|
|
Total
revenue
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
The
impact of 42West’s revenue and earnings, for the one day
between the acquisition date (March 30, 2017) and
March 31, 2017, to revenues and net loss recorded in the
condensed consolidated statement of operations for the three months
ended March 31, 2017 is de minimis.
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
US and we anticipate that it will be available for distribution
during the third quarter of 2017. We are currently sourcing
distribution platforms in which to release projects currently in
production 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 earn
fees for producing each web series, as included in the production
budget for each project. We either recognize producer’s fees
on a percentage of completion or a completed contract basis
depending on the terms of the producer agreements, which we
negotiate on a project by project basis. During 2016, we began
production of our new web series but it had not been completed as
of March 31, 2017. In addition, we concentrated our efforts in
identifying potential distribution partners.
●
Initial Distribution/Advertising
Revenue: We earn revenues from the distribution of online
content on advertiser supported video-on-demand, or AVOD,
platforms. Distribution agreements contain revenue sharing
provisions which permit the producer to retain a percentage of all
domestic and international advertising revenue generated from the
online distribution of a particular web series. Typically, these
rates range from 30% to 45% of such revenue. We have previously
distributed our productions on various online platforms including
Yahoo!, Facebook, Hulu and AOL.
●
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.
No revenues from this source have been derived during the years
ended December 31, 2015 and 2016 or during the three months ended
March 31, 2016 and 2017. 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.
Dolphin Films
During the
years ended December 31, 2015 and 2016, we derived revenues through
the international distribution of the motion picture, Believe. During the three months ended
March 31, 2017, we derived revenues from Dolphin Films primarily
through the domestic and international distribution of our motion
picture, Max
Steel.
The
production of the motion picture, Max Steel, was completed during 2015
and released in the United States on October 14, 2016. The motion
picture did not perform as well as expected domestically but we
have 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, and are expected to be, 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 has
existing agreements with theatrical exhibitors. The financial terms
negotiated with its U.S. theatrical distributor provide that we
receive a percentage of the box office results, after related
distribution fees.
●
International –
International revenues were, and are expected to be, 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. We anticipate that the revenues from these channels
will be received in 2017 and thereafter.
Our ability to
receive additional revenues from Max Steel will depend on our ability to
repay our loans under our production service agreement and prints
and advertising loan agreement. We do not currently have
sufficient funds to repay such loans when they become due. If
we are unable to repay such loans when they become due, we will
lose our copyright to the film and will no longer receive revenues
related to Max Steel. For a
discussion of the terms of such agreements, see “Liquidity
and Capital Resources” below.
Project Development and Related Services
We have
a development team that dedicates a portion of its time and
resources to sourcing scripts for future developments. The scripts
can be for either digital or motion picture productions. During
2015 and 2016, we acquired the rights to certain scripts, one that
we intend to produce in the fourth quarter of 2017 and the others
in 2018. During the three months ended March 31, 2017, we
acquired the rights to a book from which we intend to develop a
script and produce in 2018. We have not yet determined if these
projects would be produced for digital or theatrical
distribution.
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 terms of our agreement with US Youth
Soccer, we notified them that we did not intend to renew our
agreement that terminated on February 1, 2017. 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 2,170,000 shares of our common stock at a purchase price of
$0.015 per share. (See Note 10 to the consolidated financial
statements included elsewhere in this prospectus for further
discussion on the warrants).
For the
years ended December 31, 2015 and 2016, we did not record
significant revenues from the online kids clubs. For the three
months ended March 31, 2016 and 2017, we recorded $0.02 and $0
million, respectively, of revenues from the online kids clubs.
Membership revenues decreased during the three months ended
March 31, 2017, as compared to the same period in the prior
year mainly due to promotional efforts made by a consultant that we
hired to promote Club Connect. That consultant is no longer
providing services to our company.
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 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 were incurred during the years ended December
31, 2015 and 2016 and included the costs of theatrical, prints and
advertising, or P&A, 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. 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. For the years ended December 31, 2015 and
2016, selling, general and administrative expenses included the
commissions that we pay our advertising and distribution brokers,
which can range up to 25% of the distribution and advertising
revenue that we receive.
Legal
and professional fees include fees paid to our attorneys, fees for
public relations consultants, and fees for general business
consultants.
Other Income and Expenses
During
the years ended December 31, 2015 and 2016, Other income and
expenses consisted primarily of (1) interest to Dolphin
Entertainment, in connection with loans made to our company; (2)
interest payments related to the Loan and Security Agreements
entered into to finance the production of certain digital content
and motion pictures; (3) loss on extinguishment of debt; (4)
amortization of loan fees; (5) warrant issuance expense; and (6)
change in fair value of derivative liability.
During
the year ended December 31, 2016, we entered into agreements
with certain debtholders, including Dolphin Entertainment, to
convert an aggregate of $25,164,798 principal and interest into
5,032,960 shares of common stock at a price of $5.00 per share. The
conversions occurred on days when the market price of the stock was
between $6.00 and $6.99 per share. As a result, we recorded a loss
on the extinguishment of the debt of approximately $6.3 million. In
addition, we entered into (i) a termination agreement to
terminate an equity finance agreement, (ii) a purchase agreement
for the acquisition of 25% membership interest of Dolphin Kids
Clubs and (iii) a debt exchange agreement to convert certain notes.
As consideration for the three agreements, we issued Warrant J and
Warrant K that entitle the warrant holder to purchase up to
2,340,000 shares of common stock at a price of $0.015 per share. As
a result of the issuance of the shares, we recorded a loss on
extinguishment of debt of approximately $3.3 million. In addition
to Warrants J and K, we entered into a warrant purchase agreement
whereby we agreed to issue Warrants G, H and I in exchange for a
$50,000 payment that was used to reduce the exercise price of
Warrant E. The warrant purchase agreement entitles the warrant
holder to purchase shares of common stock as follows: (i) up to
1,500,000 shares of common stock prior to January 31, 2018, at
$5.00 per share (ii) up to 500,000 shares of common stock at $6.00
per share prior to January, 31, 2019, and (iii) up to 500,000
shares of common stock at $7.00 per share prior to January 31,
2020. We determined that Warrants G, H, I, J, and K, which we refer
to, collectively, as the New Warrants, should be accounted for as a
derivative for which a liability is recorded in the aggregate and
measured fair value in the consolidated balance sheets and changes
in the fair value from one reporting period to the next are
reported as income or expense. As a result of the issuance of the
New Warrants, we recorded a warrant issuance expense of
approximately $7.4 million and income of approximately, $2.2
million from changes in the fair value of the New Warrants from the
dates of issuance through December 31, 2016.
During
the quarters ended March 31, 2016 and 2017, Other income and
expenses consisted primarily of (1) interest payments to Dolphin
Entertainment in connection with loans made to our company; (2)
interest payments related to the loan and security agreements
entered into to finance the production of certain digital content
and motion pictures; (3) loss on extinguishment of debt; (4)
amortization of loan fees; and (5) changes in the fair value of
warrant liabilities.
RESULTS OF OPERATIONS
Quarter ended March 31, 2017 as compared to quarter ended
March 31, 2016
Revenues
For the
three months ended March 31, 2017, our revenues were as
follows:
|
|
For the three
months ended
March
31,
|
|
|
Revenues:
|
2017
|
2016
|
|
Production and
distribution
|
$532,866
|
$–
|
|
Membership
|
–
|
17,278
|
|
Total
revenues:
|
$532,866
|
$17,278
|
Revenues from
production and distribution increased by $0.5 million for the three
months ended March 31, 2017, as compared to the same quarter
in the prior year primarily due to the revenue generated by the
domestic and international distribution of Max Steel.
Expenses
For the
three months ended March 31, 2017 and 2016, our primary
operating expenses were as follows:
|
|
For the three
months ended
March
31,
|
|
|
Expenses:
|
2017
|
2016
|
|
Direct
costs
|
$500,526
|
$2,282
|
|
Selling, general
and administrative
|
192,409
|
268,000
|
|
Legal and
professional
|
375,269
|
344,735
|
|
Payroll
|
336,354
|
387,446
|
|
Total
expenses
|
$1,404,558
|
$1,002,463
|
Direct
costs increased by approximately $0.5 million for the three months
ended March 31, 2017 as compared to the same quarter in the
prior year, mainly due to the amortization of capitalized
production costs related to the revenues earned from our motion
picture, Max
Steel.
Selling, general
and administrative expenses decreased by approximately $0.08
million for the quarter ended March 31, 2017, as compared to
the same quarter in the prior year. The decrease is mainly due to a
decrease in travel expenses.
Legal
and professional expenses increased by approximately $0.03 million
for the quarter ended March 31, 2017, as compared to the same
quarter in the prior year primarily due to fees paid for due
diligence work related to financing that was later
abandoned.
Payroll
expenses decreased by approximately $0.05 million for the quarter
ended March 31, 2017, as compared to the same quarter in the
prior year mostly due to several employees leaving during the
second quarter of 2016.
Other
Income and Expenses
|
|
For the three
months ended
March
31,
|
|
|
Other
(Income)/Expense:
|
2017
|
2016
|
|
Other
income
|
$–
|
$(9,660)
|
|
Loss on
extinguishment of debt
|
–
|
1,191,358
|
|
Acquisition related
costs
|
537,708
|
–
|
|
Change in fair
value of warrant liability
|
(6,823,325)
|
–
|
|
Interest
expense
|
452,137
|
1,281,965
|
|
Other
(Income)/expense
|
$(5,833,480)
|
$2,463,663
|
Interest expense
decreased by approximately $0.8 million for the three months ended
March 31, 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”.
Change
in fair value of warrant liability increased by approximately $6.8
million for the three months ended March 31, 2017, as compared
to the same period in the prior year due to warrants that were
issued in the fourth quarter of 2016 that were accounted for as
derivative liabilities. We recorded the warrants at their fair
value on the date of issuance and will record any changes to fair
value at each balance sheet date on our consolidated statements of
operation.
Loss on
extinguishment of debt decreased by approximately $1.2 million for
the three months ended March 31, 2017, as compared to the same
period in prior year as a result of extinguishment of certain debt
of our company. On March 29, 2016, we entered into ten individual
subscription agreements with each of ten subscribers. The
subscribers were holders of outstanding promissory notes issued
pursuant to loan and security agreements. Pursuant to the terms of
the subscription agreements, we agreed to convert $2,883,377
aggregate amount of principal and interest outstanding under the
notes into an aggregate of 576,676 shares of common stock at $5.00
per share as payment in full of each of the notes. On the date of
the conversion, our market price was $6.00 per share and we
recorded a loss on the extinguishment of the debt of $576,676 on
our condensed consolidated statement of operations.
In
addition, on March 4, 2016, we entered into a subscription
agreement with Dolphin Entertainment. Pursuant to the terms of the
subscription agreement, we agreed to convert $3,073,410 of
principal and interest outstanding on a revolving promissory note
into 614,682 shares of common stock at $5.00 per share. On the date
of conversion, our market price was $6.00 per share and we recorded
a loss on the extinguishment of the debt of $614,682 on our
condensed consolidated statement of operations
We
incurred approximately $0.5 million of legal, consulting and
auditing costs related to our acquisition of 42West.
Net Income (Loss)
Net
income was approximately $5.0 million or $0.34 per share based on
14,477,413 weighted average shares outstanding and $0.05 per share
on a fully diluted basis based on 17,305,617 weighted average
shares outstanding for the three months ended March 31, 2017.
Net loss for the three months ended March 31, 2016 was
approximately $3.5 million or $(1.85) per share based on 4,678,469
weighted average shares. Net income and losses for the three months
ended March 31, 2017 and 2016 were related to the factors
discussed above.
Year ended December 31, 2016 as compared to year ended December 31,
2015
Revenues
For the
year ended December 31, 2016, our revenues were as
follows:
|
|
For the year
ended
December
31,
|
|
|
Revenues:
|
2016
|
2015
|
|
Production and
distribution
|
$9,367,222
|
$3,031,073
|
|
Membership
|
28,403
|
69,761
|
|
Total
revenue
|
$9,395,625
|
$3,100,834
|
Revenues from
production and distribution increased by $6.3 million for the year
ended December 31, 2016, as compared to the year ended
December 31, 2015, primarily due to the release of our motion
picture, Max Steel, on
October 14, 2016 and the recognition of domestic box office
revenues and recognition of revenue from international licensing
agreements of the motion picture. During the same period in 2015,
we derived revenues from the online release of our web series,
South Beach–Fever, on
Hulu.
Revenues from
membership fees decreased by $0.04 million for the year ended
December 31, 2016, as compared to the year ended
December 31, 2015, as a result of one individual that
purchased memberships to the online kids club for a group of
schools in Louisiana during the second quarter of
2015.
Expenses
For the
years ended December 31, 2016 and 2015, our operating expenses
were as follows:
|
|
For the year
ended
December
31,
|
|
|
Expenses:
|
2016
|
2015
|
|
Direct
costs
|
$10,661,241
|
$2,587,257
|
|
Distribution and
marketing
|
11,322,616
|
213,300
|
|
Selling, general
and administrative
|
1,245,689
|
1,845,088
|
|
Legal and
professional
|
2,405,754
|
2,392,556
|
|
Payroll
|
1,462,589
|
1,435,765
|
|
Total
expenses
|
$27,097,889
|
$8,473,966
|
Direct
costs increased by approximately $8.1 million for the year ended
December 31, 2016 as compared to the year ended
December 31, 2015, mainly due to (i) amortization of
capitalized production costs related to the release of our motion
picture, Max Steel; (ii) a
$2 million impairment of the capitalized production costs of
Max Steel; (iii)
international sales agent fees paid for the distribution of our
motion picture in international territories; and (iv) the
impairment of the cost of a script that we decided not to produce.
During the year ended December 31, 2015, direct costs
consisted primarily of (i) amortization of capitalized production
costs for our web series, South
Beach – Fever; (ii) a fee paid to our distributor in
2015 related to the release date of our motion picture; and (iii)
impairment of the costs of scripts that we do not intend to
immediately produce.
Distribution and
marketing expenses increased by approximately $11.1 million for the
year ended December 31, 2016, as compared to the year ended
December 31, 2015, mainly due to costs associated with
the distribution and marketing for the release of our motion
picture, Max
Steel.
Selling, general
and administrative expenses decreased by approximately $0.6 million
for the year ended December 31, 2016, as compared to the year
ended December 31, 2015, mainly due to a contract for
international distribution back office services that ended on
December 31, 2015 and was not renewed for 2016.
Legal
and professional fees remained relatively consistent between the
year ended December 31, 2016 and the year ended
December 31, 2015. The majority of our professional fees are
related to consulting fees and legal fees that would be considered
in the normal course of business for our industry. During the year
ended December 31, 2016, we incurred approximately $0.5
million of legal and consulting fees directly related to the
release of our motion picture. By contrast during the year ended
December 31, 2015, we incurred $0.5 million of fees for
services rendered by our advertising and distribution broker
related to our web series.
Payroll
expenses increased by approximately $0.03 million during the year
ended December 31, 2016, as compared to the year ended
December 31, 2015, mostly due to certain payroll costs
capitalized during the production of our web series in 2015 and
cost of living salary increases made at the beginning of
2016.
Other
Income and Expenses
|
|
For the year
ended
December
31,
|
|
|
Other
Income and expenses:
|
2016
|
2015
|
|
Other
income
|
$9,660
|
$96,302
|
|
Amortization of
loan fees
|
(476,250)
|
–
|
|
Change in fair
value of warrant liability
|
2,195,542
|
–
|
|
Warrant issuance
expense
|
(7,372,593)
|
–
|
|
Loss on
extinguishment of debt
|
(9,601,933)
|
–
|
|
Interest
expense
|
(4,241,841)
|
(3,559,532)
|
|
Total
|
$(19,487,415)
|
$(3,463,230)
|
Interest expense
increased by $0.7 million for the year ended December 31,
2016, as compared to the year ended December 31, 2015, and was
directly related to (i) interest related to the conversion of
certain notes payable to shares of our common stock and (ii)
interest related to the production and distribution loans of our
motion picture.
During
the year ended December 31, 2016, we amortized approximately
$0.5 million of certain loan fees related to the financing obtained
for the distribution and marketing expenses for the release of
Max Steel.
During
the year ended December 31, 2016, we entered into subscription
agreements, termination agreements and debt exchange agreements,
which we refer to, collectively, as the Conversion Agreements, to
convert debt into shares of our common stock or to warrants to
purchase shares of our common stock. These Conversion Agreements
resulted in a loss on extinguishment of debt in the aggregate
amount of $9.6 million due to the difference in the price per share
in the Conversion Agreement and the market price per share on the
date of the conversion. The following details the various
agreements we entered into during the year ended December 31,
2016:
a)
We entered into
thirteen individual agreements with parties to loan and security
agreements under which we issued promissory notes to each of the
parties. Pursuant to the terms of the debt exchange agreements, we
converted an aggregate $3.75 million of principal and approximately
$0.4 million of interest under the promissory notes into an
aggregate of 840,910 shares of common stock at $5.00 per share as
payment in full of each of the promissory notes. The market price
per share was between $6.00 and $6.45 per share at the time of the
conversions. As a result, we recorded a loss on extinguishment of
debt related to these loan and security agreements of $0.9 million
on our consolidated statement of operations.
b)
We entered into
three debt exchange agreements with parties to equity finance
agreements. Pursuant to the terms of the agreements, we converted
an aggregate $0.3 million of principal and interest into an
aggregate of 66,200 shares of our common stock at $5.00 per share
as payment in full for each equity finance agreement. The market
price per share was between $6.25 and $6.75 per share at the time
of the conversions. As a result, we recorded a loss on
extinguishment of debt related to these equity finance agreements
of $0.1 million on our consolidated statements of operations. We
also entered into a settlement agreement with a separate party to
an equity finance agreement. Pursuant to the terms of the
settlement agreement, we agreed to pay $0.2 million and recorded a
loss on extinguishment of debt on our consolidated statement of
operations of approximately $0.1 million related to this settlement
agreement.
c)
We entered into a
debt exchange agreement with a party to a kids club agreement.
Pursuant to the terms of the agreements, we converted $0.06 million
on principal and interest into 12,000 shares of our common stock at
$5.00 per share as payment in full of the kids club agreement. The
market price per share was $6.75 per share at the time of the
conversion. As a result, we recorded $0.02 million of loss on
extinguishment of debt on our consolidated statements of
operations, related to this kids club agreement.
d)
We entered into a
subscription agreement with Dolphin Entertainment. Pursuant to the
terms of the subscription agreement, we converted $3.0 million of
principal and interest outstanding on a revolving promissory note
into 614,682 shares of our common stock at a price of $5.00 per
share. At the time of the conversion, market price per share of
common stock was $6.00. As a result, we recorded a loss on the
extinguishment of debt of $0.6 million on its condensed
consolidated statement of operations for the year ended
December 31, 2016.
e)
We entered into
various individual debt exchange agreements with parties to loan
and security agreements under which we issued promissory notes to
each of the parties. Pursuant to the debt exchange agreements, we
agreed to convert an aggregate $17.9 million in principal and
interest under the promissory notes into an aggregate of 3.6
million shares of common stock at a price of $5.00 per share as
payment in full of each of the promissory notes. On the dates of
conversion the market price per share of common stock was between
$6.08 and $6.99 and as a result, we recorded a loss on the
extinguishment of debt of $4.6 million our consolidated statements
of operations.
f)
We entered into a
termination agreement and a debt exchange agreement whereby we
issued Warrants J and K that entitled the holder to purchase shares
of our common stock at a price of $0.015. In exchange the warrant
holder agreed to convert an aggregate of $6.5 million of debt.
Warrant J entitles the warrant holder to purchase up to 170,000
shares of our common stock and Warrant K entitles the warrant
holder to purchase up to 2,170,000 but also includes consideration
for the purchase of a 25% interest in Dolphin Kids Clubs. We
recorded loss on extinguishment of debt of $3.2 million related to
these agreements.
In
addition to Warrants J and K discussed above, as previously
described, we entered into a warrant purchase agreement whereby we
agreed to issue Warrants G, H and I. We recorded $7.4 million of
warrant issuance expense with respect to Warrants G, H and I. All
of the warrants issued during 2016 were recorded as a derivative
liability. We recorded the warrants at their fair value on the date
of issuance and will record any changes to fair value at each
balance sheet date as a change in the fair value of a derivative
liability on our consolidated statements of operation. For the year
ended December 31, 2016, we recorded $2.2 million of a change
in the fair value of the derivative liability.
Net
Loss
Net
loss was approximately $37.2 million or $(4.83) per share of common
stock, including a preferred stock deemed dividend of approximately
$5.2 million for the year ended December 31, 2016 based on
8,778,193 weighted average shares outstanding as of
December 31, 2016 and approximately $8.8 million or $(2.16)
per share for the year ended December 31, 2015 based on
4,094,618 weighted average shares outstanding as of
December 31, 2015. The increase in net loss between the years
ended December 31, 2016 and 2015 was related to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Quarter ended March 31, 2017 as compared to quarter ended March 31,
2016
Cash flows provided by operating
activities increased by approximately $4.4 million from
approximately $(0.6) million used for operating activities during
the three months ended March 31, 2016 to approximately $3.8
million provided by operating activities during the three months
ended March 31, 2017. This increase was primarily due to (i)
$2.1 million of production tax incentives received and (ii)
approximately $2 million received from accounts receivable related
to Max
Steel.
Cash flows from investing activities increased by approximately
$1.3 million during the three months ended March 31, 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.
Cash flows used for financing
activities increased by approximately $6 million during the three
months ended March 31, 2017 from approximately $0.9 million
provided by financing activities during the three months ended
March 31, 2016 to approximately $5.1 million used for
financing activities during the three months ended March 31,
2017 mainly due to approximately $5.8 million used to repay the
debt related to the production, distribution and marketing loans
for Max
Steel.
As previously discussed, in connection with the 42West acquisition,
we may be required to purchase from the sellers up to an aggregate
of 2,374,187 of their shares of common stock at a price equal to
$4.61 per share during certain specified exercise periods up until
December 2020. Of that amount we may be required to purchase up to
455,531 shares in 2017, for an aggregate of up to $3.1 million. On
April 14, 2017, the sellers of 42West, exercised put options in the
aggregate amount of 86,764 shares of common stock and were paid an
aggregate total of $0.4 million. On June 1, 2017, the principal
sellers exercised put options in the aggregate amount of 65,073
shares of common stock and were paid an aggregate of $0.3
million.
As of March 31, 2017 and 2016, we had cash available for
working capital of approximately $0.6 million and approximately
$0.7 million, respectively, and working capital deficits of
approximately $19.8 million and approximately $31.4 million,
respectively.
These factors, along with an accumulated deficit of $94.8 million
as of March 31, 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 any necessary additional funds through loans and
additional issuances of our common stock, securities convertible
into our common stock, debt securities or a combination of such
financing alternatives, including the proceeds from this offering.
There is no assurance that we will be successful in raising
additional capital. Such issuances of additional securities would
further dilute the equity interests of our existing shareholders,
perhaps substantially. We currently have the rights to several
scripts that we intend to obtain financing to produce and release
during 2017. We will potentially earn a producer and overhead fee
for each of these productions. There can be no assurances that such
productions will be released or fees will be realized in future
periods. We expect to begin to generate cash flows from our other
sources of revenue, including the distribution of at least one web
series that, as discussed earlier has gone into production. With
the acquisition of 42West, we are currently exploring opportunities
to expand the services currently being offered by 42West to the
entertainment community. There can be no assurance that we will be
successful in selling these services to clients.
In addition, we
have a substantial amount of debt. We do not currently have
sufficient assets to repay such debt in full when due, and our
available cash flow may not be adequate to maintain our current
operations if we are unable to repay, extend or refinance such
indebtedness. As of March 31, 2017, our total debt was $19,469,552
and our total stockholders’ deficit was
$(1,395,142). Approximately $4 million of the total
debt as of March 31, 2017 represents the fair value of put options
in connection with the 42West acquisition, which may or may not be
exercised by the sellers. Although there is no recourse to our
company other than the copyright of our film, Max Steel, with
respect to approximately $12.9 million of our current indebtedness
($9.7 outstanding under the prints and advertising loan agreement
plus $3.2 million outstanding under the production service
agreement), we will no longer receive any revenues from Max Steel
if we lose the copyright.
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.
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.
Year ended December 31, 2016 as compared to year ended December 31,
2015
Cash
flows used in operating activities increased by approximately $7.9
million from approximately $(7.0) million used during the year
ended December 31, 2015 to approximately $(14.9) million used
during the year ended December 31, 2016. This increase was
primarily due to the use of cash flows related to the release of
our motion picture, Max
Steel, as follows: (i) distribution and marketing fees of
approximately $11.3 million, (ii) $0.9 million of deposits used to
pay certain distribution fees related to the release, and (iii)
$1.4 million of accounts payable paid. These are offset by cash
received for sales of the motion picture in the amount of $4.8
million, and tax incentives in the amount of $0.7 million. We also
received $0.05 million from the sale of warrants.
Cash
flows from investing activities decreased by approximately $1.2
million. This decrease was due to a provision in the Max Steel loan and security agreement
that required us to keep as collateral, an account at the financial
institution that provided the loan.
Cash
flows from financing activities increased by approximately $5.4
million from approximately $9.1 million for year ended
December 31, 2015 to approximately $13.2 million for year
ended December 31, 2016. The increase was primarily due to
financing for the distribution and marketing costs for the release
of our motion picture and repayment of the production loan from
proceeds received from the motion picture. In addition, during the
year ended December 31, 2016, we entered into various
subscription agreements for the sale of our common stock for a
total of $7.5 million. In comparison, during the same period in
prior year, we received $3.2 million from a convertible note
payable and received $2.4 million more of advances from our
CEO.
Financing Arrangements
Prints and Advertising Loan
On August 12, 2016, Dolphin Max Steel
Holding, LLC, 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 matures on
August 25, 2017. The proceeds of the credit facility were used to
pay a portion of the P&A expenses of the domestic distribution
of our feature film, Max
Steel. To secure Max
Steel Holding's obligations under the P&A Loan, we granted to
the lender a security interest in bank account funds totaling
$1,250,000 pledged as collateral. During the three months ended
March 31, 2017, we agreed to allow the lender to apply the
$1,250,000 to the loan balance. The loan is partially secured by a
$4.5 million corporate guaranty from a party associated with the
motion picture. The lender has retained a reserve of $1.3 million
for loan fees and interest. Amounts borrowed under the credit
facility accrue interest at either (i) a fluctuating per annum rate
equal to the 5.5% plus a base rate or (ii) a per annum rate equal
to 6.5% plus the LIBOR determined for the applicable interest
period. As of December 31, 2016, we recorded $12.5 million,
including the reserve, related to this agreement. Approximately
$11.0 million was recorded as distribution and marketing costs on
our consolidated statement of operations for the year ended
December 31, 2016, related to the release of the motion picture. As
of March 31, 2017, we had an outstanding balance of $9,688,855,
including the reserve, related to this agreement recorded on our
condensed consolidated balance sheets. On our condensed
consolidated statement of operations for the three months ended
March 31, 2017, we recorded (i) interest expense of $220,155
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. There is no
recourse to our company for the debt other than the copyright of
the film.
Production Service Agreement
During 2014, we 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. Pursuant to the terms of the agreement and due to delays
in the release of the film, we have accrued $1.1 million of
interest. The film was released October 14, 2016 and delivery to
the international distributors has begun. During the year ended
December 31, 2016, an aggregate of $4.2 million was received
from the international distributors and tax incentives from the
jurisdiction in which a portion of the film was produced. As of
December 31, 2016 and March 31, 2017, we had outstanding
balances of $6.2 million and $3.2 million, respectively, related to
this debt on our condensed consolidated balance sheets. One of our
subsidiaries is party to this agreement and there is no recourse to
our company for the debt other than the copyright of the
film.
42West Line of Credit
In 2008, 42West entered into a revolving line of credit with City
National Bank, which matures on August 31, 2017. The purpose
of the line of credit was to provide 42West with working capital as
needed from time to time. The maximum amount that can be drawn on
the line of credit is $1,500,000. The line of credit bears interest
computed as the greater of (a) three and one half percent per year
or (b) the prime rate of City National Bank less one quarter of one
percent, provided that the rate per annum never exceed 16%. On
March 31, 2017, the outstanding balance on the line of credit
was $0.5 million. On April 27, 2017, we drew an additional $0.3
million from the line of credit to be used for working
capital.
Promissory Notes
On April 10, 2017, we signed two separate promissory notes, one in
the amount of $300,000 and the other in the amount of $200,000 that
both mature on October 10, 2017. On April 18, 2017, we signed a
promissory note in the amount of $250,000 that matures on October
18, 2017. On June 14, 2017, we signed a promissory note in the
amount of $400,000 that matures on June 14, 2019. Each of the four
promissory notes bear interest at a rate of 10% per annum, payable
in 30-day installments after the execution of the promissory notes.
The proceeds of these four notes were used for working
capital.
Kids Club Agreements
During
February 2011, we entered into two kids clubs agreements with
individual parties, for the development of a child fan club for the
promotion of a local university and its collegiate athletic
program, which we refer to as a Group Kids Club. Under each kids
club agreement, each party paid us $50,000 in return for the
participation of future revenue generated by the Group Kids Club.
Pursuant to the terms of each of the kids club agreements, the
amount invested by the individual investor was to be repaid by the
Group Kids Club, with a specified percentage of the Group Kids
Club’s net receipts, until the total investment was recouped.
Each individual party was to recoup its investment with a
percentage of net revenue based upon a fraction, the numerator of
which was the amount invested ($50,000), and the denominator of
which was $500,000, which we refer to as the investment ratio.
Thereafter, each individual party would share in a percentage of
the net revenue of the Group Kids Club, in an amount equal to one
half of the investment ratio. During 2015 and 2016, we made
aggregate payments of $45,000 to the party to one of the kids clubs
agreements. On July 18, 2016, we paid such party $15,000 in full
settlement of our remaining obligations under such kids club
agreement, and the agreement was terminated. On October 3,
2016, we entered into a debt exchange agreement and issued 12,000
shares of our common stock at an exchange price of $5.00 per share
to terminate the remaining kids club agreement for (i) $10,000 plus
(ii) the original investment of $50,000. On the date of the
exchange agreement, the market price of our common stock was $6.75
and we recorded a loss on extinguishment of debt in the amount of
$21,000 on our consolidated statement of operations.
Equity Finance Agreements
During
the years ended December 31, 2012 and 2011, we entered into
equity finance agreements, for the future production of web series
and the option to participate in the production of future web
series. The investors contributed a total equity investment of
$1,000,000 and had the ability to share in the future revenues of
the relevant web series, on a pro rata basis, until the total
equity investment was recouped and then would have shared at a
lower percentage of the additional revenues. The equity finance
agreements stated that prior to December 31, 2012, we could
utilize all, or any portion, of the total equity investment to fund
any chosen production. Per the equity finance agreements, we were
entitled to a producer’s fee, not to exceed $250,000, for
each web series that we produced before calculating the share of
revenues owed to the investors. We invested these funds in eleven
projects. On January 1, 2013, the production “cycle”
ceased and the investors were entitled to share in the future
revenues of any productions for which the funds invested were used.
Two of the productions were completed and there was no producer
gross revenue as defined in the equity finance agreements. The
remaining projects were impaired and there are no future projects
planned with funds from the equity finance agreements. As a result,
we were not required to pay the investors any amount in excess of
the existing liability already recorded as of December 31,
2015.
On June
23, 2016, we entered into a settlement agreement with one of the
investors that had originally contributed $0.1 million. Pursuant to
the terms of the settlement agreement, we made a payment of $0.2
million to the investor on June 24, 2016. On October 3, 2016,
October 13, 2016 and October 27, 2016 we entered into debt exchange
agreements with three investors to issue an aggregate amount of
66,200 shares of our common stock at an exchange price of $5.00 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 $6.25 and $6.75 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 170,000 shares of
our common stock at a price of $0.015 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 $5.00 per share and issued 2,630,298
shares of common stock. On May 31, 2016, the market price of a
share of common stock was $6.99 and on June 30, 2016 it was
$6.08. 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 “Warrants” below for a discussion of the
satisfaction of the last remaining note. As of March 31, 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 840,910 shares of common stock at $5.00 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 $6.00
and $6.45 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 “Warrants” below for a discussion of the
satisfaction of the last remaining note. As of March 31, 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,
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 $5.00 per share and issued 868,870 shares of
common stock. On May 31, 2016, the market price of a share of
the common stock was $6.99 and on June 30, 2016, it was $6.08.
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 “Warrants” below for a discussion of the
satisfaction of the last remaining note. As of March 31, 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.
Subscription Agreements
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 $5.00 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 pursuant to the convertible note agreement and
632,800 shares of common stock were issued in satisfaction of the
convertible note payable.
April 2016 Subscription Agreements
On
April 1, 2016, we entered into substantially identical subscription
agreements with certain private investors, pursuant to which we
issued and sold to the investors in a private placement an
aggregate of 1,075,000 shares of common stock at a purchase price
of $5.00 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. Under the terms of the April 2016 subscription agreements,
each investor had the option to purchase additional shares of
common stock at the purchase price, not to exceed the number of
such investor’s initial number of subscribed shares, during
each of the second, third and fourth quarters of 2016. One investor
delivered notice of its election to purchase shares and (i) on June
28, 2016, we issued 100,000 shares for an aggregate purchase price
of $0.5 million and (ii) on November 17, 2016, we issued 120,000
shares for an aggregate purchase price of $0.6
million.
June 2016 Subscription Agreements
On June
22, 2016 and June 30, 2016, we entered into two additional
subscription agreements with two investors. Pursuant to the terms
of the subscription agreements, we sold an aggregate of 70,000
shares of our common stock at a purchase price of $5.00 per
share.
November 2016 Subscription Agreements
On
November 15 and November 22, 2016, we entered into eight additional
subscription agreements with four investors. Pursuant to the terms
of the subscription agreements, we sold an aggregate of 135,000
shares of our common stock at a purchase price of $5.00 per
share.
Warrants
On
December 29, 2016, we entered into a debt exchange agreement with
an investor that held the following promissory notes with the
following balances:
|
Notes:
|
Outstanding
Balance
|
|
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 entitles the warrant holder to
purchase shares up to 2,170,000 shares of our common stock at a
price of $0.015 through December 29, 2020, its expiration date. We
recorded a loss on extinguishment of debt $2.7 million on our
consolidated statement of operations for the year ended
December 31, 2016. The loss on extinguishment was calculated
as the difference between the fair value of Warrant J and the
outstanding debt under the notes described above.
Critical Accounting Policies, Judgments and Estimates
Our
discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with U.S. Generally Accepted
Accounting Principles, or “GAAP”. The preparation of
these consolidated financial statements requires us to make
estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
An
accounting policy is considered to be critical if it requires an
accounting estimate to be made based on assumptions about matters
that are highly uncertain at the time the estimate is made, and if
different estimates that reasonably could have been used, or
changes in the accounting estimate that are reasonably likely to
occur, could materially impact the consolidated financial
statements. We believe that the following critical accounting
policies reflect the more significant estimates and assumptions
used in the preparation of the consolidated financial
statements.
Capitalized Production Costs
Capitalized
production costs represent the costs incurred to develop and
produce a web series or feature films. These costs primarily
consist of salaries, equipment and overhead costs, as well as the
cost to acquire rights to scripts. Capitalized production costs are
stated at the lower of cost, less accumulated amortization and tax
credits, if applicable, or fair value. These costs are capitalized
in accordance with Financial Accounting Standards Board, or
“FASB”, Accounting Standards Codification, or
“ASC”, Topic 926-20-50-2 “Other Assets –
Film Costs”. Unamortized capitalized production costs are
evaluated for impairment each reporting period on a title-by-title
basis. If estimated remaining revenue is not sufficient to recover
the unamortized capitalized production costs for that title, the
unamortized capitalized production costs will be written down to
fair value. Any project that is not greenlit for production within
three years is written off.
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. For the years ended
December 31, 2016 and 2015, we impaired approximately $2.1 and
$0.6 million, respectively of capitalized production
costs.
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 includes 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 productions. 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.
Warrant Liabilities and Related Fair Value
Measurements
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”.
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
measured the Series G, H, I, J and K warrants we issued in 2016 at
fair value in the consolidated financial statements as of and for
the year ended December 31, 2016, 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, I, J and K warrants at December 31, 2016 and
for the year then ended, due 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, I, J and K warrants at
December 31, 2016 are as follows:
|
|
As of December
31, 2016
|
||||
|
Inputs
|
Series
G
|
Series
H
|
Series
I
|
Series
J
|
Series
K
|
|
Volatility
(1)
|
63.6%
|
79.1%
|
70.8%
|
65.8%
|
65.8%
|
|
Expected term
(years)
|
1.08
|
2.08
|
3.08
|
4
|
4
|
|
Risk free interest
rate
|
.879%
|
1.223%
|
1.489%
|
1.699%
|
1.699%
|
|
Common stock
price
|
$6.00
|
$6.00
|
$6.00
|
$6.00
|
$6.00
|
|
Exercise
price
|
$5.00
|
$6.00
|
$7.00
|
$.02
|
$.02
|
(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.
Since
derivative financial instruments, such as the Series G, H, I, J and
K warrants, 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 the warrants 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.
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
merits 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.
Recent Accounting Pronouncements
For a
discussion of recent accounting pronouncements, see Note 3 to the
consolidated financial statements included elsewhere in this
prospectus.
BUSINESS
Overview
We are
a leading independent entertainment marketing and premium content
development company. Through our recent acquisition of 42West, we
provide expert strategic marketing and publicity services to all of
the major film studios, and many of the leading independent and
digital content providers, as well as for hundreds 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
development, creating significant opportunities to serve our
respective constituents more strategically and to grow and
diversify our business.
On
March 7, 2016, we acquired Dolphin Films, a content producer of
motion pictures, from Dolphin Entertainment, Inc., an entity wholly
owned by our President, Chairman and Chief Executive Officer, Mr.
O’Dowd.
On
March 30, 2017, we acquired 42West, an entertainment public
relations agency offering talent publicity, strategic
communications and entertainment content marketing. As
consideration in the 42West acquisition, we paid approximately
$18.7 million in shares of common stock based on our 30-trading-day
average stock price prior to the closing date of $4.61 per share
(less certain working capital and closing adjustments, transaction
expenses, and payments of indebtedness), plus the potential to earn
up to an additional $9.3 million in shares of common stock. As a
result, we (i) issued 1,230,280 shares of common stock on the
closing date and 344,550 shares of common stock to certain 42West
employees on April 13, 2017, (ii) may issue up to 118,655 shares of
common stock as employee stock bonuses during 2017 and (iii) will
issue 1,961,821 shares of common stock on January 2, 2018. In
addition, we may issue up to 1,963,126 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.
The
principal sellers have each entered into employment agreements with
our company and will continue as employees of our company until
March 2020. The non-executive employees of 42West have been
retained as well. In connection with the 42West acquisition, we
granted the sellers the right, but not the obligation, to cause us
to purchase up to an aggregate of 2,374,187 of their shares of
common stock received as consideration for a purchase price equal
to $4.61 per share during certain specified exercise periods up
until December 2020.
Effective May 10,
2016, we amended our Articles of Incorporation to effectuate a
1-to-20 reverse stock split.
Growth
Opportunities
We are
focused on driving growth through the following:
Expand and grow 42West to
serve more clients with more services. As a result of its
acquisition by Dolphin, 42West now has the ability to create
promotional and marketing content for clients—a critical
service for celebrities and marketers alike in today’s
digital world. We expect that by adding content creation to
42West’s menu of capabilities, it will provide a great
opportunity for immediate growth, as it will allow us to both
attract new clients and broaden our offering of billable services
to existing ones. We also believe that the skills and experience of
our 42West business in entertainment PR are readily transferable to
related business sectors—such as sports or fashion. The
growing involvement in non-entertainment businesses by many of our
existing entertainment clients has allowed 42West to establish a
presence and develop expertise outside its traditional footprint
with little risk or expense. Using this as a foundation, we are now
working to expand our involvement in these new areas.
Opportunistically grow
through more complementary acquisitions. We plan to
selectively pursue acquisitions in the future, to further enforce
our competitive advantages, scale and grow our business and
increase profitability. Our acquisition strategy is based on
identifying and acquiring companies that complement our existing
content and entertainment marketing services businesses. We believe
that complementary businesses, such as data analytics and digital
marketing, can create synergistic opportunities and bolster profits
and cash flow.
Build a portfolio of
premium film, television and digital content. We intend to
grow and diversify our portfolio of film and digital content by
capitalizing on demand for high quality digital media and film
content throughout the world marketplace. We plan to balance our
financial risks against the probability of commercial success for
each project. We believe that our strategic focus on content and
creation of innovative content distribution strategies will enhance
our competitive position in the industry, ensure optimal use of our
capital, build a diversified foundation for future growth and
generate long-term value for our shareholders. Finally, we expect
that marketing strategies that will be developed by 42West will
drive our creative content, thus creating greater potential for
profitability.
Entertainment
Production
Dolphin Digital Studios
Through
Dolphin Digital Studios, we create original content to premiere
online, in the form of “web series”. Dolphin Digital
Studios is instrumental in producing and distributing our web
series and sourcing financing for our digital media projects.
Premium online and mobile video is the largest growth sector for
online and mobile advertising, with market leaders such as YouTube,
Facebook, Verizon and AT&T investing in major initiatives
around original programming.
We
target three distinct demographics for our “web series”
activities:
●
Tweens (roughly
9-14 years old);
●
Teens and young
adults (roughly 14-24 years old); and
●
General market
(roughly 14-49 years old).
We
expect to serve each of these demographics with different content,
and we may have different distribution partners for each
demographic.
Dolphin Films
Dolphin
Films is a content producer of motion pictures. In 2016, we
released our motion picture, Max
Steel. We also own the rights to several scripts that we
intend to produce at a future date.
Production
Our
in-house development team is continuously reviewing scripts for
digital projects that are directed at one of our target
demographics and that we believe we can produce within our normal
planned budget range of $3.0 to $5.0 million. Our budget typically
includes costs associated with purchase of the script, production
of the project and marketing of the project. Occasionally, we also
hire writers to develop a script for an idea that we have
internally. From the selection provided by our development team,
our management reviews the scripts and evaluates them based on
expected appeal to advertisers, talent we think we can attract,
available budget for the production and available financing. We
normally purchase a variety of scripts which we hold for future
use. Not all scripts purchased will be produced. Some scripts
revert back to the writer if they are not produced during a
contractually agreed upon timeframe.
Once we
have a stable of scripts, we present a variety of projects, based
on these scripts, to online platforms such as Hulu, AOL, and
Yahoo!. The online platform will typically evaluate the project
based on its estimation of potential demand, considering the genre
or demographic to which they are looking to appeal. Once a project
is selected by the online platform, we enter into a distribution
agreement with the online platform that outlines, among other
things, our revenue share percentages (typically between 30% and
45%) and the length of time that the show will air on that online
platform. Based on agreements with the online platforms and
advertisers, our management then makes the decision to
“greenlight” or to approve, a project for
production.
Our
goal is also to produce young adult and family films and our
in-house development team reviews scripts for motion pictures in
this genre that can be produced within a budget range of $6.0 to
$9.0 million. Our budget includes the cost of acquiring the script
and producing the motion picture. We finance our motion pictures
with funds from investors and the financing from international
licensing agreements for the motion picture.
The
production of digital projects and motion pictures is very similar.
Once management greenlights a project, the pre-production phase,
including the hiring of a director, talent, various crew and
securing locations to film, begins. We may become signatories to
certain guilds such as Screen Actors Guild, Directors Guild of
America and Writers Guild of America in order to allow us to hire
directors and talent for our productions. We typically hire crew
members directly, engage a production service company to provide us
with, among other things, the crew, equipment and a production
office or use a combination of the two alternatives. Directors and
talent are typically compensated a base amount for their work. In
addition, directors and talent who are members of various guilds
may receive remuneration from “residuals” that we pay
to the various guilds based on the performance of our productions
in ancillary markets. To better manage our upfront production
costs, we sometimes structure our agreements with talent to allow
them to participate in the proceeds of the digital project or
motion picture in exchange for reduced upfront fixed payments,
regardless of the project’s success.
The
decision of where to produce the project is often based on
incentive tax programs implemented by many states and foreign
countries to attract film production in their jurisdictions as a
means of economic development. These incentives normally take the
form of sales tax refunds, transferable tax credits, refundable tax
credits or cash rebates that are calculated based on a percentage
spent in the jurisdiction offering the incentive. The
pre-production phase may take several months and is critical to the
success of the project.
The
length of time needed to film varies by project but is typically
between three and six weeks. Once the filming is completed, the
project will enter the post-production phase, which includes film
and sound editing, and development of special effects, as needed.
Depending on the complexity of the work to be done, post-production
may take from two to six months to complete.
In the
last five years, we produced and distributed Cybergeddon in partnership with Anthony
Zuiker, creator of CSI, Hiding, and South Beach-Fever, and were hired to
provide production services for Aim High produced by a related party in
conjunction with Warner Brothers. These productions earned various
awards including two Streamy Awards. Dolphin Films produced the
motion picture, Max Steel,
that was released in 2016.
In
2016, we entered into a co-production agreement for a new digital
project showcasing favorite restaurants of NFL players throughout
the country. Pursuant to the agreement, we were responsible for
financing 50% of the project’s budget and are entitled to 50%
of the profits. In addition, we were responsible for (a) producing;
(b) negotiating and contracting the talent; (c) securing locations;
(d) preparing the production and delivery schedules; (e)
identifying and securing digital distribution; (f) soliciting and
negotiating advertising and sponsorships; (g) legal and business
affairs and (h) managing and maintaining the production account.
The web series is still in production and we anticipate that it
will be produced and available for distribution in the third
quarter of 2017.
Distribution
Our
digital productions for AVOD platforms have premiered on online
platforms such as Hulu and Yahoo!. Distribution agreements with
online platforms are for a limited period, typically six months.
Once the contract expires, we have the ability to distribute our
productions in ancillary markets such as through home
entertainment, SVOD (e.g. Netflix), pay television, broadcast
television, foreign and other markets. Our ability to distribute
these productions in ancillary markets is typically based on the
popularity of the project during its initial online
distribution.
Similar
to distribution of digital productions described above, the
economic life of motion pictures is comprised of different phases.
The motion picture is initially distributed in theaters. A
successful motion picture may remain in theaters for several
months, after which we have the ability to distribute the motion
picture in ancillary markets such as home entertainment, PPV, VOD,
EST, SVOD, AVOD, digital rentals, pay television, broadcast
television, foreign and other markets. Concurrent with their
release in the U.S., motion pictures are generally released in
Canada and may also be released in one or more other foreign
markets.
Theatrical
distribution refers to the marketing and commercial or retail
exploitation of motion pictures. Typically, we enter into an
agreement with a distributor to place our films in theatres for a
distribution fee. Pursuant to the agreement, the distribution fee
varies depending on whether we provide our own P&A financing or
whether the distributor finances the P&A.
In
2016, we obtained the P&A financing necessary for the
distribution and marketing costs associated with our motion
picture, Max Steel, and the
film was released domestically on October 14, 2016. The motion
picture did not perform as well as expected domestically, however,
we secured approximately $8.2 million in international distribution
agreements. As part of our domestic distribution arrangement, we
still have the ability to derive revenues from the ancillary
markets described above, although the amount of revenue derived
from such channels is typically commensurate with the performance
of the film in the domestic box office.
Financing
We have
financed our acquisition of the rights to certain digital projects
and motion picture productions through a variety of financing
structures including equity finance agreements, subscription
agreements and loan and security agreements.
We
financed our production of Max
Steel using funds from investors and loans partially
collateralized by licensing agreements for the exploitation of the
motion picture in certain international territories. Our
distribution and marketing costs were financed through financing
obtained from a lender.
Entertainment Marketing and Public
Relations
42West
Through
42West, an entertainment public relations agency, we offer talent
publicity, strategic communications and entertainment content
marketing. In addition, we provide brand marketing and digital
marketing services. Prior to its acquisition, 42West was the
largest independently-owned public relations firm in the
entertainment industry. Among other benefits, we anticipate that
the 42West acquisition will strengthen and complement our current
digital and motion picture business, while expanding and
diversifying our operations. We expect that having marketing
expertise in-house will allow us to review a prospective
project’s marketing potential prior to making a production
commitment. Furthermore, for each project greenlit for production,
we can potentially create a comprehensive marketing plan before the
start of principal photography, allowing for relevant marketing
assets to be created while filming. Therefore, we believe the
marketing of our projects can begin much sooner than the delivery
of a finished film or series.
Our
public relations and marketing professionals at 42West develop and
execute marketing and publicity strategies for hundreds of movies
and television shows as well as for individual actors, filmmakers,
recording artists, and authors. Through 42West, we provide services
in the following areas:
Talent
We
focus on creating and implementing strategic communication
campaigns for performers and entertainers, including television 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.
Entertainment Marketing
We
provide marketing direction, public relations counsel and media
strategy for productions (including theatrical films, DVD and VOD
releases, television programs, and online series) as well as
content producers ranging from individual filmmakers and creative
artists to production companies, film financiers, DVD distributors,
and other entities. Our capabilities include worldwide studio
releases, independent films, television programming and web
productions. In addition, we provide entertainment marketing
services in connection with film festivals, awards campaigns, event
publicity and red carpet management.
Targeted Marketing
We
provide marketing and publicity services that are tailored to reach
diverse audiences. Our clients include major studios and
independent producers for whom we create strategic multicultural
marketing campaigns and provide strategic guidance aimed at
reaching diverse audiences.
Strategic Communications
Our
strategic communications team advises 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.
Much of
the activities of our strategic communications team involve
orchestrating high-stakes communications campaigns in response to
sensitive, complex situations. We also help companies define
objectives, develop messaging, create brand identities, and
construct long-term strategies to achieve specific goals, as well
as manage functions such as media relations or internal
communications on a day-to-day basis. The strategic communications
team focuses on strategic communications counsel, corporate
positioning, brand enhancement, media relations, reputation and
issues management, litigation support and crisis management and
communications. Our clients include major studios and production
companies, record labels, sports franchises, media conglomerates,
technology companies, philanthropic organizations, talent guilds,
and trade associations as well as a wide variety of high-profile
individuals, ranging from major movie and pop stars to top
executives and entrepreneurs.
Online Kids Clubs
Through
our online kids clubs we seek to partner with various organizations
to provide an online destination for entertainment and information
for kids. Through online kids club memberships, established
“brands” in the children’s space seek to expand
their existing online audience through the promotion of original
content supplied and/or sourced by Dolphin Digital Studios. We
expect that premium entertainment offerings, such as original web
series, will serve to both increase audiences through positive word
of mouth and to increase engagement, or length of time on site.
Furthermore, we expect that the online kids clubs will serve as a
platform for sponsorship and other marketing opportunities, such as
contests and sweepstakes and as strong marketing vehicles for the
respective brands. We expect this will keep the brands “top
of mind” for the youngest generation, and in a space (the
online world) where they increasingly go.
We
believe that online kids clubs will provide us the opportunity to
capitalize on the combination of the following two consumer
trends:
●
a greater number of
children under the age of 18 have access to the internet (and most
“own” their own devices – e.g. laptop computers,
tablets and smartphones)
●
those children who
have access to the internet spend an increasing amount of time
online.
Simply
put, the internet has become the next generation’s “go
to” destination for both entertainment and
information.
Brands
that are “offline” (those without a marketing presence
over the internet) need to engage with their participants
“online” (or marketed over the internet) or risk losing
them altogether. To build successful engagement with children and
teenagers in the “real world” and offer them nothing
(let alone an equivalent engagement opportunity) in the digital
world is a tremendous lost opportunity. For example, Little Leagues
may exist for the enjoyment of children, but their websites are
overwhelmingly only used by parents. Similarly, non-profits may
exist to provide enrichment and cultural opportunities for
children, but their websites are seldom visited by the children
they serve.
Additionally, our
online kids clubs encourage literacy in elementary school age
children. According to various studies, high school drop-out rates
have a direct, proportional correlation to 3rd grade reading
proficiency. If a child is already behind in their reading
proficiency after 3rd grade, they are over 4x more likely to drop
out of high school (a rate which increases to 10x for minority
children). In the U.S., nearly 60% of fourth graders are not
reading at their grade level. Our online kids clubs offer reading
activities, articles and games. It also promotes parent engagement
by emailing parents and continuously messaging the importance of
reading and parent involvement to achieve reading
proficiency.
We have
partnered with Scholastic Books to provide to schools sponsored by
a donor, a location in the school that is transformed into a
reading room, which we refer to as a Reading Oasis. Donors may
sponsor a school for $10,000 which entitles each child in the
school to receive an annual online kids club membership and
entitles the school to receive a Reading Oasis. The Reading Oasis
provides the school with hundreds of books (K-3), colorful bean bag
chairs, a reading themed carpet, book cases, a listening library,
and a stereo listening center with four headphones.
In
September 2016, we terminated, by mutual accord, our 2013 agreement
with United Way Worldwide pursuant to which we created an online
kids club to promote the organization’s philanthropic
philosophy and encourage literacy in elementary school age
children. We have retained the trademark to the online kids club
and will continue to operate the site. In February 2017, we also
terminated our 2012 agreement with US Youth Soccer Association,
Inc. pursuant to which we created, designed and hosted the US Youth
Soccer Clubhouse website.
We
operate our online kids club activities through our wholly-owned
subsidiary, Dolphin Kids Club LLC. Until December 2016, 25% of
Dolphin Kids Club was owned by KCF Investments, LLC. Our agreement
with KCF encompassed kids clubs created between January 1, 2012 and
December 31, 2016 and was a “gross revenue
agreement” in which we were responsible for paying all
associated operating expenses. On December 29, 2016, we purchased
KCF’s 25% membership interest in Dolphin Kids Club and, as a
result, we are the sole member of that entity.
Intellectual Property
We seek
to protect our intellectual property through trademarks and
copyright. We currently hold three trademarks for Cybergeddon and two copyrights for each
of Cybergeddon,
Hiding, South Beach and Max Steel and one for Jack of all Tastes.
Competition
The
businesses in which we engage are highly competitive. Our
entertainment production business faces competition from companies
within the entertainment business and from alternative forms of
leisure entertainment, such as travel, sporting events, video games
and computer-related activities. We are subject to competition from
other digital media and motion production companies as well as from
large, well established companies within the entertainment industry
that have significantly greater development, production,
distribution and capital resources than us. We compete for the
acquisition of literary properties and for the services of
producers, directors, actors and other artists as well as creative
and technical personnel and production financing, all of which are
essential to the success of our business. In addition, our
productions compete for audience acceptance and advertising
dollars.
Our
entertainment production and public relations business also
operates in a highly competitive industry. Through 42West, we
compete against other public relations and marketing communications
companies as well as independent and niche agencies to win new
clients and maintain existing client relationships.
We
believe that we compete on the basis of:
●
42West’s long
and loyal list of marquee clients—42West’s clients
(upwards of 400 in 2016), including many of the world’s most
famous and acclaimed screen and pop stars, its most honored
directors and producers, every major movie studio, and virtually
every digital platform and content distributor, along with a host
of production companies and media firms as well as consumer product
marketers, is a competitive advantage given the nature of the
entertainment marketing and public relations industry;
and
●
a stable and
experienced work force, led by an exceptional management
team—our CEO, Mr. O’Dowd, has a 20-year history of
producing and delivering high-quality family entertainment. In
addition, 42West’s three co-CEOs, Leslee Dart, Amanda
Lundberg, and Allan Mayer, are all longtime PR practitioners, with
decades of experience, widely regarded as being among the top
communications strategists in the entertainment industry. They lead
a staff of PR professionals that is known for both its skill and
its longevity. Staff turnover is far below industry norms, and
every one of the firm’s six managing directors has been there
for more than nine years.
●
our ability to
offer interrelated services—we believe that the ability to
create content for our 42West clients and the ability to internally
develop and execute marketing campaigns for our digital and film
productions will allow us to expand and grow each of our business
lines;
Employees
As of
June 21, 2017, we have 98 full-time employees in our operations,
including 83 employees from 42West. We believe our relationship
with our employees is good. We also utilize consultants in the
ordinary course of our business and hire additional employees on a
project-by-project basis in connection with the production of
digital media projects or motion pictures.
Regulatory Matters
Our
online kids clubs programs which are aimed at elementary school age
children are subject to laws and regulations relating to privacy
and child protection. Through our online kids clubs we may monitor
and collect certain information about the child users of these
forums. A variety of laws and regulations have been adopted in
recent years aimed at protecting children using the internet such
as COPPA. COPPA sets forth, among other things, a number of
restrictions on what website operators can present to children
under the age of 13 and what information can be collected from
them. There are also a variety of laws and regulations governing
individual privacy and the protection and use of information
collected from such individuals, particularly in relation to an
individual's personally identifiable information (e.g., credit card
numbers).
We are
also subject to state and federal work and safety laws and
disclosure obligations, under the jurisdiction of the U.S.
Occupational Safety and Health Administration and similar state
organizations.
Corporate Offices
Our
corporate headquarters is located at 2151 Le Jeune Road, Suite
150-Mezzanine, Coral Gables, Florida 33134. Our telephone number is
(305) 774-0407. We also have an office located at 10866 Wilshire
Boulevard, Suite 800, Los Angeles, California, 90024.
On June 1, 2017, we
entered into an agreement to sublease our office in Los Angeles.
The sublease agreement is through June 30, 2019. 42West has
offices located at 600 3rd Avenue, 23rd Floor, New York, New York,
10016 and 1840 Century Park East, Suite 700, Los Angeles,
California 90067.
Availability of Reports and Other Information
Dolphin
Digital Media, Inc. was first incorporated in the State of Nevada
on March 7, 1995 and was domesticated into the State of Florida on
December 3, 2014. Our principal executive offices are located
at 2151 Le Jeune Road, Suite 150-Mezzanine, Coral Gables, Florida
33134. Our corporate website is www.dolphindigitalmedia.com. We
make available, free of charge, access to our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
Proxy Statement on Schedule 14A and amendments to those materials
filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934, as amended, which we refer to
as the Exchange Act, on our website under “Investor Relations
– SEC Filings,” as soon as reasonably practicable after
we file electronically such material with, or furnish it to, the
SEC.
You may
also read and copy any materials filed by us with the SEC at the
SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549, and you may obtain information on the
operation of the Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330. In addition, the SEC maintains an
Internet website, www.sec.gov, that contains reports, proxy and
information statements and other information that we file
electronically with the SEC.
PROPERTIES
As of
the date of this prospectus, we do not own any real property. We
lease 3,332 square feet of office space located at 2151 Le Jeune
Road, Suite 150-Mezzanine, Coral Gables, Florida 33134, at a
monthly rate of $5,388 with annual increases. In 2012, we opened an
additional office located at 10866 Wilshire Boulevard, Suite 800,
Los Angeles, California 90024 and currently lease 4,582 square feet
of office space at a monthly rate of $13,746 with annual increases
of 3% for years 1 to 3 and 3.5% for the remainder of the lease. On
June 1, 2017, we entered into an agreement to sublease our office
in Los Angeles. The sublease agreement is through June 30, 2019 at
an initial monthly rate of $14,891.50. Commencing on the
thirteenth month of the sublease, the monthly lease rate will
increase by 3%. Pursuant to the lease agreement, the subtenant will
take ownership of the furniture in the premises.
42West
leases 12,505 square feet of office space located at 600 Third
Avenue, 23rd Floor, New York, NY 10016, at a monthly rate of
$67,735 with increases every three years. In addition, 42West
leases 12,139 square feet of office space at 1840 Century Park
East, Suite 700, Los Angeles, CA 90067 at a base rate of $36,417
(commencing on 2/1/14), with annual increases of 3% per year. We
believe our current facilities are adequate for our operations for
the foreseeable future.
LEGAL
PROCEEDINGS
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. 42West’s deadline to respond to the
complaint is July 19, 2017. The plaintiffs have 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, or MDL, proceeding. The request to
consolidate the cases in an MDL will be heard by the Judicial Panel
on Multi District Litigation on July 27, 2017. We believe the
claims against 42West are without merit and that we have strong
defenses to the claims both on the merits and as to their treatment
as a class action. We intend to defend the litigation, though we
have not taken a position on consolidation in an MDL proceeding. It
may not be possible for us to resolve the claims without incurring
significant legal expenses.
In
addition, we are involved in various legal proceedings relating to
claims arising in the ordinary course of business. We do not
believe that the ultimate resolution of these matters will have a
material adverse effect on our business, financial condition,
results of operations or liquidity.
MANAGEMENT
Our
directors, director nominees standing for election at our 2017
annual meeting of shareholders to be held on June 29, 2017, and our
executive officers and the positions held by each of them are as
follows:
Directors and Director Nominees
|
NAME
|
|
AGE
|
|
PRINCIPAL OCCUPATION
|
|
William
O’Dowd, IV
|
|
48
|
|
Chairman,
President and Chief Executive Officer
|
|
Michael
Espensen
|
|
67
|
|
Director
|
|
Nelson
Famadas
|
|
44
|
|
Director
|
|
Allan
Mayer
|
|
67
|
|
Director
Nominee
|
|
Mirta A
Negrini
|
|
53
|
|
Director,
Chief Financial and Operating Officer
|
|
Justo
Pozo
|
|
60
|
|
Director
Nominee
|
|
Nicholas
Stanham, Esq.
|
|
49
|
|
Director
|
Executive Officers
|
NAME
|
|
AGE
|
|
PRINCIPAL OCCUPATION
|
|
William
O’Dowd, IV
|
|
48
|
|
Chief
Executive Officer
|
|
Mirta A
Negrini
|
|
53
|
|
Chief
Financial and Operating Officer
|
William O’Dowd,
IV. Mr. O’Dowd has served as our Chief Executive
Officer and Chairman of our Board since June 2008. Mr. O’Dowd
founded Dolphin Entertainment, Inc. in 1996 and has served as its
President since that date. In 2016, we acquired Dolphin Films,
Inc., a content producer of motion pictures, from Dolphin
Entertainment. Past television series credits for Mr. O’Dowd
include serving as Executive Producer of Nickelodeon’s
worldwide top-rated series Zoey101 (Primetime Emmy-Award
nominated) and Ned’s
Declassified School Survival Guide, as well as
Nickelodeon’s first ever musical, Spectacular! In addition, Mr.
O’Dowd produced the first season of Raising Expectations, a 26-episode
family sitcom. Raising
Expectations won the 2017 KidScreen Award for Best New
Tween/Teen Series, the global children’s television
industry’s highest honor.
Qualifications. The Board nominated Mr.
O’Dowd to serve as a director because of his current and
prior senior executive and management experience at our company and
his significant industry experience, including having founded
Dolphin Entertainment, a leading entertainment company specializing
in children’s and young adult’s live-action
programming.
Michael Espensen.
Mr. Espensen has served on our Board since June 2008. From 2009 to
2014, Mr. Espensen served as Chief Executive Officer of Keraplast
Technologies, LLC, a private multi-million dollar commercial-stage
biotechnology company. From 2009 to present, Mr. Espensen has also
served as Chairman of the Board of Keraplast. While serving as
Chief Executive Officer, Mr. Espensen was responsible for
overseeing and approving Keraplast’s annual budgets and
financial statements. Mr. Espensen is also a producer and
investor in family entertainment for television and feature films.
Between 2006 and 2009, Mr. Espensen was Executive or Co-Executive
Producer of twelve made-for-television movies targeting children
and family audiences. As Executive Producer, he approved production
budgets and then closely monitored actual spending to ensure that
productions were not over budget. Mr. Espensen has also been a
real estate developer and investor for over thirty
years.
Qualifications. The Board nominated Mr.
Espensen to serve as a director because of his business management
and financial oversight experience both as the current Chairman and
former Chief Executive Officer of a multi-million dollar company
and as a former Executive Producer in the made-for-television movie
industry, as well as his valuable knowledge of our
industry.
Nelson Famadas. Mr.
Famadas has served on our Board since December 2014. Since 2015, he
has served as President of Cien, a marketing firm that serves the
Hispanic market. Prior to Cien, Mr. Famadas served as Senior Vice
President of National Latino Broadcasting from July 2011 to May
2015. NLB is an independent Hispanic media company that owns and
operates two satellite radio channels on SiriusXM. From July 2010
to March 2012, Mr. Famadas served as our Chief Operating
Officer, where he was responsible for daily operations including
public filings and investor relations. Mr. Famadas began his
career at MTV Networks, specifically MTV Latin America, ultimately
serving as New Business Development Manager. From 1995 through
2001, he co-founded and managed Astracanada Productions, a
television production company that catered mostly to the Hispanic
audience, creating over 1,300 hours of programming. As Executive
Producer, he received a Suncoast EMMY in 1997 for Entertainment
Series for A Oscuras Pero
Encendidos. Mr. Famadas has over 20 years of experience
in television and radio production, programming, operations, sales
and marketing.
Qualifications. The Board nominated
Mr. Famadas to serve as a director because of his significant
prior management experience as a co-founder and former manager of a
television production company and senior vice president of a
broadcasting firm, as well as his current management experience
with a marketing firm.
Allan Mayer. Mr.
Mayer has served as the Co-Chief Executive Officer of our
subsidiary 42West, LLC, an entertainment public relations agency
since March 2017. Previously, he served as Principal of 42West from
October 2006 until its acquisition by our company in March 2017.
Previously, from 1997 until October 2006, Mr. Mayer was
managing director and head of the entertainment practice at the
crisis communications firm Sitrick and Company. Mr. Mayer
began his professional life as a journalist, working as a staff
reporter for The Wall Street
Journal; a writer, foreign correspondent and senior editor
for Newsweek, and the
founding editor (and later publisher) of Buzz magazine. He also served as
editorial director of Arbor House Publishing Co. and senior editor
of Simon & Schuster. Mr. Mayer has authored two books
Madam Prime Minister: Margaret
Thatcher and Her Rise to Power (Newsweek Books, 1980) and
Gaston's War (Presidio
Press, 1987)—and is co-author, with Michael S. Sitrick, of
Spin: How To Turn The Power of the
Press to Your Advantage (Regnery, 1998). In addition, he has
written for a wide variety of national publications, ranging from
The New York Times Magazine
to Vogue. Mr. Mayer is a
recipient of numerous professional honors, including the National
Magazine Award, the Overseas Press Club Citation of Excellence, and
six William Allen White Awards. Mr. Mayer serves on the board of
directors of Film Independent and has lectured on crisis management
and communications at UCLA’s Anderson School of Business and
USC's Annenberg School of Communication. From December 2007 to
January 2016, Mr. Mayer served as a director and member of the
compensation and nominating and governance committees of American
Apparel Inc., a public company.
Qualifications. The Board nominated Mr.
Mayer based on his management experience as a founding principal of
42West as well as his significant experience in the entertainment
marketing and public relations industry.
Mirta A Negrini. Ms.
Negrini has served on our Board since December 2014 and as our
Chief Financial and Operating Officer since October 2013. Ms.
Negrini has over thirty years of experience in both private and
public accounting. Immediately prior to joining us, she served
since 1996 as a named partner in Gilman& Negrini, P.A., an
accounting firm of which our company was a client. Ms. Negrini is a
Certified Public Accountant licensed in the State of
Florida.
Qualifications. The Board nominated Ms.
Negrini to serve as a director because of her significant
accounting experience gained as a named partner at an accounting
firm.
Justo
Pozo. Mr. Pozo is
the Chairman of Pozo Capital Partners, LLC, a family-owned equity
investment fund, focusing in the areas of entertainment, finance
and real estate. Previously, until May 2012, Mr. Pozo was
Co-Founder and President of Preferred Care Partners, Inc., one of
the largest privately owned Healthcare Maintenance Organizations in
Florida until it was acquired by United Healthcare Services, Inc.
Under his leadership, Preferred became one of South Florida’s
fastest growing private companies in 2003, being ranked 67 out of
500 privately held companies in South Florida by South Florida CEO magazine in 2007.
Preferred was also the recipient of South Florida’s Good to
Great Award given by the Greater Miami Chamber of Commerce. During
his tenure at Preferred, he received numerous recognitions
including the induction into Florida International
University’s College of Business Entrepreneurial Hall of Fame
and the Miami Dade College Hall of Fame. He was selected by the
South Florida Business
Journal as a Heavy Hitter in the Health Care industry and
was a finalist for the same publications Excellence in Health Care
Award. In 2008, he received the prestigious Torch Award for
Distinguished Alumnus for the College of Business Administration of
Florida International University. Mr. Pozo is a Certified Public
Accountant licensed in the State of Florida. In March 2015, he was
appointed by the Florida Board of Governors, as Trustee to the
Florida International University Board of Trustees.
Qualifications. The Board nominated Mr.
Pozo to serve as a director because of his leadership experience as
a founder and President of an entity that experienced significant
growth and because of his background in accounting.
Nicholas Stanham,
Esq. Mr. Stanham has served on our Board since December
2014. Mr. Stanham is a founding partner of R&S International
Law Group, LLP in Miami, Florida, which was founded in January
2008. His practice is focused primarily in real estate and
corporate structuring. Mr. Stanham has over 20 years of experience
in real estate purchases and sales of residential and commercial
properties. Since 2004, Mr. Stanham has been a member of the
Christopher Columbus High School board of directors. In addition,
he serves as a director of ReachingU, a foundation that promotes
initiatives and supports organizations that offer educational
opportunities to Uruguayans living in poverty.
Qualifications. The Board nominated Mr.
Stanham to serve as a director because of his experience as a
founding partner at a law firm as well as his business management
experience at that firm.
Director Independence
We are
not listed on a national securities exchange; however, we have
elected to use the definition of independence under the NASDAQ
listing requirements in determining the independence of our
directors and nominees for director. In 2017, our Board undertook a
review of director independence, which included a review of each
director and director nominee’s responses to questionnaires
inquiring about any relationships with us. This review was designed
to identify and evaluate any transactions or relationships between
a director, or director nominee or any member of his or her
immediate family and us, or members of our senior management or
other members of our Board, and all relevant facts and
circumstances regarding any such transactions or relationships.
Based on its review, our Board determined that
Messrs. Espensen, Famadas, Pozo and Stanham are independent.
Messrs. O’Dowd and Mayer and Ms. Negrini are not independent
under NASDAQ’s independence standards, its compensation
committee independence standards or its nominations committee
independence standards.
In
making a determination of independence with respect to director
nominee, Mr. Pozo, our Board considered (i) Mr. Pozo’s
various past investments in our digital productions, which we refer
to as the Investments, and his receipt of interest income from such
investments, as well as the fact that Mr. Pozo is in the business
of making investments to other companies similar to ours, and has
participated in such Investments on substantially similar terms as
all other investors and has not received any preferential terms or
payment arrangements and (ii) Mr. Pozo’s beneficial ownership
of approximately 13% of our outstanding common stock as of April
17, 2017. Our Board determined that such Investments and beneficial
ownership would not impair Mr. Pozo’s independence from our
company.
EXECUTIVE
COMPENSATION
The
following summary compensation table sets forth all compensation
awarded to, earned by, or paid to our named executive officers
during the fiscal years ended December 31, 2016 and
2015.
Summary Compensation Table
|
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
All Other
Compensation
($)
|
Total
($)
|
|
William
O’Dowd, IV (1)
|
2016
|
250,000
|
—
|
377,403(2)
|
627,403
|
|
Chairman and Chief
Executive Officer
|
2015
|
250,000
|
—
|
574,947
|
824,947
|
|
Mirta A
Negrini
|
2016
|
200,000
|
—
|
—
|
200,000
|
|
Chief Financial and
Operating Officer
|
2015
|
150,000
|
50,000
|
—
|
200,000
|
____________________________
(1)
For 2016, we
accrued the full amount of Mr. O’Dowd’s salary of
$250,000 but did not make any payments on this amount.
(2)
This amount
includes life insurance in the amount of $48,384, interest paid on
accrued and unpaid compensation in the amount of $212,066 and
interest paid on the revolving promissory note in the amount of
$116,953 for the fiscal year ended December 31, 2016. In March
2016, Dolphin Entertainment exchanged $3,073,410 aggregate amount
of principal and interest outstanding under the revolving
promissory note for shares of our common stock. For additional
information on the revolving promissory note, please see
“Certain Relationships and Related
Transactions.”
Outstanding Equity Awards at Fiscal Year-End
None of
the executive officers named in the table above had any outstanding
equity awards as of December 31, 2016 and 2015.
Director Compensation
In
2016, we did not pay compensation to any of our directors in
connection with their service on our Board.
Mirta A Negrini Employment Arrangement
On
October 21, 2013, we appointed Ms. Negrini as our Chief Financial
and Operating Officer, at an annual base salary of $150,000. In
2016, Ms. Negrini’s annual base salary was increased to
$200,000. The terms of Ms. Negrini’s employment arrangement
do not provide for any payments in connection with her resignation,
retirement or other termination, or a change in control, or a
change in her responsibilities following a change in
control.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
table below shows the beneficial ownership as of June 23, 2017, of
our common stock and our Series C Convertible Preferred Stock held
by each of our directors, director nominees, named executive
officers, all current directors and executive officers as a group
and each person known to us to be the beneficial owner of more than
5% of our outstanding common stock of 5% of our Series C
Convertible Preferred Stock. The percentages in the table below are
based on 18,690,792 shares of common stock outstanding and
1,000,000 shares of Series C Convertible Preferred Stock
outstanding as of June 23, 2017. Shares of common stock that will
be issuable upon conversion of the Series C Convertible Preferred
Stock are not included in such calculation as the Board has not
determined that an optional conversion threshold (as defined below)
has occurred. The Series C Convertible Preferred Stock is
convertible in accordance with the terms set forth in our Amended
Articles of Incorporation, described in the section of this
prospectus titled “Description of
Securities.”
Beneficial
ownership is determined in accordance with Rule 13d-3 promulgated
under the Exchange Act. Except as indicated by footnote and subject
to community property laws, where applicable, to our knowledge the
persons named in the table below have sole voting and investment
power with respect to all shares of common stock that are shown as
beneficially owned by them. In computing the number of shares owned
by a person and the percentage ownership of that person, any such
shares subject to warrants or other convertible securities held by
that person that were exercisable as of June 23, 2017 or that will
become exercisable within 60 days thereafter are deemed outstanding
for purposes of that person’s percentage ownership but not
deemed outstanding for purposes of computing the percentage
ownership of any other person. 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.
Common
Stock
|
Name
and Address of Owner(1)
|
# of Shares
of
Common
Stock
|
% of
Class
(Common
Stock)
|
|
Directors and Executive Officers
|
|
|
|
William
O’Dowd, IV(2)
|
3,251,686
|
17.4%
|
|
Michael
Espensen
|
555
|
*
|
|
Nelson
Famadas
|
3,985
|
*
|
|
Allan
Mayer
|
353,045
|
1.9%
|
|
Mirta A
Negrini
|
––
|
*
|
|
Justo
Pozo(3)
|
2,366,909
|
12.7%
|
|
Nicholas Stanham, Esq.(4)
|
28,667
|
*
|
|
All Directors and
Executive Officers as a Group (5 persons)
|
3,284,893
|
17.6%
|
|
|
|
|
|
5% Holders
|
|
|
|
Stephen L.
Perrone(5)
|
4,050,000
|
21.3%
|
|
T Squared Partners
LP(6)
|
2,076,500
|
9.9%
|
|
Alvaro and Lileana
de Moya(7)
|
1,207,483
|
6.5%
|
Series C Convertible Preferred Stock
|
Name
and Address of Owner(1)
|
# of Shares of
Preferred Stock
|
% of Class
(Preferred Stock)
|
|
William
O’Dowd, IV(8)
|
1,000,000
|
100%
|
* Less
than 1% of outstanding shares.
(1)
Unless otherwise
indicated, the address of each shareholder is c/o Dolphin Digital
Media, Inc., 2151 Le Jeune Road, Suite 150, Mezzanine, Coral
Gables, Florida, 33134.
(2)
The amount shown
includes (1) 1,242,104 shares of common stock held by Dolphin
Digital Media Holdings LLC, which is wholly-owned by Mr.
O’Dowd, (2) 1,055,682 shares of common stock held by Dolphin
Entertainment, which is wholly-owned by Mr. O’Dowd and (3)
953,900 shares of common stock held by Mr. O’Dowd
individually. Does not include shares of common stock that are
issuable upon conversion of the Series C Convertible Preferred
Stock upon the determination by the independent directors of the
Board that an optional conversion threshold has occurred. In
accordance with the terms of our Amended Articles of Incorporation,
each share of Series C Convertible Preferred Stock will be
convertible into one-twentieth (1/20) of a share of common stock,
subject to adjustment for each issuance of common stock (but not
upon issuance of common stock equivalents) that occurred, or
occurs, from the date of issuance of the Series C Convertible
Preferred Stock (the “issue date”) until the fifth
(5th) anniversary of the issue date (i) upon the conversion or
exercise of any instrument issued on the issued date or thereafter
issued (but not upon the conversion of the Series C Convertible
Preferred Stock), (ii) upon the exchange of debt for shares of
common stock, or (iii) in a private placement, such that the total
number of shares of common stock held by an “Eligible Class C
Preferred Stock Holder” (based on the number of shares of
common stock held as of the date of issuance) will be preserved at
the same percentage of shares of common stock outstanding held by
such Eligible Class C Preferred Stock Holder on such date. An
Eligible Class C Preferred Stock Holder means any of (i) Dolphin
Entertainment for so long as Mr. O’Dowd continues to
beneficially own at least 90% 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 our 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 our 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.
(3)
The amount shown
includes: (i) 1,018,888 shares held by Pozo Opportunity Fund I;
(ii) 632,800 shares held by Pozo Opportunity Fund II; (iii) 1,875
shares held by Justo Pozo, Trustee FBO Zulita Pina Irrevocable
Trust; (iv) 1,750 shares held by Justo Pozo ACF Ricardo S. Pozo
U/FI/UTMA; (v) 49,706 shares held by Justo Luis and Sylvia E. Pozo;
and (vi) 661,890 held by Pozo Capital Partners LLP. Mr. Pozo is the
beneficial owner of all of the shares and has sole voting and
dispositive power with respect to all of the shares.
(4)
Mr. Stanham shares
voting and dispositive power with respect to all of the shares of
common stock with his spouse.
(5)
The amount shown
includes: (i) 2,470,000 shares held by KCF Investments LLC; (ii)
770,000 shares held by BBCF 2011 LLC; (iii) 450,000 shares held by
BBCD LLC; and (iv) 10,000 shares held by Mr. Perrone as an
individual. The amount shown also includes 350,000 shares issuable
upon the exercise of a common stock purchase warrant that is
exercisable within 60 days after June 23, 2017. Stephen L. Perrone
(4450 US Highway #1, Vero Beach, FL 32967) is the beneficial owner
of all of the shares and has sole voting and dispositive power with
respect to all of the shares.
(6)
The amount shown is
based upon: (i) 24,230 shares issuable upon the exercise of a Class
E Warrant; (ii) 350,000 shares issuable upon the exercise of a
Class F Warrant; (iii) 1,500,000 shares issuable upon the exercise
of a Class G Warrant; (iv) 500,000 shares issuable upon the
exercise of a Class H Warrant; (v) 500,000 shares issuable upon the
exercise of a Class I Warrant; and (vi) 30,177 shares held by Mark
Jensen and/or Thomas M. Suave and related entities owned by Mark
Jensen and/or Thomas M. Suave. Each of the warrants is
convertible/exercisable within 60 days after June 23, 2017, to the
extent that after giving effect to such conversion/exercise, the
holder (together with the holder’s affiliates) would not
beneficially own in excess of 9.9% of the number of shares of
common stock outstanding immediately after giving effect to such
conversion/exercise. Mark Jensen and Thomas M. Suave are both
principals of T Squared Partners LP (P.O. Box 606, Fishers, IN
46038) and are each deemed to have beneficial ownership of all the
shares. Mr. Jensen and Mr. Suave have shared voting and dispositive
power over all shares beneficially owned by T Squared Partners
LP.
(7)
The amount shown
includes: (i) 150,000 shares held by the Alvaro de Moya Revocable
Trust; (ii) 150,000 shares held by the Lileana de Moya Revocable
Trust; (iii) 200,000 shares held by the Lileana de Moya Lifetime
Trust; (iv) 20,000 shares held by the Alvaro de Moya Grantor
Retained Annuity Trust and (v) 687,483 held by Alvaro and Lileana
de Moya.
(8)
The Series C
Convertible Preferred Stock are held by Dolphin Entertainment which
is wholly-owned by Mr. O’Dowd.
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
William O’Dowd, IV
On
December 31, 2011, we issued an unsecured revolving promissory note
to Dolphin Entertainment, an entity wholly owned by our CEO, Mr.
O’Dowd. The revolving promissory note accrued interest at a
rate of 10% per annum. Dolphin Entertainment had the right at any
time to demand that all outstanding principal and accrued interest
be repaid with a ten day notice to us. During the years ended
December 31, 2015 and 2014, Dolphin Entertainment advanced
$2,797,000 and $166,000 and was repaid $3,267,000 and $2,096,856,
respectively in principal. During the year ended December 31, 2016,
Dolphin Entertainment advanced $270,000. On March 4, 2016, we
entered into a subscription agreement with Dolphin Entertainment,
pursuant to which we and Dolphin Entertainment agreed to convert
$1,920,600 of principal balance and $1,152,809 of accrued interest
outstanding under the revolving promissory note into 614,682 shares
of common stock. The shares were converted at a price of $5.00 per
share. During the years ended December 31, 2016, 2015 and 2014,
$32,008, $340,050 and $368,709, respectively, were expensed in
interest and we recorded accrued interest of $5,788, $1,126,590 and
$786,007, related to the revolving promissory note, on our
consolidated balance sheets as of December 31, 2016, 2015 and 2014,
respectively. As of December 31, 2016, 2015 and 2014, the
outstanding balances under the revolving promissory note were $0,
$1,982,267 and $2,451,767 respectively. The largest aggregate
balance that we owed to Dolphin Entertainment during 2016, 2015 and
2014 was $3,073,410, $5,056,496 and $4,839,620
respectively.
On
April 1, 2013, we entered into an agreement with a Dolphin Films,
which at the time was indirectly, wholly owned by our
CEO. We were responsible for rendering management and
production services to the related party. The terms of
the agreement were for a period between April 1, 2013 and December
31, 2014 for an annual fee of $2,000,000. The agreement
was not subsequently renewed.
Dolphin
Entertainment has previously advanced funds for working capital to
Dolphin Films, its former subsidiary which we acquired in March
2016. During the year ended December 31, 2015, Dolphin Films agreed
to enter into second loan and security agreements with certain of
Dolphin Entertainment’s debtholders, pursuant to which the
debtholders exchanged their Dolphin Entertainment notes for notes
issued by Dolphin Films totaling $8,774,327. The amount of debt
assumed by Dolphin Films was applied against amounts owed to
Dolphin Entertainment by Dolphin Films. On October 1, 2016, Dolphin
Films entered into a promissory note with Dolphin Entertainment, in
the principal amount of $1,009,624. The note is payable on demand
and bears interest at a rate of 10% per annum. As of December 31,
2016 and 2015, Dolphin Films owed Dolphin Entertainment $434,326
and $1,612,357, respectively, of principal and $19,652 and
$1,305,166, respectively, of accrued interest, that was recorded on
the consolidated balance sheets. Dolphin Films recorded interest
expense of $83,551 and $148,805, respectively, for the years ended
December 31, 2016 and 2015. During the three
months ended March 31, 2017, we agreed to include certain script
costs and other payables totaling $594,315 that were owed to
Dolphin Entertainment in the note. During the three months ended
March 31, 2017, we received proceeds related to the note from
Dolphin Entertainment in the amount of $672,000 and repaid Dolphin
Entertainment $456,330. As of March 31, 2017, Dolphin Films owed
Dolphin Entertainment $1,244,310 that was recorded on the
consolidated balance sheets. Dolphin Films recorded interest
expense of $23,287 for the three months ended March 31,
2017.
On
September 7, 2012, we entered into an employment agreement with Mr.
O’Dowd, which was subsequently renewed for a period of two
years, effective January 1, 2015. The agreement provided for an
annual salary of $250,000 and a one-time bonus of $1,000,000.
Unpaid compensation accrues interest at a rate of 10% per annum. As
of December 31, 2016, 2015 and 2014, we had a balance of $735,211,
$523,145 and $336,633, respectively of accrued interest and
$2,250,000, $2,000,000 and $1,750,000, respectively of accrued
compensation related to this agreement. We recorded $212,066,
$186,513 and $161,513 of interest expense for the years ended
December 31, 2016, 2015 and 2014. The largest aggregate balance
Dolphin Films owed Dolphin Entertainment during 2016 and 2015 was
$2,658,800 and $6,527,600, respectively.
During
2015, we agreed to pay Dolphin Entertainment $250,000 for a script
that it had developed for a web series that we produced during
2015.
As
previously mentioned, on March 7, 2016, we acquired Dolphin Films
from Dolphin Entertainment. As consideration, we issued to Dolphin
Entertainment 2,300,000 shares of Series B Convertible Preferred
Stock, par value $0.10 per share and 1,000,000 shares of Series C
Convertible Preferred Stock, par value $0.001 per share. On
November 15, 2016, Dolphin Entertainment converted the Series B
Convertible Preferred Stock into 2,185,000 shares of our common
stock. As Mr. O’Dowd is the sole owner of Dolphin
Entertainment, he is deemed the beneficial owner of such shares of
common stock.
Michael Espensen
On
December 31, 2011, we executed an unsecured promissory note in
favor of our director, Mr. Espensen, in the amount of $104,612
bearing interest at 10% per annum and payable on
demand. On the same day, we issued a payment in the
amount of $14,612 to reduce the principal. We completed
making payments of principal and interest in August 2014 and paid
$104,612 in principal and $16,389 of interest over the life of the
loan.
Justo Pozo
During
2016, we entered into three separate debt exchange agreements with
entities under the control of director nominee, Justo Pozo, to
exchange promissory notes with an aggregate principal and interest
balance of $8,178,145 into 1,629,628 shares of our common stock at
$5.00 per share. The promissory notes accrued interest at rates
ranging from 11.25% to 12.5% per annum. Mr. Pozo was the holder of
a convertible note that mandatorily and automatically converted
into common stock, at the conversion price of $5.00 per share, upon
the average market price per share of common stock being greater
than or equal to the conversion price for twenty trading days.
During 2016, such triggering event occurred and the convertible
note was converted into 632,800 shares of our common
stock.
Nicholas Stanham
In
March 2016, we entered into a debt exchange agreement with our
director, Mr. Stanham, pursuant to which we exchanged a promissory
note in the amount of $50,000 for 11,128 shares of our common
stock, as payment in full of the promissory note. The promissory
note accrued interest at a rate of 10% per annum. The shares of
common stock were converted at a price of $5.00 per
share.
T Squared Partners LP
In
connection with the merger whereby we acquired Dolphin Films, we
entered into a preferred stock exchange agreement with
T Squared Partners LP, or T Squared (previously T Squared
Investments, LLC), pursuant to which, on March 7, 2016, we issued
950,000 shares of Series B Convertible Preferred Stock to
T Squared in exchange for 1,042,753 shares of Series A
Convertible Preferred Stock, previously issued to T Squared.
On November 16, 2016, T Squared converted the Series B Convertible
Preferred Stock into 950,000 shares of our common
stock.
On
November 4, 2016, we issued Class G, Class H and Class I Warrants
to T Squared that entitles T Squared to purchase up to 2,500,000
shares of our common stock. The warrants have a maximum exercise
provision that prohibit T Squared from exercising warrants that
would cause it to exceed 9.99% of our outstanding shares of common
stock, unless the restriction is waived or amended, by the mutual
consent of us and T Squared.
In
September 2015, T Squared extended its Class E and Class F Warrants
until December 31, 2018. On April 14, 2017, T Squared partially
exercised Class E Warrants and acquired 325,770 shares of our
common stock pursuant to the cashless exercise provision in the
related warrant agreement. T Squared had previously paid down
$1,675,000 for these shares.
Stephen L. Perrone
In
December 2016, we and entities affiliated with Stephen L. Perrone
entered into: (i) a debt exchange agreement to exchange promissory
notes in the aggregate amount of $6,470,990 for shares of our
common stock and (ii) a purchase agreement to acquire a 25%
membership interest of Dolphin Kids Clubs owned by the affiliated
entity. The promissory notes accrued interest at rates ranging from
11.25% to $13.25% per annum. Pursuant to the agreements, we issued
a Class J Warrant that entitled Mr. Perrone to purchase up to
2,170,000 shares of our common stock at a price of $0.015 per share
through December 29, 2020. In addition, we issued to an entity
affiliated with Mr. Perrone a Class K Warrant as consideration to
terminate an equity finance agreement in the amount of $564,000.
The Class K Warrant entitled Mr. Perrone to purchase up to 170,000
shares of our common stock at a price of $0.015 per share prior to
December 29, 2020. On March 31, 2017, Mr. Perrone’s
affiliated entities exercised the Class J and Class K Warrants at
an aggregate purchase price of $35,100 and acquired 2,340,000
shares of our common stock.
Alvaro and Lileana De Moya
During
2016, we entered into two separate debt exchange agreements with
Alvaro and Lileana De Moya to convert two promissory notes entered
into in 2013 and 2015, with an aggregate balance of $3,437,414 of
principal and interest into 687,483 shares of our common stock at a
price of $5.00 per share. The promissory notes accrued interest at
rates ranging from 11.25% to 12.5% per annum. In addition, we
entered into a subscription agreement with the De Moya’s in
which they purchased 520,000 shares of our common stock at $5.00
per share.
DESCRIPTION OF
SECURITIES
The
following is a brief description of our capital stock. This summary
does not purport to be complete in all respects. This description
is subject to and qualified entirely by the terms of our Amended
Articles of Incorporation, which we refer to as our Articles of
Incorporation, and our Bylaws, copies of which have been filed with
the Commission and are also available upon request from
us.
Our
authorized capital stock currently consists of 400,000,000 shares
of common stock, par value $0.015 per share and 10,000,000 shares
of preferred stock, par value $0.001 per share, in one or more
series. Of such preferred stock, 1,042,753 have been designated
Series A Convertible Preferred Stock, par value $0.001 per share,
4,000,000 have been designated Series B Convertible Preferred
Stock, par value $0.10 per share, and 1,000,000 have been
designated Series C Convertible Preferred Stock, par value $0.001
per share. As of June 23, 2017, we had outstanding 18,690,792
shares of our common stock, no shares of our Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock and
1,000,000 shares of our Series C Convertible Preferred
Stock. At that date, we
had an aggregate of 3,224,230 shares of our common stock issuable
upon the exercise of outstanding warrants to purchase common stock.
Shares of our common stock are also issuable upon the conversion of
1,000,000 shares of Series C Convertible Preferred Stock
outstanding. For a discussion of the conditions upon which the
shares of Series C Convertible Preferred Stock become convertible,
and the number of shares of common stock into which such preferred
stock would be convertible upon satisfaction of such conditions,
see “Series C Convertible Preferred Stock” below. In
connection with our 42West acquisition (i) we may issue up to
118,655 shares of our common stock as employee stock bonuses during
2017; (ii) we will issue 1,961,821 shares of our common stock to
the sellers on January 2, 2018; and (iii) we may issue up to
1,963,126 shares of our common stock to the sellers based on the
achievement of specified financial performance targets over a
three-year period as set forth in the membership interest purchase
agreement. In addition, we granted the sellers the right, but not
the obligation, to cause us to purchase up to an aggregate of
2,374,187 of their shares of common stock received as
consideration, for a purchase price of $4.61 per share, during
certain specified exercise periods up until December 2020. As of
the date of this prospectus, we have repurchased 151,837 shares of
common stock from the sellers pursuant to the put
options.
Effective May 10,
2016, we amended our Articles of Incorporation to effectuate a
1-to-20 reverse stock split.
Common Stock
The
holders of our common stock are generally entitled to one vote for
each share held on all matters submitted to a vote of the
shareholders and do not have any cumulative voting rights. Unless
otherwise required by Florida law, once a quorum is present,
matters presented to shareholders, except the election of
directors, will be approved by of a majority of the votes cast. The
election of directors is determined by a plurality of the votes
cast.
Holders
of our common stock are entitled to receive dividends if, as and
when declared by the Board out of funds legally available for that
purpose, subject to preferences that may apply to any preferred
stock that we issue. In the event of our dissolution or
liquidation, after satisfaction of all our debts and liabilities
and distributions to the holders of any preferred stock that we
issued, or may issue in the future, of amounts to which they are
preferentially entitled, the holders of common stock will be
entitled to share ratably in the distribution of assets to the
shareholders.
There
are no cumulative, subscription or preemptive rights to subscribe
for any additional securities which we may issue, and there are no
redemption provisions, conversion provisions or sinking fund
provisions applicable to the common stock. The rights of holders of
common stock are subject to the rights, privileges, preferences and
priorities of any class or series of preferred stock.
Our
Articles of Incorporation and Bylaws do not restrict the ability of
a holder of our common stock to transfer his or her shares of our
common stock.
All
shares of our common stock will, when issued, be duly authorized,
fully paid and nonassessable. The shares to be issued by us in this
offering, and the shares to be issued by us upon exercise of the
warrants to be issued in this offering in accordance with the terms
of the warrants, will be when issued and paid for, validly issued,
fully paid and nonassessable.
Preferred Stock
Our
Board, without further approval of the shareholders, is authorized
to fix the designations, powers, including voting powers,
preferences and the relative, participating, optional or other
special rights, if any, of the shares of each class or series and
any qualifications, limitations and restrictions thereof, including
dividend rights, conversion rights, voting rights, sinking-fund
provisions, terms of redemption, liquidation preferences,
preemption rights, and the number of shares constituting any series
or the designation of such series. The issuance of preferred stock,
while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other
things, adversely affect the voting power or other rights of the
holders of our common stock and, under certain circumstances, make
it more difficult for a third party to gain control of us,
discourage bids for our common stock at a premium or otherwise
adversely affect the market price of the common stock.
As of
the date of this filing, there are no shares of Series A
Convertible Preferred Stock or Series B Convertible Preferred Stock
outstanding. Our Board has approved an amendment to our Articles of
Incorporation to cancel the designations of our Series A
Convertible Preferred Stock and Series B Convertible Preferred
Stock, subject to shareholder approval at our annual meeting of
shareholders to be held on June 29, 2017.
Series C Convertible Preferred Stock
On
February 23, 2016, we amended our Articles of Incorporation to
designate 1,000,000 preferred shares as Series C Convertible
Preferred Stock with a $0.001 par value per share which may be
issued only to an “Eligible Series C Preferred Stock
Holder” as described below. As previously discussed, as part
of the merger consideration in the Dolphin Films acquisition, on
March 7, 2016, we issued 1,000,000 shares of Series C Convertible
Preferred Stock to Dolphin Entertainment, an entity wholly owned by
our President, Chairman and CEO, Mr. O’Dowd.
Each
share of Series C Convertible Preferred Stock will be convertible
into one-twentieth (1/20) of a share of common stock, subject to
adjustment for each issuance of common stock (but not upon issuance
of common stock equivalents) that occurred, or occurs, from the
date of issuance of the Series C Convertible Preferred Stock (the
“issue date”) until the fifth (5th) anniversary of the
issue date (i) upon the conversion or exercise of any instrument
issued on the issued date or thereafter issued (but not upon the
conversion of the Series C Convertible Preferred Stock), (ii) upon
the exchange of debt for shares of common stock, or (iii) in a
private placement, such that the total number of shares of common
stock held by an “Eligible Class C Preferred Stock
Holder” (based on the number of shares of common stock held
as of the date of issuance) will be preserved at the same
percentage of shares of common stock outstanding held by such
Eligible Class C Preferred Stock Holder on such date. An Eligible
Class C Preferred Stock Holder means any of (i) Dolphin
Entertainment for so long as Mr. O’Dowd continues to
beneficially own at least 90% 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 our 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 we 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
Series C Convertible Preferred Stock will automatically convert
upon the occurrence of any of the following events: (i) each
outstanding share of Series C Convertible Preferred Stock which is
transferred to any holder other than an Eligible Class C Preferred
Stock Holder will automatically convert into that number of fully
paid and nonassessable Conversion Shares (as defined in the
Certificate of Designation) equal to the Conversion Number (as
defined in the Certificate of Designation) at the time in effect;
(ii) if the aggregate number of shares of common stock plus
Conversion Shares (issuable upon conversion of the Series B
Convertible Preferred Stock and the Series C Convertible Preferred
Stock) held by the Eligible Class C Preferred Stock Holders in the
aggregate constitute 10% or less of the sum of (x) the outstanding
shares of common stock plus (y) all Conversion Shares held by the
Eligible Class C Preferred Stock Holders, then each outstanding
Series C Convertible Preferred Stock then outstanding will
automatically convert into that number of fully paid and
nonassessable Conversion Shares equal to the Conversion Number at
the time in effect; or (iii) at such time as a holder of Series C
Convertible Preferred Stock ceases to be an Eligible Class C
Preferred Stock Holder, each share of Series C Convertible
Preferred Stock held by such person or entity will immediately
convert into that number of fully paid and nonassessable Conversion
Shares equal to the Conversion Number at the time in
effect.
The
Series C Convertible Preferred Stock ranks, with respect to rights
upon liquidation, winding-up or dissolution, (a) senior to all
classes of common stock, to the Series B Convertible Preferred
Stock and to each other class of capital stock or series of
preferred stock established thereafter by the Board the terms of
which expressly provide that such class ranks junior to the Series
C Convertible Preferred Stock, which we refer to as Junior Stock,
(b) on a parity with each other class of capital stock or series of
preferred stock established thereafter by the Board, which we refer
to as Parity Stock, and (c) junior to any future class of preferred
stock established thereafter by the Board, the terms of which
expressly provide that such class ranks senior to the Series C
Convertible Preferred Stock, which we refer to as Senior
Stock.
Upon
any liquidation, dissolution or winding up after payment or
provision for payment of our debts and other liabilities, the
holders of Series C Convertible Preferred Stock are entitled to be
paid out of our assets available for distribution to our
shareholders (i) prior to the holders of any class or series of
common stock and Junior Stock, (ii) pro rata with the holders of
any Parity Stock and (iii) after the holders of any Senior Stock,
an amount equal to $0.001 per share of Series C Convertible
Preferred Stock.
The Series C Convertible Preferred Stock
has dividend rights on parity with the common stock.
Our
Board has approved an amendment to our Articles of Incorporation,
subject to shareholder approval, to (i) reduce the number of Series
C Convertible Preferred Stock outstanding in light of our 20-to-1
reverse stock split from 1,000,000 to 50,000 shares and (ii)
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.
Warrants
We
currently have outstanding 3,224,230 warrants, each exercisable
into one share of our common stock at exercise prices ranging from
$3.10 to $7.00 per share.
The
material terms and provisions of the warrants being offered
pursuant to this prospectus are summarized below. This summary of
some provisions of the warrants is not complete. For the complete
terms of the warrants, you should refer to the form of warrant
filed as an exhibit to the registration statement of which this
prospectus is a part.
The
warrants issued in this offering will be governed by the terms of a
physical warrant certificate. Each whole warrant entitles the
purchaser to purchase of a share of our common stock at a price
equal to $ per share at any time for up to years after the date of
the closing of this offering.
The
holder of a warrant will not be deemed a holder of our underlying
common stock until the warrant is exercised. No fractional warrants
will be issued. If an investor would otherwise be entitled to
receive a fractional warrant, the number of warrants issued to the
investor will be rounded up to the nearest whole
warrant.
Subject
to certain limitations as described below the warrants are
immediately exercisable and expire on
the
anniversary of the date of issuance. Subject to limited exceptions,
a holder of warrants will not have the right to exercise any
portion of its warrants if the holder, together with its
affiliates, would beneficially own in excess of 4.99% of the number
of shares of our common stock outstanding immediately after giving
effect to such exercise.
The
exercise price and the number of shares issuable upon exercise of
the warrants is subject to appropriate adjustment in the event of
recapitalization events, stock dividends, stock splits, stock
combinations, reclassifications, reorganizations or similar events
affecting our common stock, and also upon any distributions of
assets, including cash, stock or other property to our
shareholders. The warrant holders must pay the exercise price in
cash upon exercise of the warrants, unless such warrant holders are
utilizing the cashless exercise provision of the warrants. After
the close of business on the expiration date, unexercised warrants
will become void.
In
addition, in the event we consummate a merger or consolidation with
or into another person or other reorganization event in which our
common shares are converted or exchange for securities, cash or
other property, or we sell, lease, license, assign, transfer,
convey or otherwise dispose of all or substantially all of our
assets or we or another person acquire 50% or more of our
outstanding shares of common stock, then following such event, the
holders of the warrants will be entitled to receive upon exercise
of the warrants the same kind and amount of securities, cash or
property which the holders would have received had they exercised
the warrants immediately prior to such fundamental transaction. Any
successor to us or surviving entity shall assume the obligations
under the warrants. In addition, as further described in the form
of warrant filed as an exhibit to the registration statement of
which this prospectus forms a part, in the event of any fundamental
transaction completed for cash, or a going private transaction
under Rule 13e-3 of the Exchange Act, or involving a person not
trading on a national securities exchange, the holders of the
warrants will have the right to require us to purchase the warrants
for an amount in cash that is determined in accordance with a
formula set forth in the warrants.
Upon
the holder’s exercise of a warrant, we will issue the shares
of common stock issuable upon exercise of the warrant within three
business days following our receipt of notice of
exercise.
Prior
to the exercise of any warrants to purchase common stock, holders
of the warrants will not have any of the rights of holders of the
common stock purchasable upon exercise, including the right to vote
or to receive any payments of dividends on the common stock
purchasable upon exercise.
Warrant
holders may exercise warrants only if the issuance of the shares of
common stock upon exercise of the warrants is covered by an
effective registration statement, or an exemption from registration
is available under the Securities Act of 1933, as amended, or the
Securities Act, and the securities laws of the state in which the
holder resides. We intend to use commercially reasonable efforts to
have the registration statement, of which this prospectus forms a
part, effective when the warrants are exercised. The warrant
holders must pay the exercise price in cash upon exercise of the
warrants unless there is not an effective registration statement
or, if required, there is not an effective state law registration
or exemption covering the issuance of the shares underlying the
warrants (in which case, the warrants may only be exercised via a
“cashless” exercise provision).
Registration
Rights
In
connection with the 42West acquisition, on March 30, 2017, we
entered into a registration rights agreement with the sellers.
Pursuant to the registration rights agreement, the sellers are
entitled to rights with respect to the registration under the
Securities Act of shares received as consideration in the
acquisition. These shares are referred to as registrable
securities.
The
registration of shares of our common stock pursuant to the exercise
of the registration rights described below would enable the sellers
to trade these shares without restriction under the Securities Act
when the applicable registration statement is declared effective.
We will pay the fees, costs and expenses of underwritten
registrations under the registration rights agreement.
Generally, in an
underwritten offering, the managing underwriter, if any, has the
right to limit the number of shares the sellers may include in
accordance with the terms of the registration rights
agreement. The registrable securities will no longer be
registrable securities when (i) a registration statement covering
the registrable securities has been declared effective and such
registrable securities have been disposed of pursuant to the
effective registration statement, (ii) the registrable securities
may be sold without manner of sale, volume or other restriction
pursuant to Rule 144 under the Securities Act, or (iii) the
registrable securities are no longer outstanding.
Demand Registration Rights
At any
time after the one-year anniversary of the registration rights
agreement, we will be required, upon the request of sellers holding
at least a majority of the consideration received in the
acquisition, to file a registration statement on Form S-1 and
use our reasonable efforts to effect a registration covering up to
25% of the registrable securities. We are required to effect only
one registration on Form S-1. The right to have the registrable
securities registered on Form S-1 is subject to other specified
conditions and limitations.
Piggyback Registration Rights
If we
receive a request from the sellers to register securities under the
Securities Act pursuant to the registration rights agreement, we
will promptly (but not later than ten (10) days after receipt)
deliver notice of such request to all other sellers, who will then
have five (5) days from the date such notice is given to notify us
in writing of their desire to be included in such registration.
However, if the aggregate amount of registrable securities
requested to be included by the sellers exceeds 25% of the
aggregate registrable securities held by all the sellers at that
time, the number of registrable securities to be included by each
seller will be allocated among them as agreed upon by the
sellers.
Form S-3 Registration Rights
If we
become eligible to file a registration statement on Form S-3, upon
the request of the sellers holding at least a majority of the
consideration received by the sellers, we will be required to use
our reasonable efforts to effect a registration of such shares on
Form S-3 covering up to an additional 25% of the consideration
received by the sellers. We are required to effect only one
registration on Form S-3, if eligible. The right to have the
registrable securities registered on Form S-1 is subject to other
specified conditions and limitations.
Perrone Piggyback Registration
Rights
Pursuant to a debt exchange agreement, a purchase agreement and a termination agreement, we granted Stephen Perrone, a greater than 5% shareholder of our company, piggyback registration rights with respect to 2,340,000 shares that he received upon exercise of Class J and Class K warrants. For a discussion of the agreements, see “Certain Relationships and Related Transactions”. As a result, Mr. Perrone was entitled to notice of this offering and to include his shares of common stock in this offering.
Pursuant to a debt exchange agreement, a purchase agreement and a termination agreement, we granted Stephen Perrone, a greater than 5% shareholder of our company, piggyback registration rights with respect to 2,340,000 shares that he received upon exercise of Class J and Class K warrants. For a discussion of the agreements, see “Certain Relationships and Related Transactions”. As a result, Mr. Perrone was entitled to notice of this offering and to include his shares of common stock in this offering.
Anti-takeover
Effects of our Articles of Incorporation
Our
Articles of Incorporation provide that our Board may provide
further issuances of preferred stock, in one or more series, to
establish the number of shares to be included in each series, to
fix the designation, rights, preferences, privileges and
restrictions of the shares of each series and to increase or
decrease the number of shares of any series of preferred stock, all
without any further vote or action by our shareholders. The
existence of authorized but unissued and unreserved preferred stock
may enable our Board to issue shares to persons friendly to current
management, which could render more difficult or discourage an
attempt to obtain control of our company by means of a proxy
contest, tender offer, merger or otherwise, and thereby protect the
continuity of our management.
Indemnification
Both
our Articles of Incorporation and Bylaws provide for
indemnification of our directors and officers to the fullest extent
permitted by the Florida Business Corporation Act.
Transfer Agent
The
transfer agent and registrar for our common stock is Nevada Agency
and Transfer Company.
UNDERWRITING
is
the sole underwriter of the offering. We have entered into an
underwriting agreement
dated , 2017
with the underwriter. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the underwriter
and the underwriter has agreed to purchase, at the public offering
price less the underwriting discounts and commissions set forth on
the cover page of this prospectus, the following respective number
of shares of our common stock:
|
Underwriter
|
Number of
Shares
|
|
|
|
The
underwriter is committed to purchase all the securities offered by
us other than those covered by the option to purchase additional
shares described below, if it purchases any shares. The obligations
of the underwriter may be terminated upon the occurrence of certain
events specified in the underwriting agreement. Furthermore,
pursuant to the underwriting agreement, the underwriter’s
obligations are subject to customary conditions, representations
and warranties contained in the underwriting agreement, such as
receipt by the underwriter of officers’ certificates and
legal opinions.
We have
agreed to indemnify the underwriter against specified liabilities,
including liabilities under the Securities Act, and to contribute
to payments the underwriter may be required to make in respect
thereof.
The
underwriter is offering the securities, subject to prior sale,
when, as and if issued to and accepted by it, subject to approval
of legal matters by its counsel and other conditions specified in
the underwriting agreement. The underwriter reserves the right to
withdraw, cancel or modify offers to the public and to reject
orders in whole or in part.
The
underwriter proposes to offer the securities offered by us to the
public at the public offering price set forth on the cover of this
prospectus supplement. In addition, the underwriter may offer some
of the securities to other securities dealers at such price less a
concession of $ .
per share. After the initial offering, the public offering price
and concession to dealers may be changed.
Option to Purchase Additional Securities
We have
granted the underwriter an over-allotment option. This option,
which is exercisable for up
to days after the
date of this prospectus, permits the underwriter to purchase a
maximum of additional shares of common
stock from us to cover over-allotments. If the underwriter
exercises all or part of this option, it will
purchase
shares of common stock covered by the option at the public offering
price that appears on the cover page of this prospectus supplement,
less the underwriting discount. If this option is exercised in
full, the total price to the public will be approximately
$ and the total proceeds to us will be
$ .
Discounts and Commissions
The
following table shows the public offering price, underwriting
discount and proceeds, before expenses, to us. The information
assumes either no exercise or full exercise by the underwriter of
its over-allotment option.
|
|
|
Total
|
|
|
|
Per
Share
|
Without
Over-Allotment
|
With
Over-Allotment
|
|
Public offering
price
|
$
|
$
|
$
|
|
Underwriting
discount ( %)
|
$
|
$
|
$
|
|
Proceeds, before
expenses, to us
|
$
|
$
|
$
|
We have
agreed to reimburse the underwriter its actual, out-of-pocket
expenses, including the reasonable fees and disbursements of the
underwriter’s counsel related to the offering, up to an
aggregate maximum amount of $ , regardless of whether the offering
is completed, but in any event in compliance with the provisions of
FINRA Rule 5110(f)(2). We estimate that the total expenses of the
offering including all expenses to be reimbursed to the underwriter
excluding the underwriter discount, will be approximately
$ .
Price Stabilization, Short Positions and Penalty Bids
The
underwriter may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids or purchasers for
the purpose of pegging, fixing or maintaining the price of the
common stock, in accordance with Regulation M under the Exchange
Act:
●
Over-allotment
involves sales by the underwriter of securities in excess of the
number of securities the underwriter is obligated to purchase,
which creates a syndicate short position. The short position may be
either a covered short position or a naked short position. In a
covered short position, the number of securities over-allotted by
the underwriter is not greater than the number of securities that
it may purchase in the over-allotment option. In a naked short
position, the number of securities involved is greater than the
number of securities in the over-allotment option. The underwriter
may close out any short position by either exercising its
over-allotment option (which it anticipates will occur if our stock
prices are greater than the price per security in this offering)
and/or purchasing securities in the open market (which it
anticipates will occur if our stock prices are less than the price
per security in this offering).
●
Stabilizing
transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified
maximum.
●
Syndicate covering
transactions involve purchases of securities in the open market
after the distribution has been completed in order to cover
syndicate short positions. In determining the source of securities
to close out the short position, the underwriter will consider,
among other things, the price of securities available for purchase
in the open market as compared to the price at which it may
purchase securities through the over-allotment option. If the
underwriter sells more securities than could be covered by the
over-allotment option, a naked short position, the position can
only be closed out by buying securities in the open market. A naked
short position is more likely to be created if the underwriter is
concerned that there could be downward pressure on the price of the
securities in the open market after pricing that could adversely
affect investors who purchase in the offering.
●
Penalty bids permit
the underwriter to reclaim a selling concession from a syndicate
member when the securities originally sold by the syndicate member
is purchased in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
These
stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our securities, or preventing or retarding a
decline in the market price of those securities. As a result, the
price of our common stock may be higher than the price that might
otherwise exist in the open market. These transactions may be
effected on an exchange or in the over-the-counter market or
otherwise and, if commenced, may be discontinued at any
time.
Neither
we nor the underwriter make any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of the securities. In
addition, neither we nor the underwriter make any representation
that the underwriter will engage in these stabilizing transactions
or that any transaction, once commenced, will not be discontinued
without notice.
In
connection with this offering, the underwriter and selling group
members may also engage in passive market making transactions in
our securities. Passive market making consists of displaying bids
on a national securities exchange limited by the prices of
independent market makers and effecting purchases limited by those
prices in response to order flow. Rule 103 of Regulation M
promulgated by the SEC limits the amount of net purchases that each
passive market maker may make and the displayed size of each bid.
Passive market making may stabilize the market price of our
securities at a level above that which might otherwise prevail in
the open market and, if commenced, may be discontinued at any
time.
Electronic Offer, Sale and Distribution of Shares
The
underwriter may facilitate the marketing of this offering online
directly or through one of the underwriter’s affiliates. In
those cases, prospective investors may view offering terms and a
prospectus online and place orders online or through their
financial advisors. Such websites and the information contained on
such websites, or connected to such sites, are not incorporated
into and are not a part of this prospectus. In connection with this offering, the
underwriter may distribute prospectuses
electronically.
Other Relationships
The
underwriter and its affiliates are full service financial
institutions engaged in various activities, which may include
securities trading, commercial and investment banking, financial
advisory, investment management, investment research, principal
investment, hedging, financing and brokerage activities. The
underwriter has in the past, and may in the future, engage in
investment banking and other commercial dealings in the ordinary
course of business with us or our affiliates. The underwriter has
in the past, and may in the future, receive customary fees and
commissions for these transactions.
In the
ordinary course of their various business activities, the
underwriter and its affiliates may make or hold a broad array of
investments and actively trade debt and equity securities (or
related derivative securities) and financial instruments (including
bank loans) for their own account and for the accounts of their
customers, and such investment and securities activities may
involve securities and/or instruments of the issuer. The
underwriter and its affiliates may also make investment
recommendations and/or publish or express independent research
views in respect of such securities or instruments and may at any
time hold, or recommend to clients that they acquire, long and/or
short positions in such securities and instruments.
Listing
The
shares of our common stock are currently quoted on the OTC Pink
Marketplace under the symbol “DPDM.” We do not intend
to apply for listing of the warrants on any securities exchange and
we do not expect that the warrants will be quoted on the OTC Pink
Marketplace.
LEGAL
MATTERS
The
validity of the securities offered by this prospectus will be
passed upon by Greenberg Traurig, P.A., Fort Lauderdale, Florida.
Certain legal matters will be passed upon for the underwriter by
.
EXPERTS
The
consolidated financial statements of Dolphin Digital Media, Inc. as
of December 31, 2016 and 2015 and for each of the years then ended
included in this prospectus and in the registration statement have
been so included in reliance on the report of BDO USA, LLP, an
independent registered public accounting firm, appearing elsewhere
herein and in the Registration Statement, given on the authority of
said firm as experts in auditing and accounting.
The
financial statements of 42 West, LLC as of December 31, 2016 and
2015 and for each of the years then ended, included in this
prospectus and in the registration statement have been so included
in reliance on the report of BDO USA, LLP, independent auditors,
appearing elsewhere herein and in the Registration Statement, given
on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND
MORE INFORMATION
Our
corporate website is www.dolphindigitalmedia.com. We make
available, free of charge, access to our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
Proxy Statement on Schedule 14A and amendments to those materials
filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, on our website under “Investor Relations
– SEC Filings,” as soon as reasonably practicable after
we file electronically such material with, or furnish it to, the
SEC.
You may
also read and copy any materials filed by us with the SEC at the
SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549, and you may obtain information on the
operation of the Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330. In addition, the SEC maintains an
Internet website, www.sec.gov, that contains reports, proxy and
information statements and other information that we file
electronically with the SEC.
INDEX TO FINANCIAL
STATEMENTS
Dolphin Digital Media, Inc.
Audited Condensed Consolidated Financial Statements
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
Dolphin Digital Media, Inc.
Unaudited Condensed Consolidated Financial Statements
|
F-42
|
|
|
F-43
|
|
|
F-44
|
|
|
F-45
|
|
|
F-46
|
|
|
|
|
42 West, LLC
Audited Financial Statements
|
F-74
|
|
|
F-75
|
|
|
F-76
|
|
|
F-77
|
|
|
F-78
|
|
|
F-79
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board
of Directors and Stockholders
Dolphin
Digital Media, Inc. and subsidiaries
Coral
Gables, Florida
We
have audited the accompanying consolidated balance sheets of
Dolphin Digital Media, Inc. and subsidiaries as of December 31,
2016 and 2015 and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for each of
the years then ended. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Dolphin Digital Media, Inc. and
subsidiaries at December 31, 2016 and 2015, and the results of its
operations and its cash flows for each of the years then
ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying
consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note
2 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to
these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO USA,
LLP Certified
Public Accountants
Miami,
Florida
April 17,
2017
|
DOLPHIN DIGITAL MEDIA, INC. AND SUBSIDIARIES
|
||
|
Consolidated Balance
Sheets
|
||
|
As of December 31, 2016 and 2015
|
||
|
ASSETS
|
2016
|
2015(1)
|
|
Current
|
|
|
|
Cash
and cash equivalents
|
$662,546
|
$2,392,685
|
|
Restricted
cash
|
1,250,000
|
-
|
|
Prepaid
Expenses
|
-
|
72,518
|
|
Related
party receivable
|
-
|
453,529
|
|
Accounts
receivable
|
3,668,646
|
-
|
|
Other
current assets
|
2,665,781
|
2,827,131
|
|
Total
Current Assets
|
8,246,973
|
5,745,863
|
|
Capitalized
production costs
|
4,654,013
|
15,170,768
|
|
Property
and equipment
|
35,188
|
55,413
|
|
Deposits
|
1,261,067
|
397,069
|
|
Total
Assets
|
$14,197,241
|
$21,369,113
|
|
LIABILITIES
|
|
|
|
Current
|
|
|
|
Accounts
payable
|
$677,249
|
$2,070,545
|
|
Other
current liabilities
|
2,958,523
|
2,984,320
|
|
Warrant
liability
|
14,011,254
|
-
|
|
Accrued
compensation
|
2,250,000
|
2,065,000
|
|
Debt
|
18,743,069
|
37,331,008
|
|
Loan
from related party
|
684,326
|
2,917,523
|
|
Deferred
revenue
|
46,681
|
1,418,368
|
|
Note
payable
|
300,000
|
300,000
|
|
Total
Current Liabilities
|
39,671,102
|
49,086,764
|
|
Noncurrent
|
|
|
|
Convertible
note
|
-
|
3,164,000
|
|
Warrant
liability
|
6,393,936
|
|
|
Loan
from related party
|
-
|
1,982,267
|
|
Total
Noncurrent Liabilities
|
6,639,936
|
5,146,267
|
|
Total
Liabilities
|
46,065,038
|
54,233,031
|
|
STOCKHOLDERS' DEFICIT
|
|
|
|
Common
stock, $0.015 par value, 400,000 shares authorized, 14,395,521 and
4,094,618 , respectively, issued and outstanding at December 31,
2016 and 2015
|
215,933
|
61,419
|
|
Preferred
Stock , 10,000,000 shares authorized, Preferred Stock, Series A
$0.001 par value, liquidation preference of 1,042,756, 1,043 share
authorized, issued and outstanding at December 31, 2015. None were
issued and outstanding at December 31, 2016
|
-
|
1,043
|
|
Preferred
Stock, Series B, $0.10 par value, 4,000,000 authorized, 2,300,000
issued and outstanding at December 31, 2015, none were issued and
outstanding at December 31, 2016
|
-
|
230,000
|
|
Preferred
Stock, Series C, $0.001 par value, 1,000,000 shares authorized,
1,000,000 shares issued and outstanding at December 31, 2016 and
2015
|
1,000
|
1,000
|
|
Additional
paid in capital
|
67,727,474
|
26,480,240
|
|
Accumulated
deficit
|
(99,812,204)
|
(62,615,428)
|
|
Total
Dolphin Digital Media, Inc. Deficit
|
(31,867,797)
|
(35,841,726)
|
|
Non-controlling
interest
|
-
|
2,977,808
|
|
Total
Stockholders' Deficit
|
(31,867,797)
|
(32,863,918)
|
|
Total
Liabilities and Stockholders' Deficit
|
$14,197,241
|
$21,369,113
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
||
|
(1)
Financial information has been
retrospectively adjusted for the acquisition of Dolphin Films, Inc.
See Notes 1 and 4
. |
|
|
DOLPHIN DIGITAL MEDIA, INC. AND SUBSIDIARIES
Consolidated Statements of
Operations
For the years ended December 31, 2016 and 2015
|
|
2016
|
2015(1)
|
|
Revenues:
|
|
|
|
Production
and distribution
|
$9,367,222
|
$3,031,073
|
|
Membership
|
28,403
|
69,761
|
|
Total
Revenue:
|
9,395,625
|
3,100,834
|
|
|
|
|
|
Expenses:
|
|
|
|
Direct
costs
|
10,661,241
|
2,587,257
|
|
Distribution
and marketing
|
11,322,616
|
213,300
|
|
Selling,
general and administrative
|
1,245,689
|
1,845,088
|
|
Legal
and professional
|
2,405,754
|
2,392,556
|
|
Payroll
|
1,462,589
|
1,435,765
|
|
Loss
before other income (expense)
|
(17,702,264)
|
(5,373,132)
|
|
|
|
|
|
Other
Income(Expense)
|
|
|
|
Other
income
|
9,660
|
96,302
|
|
Amortization
of loan fees
|
(476,250)
|
-
|
|
Change
in fair value of warrant liability
|
2,195,542
|
-
|
|
Warrant
issuance expense
|
(7,372,593)
|
-
|
|
Loss
on extinguishment of debt
|
(9,601,933)
|
-
|
|
Interest
expense
|
(4,241,841)
|
(3,559,532)
|
|
Total
Other Income(Expense)
|
(19,487,415)
|
(3,463,230)
|
|
Net
Loss
|
$(37,189,679)
|
$(8,836,362)
|
|
|
|
|
|
Net
Income attributable to noncontrolling interest
|
-
|
17,440
|
|
Net
loss attributable to Dolphin Films, Inc.
|
-
|
(4,786,341)
|
|
Net
Loss attributable to Dolphin Digital Media, Inc.
|
(37,189,679)
|
(4,067,461)
|
|
|
$(37,189,679)
|
$(8,836,362)
|
|
|
|
|
|
Deemed dividend on preferred stock
|
5,247,227
|
-
|
|
|
|
|
|
Net loss attributable to common shareholders
|
$(42,436,906)
|
$(8,836,362)
|
|
|
|
|
|
Basic
and Diluted Loss per Share
|
$(4.83)
|
$(2.16)
|
|
|
|
|
|
Weighted
average number of shares used in share calculation
|
8,778,193
|
4,094,618
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
||
|
(1)
Financial information has been
retrospectively adjusted for the acquisition of Dolphin Films, Inc.
See Notes 1 and 4.
|
|
|
DOLPHIN DIGITAL MEDIA INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows
For the years ended December 31, 2016 and 2015
|
|
2016
|
2015(1)
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$(37,189,679)
|
$(8,836,362)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
20,225
|
24,826
|
|
Amortization
of capitalized production costs
|
7,822,549
|
1,672,120
|
|
Impairment
of capitalized production costs
|
2,075,000
|
861,825
|
|
Loss
on extinguishment of debt
|
9,601,933
|
-
|
|
Warrant
issuance
|
7,394,850
|
-
|
|
Change
in fair value of derivative liability
|
(2,195,542)
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
(3,668,646)
|
-
|
|
Other
current assets
|
161,250
|
(265,616)
|
|
Prepaid
expenses
|
72,518
|
(7,679)
|
|
Capitalized
production costs
|
619,206
|
(2,736,321)
|
|
Deposits
|
(863,998)
|
-
|
|
Deferred
revenue
|
(1,371,687)
|
-
|
|
Accrued
compensation
|
185,000
|
315,000
|
|
Accounts
payable
|
(1,393,296)
|
784,829
|
|
Other
current liabilities
|
3,757,873
|
1,121,876
|
|
Warrant
liability
|
50,000
|
-
|
|
Net Cash Used in
Operating Activities
|
(14,922,444)
|
(7,065,502)
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
Restricted
cash
|
(1,250,000)
|
-
|
|
Purchase of
furniture and equipment
|
-
|
(2,549)
|
|
Net Cash Used In
Investing Activities
|
(1,250,000)
|
(2,549)
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
Proceeds from Loan
and Security agreement
|
12,500,000
|
2,610,000
|
|
Repayment of Loan
and Security agreement
|
(410,000)
|
(405,219)
|
|
Proceeds from
production loan
|
-
|
440,130
|
|
Repayment of
production loan
|
(4,263,602)
|
-
|
|
Proceeds from
convertible note payable
|
-
|
3,164,000
|
|
Sale of common
stock
|
7,500,000
|
-
|
|
Advances from
related party
|
320,000
|
6,583,436
|
|
Repayment to
related party
|
(1,204,093)
|
(3,324,686)
|
|
Net Cash Provided
by Financing Activities
|
14,442,305
|
9,067,661
|
|
NET DECREASE IN
CASH AND CASH EQUIVALENTS
|
(1,730,139)
|
1,999,610
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
2,392,685
|
393,075
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
$662,546
|
$2,392,685
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
Interest
paid
|
$156,666
|
$1,635,814
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW INFORMATION:
|
|
|
|
Refinance
of related party debt to third party debt
|
$-
|
$8,774,337
|
|
Conversion of
related party debt and interest to shares of common
stock
|
$3,073,410
|
$-
|
|
Conversion of
convertible debt
|
$3,164,000
|
$-
|
|
Conversion of loan
and security agreements, including interest, into shares of common
stock
|
$22,091,388
|
$-
|
|
Conversion of loan
and security agreements converted to warrants to purchase shares of
common stock.
|
$7,034,990
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
(1)
Financial information has been
retrospectively adjusted for the acquisition of Dolphin Films, Inc.
See Notes 1 and 4.
Dolphin Digital Media Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders' Deficit
For the year ended December 31, 2016
|
|
|
|
|
|
Additional
|
|
|
Total
|
|
|
Preferred
Stock
|
Common
Stock
|
Paid-in
|
Noncontrolling
|
Accumulated
|
Stockholders
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
interest
|
Deficit
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
Balance December
31, 2014
|
4,343,000
|
$232,043
|
4,094,618
|
$61,419
|
$26,480,240
|
$2,995,249
|
$(53,761,626)
|
$(23,992,675)
|
|
Net loss for the year ended December
31, 2015
|
-
|
-
|
-
|
-
|
-
|
-
|
(8,836,362)
|
(8,836,362)
|
|
Income attributable to the
noncontrolling interest
|
-
|
-
|
-
|
-
|
-
|
17,440
|
(17,440)
|
-
|
|
Return of capital to
noncontrolling member
|
-
|
-
|
-
|
-
|
-
|
(34,881)
|
-
|
(34,881)
|
|
Balance December
31, 2015
|
4,343,000
|
$232,043
|
4,094,618
|
$61,419
|
$26,480,240
|
$2,977,808
|
$(62,615,428)
|
$(32,863,918)
|
|
Net loss for the year ended December
31, 2016
|
-
|
-
|
-
|
-
|
-
|
-
|
(37,189,679)
|
(37,189,679)
|
|
Income attributable to the
noncontrolling interest
|
-
|
-
|
-
|
-
|
-
|
7,097
|
(7,097)
|
-
|
|
Return of capital to
noncontrolling member
|
-
|
-
|
-
|
-
|
-
|
(14,200)
|
-
|
(14,200)
|
|
Acquisition of 25%
interest in Dolphin Kids Clubs LLC
|
-
|
-
|
-
|
-
|
(921,122)
|
(2,970,705)
|
-
|
(3,891,827)
|
|
Issuance of common
stock during the year ended December 31, 2016
|
-
|
-
|
375,143
|
5,628
|
1,869,375
|
-
|
-
|
1,875,003
|
|
Extinguishment of debt
at a price of $5.00
|
-
|
-
|
6,157,960
|
92,369
|
37,190,455
|
-
|
-
|
37,282,824
|
|
Issuance of common
stock for convertible debt
|
|
|
632,800
|
9,492
|
3,154,508
|
|
|
3,164,000
|
|
Preferred stock
dividend related to exchange of Series A for Series B Preferred
Stock
|
1,000,000
|
100,000
|
-
|
-
|
(5,227,247)
|
-
|
-
|
(5,127,247)
|
|
Issuance and conversion
of Series B Preferred
|
(3,300,000)
|
(330,000)
|
3,135,000
|
47,025
|
6,223,222
|
-
|
-
|
5,940,247
|
|
Retirement of Series A
Preferred
|
(1,043,000)
|
(1,043)
|
-
|
-
|
(1,041,957)
|
-
|
-
|
(1,043,000)
|
|
Balance December 31,
2016
|
1,000,000
|
$1,000
|
14,395,521
|
$215,933
|
$67,727,474
|
$-
|
$(99,812,204)
|
$(31,867,797)
|
The accompanying notes are an integral part of these consolidated
financial statements.
|
(1)
Financial information has been
retrospectively adjusted for the acquisition of Dolphin Films, Inc.
See Notes 1 and 4.
|
DOLPHIN
DIGITAL MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER
31, 2016 AND 2015
NOTE
1 — BASIS OF PRESENTATION AND ORGANIZATION:
Dolphin Digital
Media, Inc. (the “Company”, "Dolphin"), initially known
as Rising Fortune Incorporated, was incorporated in the State of
Nevada on March 7, 1995. The Company had no operations between
inception and 2003. On November 19, 2003, the Company amended
its Articles of Incorporation to change its name to Maximum Awards
Inc. On July 3, 2007, the Company amended its Articles of
Incorporation again to change its name to Logica Holdings Inc. On
July 29, 2008, the Company amended its Articles of Incorporation
again to change its name to Dolphin Digital Media,
Inc.
The accompanying
consolidated financial statements include the accounts of Dolphin,
and all of its majority-owned and controlled subsidiaries,
including Dolphin Films, Inc., Hiding Digital Productions, LLC,
Dolphin Kids Clubs, LLC, Cybergeddon Productions, LLC, Dolphin SB
Productions LLC, Max Steel Productions, LLC, Dolphin Max Steel
Holdings LLC, Dolphin JB Believe Financing, LLC and Dolphin JOAT
Productions, LLC
Effective March 7,
2016, the Company acquired Dolphin Films, Inc.
(“Dolphin Films”) from Dolphin Entertainment, Inc.
(“Dolphin Entertainment”), a company wholly owned by
William O’Dowd, CEO, President and Chairman of the Board of
Directors of the Company. The acquisition from Dolphin
Entertainment was a transfer between entities under common control.
As such, the Company recorded the assets, liabilities and deficit
of Dolphin Films on its consolidated balance sheets at Dolphin
Entertainment’s historical basis instead of fair value.
Transfers of businesses between entities under common control
require prior periods to be retrospectively adjusted to furnish
comparative information. Accordingly, the accompanying financial
statements and related notes of the Company have been
retrospectively adjusted to include the historical balances of
Dolphin Films prior to the effective date of the acquisition. See
Note 4 for additional information regarding the Dolphin Films
acquisition.
On May 9, 2016, the
Company filed an amendment to its Articles of Incorporation with
the Secretary of State of the State of Florida to effectuate a
20-to-1 reverse stock split. The reverse stock split was approved
by the Board of Directors and a majority of the Company’s
shareholders and became effective May 10, 2016. The number of
shares of common stock of the Company, par value $0.015 (the
“Common Stock”) in the consolidated financial
statements and all related footnotes has been adjusted to
retrospectively reflect the reverse stock split.
The Company enters
into relationships or investments with other entities, and in
certain instances, the entity in which the Company has a
relationship or investment may qualify as a variable interest
entity (“VIE”). A VIE is consolidated in the financial
statements if the Company is deemed to be the primary beneficiary
of the VIE. The primary beneficiary is the party that has the power
to direct activities that most significantly impact the activities
of the VIE and has the obligation to absorb losses or the right to
benefits from the VIE that could potentially be significant to the
VIE. The Company has included Max Steel Productions, LLC formed on
July 8, 2013 in the State of Florida and JB Believe, LLC formed on
December 4, 2012 in the State of Florida in its combined financial
statements as VIE’s.
NOTE
2 — GOING CONCERN
The
accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America which contemplate the continuation of the
Company as a going concern. The Company has incurred net losses of
$37,189,679 and $8,836,362, respectively for the years ended
December 31, 2016 and 2015. The Company has generated negative cash
flows from operations for the years ended December 31, 2016 and
2015 of $14,922,444 and $7,065,502 respectively. Further, the
Company has a working capital deficit for the years ended December
31, 2016 and 2015 of $31,424,129 and $43,340,901, respectively,
that is not sufficient to maintain or develop its operations, and
it is dependent upon funds from private investors and the support
of certain stockholders.
These factors raise
substantial doubt about the ability of the Company to continue as a
going concern. The 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 any
necessary additional funds through loans and additional issuance of
its Common Stock. There is no assurance that the Company will be
successful in raising additional capital. If the Company is unable
to obtain additional funding from these sources within the next
twelve months, it could be forced to liquidate. On February 16,
2017, the Company sold 100,000 shares of its Common Stock for $5.00
per share. During 2017, it has also received loans from its
CEO in the amount of $420,000. On April 10, 2017, the Company
signed two promissory notes with one debtholder for an aggregate
amount of $300,000. The promissory notes bear interest at
10.00% per annum and have a maturity date of October 10,
2017. The Company currently has the rights to several scripts
that it intends to obtain financing to produce and release during
2017 and 2018. It expects to earn a producer and overhead fee for
each of these productions. There can be no assurances that such
productions will be released or fees will be realized in future
periods. The Company is currently working on producing a variety of
digital projects which it intends to fund through private investors
on a project basis and expects to derive additional revenues from
these productions in the third quarter of 2017. There can be no
assurances that such income will be realized in future
periods.
On March 30, 2017, the Company acquired 42West
LLC, a limited liability company incorporated in the State of
Delaware. 42West is an entertainment public relations agency
offering talent publicity, strategic communications and
entertainment content marketing. The
Company expects to derive revenues from this wholly owned
subsidiary and will seek to identify additional revenue streams
from the combined companies. See Note 21 for further
discussion.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of
our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. These estimates are based on
management’s past experience and best knowledge of historical
trends, actions that we may take in the future, and other
information available when the consolidated financial statements
are prepared. Changes in estimates are recognized in
accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available. The
most significant estimates made by management in the preparation of
the financial statements relate to ultimate revenue and costs for
investment in digital and feature film projects; estimates of
allowances and provisions for doubtful accounts and impairment
assessments for investment in digital and feature film projects.
Actual results could differ from such estimates.
Statement of Comprehensive
Income
In accordance with
Financial Accounting Standards Board (“FASB”)
Accounting Standard Codification (“ASC”) Topic
220, Comprehensive
Income , a statement of comprehensive income has not
been included as the Company has no items of other comprehensive
income. Comprehensive loss is the same as net loss for
all periods presented.
Cash and cash
equivalents
Cash and cash
equivalents consist of cash deposits at financial
institutions. The Company considers all highly liquid
investments with a maturity of three months or less when purchased
to be cash equivalents.
Restricted Cash
Restricted cash
represents amounts held as collateral required under the
Company’s loan and security agreement. Proceeds
from this loan were used for the distribution and marketing costs
of the Company’s feature film. See Note 6 for
further discussion. As of December 31, 2016, the Company
maintained $1,250,000 in a separate bank account restricted for
this purpose. The funds were disbursed to the lender
subsequent to the year ended December 31, 2016.
Contracts in the Company’s
Equity
From time to time,
the Company issues contracts related to its own equity securities,
such as warrants and convertible notes. The Company evaluates
whether a standalone contract (such as a warrant), or an embedded
feature of a contract (such as the conversion feature of a
convertible note) should be classified in stockholder’s
deficit or as a liability in the Company’s consolidated
balance sheet. The determination is made in accordance with the
requirements of ASC Topic 480, Distinguishing Liabilities from Equity
(ASC 480), and ASC Topic 815, Derivatives and Hedging (ASC
815).
A warrant is
classified 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 the Company
subsequently issues equity, warrants, and/or conversion options at
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, must be classified as a derivative
liability.
A convertible debt
instrument in its entirety must be classified as a liability under
ASC 480 and carried at fair value in the financial statements if it
has a mandatory conversion feature. A conversion feature
of a convertible debt instrument or certain convertible preferred
stock, is separated from the convertible instrument and classified
as a derivative liability if the conversion feature, were it a
standalone instrument, would meet certain characteristics in the
definitions in ASC 815 of both an embedded derivative and a
derivative, generally including, among other conditions, if the
conversion feature must be settled in cash or a financial
instrument that is readily convertible to cash.
When a warrant or a
separated conversion feature is classified as a derivative
liability, the liability is initially and subsequently reported on
the balance sheet at its fair value, and subsequent increases or
decreases in the fair value are recorded through the statement of
operations.
When a conversion
feature does not meet the definition of a derivative per ASC 815,
it must be assessed further to determine whether a beneficial
conversion feature exists, which exists when the effective exercise
price is lower than the fair value of the Company’s related
equity instrument on the date of issuance. If it contains a
beneficial conversion feature, the amount of the beneficial
conversion feature reduces the balance of the convertible debt
instrument, creating a debt discount which is amortized over the
term of the debt to interest expense in the consolidated statement
of operations.
The classification
of a warrant or conversion feature must be reassessed at each
financial reporting date, as a change in circumstances may
necessitate reclassification of the warrant or conversion feature.
The Company has classified certain warrants issued during 2016 as
derivative liabilities due to the existence of full-ratchet down
round provisions in the warrants (see Note 16).
Gross versus Net
Revenue
The Company’s
motion pictures are primarily distributed and marketed by third
party distributors. The Company evaluates its arrangements with
third parties to determine whether revenue should be reported under
each individual arrangement on a gross or net basis by determining
whether the Company acts as the principal or agent under the terms
of each arrangement. To the extent that the Company acts as the
principal in an arrangement, revenues are reported on a gross
basis, resulting in revenues and expenses being classified in their
respective financial statement line items. Conversely, to the
extent that the Company acts as the agent in an arrangement,
revenues are reported on a net basis, resulting in revenues being
presented net of any related expenses. Determining whether the
Company acts as principal or agent is based on an evaluation of
which party has substantial risks and rewards of ownership under
the terms of an arrangement. The most significant factors that the
Company considers include identification of the primary obligor, as
well as which party has general and physical inventory risk, credit
risk and discretion in the supplier selection. The Company’s
primary distribution arrangements, which are those for its
theatrical release, are recorded on a gross basis as a result of
the evaluation previously described.
Revenue
Recognition
Revenue from motion
pictures and web series are recognized in accordance with guidance
ASC 926-60 “Revenue
Recognition –
Entertainment-Films”. Revenue is recorded
when a distribution contract, domestic or international, exists,
the movie or web series is complete in accordance with the terms of
the contract, the customer can begin exhibiting or selling the
movie or web series, the fee is determinable and collection of the
fee is reasonable. On occasion, the Company may enter into
agreements with third parties for the co-production or distribution
of a movie or web series. Revenue from these agreements
will be recognized when the movie is complete and ready to be
exploited. Cash received and amounts billed in advance
of meeting the criteria for revenue recognition is classified as
deferred revenue.
Additionally,
because third parties are the principal distributors of the
Company’s movies, the amount of revenue that is recognized
from films in any given period is dependent on the timing, accuracy
and sufficiency of the information received from its distributors.
As is typical in the film industry, the Company's distributors may
make adjustments in future periods to information previously
provided to the Company that could have a material impact on the
Company’s operating results in later periods. Furthermore,
management may, in its judgment, make material adjustments to the
information reported by its distributors in future periods to
ensure that revenues are accurately reflected in the
Company’s financial statements. To date, the distributors
have not made, nor has the Company made, subsequent material
adjustments to information provided by the distributors and used in
the preparation of the Company’s historical financial
statements.
In general, the
Company records revenue when persuasive evidence of an arrangement
exists, products have been delivered or services have been
rendered, the selling price is fixed and determinable, and
collectability is reasonably assured. Advertising revenue is
recognized over the period the advertisement is
displayed.
Capitalized Production
Costs
Capitalized
production costs represent the costs incurred to develop and
produce a motion picture or a web series. These costs primarily
consist of salaries, equipment and overhead costs, capitalized
interest as well as the cost to acquire rights to
scripts. 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 FASB
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.
The Company is
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 motion picture or web
series and are based on factors such as total revenue as defined
per each of the participation agreements. The Company is
also responsible for residuals, which are payments based on revenue
generated from secondary markets and are generally paid to third
parties pursuant to a collective bargaining, union or guild
agreement. The Company has entered into a fifteen
year distribution agreement for its motion picture. As
prescribed in the agreement, the distributor has entered into a
distribution assumption agreement with the guilds to pay the
residuals from gross revenues. Upon expiration of the
term of the agreement, and nonrenewal, the Company will be
responsible for making the payments directly. 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. 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. 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.
Amortization of film costs, participation and residuals and/or
write downs of all or a portion of the unamortized deferred
production costs to its estimated fair value is recorded in direct
costs.
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 deferred
production costs, and also periodically results in an impairment
requiring a write-down of the deferred production costs to fair
value. These write-downs are included in production expense within
the combined statements of operations. For the year ended December
31, 2015, the Company amortized $1,642,120 of capitalized
production costs related to South
Beach-Fever and recorded $648,525 for impairment of certain
capitalized production costs. During the year ended December 31,
2016, the Company amortized $7,822,549 of capitalized production
costs related to the revenues earned for its feature film and
impaired $2,075,000 of capitalized production costs that were below
the fair value.
Long-Lived Assets
The Company reviews
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparison of the
carrying amount to the future net cash flows which the assets are
expected to generate. If such assets are considered to be impaired,
the impairment to be recognized equals the amount by which the
carrying value of the assets exceeds its fair value. Except for
those described above in Capitalized Production Costs, there were
no impairment charges for long lived assets during the years ended
December 31, 2016 and 2015.
Property and
Equipment
Property and
equipment is recorded at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. The
Company recorded depreciation expense of $20,226 and $24,826,
respectively for the years ended December 31, 2016 and 2015. When
items are retired or otherwise disposed of, income is charged or
credited for the difference between net book value and proceeds
realized thereon. Ordinary maintenance and repairs are charged to
expense as incurred, and replacements and betterments are
capitalized. The range of estimated useful lives to be used to
calculate depreciation and amortization for principal items of
property and equipment are as follows:
|
|
|
Depreciation/
|
|
|
|
Amortization
|
|
Asset
Category
|
|
Period
|
|
F Furniture and
fixtures
|
|
5
Years
|
|
Computer
equipment
|
|
3
Years
|
|
Leasehold
improvements
|
|
5
Years
|
Warrants
When the Company
issues warrants, it evaluates 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), the Company classifies 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 the Company 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 sheet at fair value
with any changes in its fair value recognized currently in the
statement of operations.
The Company
classified certain warrants issued during 2016 as derivative
liabilities, because they contain full-ratchet down round
provisions (see Notes 10 and 16). The Company also had equity
classified warrants outstanding at December 31, 2016 and 2015 (see
Note 16).
Convertible Debt and Convertible
Preferred Stock
When the Company
issues convertible debt or convertible deferred stock, it evaluates
the balance sheet classification to determine whether the
instrument should be classified either as debt or equity, and
whether the conversion feature should be accounted for separately
from the host instrument. A conversion feature of a convertible
debt instrument or certain convertible preferred stock would be
separated from the convertible instrument and classified as a
derivative liability if the conversion feature, were it a
standalone instrument, meets the definition of an “embedded
derivative” in ASC 815, Derivatives and Hedging. Generally,
characteristics that require derivative treatment include, among
others, when the conversion feature is not indexed to the
Company’s equity, as defined in ASC 815-40, or when it must
be settled either in cash or by issuing stock that is readily
convertible to cash. When a conversion feature meets the definition
of an embedded derivative, it would be separated from the host
instrument and classified as a derivative liability carried on the
consolidated balance sheet at fair value, with any changes in its
fair value recognized currently in the consolidated statements of
operations.
If a conversion
feature does not meet the conditions to be accounted for as a
derivative liability, the Company then determines whether the
conversion feature is “beneficial”. A conversion
feature would be considered beneficial if the conversion feature is
“in the money” when the host instrument is issued or,
under certain circumstances, later. If convertible debt contains a
beneficial conversion feature (“BCF”), the amount of
the amount of the proceeds allocated to the BCF reduces the balance
of the convertible debt, creating a discount which is amortized
over the debt’s term to interest expense in the consolidated
statements of operations. When a convertible preferred stock
contains a BCF, after allocating the proceeds to the BCF, the
resulting discount is either amortized over the period beginning
when the convertible preferred stock is issued up to the earliest
date the conversion feature may be exercised, or if the convertible
preferred stock is immediately exercisable, the discount is fully
amortized at the date of issuance. The amortization is recorded
similar to a dividend.
The Company had no
outstanding convertible debt or convertible preferred stock which
contain conversion feature that is accounted for either as a
derivative or a beneficial conversion feature at either December
31, 2016 or 2015 or during the years then ended.
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 the Company. Unobservable
inputs reflect the Company’s 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.
|
Certain warrants
issued in 2016 (see Note 16) are measured and carried at fair value
in the consolidated financial statements as of and for the year
ended December 31, 2016. As of December 31, 2015, and
for the year then ended, the Company had no assets or liabilities
measured at fair value, on a recurring or nonrecurring basis. See
Note 10 for additional fair value disclosures.
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 in
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 merits 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 fifty percent 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.
Loss per share
Loss per share of
Common Stock is computed by dividing loss available to common stock
shareholders by the weighted average number of shares of Common
Stock outstanding during the period, including the issuable shares
related to the anti-dilution agreement. Stock warrants were not
included in the computation of loss per share for the periods
presented because their inclusion is anti-dilutive. The total
potential dilutive warrants outstanding were 5,890,000 and
1,050,000 at December 31, 2016 and 2015.
Going Concern
In accordance with
ASC Subtopic 205-40, Going Concern, management evaluates whether
relevant conditions and events that, when considered in the
aggregate, indicate that it is probable the Company will be unable
to meet its obligations as they become due within one year after
the date that the financial statements are issued. When
relevant conditions or events, considered in the aggregate,
initially indicate that it is probable that the Company
will be unable to meet its obligations as they become due within
one year after the date that the financial statements are
issued (and therefore they raise substantial doubt about
the Company’s ability to continue as a going concern),
management evaluates whether its plans that are intended to
mitigate those conditions and events, when implemented, will
alleviate substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans are
considered only to the extent that 1) it is probable that the plans
will be effectively implemented and 2) it is probable that the
plans will mitigate the conditions or events that raise substantial
doubt about the Company’s ability to continue as a going
concern. See Note 2 related to going
concern.
Concentration of
Risk
The Company
maintains its cash and cash equivalents with financial institutions
and, at times, balances may exceed federally insured limits of
$250,000. Substantially all of the production revenue
during the years ended December 31, 2016 and 2015 was derived from
two productions.
Business Segments
The Company
operates 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. The Company derived a majority of its revenues
from this segment during the year ended December 31,
2015.
|
|
|
|
|
|
|
|
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 year ended December 31,
2016.
|
Based on an
analysis of the Company’s operating segments and the
provisions of ASC 280, Segment
Reporting, the Company believes it meets the criteria for
aggregating its operating segments into a single reporting segment
because they have similar economic characteristics, similar nature
of product sold, (content), similar production process (the Company
uses the same labor force, and content) and similar type of
customer (children, teens, tweens and family).
Recent Accounting
Pronouncements
In May 2014, the
FASB issued Accounting Standards Update (“ASU”) No.
2014-09 —Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), which provides guidance for revenue
recognition. This ASU will supersede the revenue recognition
requirements in ASC Topic 605, and most industry specific guidance,
and replace it with a new Accounting Standards Codification
(“ASC”) Topic 606. The FASB has also issued several
subsequent ASUs which amend ASU 2014-09. The amendments do not
change the core principle of the guidance in ASC 606.
The core principle
of ASC 606 is that revenue is recognized when promised goods or
services are transferred to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. To achieve that core
principle, an entity should apply the following steps:
Step 1: Identify
the contract(s) with a customer
Step 2: Identify
the performance obligations in the contract.
Step 3: Determine
the transaction price.
Step 4: Allocate
the transaction price to the performance obligations in the
contract.
Step 5: Recognize
revenue when (or as) the entity satisfies a performance
obligation.
The guidance in ASU
2014-09 also specifies the accounting for some costs to obtain or
fulfill a contract with a customer.
ASC 606 will
require the Company to make significant judgments and estimates.
ASC 606 also requires more extensive disclosures regarding the
nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers.
Public business
entities are required to apply the guidance of ASC 606 to annual
reporting periods beginning after December 15, 2017 (2018 for the
Company), including interim reporting periods within that reporting
period. Accordingly, the Company will adopt ASU 606 in the first
quarter of 2018.
ASC 606 requires an
entity to apply ASC 606 using one of the following two transition
methods:
1.
Retrospective
approach: Retrospectively to each prior reporting period presented
and the entity may elect certain practical
expedients.
2.
Modified
retrospective approach: Retrospectively with the cumulative effect
of initially applying ASC 606 recognized at the date of initial
application. If an entity elects this transition method it also is
required to provide the additional disclosures in reporting periods
that include the date of initial application of (a) the amount by
which each financial statement line item is affected in the current
reporting period by the application ASU 606 as compared to the
guidance that was in effect before the change, and (b) an
explanation of the reasons for significant
changes.
The Company expects
that it will adopt ASC 606 following the modified retrospective
approach. The Company is currently evaluating the impact that the
adoption of this new guidance will have on our consolidated
financial statements.
In
November 2015, the FASB issued ASU 2015-17, Income
Taxes (Topic 740) regarding balance sheet classification of
deferred income taxes. ASU 2015-17 simplifies the presentation of
deferred taxes by requiring deferred tax assets and liabilities be
classified as noncurrent on the balance sheet. ASU
2015-17 is effective for public companies for annual reporting
periods beginning after December 15, 2016 (2017 for the
Company), and interim periods within those fiscal
years. The guidance may be adopted prospectively or
retrospectively and early adoption is permitted. The
Company does not believe that adoption of guidance in ASU 2015-17
will have a material impact on our financial position, or results
of operations or cash flows.
In February 2016,
the FASB issued ASU 2016-02, Leases (Topic 642) intended to improve
financial reporting about leasing transactions. The ASU
affects all companies and other organizations that lease assets
such as real estate, airplanes, and manufacturing
equipment. The ASU will require organizations that lease
assets—referred to as “lessees”—to
recognize on the balance sheet the assets and liabilities for the
rights and obligations created by those leases. Under
the new guidance, a lease will be required to recognize assets and
liabilities for leases with lease terms of more than 12
months. Consistent with current Generally Accepted
Accounting Principles (GAAP), the recognition, measurement, and
presentation of expenses and cash flows arising from a lease by a
lessee primarily will depend on its classification as a finance or
operating lease. However, unlike current
GAAP—which requires only capital leases to be recognized on
the balance sheet –the new ASU will require both types of
leases to be recognized on the balance sheet. The ASU
also will require disclosures to help investors and other financial
statement users better understand the amount, timing, and
uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements,
providing additional information about the amounts recorded in the
financial statements.
ASU 2016-02 will
take effect for public companies for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018 (2019 for the Company). For all other organizations
the ASU on leases will take effect for fiscal years beginning after
December 15, 2019, and for interim periods within fiscal years
beginning after December 15, 2020. Early application
will be permitted for all organizations. The company is currently
reviewing the impact that implementing this ASU will
have.
In August 2016, the
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments, which
addresses how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. The ASU will be
effective on a retrospective or modified retrospective basis for
annual reporting periods beginning after December 15, 2017 (2018
for the Company), and interim periods within those years, with
early adoption permitted. The Company does not believe adoption of
this new guidance will have a material affect on our consolidated
financial statements.
In October 2016,
the FASB issued ASU 2016-17 —Consolidation (Topic 810):
Interests Held through Related Parties That Are under Common
Control, The update amends the consolidation guidance on how
VIE’s should treat indirect interest in the entity held
through related parties. The ASU will be effective on a
retrospective or modified retrospective basis for annual reporting
periods beginning after December 15, 2016 (2017 for the Company),
and interim periods within those years, with early adoption
permitted. The Company does not believe adoption of this new
guidance will have a material affect on our consolidated financial
statements.
NOTE
4 — ACQUISITION OF DOLPHIN FILMS, INC.
On March 7, 2016,
the Company, DDM Merger Sub, Inc., a Florida corporation and a
direct wholly-owned subsidiary of the Company (“Merger
Subsidiary”), Dolphin Entertainment and Dolphin Films
completed their previously announced merger contemplated by the
Agreement and Plan of Merger, dated October 14, 2015 (the
“Merger Agreement”). Pursuant to the terms of the
Merger Agreement, Merger Subsidiary merged with and into Dolphin
Films (the “Merger”) with Dolphin Films surviving the
Merger. As a result of the Merger, the Company acquired Dolphin
Films. At the effective time of the Merger, each share of Dolphin
Films’ common stock, par value $1.00 per share, issued and
outstanding, was converted into the right to receive the
consideration for the Merger (the “Merger
Consideration”). The Company issued 2,300,000 shares of
Series B Convertible Preferred Stock, par value $0.10 per share,
and 1,000,000 shares of Series C Convertible Preferred Stock, par
value $0.001 per share to Dolphin Entertainment as the Merger
Consideration.
William
O’Dowd is the President, Chairman and Chief Executive Officer
of the Company and, as of March 4, 2016, was the beneficial owner
of 52.5% of the outstanding Common Stock. In addition,
Mr. O’Dowd is the founder, president and sole shareholder of
Dolphin Entertainment, which was the sole shareholder of Dolphin
Films. The Merger Consideration was determined as a result of
negotiations between Dolphin Entertainment and a special committee
of independent directors of the Board of Directors of the Company
(the “Special Committee”), with the assistance of
separate financial and legal advisors selected and retained by the
Special Committee. The Special Committee unanimously determined
that the Merger Agreement and the transactions contemplated
thereby, including the Merger, were fair to and in the best
interests of the shareholders of the Company other than Mr.
O’Dowd, and that it was advisable for the Company to enter
into the Merger Agreement. The Merger was consummated following the
approval and adoption of the Merger Agreement by the
Company’s shareholders.
The Company
retrospectively adjusted the historical financial results for all
periods to include Dolphin Films as required for transactions
between entities under common control. The following table presents
the Company’s previously reported Consolidated Balance Sheet,
retrospectively adjusted for the acquisition of Dolphin
Films:
|
As of
December 31, 2015 (unaudited)
|
||||
|
|
|
|
|
|
|
|
Dolphin
Digital Media, Inc.*
|
Dolphin
Films, Inc.
|
Acquisition
Adjustments
|
Consolidated
Balance Sheets as currently reported
|
|
ASSETS
|
|
|
|
|
|
Current
|
|
|
|
|
|
Cash
and cash equivalents
|
$2,259,504
|
$133,181
|
-
|
$2,392,685
|
|
Related
party receivable
|
-
|
453,529
|
-
|
453,529
|
|
Prepaid
Expenses
|
10,018
|
62,500
|
-
|
72,518
|
|
Receivables
and other current assets
|
560,112
|
2,267,019
|
-
|
2,827,131
|
|
Total
Current Assets
|
2,829,634
|
2,916,229
|
-
|
5,745,863
|
|
|
|
|
-
|
|
|
Capitalized
production costs
|
2,439
|
15,168,329
|
-
|
15,170,768
|
|
Property
and equipment
|
55,413
|
-
|
-
|
55,413
|
|
Deposits
|
41,291
|
355,778
|
-
|
397,069
|
|
Total
Assets
|
$2,928,777
|
$18,440,336
|
-
|
$21,369,113
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Current
|
|
|
|
|
|
Accounts
payable
|
$479,799
|
$1,590,746
|
-
|
$2,070,545
|
|
Other
current liabilities
|
2,669,456
|
314,864
|
-
|
2,984,320
|
|
Accrued
compensation
|
2,065,000
|
-
|
-
|
2,065,000
|
|
Debt
|
5,145,000
|
32,186,008
|
-
|
37,331,008
|
|
Loan
from related party
|
-
|
2,917,523
|
-
|
2,917,523
|
|
Deferred
revenue
|
-
|
1,418,368
|
-
|
1,418,368
|
|
Notes
payable
|
300,000
|
-
|
-
|
300,000
|
|
Total
Current Liabilities
|
10,659,255
|
38,427,509
|
-
|
49,086,764
|
|
Noncurrent
|
|
|
|
|
|
Convertible
note payable
|
3,164,000
|
-
|
-
|
3,164,000
|
|
Loan
from related party
|
1,982,267
|
-
|
-
|
1,982,267
|
|
Total
Noncurrent Liabilities
|
5,146,267
|
-
|
-
|
5,146,267
|
|
|
|
|
-
|
|
|
Total
Liabilities
|
15,805,522
|
38,427,509
|
-
|
54,233,031
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
Common
stock, $0.015 par value, 400,000,000 shares authorized, 4,094,618
issued and outstanding at December 31, 2015.
|
61,419
|
100
|
(100)
|
61,419
|
|
|
|
|
|
|
|
Preferred
stock, Series A. $0.001 par value, 10,000,000 shares authorized,
1,042,753 shares issued and outstanding, liquidation preference of
$1,042,753 at December 31, 2015.
|
1,043
|
-
|
-
|
1,043
|
|
|
|
|
|
|
|
Preferred
stock, Series B. $0.10 par value, 4,000,000 shares authorized,
3,300,000 shares issued and outstanding at December 31,
2015.
|
-
|
-
|
230,000
|
230,000
|
|
|
|
|
|
|
|
Preferred
stock, Series C. $0.001 par value, 1,000,000 shares authorized,
1,000,000 shares issued and outstanding at December 31,
2015.
|
-
|
-
|
1,000
|
1,000
|
|
|
|
|
|
|
|
Additional
paid in capital
|
26,711,140
|
-
|
(230,900)
|
26,480,240
|
|
Accumulated
deficit
|
(42,628,155)
|
(19,987,273)
|
-
|
(62,615,428)
|
|
Total
Dolphin Digital Media, Inc. Deficit
|
$(15,854,553)
|
$(19,987,173)
|
-
|
$(35,841,726)
|
|
Non-controlling
interest
|
2,977,808
|
-
|
-
|
2,977,808
|
|
Total
Stockholders' Deficit
|
$(12,876,745)
|
$(19,987,173)
|
-
|
$(32,863,918)
|
|
Total
Liabilities and Stockholders' Deficit
|
$2,928,777
|
$18,440,336
|
-
|
$21,369,113
|
|
*Previously
reported on Form 10-K filed with the SEC March 31,
2016
. |
|
|
|
|
The following table
presents the Company’s previously reported Consolidated
Statement of Operations, retrospectively adjusted for the
acquisition of Dolphin Films:
|
For the year ended December 31,
2015
|
||||
|
|
Dolphin Digital
Media, Inc.*
|
Dolphin Films,
Inc.
|
Pro Forma
Adjustments
|
Consolidated
Statement of Operations as currently reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Production
|
$2,929,518
|
$101,555
|
|
$3,031,073
|
|
Membership
|
69,761
|
-
|
|
69,761
|
|
Total
Revenue:
|
2,999,279
|
101,555
|
|
$3,100,834
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Direct
costs
|
2,290,645
|
296,612
|
|
2,587,257
|
|
Impairment of
deferred production costs
|
-
|
213,300
|
|
213.300
|
|
Selling, general
and administrative
|
2,478,794
|
341,772
|
(975,478)
|
1,845,088
|
|
Legal and
professional
|
-
|
1,417,078
|
975,478
|
2,392,556
|
|
Payroll
|
1,435,765
|
-
|
|
1,435,765
|
|
Loss before other
income (expense)
|
(3,205,925)
|
(2,167,207)
|
|
(5,373,132)
|
|
|
|
|
|
|
|
Other Income
(Expense):
|
|
|
|
|
|
Other
Income
|
96,302
|
-
|
|
96,302
|
|
Interest
expense
|
(940,398)
|
(2,619,134)
|
|
(3,559,532)
|
|
Net
Loss
|
(4,050,021)
|
(4,786,341)
|
|
(8,836,362)
|
|
|
|
|
|
|
|
Net income
attributable to noncontrolling interest
|
$17,440
|
$-
|
|
$17,440
|
|
Net loss
attributable to Dolphin Films, Inc.
|
-
|
(4,786,341)
|
|
(4,786,341)
|
|
Net loss
attributable to Dolphin Digital Media, Inc.
|
(4,067,461)
|
-
|
|
(4,067,461)
|
|
Net
loss
|
$(4,050,021)
|
$(4,786,341)
|
|
$(8,836,362)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
Loss per Share
|
$(0.99)
|
|
|
$(2.16)
|
|
|
|
|
|
|
|
Weighted average
number of shares used in share calculation
|
4,094,618
|
|
|
4,094,618
|
|
*Previously
reported on Form 10-K filed with the SEC March
31, 2016.
|
|
|
|
|
The following table
presents the Company’s previously reported Condensed
Consolidated Statement of Cash Flows, retrospectively adjusted for
the acquisition of Dolphin Films:
|
For
the year ended December 31, 2015
|
||||
|
|
Dolphin
Digital Media, Inc.*
|
Dolphin
Films, Inc.
|
Acquisition
Adjustments
|
Consolidated
Statement of Cash Flows (as currently reported)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
Loss
|
(4,050,021)
|
(4,786,341)
|
-
|
(8,836,362)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
-
|
|
|
Depreciation
|
24,826
|
-
|
-
|
24,826
|
|
Amortization
of capitalized production costs
|
1,642,120
|
30,000
|
-
|
1,672,120
|
|
Impairment
of capitalized production costs
|
648,525
|
213,300
|
-
|
861,825
|
|
Changes
in operating assets and liabilities:
|
|
|
|
-
|
|
Prepaid
expenses
|
(7,679)
|
-
|
-
|
(7,679)
|
|
Receivables
and other current assets
|
(115,069)
|
(150,547)
|
-
|
(265,616)
|
|
Capitalized
production costs
|
(1,599,558)
|
(1,136,763)
|
-
|
(2,736,321)
|
|
Accounts
Payable
|
239,063
|
545,766
|
-
|
784,829
|
|
Accrued
compensation
|
315,000
|
-
|
-
|
315,000
|
|
Other
current liabilities
|
1,121,876
|
-
|
-
|
1,121,876
|
|
Net
Cash Used in Investing Activities
|
(1,780,917)
|
(5,284,585)
|
|
(7,065,502)
|
|
CASH
FLOWS FROM INVESTING ACTIVITES:
|
|
|
|
|
|
Purchase
of property and equipment
|
(2,549)
|
-
|
-
|
(2,549)
|
|
Net
Cash Used in Investing Activities
|
(2,549)
|
-
|
|
(2,549)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds
from Loan and Security agreements
|
1,150,000
|
1,460,000
|
-
|
2,610,000
|
|
Repayment
of loan and security agreements
|
-
|
(405,219)
|
-
|
(405,219)
|
|
Proceeds
from production loan
|
-
|
440,130
|
-
|
440,130
|
|
Proceeds
from convertible note payable
|
3,164,000
|
-
|
-
|
3,164,000
|
|
Proceeds
from note payable with related party
|
2,797,500
|
3,785,936
|
-
|
6,583,436
|
|
Repayment
of note payable to related party
|
(3,267,000)
|
(57,686)
|
-
|
(3,324,686)
|
|
Net
Cash Provided By Financing Activities
|
3,844,500
|
5,223,161
|
-
|
9,067,661
|
|
NET
INCREASE (DECREASE) IN CASH
|
2,061,034
|
(61,424)
|
-
|
1,999,610
|
|
CASH,
BEGINNING OF PERIOD
|
198,470
|
194,605
|
-
|
393,075
|
|
CASH,
END OF PERIOD
|
2,259,504
|
133,181
|
-
|
2,392,685
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
Interest
Paid
|
234,777
|
1,401,037
|
|
1,635,814
|
|
SUPPLEMENTAL
DISCLOSURES OF NON CASH FLOW INFORMATION:
|
|
|
|
|
|
Refinance
of related party debt to third party debt
|
-
|
8,774,337
|
|
8,774,337
|
|
*Previously
reported on Form 10-K filed with the SEC March 31,
2016.
|
|
|
|
|
NOTE
5 — CAPITALIZED PRODUCTION COSTS 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 year ended
December 31, 2016, revenues earned from motion pictures were
$9,367,222 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. Revenues from
motion pictures for the year ended December 31, 2015 were $101,555
attributable to international sales of Believe. The
Company amortized capitalized production costs (included as direct
costs) in the consolidated statements of operations using the
individual film forecast computation method in the amount of
$7,822,550 and $30,000, respectively for the years ended
December 31, 2016 and 2015, related to these two motion
pictures. As of December 31, 2016 and 2015, the Company had a
balance of $4,189,930 and $14,893,329, respectively recorded as
capitalized production costs related to our motion
picture. As of December 31, 2016,the Company has amortized
all of the capitalized production costs related to Believe and 65% of the capitalized
production costs related to Max
Steel. The Company expects that approximately
85% of the capitalized production costs of Max Steel will be amortized over the
next two years.
ASC 926-20-35-12
states that “unamortized film costs shall 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”. Max
Steel did not perform as well as expected in the domestic
box office. Since the Company determined that
Max
Steel’s performance in the domestic box
office was an indicator that the capitalized production costs may
be impaired, it used a discounted cash flow model to help determine
the fair value of the capitalized production
costs. After careful analysis, the Company recorded an
impairment of $2,000,000 since it determined that the fair value of
the motion picture was lower than the balance of the capitalized
production costs.
The Company has
purchased scripts, including one from a related party, for other
motion picture productions and has deferred $215,000 and $275,000
in capitalized production costs as of December 31, 2016 and 2015
associated with these scripts. The Company intends to produce these
projects but they were not yet in production as of December 31,
2016.
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 and the distributor
will assist the Company in releasing its completed motion
picture. The Company recorded $213,300 in direct costs
and reduced the capitalized production costs by the same amount
during the year ended December 31, 2015 as there is no guarantee
the distributor will produce the motion picture.
Additionally, during the year ended December 31, 2016, the Company
decided that it would not extend its option to produce a script
that it had purchased. As a result, the Company recorded
$75,000 in direct costs and reduced the capitalized production
costs by the same amount during the year ended December 31,
2016. The Company did not have any other development
projects abandoned during the years ended December 31, 2016 and
2015.
As of December 31,
2016 and 2015, respectively, the Company has total capitalized
production costs of $4,654,013 and $15,168,329, net of accumulated
amortization, tax incentives and impairment charges, recorded on
its consolidated balance sheets related to motion
pictures.
Digital
During the year
ended December 31, 2016, the Company began production of a new
digital project showcasing favorite restaurants of NFL players
throughout the country. The Company entered into a co-production
agreement with an unrelated party and is responsible 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 project is still in
production, and as such, for the year ended December 31, 2016,
revenues earned from digital projects were
immaterial. For the year ended December 31, 2015, the
Company earned $2,929,518 from the release of the digital web
series, South
Beach-Fever.. The Company amortized capitalized
production costs (included as direct costs) in the consolidated
statements of operations using the individual film forecast
computation method in the amount of $2,439 and $1,642,120 for the
years ended December 31, 2016 and 2015.
In previous years,
the Company entered into agreements to hire writers to develop
scripts for other digital web series
productions. Management evaluated the scripts and based
on guidance in ASC 926-20-40-1 impaired $648,525 of capitalized
production costs during the year ended December 31, 2015, as the
scripts were more than three years old and the Company had not
begun production on the projects.
As of December 31, 2016 and 2015,
respectively, the Company has total capitalized production costs of
$249,083 and $2,439, net of accumulated amortization, tax
incentives and impairment charges, recorded on its consolidated
balance sheet related to web series.
The Company has
assessed events 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 capitalized 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 its 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, and the Company had a
balance of $3,668,646 in accounts receivable related to these
contracts.
Other Current Assets
The Company had a
balance of $2,665,781 and $2,827,131 in other current assets on its
consolidated balance sheets as of December 31, 2016 and 2015,
respectively. As of December 31, 2016, these amounts were primarily
comprised of tax incentive receivables and prepaid loan interest.
For the year ended December 31, 2015, the amount was primarily
comprised of tax incentive receivables, loan receivable, prepaid
expenses and advertising revenue.
Tax Incentives -The Company has
access to government programs that are designed to promote film
production in the jurisdiction. As of December 31, 2016 and 2015,
the Company recorded $2,060,883 and $1,854,066 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. During the year ended December 31, 2015,
the Company received $131, 807, net of discount and financing fees,
related to these incentives. The remaining tax incentives were
collected subsequent to December 31, 2016.
Prepaid Interest – The
Company entered into a loan and security agreement to finance the
distribution and marketing costs of a motion picture and prepaid
interest related to the agreement. As of December 31, 2016, there
was $602,697 of prepaid interest recorded.
Loan Receivable – During
the year ended December 31, 2015, Dolphin Films entered into a Loan
and Security agreement, with an existing investor, for $500,000
that was paid, net of interest, in January of 2016.
Prepaid Expenses – As of
December 31, 2015, the Company prepaid $62,500 for consulting fees
for the first quarter of 2016.
Advertising Revenue
Receivable –
During the year ended December 31, 2015, the Company released a web
series on Hulu. As of December 31, 2015, it recorded
$569,772 of advertising receivables related to this
project. The receivable was collected in
2016.
NOTE
6 — DEBT
Kids Club Agreements
During February
2011, the Company entered into two agreements with individual
parties (each a “Kids Club Agreement”) for the
development of a child fan club for the promotion of a local
university and its collegiate athletic program (the “Group
Kids Club”). Under each Kids Club Agreement, each party paid
the Company $50,000 in return for the participation of future
revenue generated by the Group Kids Club. Pursuant to the terms of
each of the Kids Club Agreements, the amount invested by the
individual investor was to be repaid by the Group Kids Club, with a
specified percentage of the Group Kids Club’s net receipts,
until the total investment was recouped. Each individual party was
to recoup its investment with a percentage of net revenue based
upon a fraction, the numerator of which was the amount invested
($50,000), and the denominator of which was $500,000 (the
“Investment Ratio”). Thereafter, each individual party
was to share in a percentage of the net revenue of the Group Kids
Club, in an amount equal to one half of the Investment Ratio. The
Company had made aggregate payments of $45,000 under one of the two
Kids Clubs Agreements. During the year ended December 31, 2016, the
Company agreed to terminate such Kids Club Agreement with one of
the parties for (i) $10,000, plus (ii) the balance of the original
investment ($5,000). The Company paid such individual party $15,000
on July 18, 2016 in full settlement of the Company’s
obligations under such Kids Club Agreement, and the Kids Club
Agreement for such party was terminated. On October 3, 2016, the
Company entered into a debt exchange agreement with the remaining
party whereby The Company agreed to issue 12,000 shares of Common
Stock at an exchange price of $5.00 per share to in exchange
for (i) $10,000 plus (ii) the remaining party’s
original investment of $50,000 to terminate the Kids Club
Agreement.
For the years ended
December 31, 2016 and 2015, there were no significant
revenues generated or costs incurred related to the Group Kids
Club. The Company balance of debt related to the Kids
Club Agreements as of December 31, 2016 and 2015 was $0 and
$100,000, respectively.
Equity Finance Agreements
During the years
ended December 31, 2012 and 2011, the Company entered into Equity
Finance Agreements (the “Equity Finance Agreements”)
for the future production of web series and the option to
participate in the production of future web series. The investors
contributed a total investment of $1,000,000 and had the ability to
share in the future revenues of the relevant web series, on a
prorata basis, until the total 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, the Company could utilize all, or any portion, of the total
investment to fund any chosen production. Per the Equity Finance
Agreements, the Company was entitled to a producer’s fee, not
to exceed $250,000, for each web series that it produced before
calculating the share of revenues owed to the investors. The
Company invested these funds in eleven projects. On January 1,
2013, the “production cycle”, as defined in
the Equity Finance Agreements, ceased and the
investors were entitled to share in the future revenues of any
productions for which the funds invested were used. Based on the
producer’s gross revenues, (as defined in the Equity Finance
Agreements) for the productions to date and the amount of investor
funds used to date, the Company was not required to pay the
investors any amount in excess of the existing liability already
recorded as of December 31, 2016 and 2015. Two of the productions
were completed as of December 31, 2016 and there was no producer
gross revenue as defined in the Equity Finance Agreements for each
of the years ended December 31, 2016 and 2015 related to those two
productions The costs of the other nine projects was impaired and
no future projects are planned with funds from the Equity Finance
Agreements. As a result, the investors did not recoup any of their
investment.
On June 23, 2016,
the Company entered into a settlement agreement (the
“Settlement”) with one of the Equity Finance Agreement
investors that had originally contributed $105,000. Pursuant to the
terms of the Settlement, the Company made a payment of $200,000 to
the investor on June 24, 2016 resulting in a loss on extinguishment
of debt of $95,000 recorded in the consolidated statement of
operations for the year ended December 31, 2016. On October 3,
13 and 27, 2016, the Company
entered into debt exchange agreements with three Equity Finance
Agreement three investors to
issue an aggregate total of 66,200 shares of Common Stock at an
exchange price of $5.00 per share to terminate each of their Equity
Finance Agreements for a cumulative original investment amount of
$331,000. On the date of the
conversions the market price of the Common Stock was between $6.25
and $6.75 and as a result, the Company recorded a loss on
extinguishment of debt of $112,025, related to these three
agreements, on its consolidated statement of operations. On
December 29, 2016, the Company entered into a termination agreement
whereby the Company agreed to issue Warrant “K” to
another investor that entitles the warrant holder to purchase
170,000 shares of Common Stock at an exercise price of $0.015 per
share in return for terminating its Equity Finance Agreement. As a
result, the Company recorded a loss on extinguishment of debt of
$538,685 on the consolidated statement of operations for the year
ended December 31, 2016 based on the difference between the fair
value of the Warrant “K” and the carrying amount of the
balance owed to the investor under the Equity Finance Agreement on
the date the Equity Finance Agreement was terminated. The Company
balance of debt related to the Equity Finance Agreements as of
December 31, 2016 and 2015 was $0 and $1,000,000,
respectively.
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, will 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 is 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 $5.00 per
share and issued 2,630,298 shares of Common Stock. On May 31, 2016,
the market price of a share of Common Stock was $6.99 and on June
30, 2016 it was $6.08. As a result, the Company recorded losses on
the extinguishment of debt on its consolidated statement of
operations of $3,328,366 for the year ended December 31, 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 the noteholder under each of the 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 $0.015 per share in settlement of $1,160,000 of debt from
the note under the First Loan and Security
Agreement. See Note 16 for further discussion of
Warrant “J”.
During the years
ended December 31, 2016 and 2015, the Company expensed $518,767 and
$$1,238,234, respectively in interest related to the First Loan and
Security Agreements. As of December 31, 2016 and 2015, the Company
had $0 and $9,334,303, respectively of outstanding debt related to
the First Loan and Security Agreements and $0 and $602,661,
respectively of accrued interest recorded in other current
liabilities on the Company’s 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 First Loan and
Security 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.
On March 29, 2016
and June 30, 2016, the Company entered into eleven 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 $2,650,000 of principal and
$289,017 of accrued interest under the Web Series Loan and Security
Agreements into an aggregate of 587,804 shares of Common Stock at
an exchange price of $5.00 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. On December 15 and December 20, 2016, the Company entered
into substantially identical Subscription Agreements with two Web
Series Noteholders to convert $1,265,530 of principal and interest
into an aggregate of 253,106 shares of Common Stock at an exchange
price of $5.00 per share as payment in full of each of the notes
issued under the Web Series Loan and Security Agreements.
The Company recorded a loss on
extinguishment of debt of $1,489,582 on its consolidated statement
of operations related to the Web Series Loan and Security
Agreements due to the following market prices per share on the
dates of the exchanges (i) $6.00 per share for 576,676 shares
issued, (ii) $6.08 for 11,128 shares issued, (iii) $6.10 for
253,934 shares issued and (iv) $6.45 for 32,273 shares issued,
which were in excess of the $5.00 per share exchange prices.
On December 29, 2016, as part of a global settlement agreement with
another investor that was the Noteholder 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 $0.015 per share in settlement of $340,000 of debt from
the Web Series Loan and Security Agreement. See Note 16 for further
discussion of Warrant “J”.
During the years
ended December 31, 2016 and 2015, the Company recorded expense of
$31,487 and $388,320 respectively, in interest related to the Web
Series Loan and Security Agreements. As of December 31, 2016 and
2015, respectively, the Company had outstanding balances of $0 and
$4,090,000, respectively of principal and $0 and $173,211,
respectively, of accrued interest recorded on the Company’s
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 Dolphin Entertainment, Inc., 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, will receive the Company’s entire share of the
proceeds from the related group of film projects, on a prorata
basis, until the principal balance is 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, 2016 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
$4,003,337 of principal and $341,013 of 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
$5.00 per share and issued 868,870 shares of Common
Stock. On May 31, 2016, the market price of a share of
the Common Stock was $6.99 and on June 30, 2016, it was $6.08. As a
result, the Company recorded a loss on the extinguishment of debt
of $1,312,059 on its consolidated statement of operations for the
year ended December 31, 2016, due to the difference between the
exchange price and the market price of the Common Stock on the
dates of exchange. On June 22, 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 the 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 $0.015 per share in
settlement of $4,970,990 of debt from the note under the Second
Loan and Security Agreement. See Note 16 for further
discussion of Warrant “J”.
During the years
ended December 31, 2016 and 2015, the Company recorded interest
expense of $715,934 and $634,923, respectively, related
to the Second Loan and Security Agreements.
As of
December 31, 2016 and 2015, the Company had $0 and
$9,334,303, respectively, of outstanding debt related to the Second
Loan and Security Agreements and $0 and $228,040, respectively of
accrued interest recorded in other current liabilities on the
Company’s 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. The Company does not
purport the arrangements to be a sale and the Company has
significant continuing involvement in the generation of cash flows
due to the noteholders.
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
film, 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
$1,147,520 and $381,566, respectively, as of December 31, 2016 and
2015 in other current liabilities on the Company’s
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.
During the year
ended December 31, 2016, the motion picture, Max Steel, was released in the US and
delivered to the international
distributors. International distributors made payments
totaling $3,493,105 and $675,507 of Canadian tax incentives were
received for an aggregate of $4,168,612 applied to the balance of
the Production Service Agreement debt. As of December
31, 2016 and 2015 the Company had outstanding balances of
$6,243,069 and $10,411,681, respectively, related to this debt on
its consolidated statement of operations.
Loan and Security Agreement – (Prints and Advertising
Loan)
On August 12, 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 $14,500,000 non-revolving credit facility that
matures on August 25, 2017. The proceeds of the credit facility
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 Loan and Security Agreement, the Company has
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 consolidated balance sheet as of December
31, 2016, and rights to the assets of Max Steel Holdings, but
without recourse to the assets of the Company. The loan is also
partially secured by a $4,500,000 corporate guaranty from a party
associated with the film. The lender has retained a
reserve of $1,531,871 for loan fees and interest (the
“Reserve”). Amounts borrowed under the
credit facility will accrue interest at either (i) a fluctuating
per annum rate equal to the 5.5% plus a base rate or (ii) a per
annum rate equal to 6.5% plus the LIBOR determined for the
applicable interest period. As of December 31, 2016, the Company
had an outstanding balance of $12,500,000, including the Reserve,
related to this agreement recorded on the consolidated balance
sheet as of December 31, 2016. The Company recorded
$10,168,129 in distribution and marketing costs related to the
release of the feature film on the consolidated statement of
operations for the year ended December 31, 2016.
NOTE
7 — 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, bears interest on the unpaid
balance at a rate of 10% per annum, becomes due and payable on
December 7, 2016 and may be prepaid, without penalty, at any time.
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 has the right, at
its option, to convert some or all of the convertible note into
Common Stock. The convertible note has a conversion price of $5.00
per share. The outstanding principal amount and all accrued
interest are 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.
On February 5,
2016, a triggering event occurred pursuant to the convertible note
agreement. As such 632,800 shares of Common Stock were issued in
satisfaction of the convertible note payable. As of December 31,
2016 and 2015, the Company recorded $0 and $3,164,000 as
convertible note and accrued $0 and $21,671 of interest in other
current liabilities in its consolidated balance sheets. The Company
expensed $31,207 of interest, incurred prior to its conversion,
during the year ended December 31, 2016.
NOTE
8 — NOTES PAYABLE
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 payments were made on
the note during the years ended December 31, 2016 and 2015. The
Company recorded accrued interest of $134,794 and $104,712 as of
December 31, 2016 and 2015, respectively related to this note. As
of December 31, 2016 and 2015, the Company had a balance of
$300,000 on its consolidated balance sheets related to this note
payable.
The Company
expensed $30,082 and $30,000, respectively for the years ended
December 31, 2016 and 2015, respectively for interest related to
this note.
NOTE 9 — LOANS FROM RELATED PARTY
On December 31,
2011, the Company issued an unsecured revolving promissory note
(the “DE Note”) to Dolphin Entertainment
(“DE”), an entity wholly owned by the Company's CEO
that, at December 31, 2016 and December 31, 2015, had outstanding
balances of $0 and $1,982,267, respectively. The DE Note accrued
interest at a rate of 10% per annum. Dolphin Entertainment had the
right at any time to demand that all outstanding principal and
accrued interest be repaid with a ten day notice to the Company.
During the year ended December 31, 2015, DE loaned the Company
$2,797,000 and was repaid $3,267,000 in principal. During the year
ended December 31, 2016, DE advanced the Company $270,000. On March
4, 2016, the Company entered into a subscription agreement (the
“Subscription Agreement”) with DE. Pursuant to the
terms of the Subscription Agreement, the Company and DE agreed to
convert the $3,073,410 aggregate amount of principal and interest
outstanding under the DE Note into 614,682 shares of Common Stock.
The shares were converted at a price of $5.00 per share. On the
date of the conversion that market price of the shares was $6.00
and as a result the Company recorded a loss on the extinguishment
of the debt of $614,682 on the consolidated statement of operations
for the year ended December 31, 2016. During the year ended
December 31, 2016 and 2015 $32,008 and $340,050 was expensed in
interest, respectively and the Company recorded accrued interest of
$5,788 and $1,126, related to the DE Note, on its consolidated
balance sheet as of December 31, 2016 and 2015,
respectively.
In addition, DE 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’s debtholders, pursuant to which the debtholders exchanged
their DE notes for notes issued by Dolphin Films totaling
$8,774,327. See Note 6 for more details. The amount of debt assumed
by Dolphin Films was applied against amounts owed to Dolphin
Entertainment by Dolphin Films. On October 1, 2016, Dolphin Films
entered into a promissory note with DE (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. As of December 31, 2016 and 2015,
Dolphin Films owed DE $434,326 and $2,917,523, respectively, that
was recorded on the condensed consolidated balance sheets. Dolphin
Films recorded interest expense of $83,551 and $148,805,
respectively for the years ended December 31, 2016 and
2015.
NOTE
10—FAIR VALUE MEASUREMENTS
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 16), for
which a liability is recorded in the aggregate and measured at fair
value in the consolidated balance sheets on a recurring basis, and
the change in fair value from one reporting period to the next is
reported as income or expense in the consolidated statements of
operations.
The Company records
the fair value of the liability in the consolidated balance sheets
under the caption “Warrant liability” and records
changes to the liability against earnings or loss under the caption
“Changes in fair value of warrant liability” in the
consolidated statements of operations. The carrying
amount at fair value of the aggregate liability for the Warrants
recorded on the consolidated balance sheet at December 31, 2016 is
$20,405,190, and due to the decrease in the fair value of the
Warrant Liability for the period in which the Warrants were
outstanding during the year, the Company recorded a gain on the
warrant liability of $2,195,542 in the consolidated statement of
operations for the year ended December 31, 2016. There
were no assets or liabilities carried at fair value on a recurring
basis at December 31, 2015 or for the year then ended.
The Warrants have
the following terms:
|
|
|
Issuance
Date
|
Number of Common
Shares
|
Initial Per Share
Exercise Price
|
Initial Term
(Years)
|
Expiration
Date
|
|
Series
G Warrants
|
|
November 4,
2016
|
1,500,000
|
$5.00
|
1.2
|
January 31,
2018
|
|
Series
H Warrants
|
|
November 4,
2016
|
500,000
|
$6.00
|
2.2
|
January 31,
2019
|
|
Series
I Warrants
|
|
November 4,
2016
|
500,000
|
$7.00
|
3.2
|
January 31,
2020
|
|
Series
J Warrants
|
|
December 29,
2016
|
2,170,000
|
$.015
|
4
|
December 29,
2020
|
|
Series
K Warrants
|
|
December 29,
2016
|
170,000
|
$.015
|
4
|
December 29,
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’s
management determined the fair value of the warrant liability as of
December 31, 2016 by using a Monte Carlo simulation model with the
following key inputs:
|
|
As of December 31,
2016
|
||||
|
Inputs
|
Series
G
|
Series
H
|
Series
I
|
Series
J
|
Series
K
|
|
Volatility
(1)
|
63.6%
|
79.1%
|
70.8%
|
65.8%
|
65.8%
|
|
Expected term
(years)
|
1.08
|
2.08
|
3.08
|
4
|
4
|
|
Risk free interest
rate
|
.879%
|
1.223%
|
1.489%
|
1.699%
|
1.699%
|
|
Common stock
price
|
$6.00
|
$6.00
|
$6.00
|
$6.00
|
$6.00
|
|
Exercise
price
|
$5.00
|
$6.00
|
$7.00
|
$.02
|
$.02
|
(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.
Other financial
instruments such as cash, accounts receivable, debt, notes and
related party notes approximate their fair value due to their short
term nature or being due on demand.
NOTE
11 — LICENSING AGREEMENTS - RELATED PARTY
The
Company has entered into a ten year licensing agreement with
Dolphin Entertainment, a related party. Under the license, the
Company is authorized to use Dolphin Entertainment’s brand
properties in connection with the creation, promotion and operation
of subscription based Internet social networking websites for
children and young adults. The license requires that the Company
pays to Dolphin Entertainment, Inc. royalties at the rate of
fifteen percent of net sales from performance of the licensed
activities. The Company did not use any of the brand properties
related to this agreement and as such, there was no royalty expense
for the years ended December 31, 2016 and 2015.
NOTE
12 — DEFERRED REVENUE
During the year
ended December 31, 2014, 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 consolidated balance sheet. During the
year ended December 31, 2016, the Company delivered the
motion picture to various international distributors and recorded
$1,371,687 of revenue from production from these
deposits. As of December 31, 2016 and 2015, the Company
recorded $46,681 and $1,418,368 as deferred revenue on its
consolidated balance sheets.
NOTE
13 – VARIABLE INTEREST ENTITIES
VIEs are entities
that, by design, either (1) lack sufficient equity to permit the
entity to finance its activities without additional subordinated
financial support from other parties, or (2) have equity investors
that do not have the ability to make significant decisions relating
to the 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 December 31, 2016
and 2015, and in the statements of operations and statements of
cash flows presented herein for the years ended December 31, 2016
and 2015. These entities were previously under common control and
have been accounted for at historical costs for all periods
presented.
|
|
Max Steel
Productions LLC
As of and for the
years ended December 31,
|
JB Believe
LLC
As of and for the
years ended December 31,
|
||
|
(in
USD)
|
2016
|
2015
|
2016
|
2015
|
|
Assets
|
12,327,887
|
18,295,633
|
240,269
|
143,549
|
|
Liabilities
|
(15,922,552)
|
(19,113,335)
|
(7,014,098)
|
(6,655,335)
|
|
Revenues
|
9,233,520
|
-
|
133,331
|
101,555
|
|
Expenses
|
(11,627,444)
|
(677,339)
|
(395,374)
|
(398,959)
|
NOTE
14 — STOCKHOLDERS’ DEFICIT
A) Preferred
Stock
The Company’s
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 October 14,
2015, the Company amended its Articles of Incorporation to
designate 4,000,000 preferred shares, as “Series B
Convertible Preferred Stock” with a $0.10 par value. Each
share of Series B Convertible Preferred Stock is convertible, at
the holders request, into 0.95 shares of Common
Stock. Holders of Series B Convertible Preferred Stock
do not have any voting rights.
On October 16,
2015, the Company and T Squared Partners LP ("T Squared") entered
into a Preferred Stock Exchange Agreement whereby 1,042,753 shares
of Series A Convertible Preferred Stock were to be exchanged for
1,000,000 shares of Series B Convertible Preferred Stock upon
satisfaction of certain conditions. On March 7, 2016, all
conditions were satisfied and, pursuant to the Preferred Stock
Exchange Agreement, the Company issued to T Squared Partners LP
1,000,000 shares of Series B Convertible Preferred Stock. The
Company retired the 1,042,753 shares of Series A Convertible
Preferred Stock it received in the exchange. The Company recorded a
preferred stock dividend in additional paid in capital of
$5,227,247 related to this exchange. On November 14, 2016, T
Squared notified the Company that it would convert 1,000,000 shares
of Series B Preferred Stock into 950,000 shares of the Common Stock
effective November 16, 2016.
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”. An Eligible Class C Preferred Stock
Holder means any of (i) Dolphin Entertainment for so long as Mr.
O’Dowd continues to beneficially own at least 90% of Dolphin
Entertainment and serves on the board of directors or other
governing body of Dolphin Entertainment, (ii) any other entity in
which Mr. O’Dowd beneficially owns more than 90%, or a trust
for the benefit of others but for which Mr. O’Dowd serves as
trustee and (iii) Mr. O’Dowd individually. The certificate of
designation of the Series C Convertible Preferred Stock (the
“Certificate of Designation”) provides that each share
of Series C Convertible Preferred Stock is convertible into one
share of Common Stock. Until the fifth anniversary of the date of
the issuance, the Series C Convertible Preferred Stock has certain
anti-dilution protections as provided in the Certificate of
Designation. Specifically, the number of shares of Common Stock
into which the Series C Convertible Preferred Stock may convert
(the “Conversion Number”) will be adjusted for each
future issuance of Common Stock (but not upon issuance of Common
Stock equivalents) (i) upon the conversion or exercise of any
instrument currently or hereafter issued (but not upon the
conversion of the Series C Convertible Preferred Stock), (ii) upon
the exchange of debt for shares of Common Stock, or (iii) in a
private placement, such that the total number of shares of Common
Stock held by an “Eligible Series C Preferred Holder”
(based on the number of shares of Common Stock held as of the date
of issuance) will be preserved at the same percentage of shares of
Common Stock outstanding at the time by the holder, which is
approximately 53% of the shares of Common Stock outstanding at
December 31, 2016. The shares of Series C Convertible Preferred
Stock will automatically convert into the number of shares of
Common Stock equal to the Conversion Number in effect at that time
(“Conversion Shares”) upon the occurrence of any of the
following events: (i) upon transfer, by current holder, of the
Series C Convertible Preferred Stock to any holder other than an
Eligible Class C Preferred Stock Holder, (ii) if the aggregate
number of shares of Common Stock plus Conversion Shares (issuable
upon conversion of each share of Series B Convertible Preferred
Stock and the Series C Convertible Preferred Stock) held by the
Eligible Class C Preferred Stock Holders in the aggregate
constitutes 10% or less of the sum of (x) the outstanding shares of
Common Stock plus (y) all Conversion Shares held by the Eligible
Class C Preferred Stock Holders and (iii) at such time as the
holder of Series C Convertible Preferred Stock ceases to be an
Eligible Class C Preferred Stock Holder. Series C Convertible
Preferred Stock will only be convertible by the holder upon the
Company satisfying certain “optional conversion
thresholds” as provided in the Certificate of Designation.
The Certificate of Designation also provides for a liquidation
value of $0.001 per share. The holders of Series C Convertible
Preferred Stock and Common Stock will vote together as a single
class on all matters upon which the Common Stock is entitled to
vote, except as otherwise required by law. The holders of Series C
Convertible Preferred Stock will be entitled to three votes for
each share of Common Stock into which such holders’ shares of
Series C Convertible Preferred Stock could then be converted. The
Certificate of Designation also provides for dividend rights of the
Series C Convertible Preferred Stock on parity with the
Company’s Common Stock.
On March 7, 2016,
as the Merger Consideration related to the Company’s merger
with Dolphin Films (see Note 4 for further discussion), Dolphin
Entertainment was issued 2,300,000 shares of Series B Convertible
Preferred Stock and 1,000,000 shares of Series C Convertible
Preferred Stock. On November 15, 2016, Mr. O’Dowd converted
2,300,000 shares of Series B Convertible Preferred Stock into
2,185,000 shares of the Company’s Common Stock.
As of December 31,
2016, the Company did not have any Series B Convertible Preferred
Stock outstanding and 1,000,000 shares of Series C
Convertible Preferred Stock issued and outstanding. As
of December 31, 2015, the Company had 1,042,753 shares of Series A
Convertible Preferred Stock issued and outstanding.
B) Common
Stock
The Company’s
Articles of Incorporation previously authorized the issuance of
200,000,000 shares of Common Stock. 10,000,000 shares have been
designated for an Employee Incentive Plan. As of December 31, 2016
and 2015, no awards have been issued in connection with this
plan. On February 23, 2016, the Company filed Articles
of Amendment to the Amended Articles of Incorporation with the
Secretary of State of the State of Florida to increase the number
of authorized shares of its Common Stock from 200,000,000 to
400,000,000.
On February 5,
2016, the Company issued 632,800 shares of Common Stock, at a
post-split price of $5.00 per share, in connection with the
conversion of the debt per the terms of the convertible debt
agreement entered into on December 7, 2015. See Note 7 for further
discussion.
On March 4, 2016,
the Company issued 614,682 shares of Common Stock in connection
with a subscription agreement entered into with Dolphin
Entertainment for debt and interest on its revolving promissory
note. The debt was converted at a post-split price of $5.00 per
share. See Note 9 for further discussion.
On March 29, 2016,
the Company entered into ten debt exchange agreements to convert
$2,883,377 of aggregate principal and accrued interest under
certain loan and security agreements into 576,676 shares of Common
Stock at a post-split conversion price of $5.00 per share. See Note
6 for further discussion.
On April 1, 2016,
the Company entered into subscription agreements under
substantially identical terms with certain private investors (the
“Quarterly Investors”), pursuant to which the Company
issued and sold to the Quarterly Investors in a private placement
(the “Quarterly Placement”) an aggregate of 1,075,000
shares (the “Initial Subscribed Shares”) of Common
Stock (on a post-split basis), at a post-split purchase price of
$5.00 per Share (the “Quarterly Purchase Price”). The
Quarterly Placement initially provided $5,375,000 of aggregate
gross proceeds to the Company. Under the terms of the Agreements,
each Quarterly Investor has the option to purchase additional
shares of Common Stock at the Quarterly Purchase Price, not to
exceed the number of such Quarterly Investor’s Initial
Subscribed Shares, during each of the second, third and fourth
quarters of 2016 (each, a “Quarterly Subscription”). To
exercise a Quarterly Subscription, a Quarterly Investor must
deliver notice to the Company of such election during the first ten
business days of the applicable quarter, specifying the number of
additional shares of Common Stock such Quarterly Investor elects to
purchase. If a Quarterly Investor timely delivers such notice to
the Company, then the closing of the sale of the applicable number
of additional shares of Common Stock must occur on the last
business day of the applicable quarter. On June 28, 2016, the
Company received $500,000 and issued 100,000 shares of Common Stock
related to these agreements. On October 13, 2016, the Company
received $600,000 and issued 120,000 shares of Common Stock related
to these agreements.
On May 9, 2016, the
Company filed Articles of Amendment to its Amended Articles of
Incorporation to effectuate a 1 to 20 reverse stock split, as
previously approved by the Company’s Board of Directors and a
majority of its shareholders. The reverse stock split became
effective on May 10, 2016. All shares and per share amounts in the
Consolidated Financial Statements have been retrospectively
adjusted for the reverse stock split.
On May 31, 2016,
the Company entered into debt exchange agreements under
substantially identical terms with certain investors, pursuant to
which the Company issued and sold to such investors in a private
placement an aggregate of 946,509 shares of Common Stock, in
exchange for the cancellation of $4,732,545 of aggregate principal and
accrued interest under certain notes held by such investors, at an
exchange rate of $5.00 per share. See Note 6 for further
discussion.
On June 22, 2016,
the Company entered into a subscription agreement with an investor,
pursuant to which the Company issued and sold to such investor
50,000 shares of Common Stock at a price of $5.00 per Share. This
transaction provided $250,000 in proceeds for the
Company.
On June 30, 2016,
the Company entered into a subscription agreement with an investor,
pursuant to which the Company issued and sold to such investor
20,000 shares of Common Stock at a price of $5.00 per Share. This
transaction provided $100,000 in proceeds for the
Company.
On June 30, 2016,
the Company, entered into debt exchange agreements under
substantially identical terms with certain investors pursuant to
which the Company issued and sold to such investors in a private
placement an aggregate of 2,552,659 shares of Common Stock, in
exchange for the cancellation of $12,763,295 of aggregate principal
and accrued interest under certain notes held by such investors, at
an exchange rate of $5.00 per share. See Note 6 for further
discussion.
On June 30, 2016,
the Company entered into a substantially identical debt exchange
agreement as those entered into on March 29, 2016. Pursuant to the
terms of the debt exchange agreement, the Company converted an
aggregate of $55,640 principal and interest into 11,128 shares of
Common Stock at a conversion price of $5.00 per share. See Note 6
for further discussion.
On October 3, 2016,
October 13, 2016 and October 27, 2016, the Company entered into
three substantially identical debt exchange agreements to issue an
aggregate of 66,200 shares of Common Stock at an exchange price of
$5.00 per share to terminate three Equity Finance Agreements for a
cumulative original investment amount of $331,000.
On October 3, 2016,
the Company entered into a debt exchange agreement and agreed to
issue 12,000 shares of the Common Stock at an exchange price of
$5.00 per share to terminate the remaining Kids Club Agreement for
(i) $10,000 plus (ii) the original investment of
$50,000.
On October 13,
2016, the Company entered into six substantially identical
subscription agreements, pursuant to which the Company issued
25,000 shares at $5.00 per share and received
$125,000.
On November 15,
2016, the Company entered into a subscription agreement pursuant to
which the Company issued and sold to an investor 100,000 shares of
Common Stock at a price of $5.00 per Share. This transaction
provided $500,000 in proceeds for the Company.
On November 16,
2016, the Company entered into five subscription agreements
pursuant to which the Company issued and sold to three investors
25,000 shares of Common Stock at a price of $5.00 per Share. This
transaction provided $125,000 in proceeds for the
Company.
On November 22,
2016, the Company entered into a subscription agreement pursuant to
which the Company issued and sold to an investor 10,000 shares of
Common Stock at a price of $5.00 per Share. This transaction
provided $50,000 in proceeds for the Company.
On December 15 and
December 20, 2016, the Company entered into two substantially
identical subscription agreements with two noteholders to convert
an aggregate of $1,265,530 principal and interest on the notes into
253,106 shares of Common Stock at a conversion price of $5.00 per
share. See Note 6 for further discussion.
As of December 31,
2016 and 2015, the Company had 14,395,521 and 4,094,618 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 during 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 is a “gross revenue agreement” and the
Company will be responsible for paying all associated operating
expenses. On December 29, 2016, as part of a global agreement with
the 25% member of Dolphin Kids Clubs, the Company entered into a
Purchase Agreement and acquired the 25% noncontrolling interest of
Dolphin Kids Clubs. In exchange for the 25% interest,
the Company issued Warrant “J” that entitles the
warrant holder to purchase shares of common stock at a price of
$0.015 per share. At the time of the agreement, the
balance of the noncontrolling interest was
$2,970,708. The Company recorded to Additional Paid in
Capital $921,123 for the difference between the fair value of the
warrants and the balance of the noncontrolling interest on the
consolidated balance sheet on the date of the
agreement. See Note 16 for further discussion of Warrant
“J”.
In accordance with
ASC 810-20, Consolidation –
Control of Partnerships and Similar Entities Dolphin Kids
Clubs is consolidated in the Company’s financial statements.
Amounts attributable to the noncontrolling interest will follow the
provisions in the contractual arrangement. As of December 31, 2015,
noncontrolling interest of $2,977,808 is presented as a separate
component of shareholders’ equity on the consolidated balance
sheet.
NOTE
15 — LOSS PER SHARE
Net loss per share
is computed by dividing income available to holders of Common Stock
(the numerator) by the weighted-average number of Common Stock
outstanding (the denominator) for the period. Diluted earnings per
share assumes that any dilutive convertible securities outstanding
were converted, with related preferred stock dilution requirements
and outstanding Common Stock adjusted accordingly. 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 would be anti-dilutive. The Company included the
preferred stock dividend of $5,227,247 in the calculation of loss
per share for the year ended December 31, 2016, as the loss for
holders of Common Stock would be increased by that amount. Due to
the net losses reported the following were excluded from the
computation of diluted loss per share (i) dilutive common
equivalent shares as of December 31, 2015, (ii) 5,890,000 and
1,050,000 of warrants as of December 31, 2016 and 2015,
respectively and (iii) convertible debt as of December 31, 2015.
These were excluded from the computation of diluted loss per share,
as inclusion would be anti-dilutive for the periods
presented.
NOTE
16 — WARRANTS
A summary of
warrants outstanding at December 31, 2015 and issued, exercised and
expired during the year ended December 31, 2016 is as follows
(amounts have been adjusted to reflect the reverse stock
split):
|
|
|
Weighted
|
|
|
|
Avg.
|
|
|
|
Exercise
|
|
Warrants:
|
Shares
|
Price
|
|
Balance at December
31, 2015
|
1,050,000
|
$3.45
|
|
Issued
|
4,840,000
|
2.90
|
|
Exercised
|
—
|
—
|
|
Expired
|
—
|
—
|
|
Balance at December
31, 2016
|
5,890,000
|
$2.99
|
On March 10, 2010,
T Squared Investments, LLC (“T Squared”) was issued
Warrant “E” for 350,000 shares of Dolphin Digital
Media, Inc. at an exercise price of $5.00 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 $0.002 per
share. Each time a payment by T Squared is made to Dolphin, a side
letter will be executed by both parties that states 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 $0.002 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 of 1933 (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”. As
such, the current exercise price is $$0.22 per share.
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
350,000 warrants to T Squared (“Warrant “F”) with
an exercise price of $5.00 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 $0.002 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 year ended December 31, 2016 to reduce the exercise
price of the warrants.
On September 13,
2012, the Company sold 350,000 warrants with an exercise price of
$5.00 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 $0.002 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 year ended December 31, 2016 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:
|
Number of
Shares
|
Exercise
Price
|
Fair Value as of
December 31, 2016
|
Expiration
Date
|
|
Warrant
“G”
|
1,500,000
|
$5.00
|
$3,300,671
|
January 31,
2018
|
|
Warrant
“H”
|
500,000
|
$6.00
|
$1,524,805
|
January 31,
2019
|
|
Warrant
“I”
|
500,000
|
$7.00
|
$1,568,460
|
January 31,
2020
|
|
|
2,500,000
|
|
$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 $0.01 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 $0.01 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.
Due to the
existence of the antidilution provision, the Warrants
“G”, “H” and “I” are carried in
the consolidated financial statements as derivative liabilities at
fair value (see Note 10).
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 6), the Company issued Warrant
“J” and Warrant “K” (Warrants
“J” and “K”) to the seller. A summary of
Warrants “J” and “K” follows:
|
Warrant:
|
Number of
Shares
|
Exercise
Price
|
Fair Value as of
December 31, 2016
|
Expiration Date
|
|
Warrant
“J”
|
2,170,000
|
$.015
|
$12,993,342
|
December 29,
2020
|
|
Warrant
“K”
|
170,0000
|
$.015
|
$1,017,912
|
December 29,
2020
|
|
|
2,340,000
|
|
$14,011,254
|
|
The Warrants
“J” and “K” each contain 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” are carried in the consolidated
financial statements as derivative liabilities at fair value (see
Note 10).
None
of the warrants were included in computing diluted earnings per
share because the effect was anti-dilutive.
NOTE 17— RELATED PARTY
TRANSACTIONS
On December 31,
2014, the Company and its CEO renewed his employment agreement for
a period of two years commencing January 1, 2015. The agreement
stated that the CEO was to receive annual compensation of $250,000
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
his agreement, he received a $1,000,000 signing bonus in 2012 that
is recorded in accrued compensation on the consolidated balance
sheets. Any unpaid and accrued compensation due to the CEO under
this agreement will accrue interest on the principal amount at a
rate of 10% per annum from the date of this agreement until it is
paid. The agreement included provisions for disability, termination
for cause and without cause by the Company, voluntary termination
by executive and a non-compete clause. The Company accrued
$2,250,000 and $2,000,000 of compensation as accrued compensation
and $735,211 and $523,144 of interest in other current liabilities
on its consolidated balance sheets as of December 31, 2016 and
2015, respectively, in relation to this agreement. For the years
ended December 31, 2016 and 2015, the Company recorded interest
expense of $212,066 and $186,513, respectively, on the consolidated
statements of operations.
During the year
ended December 31, 2016, the Company issued Warrants G, H and I
that entitled T Squared, a related party which would own 9.99%, on
the fully diluted basis, of Common Stock to purchase up to
2,500,000 shares of Common Stock. T Squared already held
Warrants E and F that entitles them to purchase up to 700,000
shares of the Company’s common stock. As a result,
T Squared has warrants entitling them to purchase up to an
aggregate number of 3,200,000 shares of Common
Stock. Warrants E, F, G, H and I have a maximum
exercise provision that prohibit T Squared from exercising warrants
that would cause them to exceed 9.99% of the outstanding shares of
Common Stock, unless the restriction is waived or amended, which
may only be done with the consent of the Company and T
Squared. The TSquared warrants have the following
exercise prices and expiration dates (See Note 16 for further
discussion):
|
Warrant
|
Number of
shares
|
Exercise
price
|
Expiration
|
|
Warrant
E
|
350,000
|
$0.22
|
December 31,
2018
|
|
Warrant
F
|
350,000
|
$5.00
|
December 31,
2018
|
|
Warrant
G
|
1,500,000
|
$5.00
|
January 31,
2018
|
|
Warrant
H
|
500,000
|
$6.00
|
January 31,
2019
|
|
Warrant I
|
500,000
|
$7.00
|
January 31,
2020
|
During 2015,
the Company agreed to pay a related party, Dolphin Entertainment
$250,000 for a script that it had developed for a web series that
the Company produced during the year ended December 31, 2015. As
December 31, 2016 and 2015, the Company recorded an accrual of
$250,000 in other current liabilities on its consolidated balance
sheets.
As discussed in
Note 4, on October 14, 2015, the Company and Merger Subsidiary, a
wholly owned subsidiary of the Company, entered into a merger
agreement with Dolphin Films and Dolphin Entertainment, 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 of the
Merger, 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 1,000,000 shares of Series C Convertible
Preferred Stock, par value $0.001 per share to Dolphin
Entertainment. During the year ended December 31, 2016, the Series
B shares were converted into 2,185,000 shares of Common
Stock.
In connection with
the Merger, on October 16, 2015, the Company and T Squared entered
into a Preferred Stock Exchange Agreement pursuant to which the
Company agreed to issue 1,000,000 shares of Series B to T Squared
in exchange for 1,042,753 shares of Series A Convertible Preferred
Stock, previously issued to T Squared. During the year ended
December 31, 2016, T Squared converted the Series B into 950,000
shares of Common Stock.
The Company entered
into a verbal agreement with Dolphin Entertainment for producer
services related to certain of its projects. The agreement was for
an annual amount of $500,000. The Company terminated the agreement
effective June 30, 2015. The Company recorded $250,000 during the
year ended December 31, 2015 in its consolidated statement of
operations.
During the year
ended December 31, 2016, the Company entered into the following
transactions with entities under the control of Justo L Pozo, an
affiliate of the Company; (i) Debt exchange agreement with Pozo
Opportunity Fund I to exchange debt in the amount of $5,088,692
into 1,017,738 shares of Common Stock, (ii) Debt Exchange Agreement
with Pozo Capital Partners LLP to exchange debt in the amount of
$2,423,166 into 484,633 shares of Common Stock, (iii) Debt Exchange
Agreement with Pozo Capital Partners LLP to exchange debt in the
amount of $636,287 into 127,257 shares of Common Stock, (iv)
Subscription Agreement with Pozo Opportunity Fund II, LLC for the
purchase of 50,000 shares of Common Stock at a price of $5.00 per
share and (v) mandatory issuance of 632,800 shares of Common Stock
per the terms of a Convertible Debt Agreement with Pozo Opportunity
Fund II, LLC. As a result of the transaction, Justo L Pozo,
individually and collectively with the above entities is the owner
of approximately 16% of the outstanding shares of Common
Stock.
NOTE
18 — INCOME TAXES
Income tax expense
(benefit) is as follows:
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
Current income tax
expense (benefit)
|
|
|
|
Federal
|
$-
|
$-
|
|
State
|
-
|
-
|
|
|
$-
|
$-
|
|
Deferred income tax
expense (benefit)
|
|
|
|
Federal
|
$(10,854,954)
|
$(1,354,370)
|
|
State
|
(817,631)
|
(202,112)
|
|
|
$(11,259,911)
|
$(1,556,482)
|
|
Change in valuation
allowance (benefit)
|
|
|
|
Federal
|
$10,854,954
|
$1,354,370
|
|
State
|
817,631
|
202,112
|
|
|
11,259,911
|
1,556,482
|
|
Income tax
expense
|
$-
|
$-
|
At December 31,
2016 and 2015, the Company had deferred tax assets and liabilities
as a result of temporary differences between financial statement
carrying amounts and the tax basis of assets and
liabilities. Deferred tax values at December 31, 2016
and 2015, are as follows:
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
|
||
|
Deferred tax
assets:
|
|
|
|
Long
Term:
|
|
|
|
Accrued
expenses
|
$177,447
|
$184,726
|
|
Interest
expense
|
329,942
|
726,575
|
|
Deferred
Rent
|
3,418
|
11,251
|
|
Accrued
compensation
|
829,051
|
779,967
|
|
Other
expenses
|
-
|
3,649
|
|
|
|
|
|
Capitalized
costs
|
$795,318
|
$829,108
|
|
Capitalized
production costs
|
1,019,784
|
219,657
|
|
Charitable
contributions
|
388,644
|
319,091
|
|
Net
operating losses and credits
|
16,364,744
|
5,170,093
|
|
Valuation
Allowance
|
(19,902,573)
|
(8,244,117)
|
|
Total
deferred tax assets
|
$5,775
|
$14,130
|
|
Deferred tax
liability:
|
|
|
|
Long
term:
|
|
|
|
Prepaid
expenses
|
-
|
(3,784)
|
|
Fixed
assets
|
(5,775)
|
(10,346)
|
|
Total net deferred
tax assets
|
$-
|
$-
|
As of December 31,
2016, the Company has approximately $44,600,000 of net operating
loss carryforwards for U.S. federal income tax purposes that begin
to expire in 2028. Additionally, the Company has
approximately $32,700,000 of net operating loss carryforwards for
Florida state income tax purposes that begin to expire in 2029 and
approximately $561,000 of California net operating loss
carryforwards that begin to expire in 2032. In assessing
the ability to realize the deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax asset is dependent upon
the generation of future taxable income during the periods in which
these temporary differences become
deductible. Management believes it is more likely than
not that the deferred tax asset will not be realized and has
recorded a net valuation allowance of $19,902,573 and $8,229,988 as
of December 31, 2016 and 2015, respectively.
The Company did not
have any income tax expense or benefit for the years ended December
31, 2016 and 2015. A reconciliation of the federal statutory tax
rate with the effective tax rate from continuing operations
follows:
|
|
2016
|
2015
|
|
Federal statutory
tax rate
|
(34.0)%
|
(34.0)%
|
|
Permanent items
affecting tax rate
|
4.9%
|
0.8%
|
|
State income taxes,
net of federal income tax benefit
|
(2.2)%
|
(3.3)%
|
|
Change in Deferred
Rate
|
0.2%
|
(1.2)%
|
|
Return to Provision
Adjustment
|
(0.1)%
|
0.2%
|
|
Miscellaneous
items
|
(0.2)%
|
(1.0)%
|
|
Change in valuation
allowance
|
31.4%
|
38.5%
|
|
Effective tax
rate
|
0.00%
|
0.00%
|
As of December 31,
2016 and 2015, the Company does not have any material unrecognized
tax benefits and accordingly has not recorded any interest or
penalties related to unrecognized tax benefits. The
Company does not believe that unrecognized tax benefits will
significantly change within the next twelve months. The
Company and its subsidiaries file federal, Florida and California
income tax returns. These returns remain subject to examination by
taxing authorities for all years after December 31,
2012.
NOTE
19— LEASES
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 September 30, 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% for the remainder of
the lease. The Company is also entitled to four half
months of free rent over the life of the agreement.
Lease
Payments
Future minimum
payments for operating leases in effect at December 31, 2016 were
as follows:
|
2017
|
$243,269
|
|
2018
|
184,820
|
|
2019
|
110,446
|
|
Total
|
$538,535
|
Rent expense for
the years ended December 31, 2016 and 2015 was $220,426 and
$226,212, respectively.
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 Stockdale in the Superior Court of Justice in Ontario (Canada)
alleging breach of a commercial lease and breach of a personal
guaranty. On or about March 18, 2010, Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale filed a Statement of Defense
and Crossclaim. In the Statement of Defense, Winterman Group
Limited, Malcolm Stockdale and Sara Stockdale deny any liability
under the lease and guaranty. In the Crossclaim filed against
Dolphin Digital Media (Canada) Ltd., Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale seek contribution or indemnity
against Dolphin Digital Media (Canada) Ltd. alleging that Dolphin
Digital Media (Canada) agreed to relieve Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale from any and all liability
with respect to the lease or the guaranty. On or about March 19,
2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale
filed a Third Party Claim against the Company seeking contribution
or indemnity against the Company, formerly known as Logica
Holdings, Inc., alleging that the Company agreed to relieve
Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from
any and all liability with respect to the lease or the guaranty.
The Third Party Claim was served on the Company on April 6, 2010.
On or about April 1, 2010, Dolphin Digital Media (Canada) filed a
Statement of Defense and Crossclaim. In the Statement of Defense,
Dolphin Digital Media (Canada) denied any liability under the lease
and in the Crossclaim against Winterman Group Limited, Malcolm
Stockdale and Sara Stockdale, Dolphin Digital Media (Canada) seeks
contribution or indemnity against Winterman Group Limited, Malcolm
Stockdale and Sara Stockdale alleging that the leased premises were
used by Winterman Group Limited, Malcolm Stockdale and Sara
Stockdale for their own use. On or about April 1, 2010, Dolphin
Digital Media (Canada) also filed a Statement of Defense to the
Crossclaim denying any liability to indemnify Winterman Group
Limited, Malcolm Stockdale and Sara Stockdale. The ultimate results
of these proceedings against the Company cannot be predicted with
certainty. On or about March 12, 2012, the Court served a Status
Notice on all the parties indicating that since more than (2) years
had passed since a defense in the action had been filed, the case
had not been set for trial and the case had not been terminated,
the case would be dismissed for delay unless action was taken
within ninety (90) days of the date of service of the
notice. The Company has not filed for a motion to
dismiss and no further action has been taken in the case. The
ultimate results of these proceedings against the Company could
result in a loss ranging from 0 to $325,000. On March
23, 2012, Dolphin Digital Media (Canada) Ltd filed for bankruptcy
in Canada. The bankruptcy will not protect the Company
from the Third Party Claim filed against it. However, the Company
has not accrued for this loss because it believes that the claims
against it are without substance and it is not probable that they
will result in loss. During the years ended December 31,
2016 and 2015, the Company has not received any other notifications
related to this action.
Tax Filings
For the year ended
December 31, 2011, 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. We received notification from the Internal
Revenue Service concerning information returns for the year ended
December 31, 2009. The Company
responded with a letter stating reasonable cause for the
noncompliance and requested that penalties be
abated. During 2012, we received a notice stating that
the reasonable cause had been denied. The Company
decided to pay the penalties and not appeal the decision for the
2009 Internal Revenue Service notification. There is no
associated interest expense as the tax filings are for information
purposes only and would not result in further income taxes to be
paid by the Company. The Company made payments in the
amount of $40,000 during the year ended December 31, 2012 related
to these penalties and $80,000 remains accrued. The Company has not
received any other notifications related to these returns during
the years ended December 31, 2016 and 2015. During the year ended
December 31, 2014, the Company determined that the Statute of
limitations for penalties to be assessed for not filing certain
information returns on a timely basis had expired. As
such, the Company recorded $40,000 of other income and reduced its
accrued liability related to these tax filings.
Kids Club
In February 2012,
the Company entered into a five year agreement with US Youth Soccer
Association, Inc. to create, design and host the US Youth Soccer
Clubhouse website. During 2012, the Company hired a
third party to begin building the US Soccer Clubhouse website at a
cost of $125,000. The first two installments of $25,000
each were paid during 2012 and remaining payments were made monthly
over a two year period once the website was delivered. The Company
expensed the payments since it could not reasonably estimate future
cash flows or revenues from the website development. The
Company decided not to renew the contract that expired on February
1, 2017.
In January 2013,
the Company entered into an agreement with United Way Worldwide to
create an online kids club to promote the organizations
philanthropic philosophy and encourage literacy programs. Effective
July 1, 2015, the two parties agreed to amend and restate the
agreement. The agreement was for a period of three years from the
effective date and was to be automatically renewed for successive
terms of three years unless terminated by either party with written
notice at least 180 day prior to the expiration of the initial or
any subsequent term. On July 1, 2016, the Company and United Way
Worldwide mutually agreed to terminate the
agreement. The Company intends to continue promoting the
online kids club with the remaining partners and it does not
anticipate any material change in the operations of the online kids
club. Each school sponsorship package is $10,000 with the Company
earning $1,250. The remaining funds are used for program materials
and the costs of other partners.
The Company
recorded revenues of $28,403 and $69,761 during the years ended
December 31 2016 and 2015, respectively, related to these
agreements.
Incentive Compensation
Plan
During the year
ended December 31, 2012, the Company’s Board of Directors
approved an Incentive Compensation Plan. The plan was enacted as a
way of attracting and retaining exceptional employees and
consultants by enabling them to share in the long term growth and
financial success of the Company. The plan is administered by the
Board of Directors or a committee designated by the Board of
Directors. As part of an increase in authorized shares approved by
the Board of Directors in 2012, 10,000,000 common shares were
designated for this plan. No awards have been issued and, as such,
the Company has not recorded any liability or equity related to
this plan for the years ended December 31, 2016 and
2015.
Talent, Director and Producer
Participations
Per agreements with
talent, directors and producers on certain projects, the Company
will be responsible 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. As of December 31, 2016 and 2015, the
Company had not recorded any liability related to these
participations.
NOTE
21 – SUBSEQUENT EVENTS
Subsequent to year
end, the Company received a tax incentive payment from the State of
North Carolina in the amount of $2,060,670 for filming a motion
picture in that jurisdiction. The proceeds of the tax incentive
were used to paydown the production loan.
On February 16,
2017, the Company entered into a subscription agreement pursuant to
which the Company issued and sold to an investor 100,000
shares of Common Stock at a price of $5.00 per Share. This
transaction provided $500,000 in proceeds for the
Company.
On March 30, 2017,
the Company entered into a Membership Interest Purchase Agreement
(the “Purchase Agreement”), by and among the Company
and Leslee Dart, Amanda Lundberg, Allan Mayer and the Beatrice B.
Trust (the “Sellers”). Pursuant to the Purchase
Agreement, on March 30, 2017, the Company acquired from the Sellers
100% of the membership interests of 42West, LLC, a Delaware limited
liability company (“42West”) and 42West became a
wholly-owned subsidiary of the Company (the “42West
Acquisition”). 42West is an entertainment public relations
agency offering talent publicity, strategic communications and
entertainment content marketing. As consideration in the 42West
Acquisition, the Company paid approximately $18.7 million in shares
of Common Stock based on the Company’s 30-trading-day average
stock price prior to the closing date of $4.61 per share (less
certain working capital and closing adjustments, transaction
expenses and payments of indebtedness), plus the potential to earn
up to an additional $9.3 million in shares of Common Stock. As a
result, the Company (i) issued 1,230,280 shares of Common Stock on
the closing date (the “Initial Consideration”), (ii)
will issue (a) 344,550 shares of Common Stock to certain employees
within 30 days of the closing date, (b) 118,655 shares of Common
Stock as bonuses during 2017 and (c) approximately 1,961,821 shares
of Common Stock on January 2, 2018 (the "Post-Closing
Consideration") and (iii) may issue approximately 1,963,126 shares
of Common Stock based on the achievement of specified financial
performance targets over a three-year period as set forth in the
Purchase Agreement (the "Earn-Out Consideration", and together with
the Initial Consideration and the Post-Closing Consideration, the
"Consideration").
Each of Leslee
Dart, Amanda Lundberg and Allan Mayer (the “Principal
Sellers”) has entered into employment agreements with the
Company and will continue as employees of the Company for a
three-year term after the closing of the 42West Acquisition. The
non-executive employees of 42West are expected to be retained as
well. The Purchase Agreement contains customary representations,
warranties and covenants. 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 2,374,187 of their shares of Common Stock
received as Consideration for a purchase price equal to $4.61 per
share during certain specified exercise periods set forth in the
Put Agreements up until December 2020. 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 of 1933, as amended (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
Consideration received by the Sellers, to file a registration
statement on Form S-1 and use its reasonable efforts to effect a
registration covering up to 25% of the Consideration received by
the Sellers. In addition, if the Company is eligible to file a
registration statement on Form S-3, upon the request of such
Sellers holding at least a majority of the Consideration received
by the Sellers, the Company will be required to use its reasonable
efforts to effect a registration of such shares on Form S-3
covering up to an additional 25% of the 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 Consideration received by
the Sellers registered on Form S-1 or Form S-3 is subject to other
specified conditions and limitations.
On April 1, 2017,
pursuant to the terms of the Purchase Agreement, each of the
Principal Sellers notified the Company that they would exercise the
put option. As a result, 86,764 shares of Common Stock were
returned to the Company in exchange for an aggregate of $400,000.
The Company retired the shares from the number of outstanding
shares.
On March 31, 2017,
KCF Investments LLC and BBCF 2011 LLC notified the Company that
they would be exercising Warrants J and K to purchase 2,170,000 and
170,000, respectively of shares of Common Stock at a purchase price
of $0.015 per share. This transaction provided $35,100
in proceeds for the Company.
On April 10, 2017,
the Company signed two separate promissory notes (the
“Notes”) with one investor for an aggreagate amount of
$300,000. The Notes bear interest at 10% per annum, payable
monthly, and have a maturity date of October 10,
2017.
On April 14, 2017,
T Squared notified the Company that it would exercise 325,770 of
Warrant E pursuant to the cashless exercise provision in Warrant
E. T Squared had previously paid $1,675,000 for the
warrants. The Company will issue a new warrant for the
remaining 24,230 shares that T Squared can exercise at a price of
$3.10 per share.
|
DOLPHIN
DIGITAL MEDIA, INC. AND SUBSIDIARIES
|
||
|
Condensed Consolidated Balance Sheets
|
||
|
(unaudited)
|
||
|
ASSETS
|
As
of
March
31,
2017
|
As
of
December
31,
2016
|
|
Current
|
|
|
|
Cash and cash
equivalents
|
$585,343
|
$662,546
|
|
Restricted
cash
|
-
|
1,250,000
|
|
Accounts
receivable, net of $235,000 of allowance for doubtful
accounts
|
3,422,863
|
3,668,646
|
|
Other current
assets
|
382,755
|
2,665,781
|
|
Total current
assets
|
4,390,961
|
8,246,973
|
|
Capitalized
production costs
|
4,242,096
|
4,654,013
|
|
Intangible
assets
|
9,110,000
|
-
|
|
Goodwill
|
13,996,337
|
-
|
|
Property, equipment
and leasehold improvements
|
1,118,514
|
35,188
|
|
Investments
|
220,000
|
-
|
|
Deposits
|
1,201,481
|
1,261,067
|
|
Total
assets
|
$34,279,389
|
$14,197,241
|
|
LIABILITIES
|
|
|
|
Current
|
|
|
|
Accounts
payable
|
$1,305,031
|
677,249
|
|
Other current
liabilities
|
4,322,967
|
2,958,523
|
|
Line of
credit
|
500,000
|
-
|
|
Put
Rights
|
750,343
|
-
|
|
Warrant
liability
|
-
|
14,011,254
|
|
Accrued
compensation
|
2,312,500
|
2,250,000
|
|
Debt
|
12,900,242
|
18,743,069
|
|
Loan from related
party
|
1,244,310
|
684,326
|
|
Deferred
revenue
|
26,428
|
46,681
|
|
Note
payable
|
825,000
|
300,000
|
|
Total current
liabilities
|
24,186,821
|
39,671,102
|
|
Noncurrent
|
|
|
|
Warrant
|
3,636,865
|
6,393,936
|
|
Put
Rights
|
3,249,657
|
-
|
|
Contingent
Consideration
|
3,541,000
|
-
|
|
Other noncurrent
liabilities
|
1,060,188
|
-
|
|
Total noncurrent
liabilities
|
11,487,710
|
6,393,936
|
|
Total
Liabilities
|
35,674,531
|
46,065,038
|
|
STOCKHOLDERS' DEFICIT
|
|
|
|
Common stock,
$0.015 par value, 400,000,000 shares authorized, 18,065,801 and
14,395,521, respectively, issued and outstanding at March 31, 2017
and December 31, 2016.
|
270,988
|
215,933
|
|
Preferred Stock,
Series C, $0.001 par value, 1,000,000 shares authorized, 1,000,000
at March 31, 2017 and December 31, 2016
|
1,000
|
1,000
|
|
Additional paid in
capital
|
93,183,286
|
67,727,474
|
|
Accumulated
deficit
|
(94,850,416)
|
(99,812,204)
|
|
Total Stockholders'
Deficit
|
$(1,395,142)
|
$(31,867,797)
|
|
Total Liabilities
and Stockholders' Deficit
|
$34,279,389
|
$14,197,241
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-42
|
DOLPHIN
DIGITAL MEDIA, INC. AND SUBSIDIARIES
|
||
|
Condensed Consolidated Statements of
Operations
|
||
|
(Unaudited)
|
||
|
|
For the three
months ended
|
|
|
|
March
31,
|
|
|
|
2017
|
2016
|
|
Revenues:
|
|
|
|
Production and
distribution
|
$532,866
|
$-
|
|
Membership
|
-
|
17,278
|
|
Total
Revenue:
|
532,866
|
17,278
|
|
|
|
|
|
Expenses:
|
|
|
|
Direct
costs
|
500,526
|
2,282
|
|
Selling, general
and administrative
|
192,409
|
268,000
|
|
Legal and
professional
|
375,269
|
344,735
|
|
Payroll
|
336,354
|
387,446
|
|
Loss before other
income (expense)
|
(871,692)
|
(985,185)
|
|
|
|
|
|
Other Income
(Expense)
|
|
|
|
Other
income
|
-
|
9,660
|
|
Loss on
extinguishment of debt
|
-
|
(1,191,358)
|
|
Change in fair
value of warrant liability
|
6,823,325
|
-
|
|
Acquisition related
costs
|
(537,708)
|
-
|
|
Interest
expense
|
(452,137)
|
(1,281,965)
|
|
Total Other Income
(Expense)
|
5,833,480
|
(2,463,663)
|
|
Net Income
(Loss)
|
$4,961,788
|
$(3,448,848)
|
|
Deemed dividend on
preferred stock
|
-
|
(5,247,227)
|
|
Net Income (Loss)
attributable to common shareholders
|
$4,961,788
|
$(8,696,075)
|
|
Income (Loss) Per
Share:
|
|
|
|
Basic
|
$0.34
|
$(1.85)
|
|
Diluted
|
$0.05
|
$(1.85)
|
|
Weighted average
number of shares used in per share calculation:
|
|
|
|
Basic
|
14,477,413
|
4,678,469
|
|
Diluted
|
17,305,617
|
4,678,469
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-43
|
DOLPHIN
DIGITAL MEDIA INC. AND SUBSIDIARIES
|
||
|
Condensed Consolidated Statements of Cash
Flows
|
||
|
(Unaudited)
|
|
|
For the three
months ended
March
31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
Net income
(loss)
|
$4,961,788
|
$(3,448,848)
|
|
Adjustments to
reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
Depreciation
|
4,635
|
5,658
|
|
Amortization of
capitalized production costs
|
429,278
|
-
|
|
Impairment of
capitalized production costs
|
-
|
2,439
|
|
Loss on
extinguishment of debt
|
-
|
1,191,358
|
|
Change in fair
value of warrant liability
|
(6,823,325)
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
1,952,427
|
-
|
|
Other current
assets
|
2,283,026
|
970,552
|
|
Prepaid
expenses
|
-
|
49,167
|
|
Capitalized
production costs
|
(17,361)
|
-
|
|
Deposits
|
105,149
|
-
|
|
Deferred
revenue
|
(20,253)
|
-
|
|
Accrued
compensation
|
62,500
|
(2,500)
|
|
Accounts
payable
|
530,690
|
(1,413,545)
|
|
Other current
liabilities
|
282,674
|
2,074,950
|
|
Net Cash Provided
by (Used in) Operating Activities
|
3,751,228
|
(570,769)
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
Restricted
cash
|
1,250,000
|
-
|
|
Acquisition of
42West, net of cash acquired
|
13,626
|
-
|
|
Net Cash Provided
by Investing Activities
|
1,263,626
|
-
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
Advance on sale of
common stock
|
-
|
1,500,000
|
|
Sale of common
stock
|
500,000
|
-
|
|
Repayment of
debt
|
(5,842,827)
|
-
|
|
Proceeds from the
exercise of warrants
|
35,100
|
-
|
|
Advances from
related party
|
672,000
|
716,881
|
|
Repayment to
related party
|
(456,330)
|
(1,275,086)
|
|
Net Cash
(Used
in) Provided by
Financing Activities
|
(5,092,057)
|
941,795
|
|
NET
(DECREASE)
INCREASE IN
CASH AND CASH EQUIVALENTS
|
(77,203)
|
371,026
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
662,546
|
2,392,685
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
$585,343
|
$2,763,711
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
Interest
paid
|
$-
|
$191,322
|
|
SUPPLEMENTAL
DISCLOSURES OF NON CASH FLOW INFORMATION:
|
|
|
|
Conversion of
related party debt and interest to shares of common
stock
|
$-
|
$3,073,410
|
|
Conversion of debt
into shares of common stock
|
$-
|
$3,164,000
|
|
Conversion of loan
and security agreements, including interest, into shares of common
stock
|
$-
|
$2,883,378
|
|
Issuance of Common
Stock related to the 42West Acquisition
|
$15,030,767
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-44
|
Dolphin
Digital Media Inc. and Subsidiaries
|
||||||||
|
Consolidated Statements of Changes in Stockholders'
Deficit
|
||||||||
|
For
the three months ended March 31, 2017
|
|
|
|
|
|
|
Additional
|
|
Total
|
|
|
Preferred
Stock
|
Common
Stock
|
Paid-in
|
Accumulated
|
Stockholders
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2016
|
1,000,000
|
$1,000
|
14,395,521
|
$215,933
|
$67,727,474
|
$(99,812,204)
|
$(31,867,797)
|
|
Net income
for the three months ended March 31, 2017
|
-
|
-
|
-
|
-
|
-
|
4,961,788
|
4,961,788
|
|
Issuance of common
stock during the three months ended March 31, 2017
|
-
|
-
|
100,000
|
1,500
|
498,500
|
-
|
500,000
|
|
Issuance of shares
from exercise of Warrants J and K
|
-
|
-
|
2,340,000
|
35,100
|
9,945,000
|
-
|
9,980,100
|
|
Issuance of shares
related to acquisition of 42West
|
-
|
-
|
1,230,280
|
18,455
|
15,012,312
|
-
|
15,030,767
|
|
Balance
March 31, 2017
|
1,000,000
|
$1,000
|
18,065,801
|
$270,988
|
$93,183,286
|
$(94,850,416)
|
$(1,395,142)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-45
DOLPHIN
DIGITAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH
31, 2017
NOTE
1 – GENERAL
Nature of
Business
Dolphin Digital
Media, Inc. (the “Company,” “Dolphin,”
“we,” “us” or “our”) is a
producer of original high-quality digital programming for online
consumption and is committed to delivering premium, best-in-class
entertainment and securing premiere distribution partners to
maximize audience reach and commercial advertising potential.
Dolphin is also developing online kids clubs. On March 7, 2016, the
Company completed its merger with Dolphin Films, Inc., an entity
under common control. Dolphin Films, Inc. (“Dolphin
Films”) is a motion picture studio focused on storytelling on
a global scale for young, always-connected audiences. On March 30,
2017, the Company acquired 42West, LLC, a Delaware limited
liability company (“42West”). 42West is an
entertainment public relations agency offering talent publicity,
strategic communications and entertainment content
marketing.
Basis of
Presentation
The accompanying
unaudited condensed consolidated financial statements include the
accounts of Dolphin, and all of its majority-owned and controlled
subsidiaries, including Dolphin Films, Inc., Hiding Digital
Productions, LLC, Dolphin Kids Clubs, LLC, Cybergeddon Productions,
LLC, Dolphin SB Productions LLC, Dolphin Max Steel Holdings LLC,
Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC
and 42West.
Effective March 7,
2016, the Company acquired Dolphin Films from Dolphin
Entertainment, Inc. (“Dolphin Entertainment”), a
company wholly owned by William O’Dowd, CEO, President and
Chairman of the Board of Dolphin. At the time of the acquisition,
Mr. O’Dowd was also the majority shareholder of Dolphin. The
acquisition from Dolphin Entertainment was a transfer between
entities under common control. As such, the Company recorded the
assets, liabilities and deficit of Dolphin Films on its
consolidated balance sheets at Dolphin Entertainment’s
historical basis instead of fair value. Transfers of businesses
between entities under common control require prior periods to be
retrospectively adjusted to furnish comparative information.
Accordingly, the accompanying financial statements and related
notes of the Company have been retrospectively adjusted to include
the historical balances of Dolphin Entertainment prior to the
effective date of the acquisition.
On May 9, 2016, the
Company filed an amendment to its Articles of Incorporation with
the Secretary of State of the State of Florida to effectuate a
20-to-1 reverse stock split. The reverse stock split was approved
by the Board of Directors and a majority of the Company’s
shareholders and became effective May 10, 2016. The number of
common shares in the accompanying unaudited condensed consolidated
financial statements and all related footnotes has been adjusted to
retrospectively reflect the reverse stock split.
On March 30, 2017,
the Company entered into a Membership Interest Purchase Agreement
(the “Purchase Agreement”), by and among the Company
and Leslee Dart, Amanda Lundberg, Allan Mayer and the Beatrice B.
Trust (the “Sellers”). Pursuant to the Purchase
Agreement, the Company acquired from the Sellers 100% of the
membership interests of 42West and 42West became a wholly-owned
subsidiary of the Company (the “42West Acquisition”).
The consideration paid by the Company in connection with the 42West
Acquisition was approximately $18.7 million in shares of common
stock of the Company, par value $0.015 (the “Common
Stock”), based on the Company’s 30-trading-day average
stock price prior to the closing date of $4.61 per share (less
certain working capital and closing adjustments, transaction
expenses and payments of indebtedness), plus the potential to earn
up to an additional $9.3 million in shares of Common Stock based on
achieving certain financial targets. See note 4 for additional
information regarding the acquisition.
F-46
The Company enters
into relationships or investments with other entities, and in
certain instances, the entity in which the Company has a
relationship or investment may qualify as a variable interest
entity (“VIE”). A VIE is consolidated in the financial
statements if the Company is deemed to be the primary beneficiary
of the VIE. The primary beneficiary is the party that has the power
to direct activities that most significantly impact the activities
of the VIE and has the obligation to absorb losses or the right to
benefits from the VIE that could potentially be significant to the
VIE. The Company has included Max Steel Productions, LLC formed on
July 8, 2013 in the State of Florida and JB Believe, LLC formed on
December 4, 2012 in the State of Florida in its combined financial
statements as VIE’s.
The unaudited
condensed consolidated financial statements have been prepared in
accordance with United States (“U.S.”) generally
accepted accounting principles (“GAAP”) for interim
financial information and the instructions to quarterly report on
Form 10-Q under the Securities Exchange Act of 1934 (the
“Exchange Act”), as amended, and Article 8 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of the Company’s
management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been
reflected in these unaudited condensed consolidated financial
statements. Operating results for the three months ended March 31,
2017 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2017. The balance
sheet at December 31, 2016 has been derived from the audited
financial statements at that date, but does not include all the
information and footnotes required by U.S. GAAP for complete
financial statements. The accompanying unaudited condensed
consolidated financial statements should be read together with the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2016.
Use of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during
the reporting period. The most significant estimates made by
management in the preparation of the financial statements relate to
ultimate revenue and costs for investment in digital and feature
film projects; estimates of sales returns and other allowances and
provisions for doubtful accounts and impairment assessments for
investment in digital and feature film projects. Actual results
could differ from such estimates.
Recent Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update (“ASU”) No. 2014-09 —Revenue
from Contracts with Customers (Topic 606) (“ASU
2014-09”), which provides guidance for revenue recognition.
This ASU will supersede the revenue recognition requirements in ASC
Topic 605, and most industry specific guidance, and replace it with
a new Accounting Standards Codification (“ASC”) Topic
606. The FASB has also issued several subsequent ASUs which amend
ASU 2014-09. The amendments do not change the core principle of the
guidance in ASC 606.
The core principle
of ASC 606 is that revenue is recognized when promised goods or
services are transferred to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. To achieve that core
principle, an entity should apply the following steps:
Step 1: Identify
the contract(s) with a customer
Step 2: Identify
the performance obligations in the contract.
Step 3: Determine
the transaction price.
Step 4: Allocate
the transaction price to the performance obligations in the
contract.
Step 5: Recognize
revenue when (or as) the entity satisfies a performance
obligation.
The guidance in ASU
2014-09 also specifies the accounting for some costs to obtain or
fulfill a contract with a customer. ASC 606 will require the
Company to make significant judgments and estimates. ASC 606 also
requires more extensive disclosures regarding the nature, amount,
timing and uncertainty of revenue and cash flows arising from
contracts with customers.
F-47
Public business
entities are required to apply the guidance of ASC 606 to annual
reporting periods beginning after December 15, 2017 (2018 for the
Company), including interim reporting periods within that reporting
period. Accordingly, the Company will adopt ASU 606 in the first
quarter of 2018.
ASC 606 requires an
entity to apply ASC 606 using one of the following two transition
methods:
1.
Retrospective
approach: Retrospectively to each prior reporting period presented
and the entity may elect certain practical
expedients.
2.
Modified
retrospective approach: Retrospectively with the cumulative effect
of initially applying ASC 606 recognized at the date of initial
application. If an entity elects this transition method it also is
required to provide the additional disclosures in reporting periods
that include the date of initial application of (a) the amount by
which each financial statement line item is affected in the current
reporting period by the application ASU 606 as compared to the
guidance that was in effect before the change, and (b) an
explanation of the reasons for significant
changes.
The Company expects
that it will adopt ASC 606 following the modified retrospective
approach. The Company is currently evaluating the impact that the
adoption of this new guidance will have on its consolidated
financial statements, particularly regarding the recent 42West
acquisition.
In November 2015,
the FASB issued ASU 2015-17, Income Taxes (Topic 740) regarding
balance sheet classification of deferred income taxes. ASU 2015-17
simplifies the presentation of deferred taxes by requiring deferred
tax assets and liabilities be classified as noncurrent on the
balance sheet. ASU 2015-17 is effective for public companies
for annual reporting periods beginning after December 15, 2016
(2017 for the Company), and interim periods within those fiscal
years. The guidance may be adopted prospectively or
retrospectively and early adoption is permitted. Adoption of ASU
2015-17 did not have an impact on the Company’s financial
position, results of operations or cash flows.
In February 2016,
The FASB issued ASU 2016-02, Leases (Topic 642) intended to improve
financial reporting about leasing transactions. The ASU
affects all companies and other organizations that lease assets
such as real estate, airplanes, and manufacturing
equipment. The ASU will require organizations that lease
assets—referred to as “lessees”—to
recognize on the balance sheet the assets and liabilities for the
rights and obligations created by those leases. Under
the new guidance, a lease will be required to recognize assets and
liabilities for leases with lease terms of more than 12
months. Consistent with current Generally Accepted
Accounting Principles (GAAP), the recognition, measurement, and
presentation of expenses and cash flows arising from a lease by a
lessee primarily will depend on its classification as a finance or
operating lease. However, unlike current
GAAP—which requires only capital leases to be recognized on
the balance sheet –the new ASU will require both types of
leases to be recognized on the balance sheet. The ASU
also will require disclosures to help investors and other financial
statement users better understand the amount, timing, and
uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements,
providing additional information about the amounts recorded in the
financial statements.
ASU 2016-02 will
take effect for public companies for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018 (2019 for the Company). For all other
organizations, the ASU on leases will take effect for fiscal years
beginning after December 15, 2019, and for interim periods within
fiscal years beginning after December 15, 2020. Early
application will be permitted for all organizations. The Company is
currently reviewing the impact that implementing this ASU will
have.
In August 2016, the
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments, which
addresses how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. The ASU will be
effective on a retrospective or modified retrospective basis for
annual reporting periods beginning after December 15, 2017 (2018
for the Company), and interim periods within those years, with
early adoption permitted. The Company does not believe that
adoption of this new guidance will have a material effect on our
consolidated financial statements.
F-48
In October 2016,
the FASB issued ASU 2016-17 —Consolidation (Topic 810):
Interests Held through Related Parties That Are under Common
Control. The update amends the consolidation guidance on how
VIE’s should treat indirect interest in the entity held
through related parties. The ASU will be effective on a
retrospective or modified retrospective basis for annual reporting
periods beginning after December 15, 2016 (2017 for the Company),
and interim periods within those years, with early adoption
permitted. The adoption of ASU 2016-17 did not have an effect on
the Company’s condensed consolidated financial
statements.
In November 2016,
the FASB issued ASU 2016-18, Statement of Cash Flows (Topic
230): Restricted Cash (“ASU 2016-18”). ASU
2016-18 provides guidance on the classification of restricted cash
and cash equivalents in the statement of cash flows. Although it
does not provide a definition of restricted cash or restricted cash
equivalents, it states that amounts generally described as
restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the
beginning-of-period and end-of period total amounts shown on the
statement of cash flows. ASU 2016-18 is effective for interim and
annual reporting periods beginning after December 15, 2017. The
Company does not currently expect the adoption of this new standard
to have a material impact on its consolidated financial
statements.
NOTE
2 — GOING CONCERN
The accompanying
unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the U.S. which contemplate the continuation of the
Company as a going concern. Although the Company had net income of
$,4,961,788 for the three months ended March 31, 2017, it was
primarily due to a change in the fair value of the warrant
liability. Furthermore, the Company has recorded
accumulated deficit of $94,850,416 as of March 31,
2017. The Company has a working capital deficit of
$19,795,860 and therefore does not have adequate capital to fund
its obligations as they come due or to maintain or develop its
operations. The Company is dependent upon funds from private
investors and support of certain stockholders. If the Company is
unable to obtain funding from these sources within the next 12
months, it could be forced to liquidate.
These factors raise
substantial doubt about the ability of the Company 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 any necessary additional funds through loans and additional
issuance of its Common Stock, securities convertible into our
Common Stock, debt securities or a combination of such financing
alternatives. There is no assurance that the Company will be
successful in raising additional capital. Such issuances of
additional securities would further dilute the equity interests of
our existing shareholders, perhaps substantially. The Company
currently has the rights to several scripts that it intends to
obtain financing to produce and release during 2017 and 2018. It
expects to earn a producer and overhead fee for each of these
productions. There can be no assurances that such productions will
be released or fees will be realized in future periods. With
the acquisition of 42 West, the Company is currently exploring
opportunities to expand the services currently being offered by
42West to the entertainment community. There can be no
assurance that the Company will be successful in selling these
services to clients.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable and Allowance for
Doubtful Accounts
The Company’s
trade accounts receivable 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. The policy
for determining the past due status of receivables is based on how
recently payments have been received. Receivables are charged off
when they are deemed uncollectible.
Revenue
Recognition
In general, the
Company records motion picture revenue when persuasive evidence of
an arrangement exists, products have been delivered or services
have been rendered, the selling price is fixed and determinable,
and collectability is reasonably assured.
Revenue from motion
pictures and web series are recognized in accordance with guidance
of FASB Accounting Standard Codification (“ASC”) 926-60
“Revenue Recognition –
Entertainment-Films”. Revenue is recorded when a
distribution contract, domestic or international, exists, the movie
or web series is complete in accordance with the terms of the
contract, the customer can begin exhibiting or selling the movie or
web series, the fee is determinable and collection of the fee is
reasonable. On occasion, the Company may enter into agreements with
third parties for the co-production or distribution of a movie or
web series. Revenue from these agreements will be
recognized when the movie is complete and ready to be
exploited. Cash received and amounts billed in advance
of meeting the criteria for revenue recognition is classified as
deferred revenue.
F-49
Additionally,
because third parties are the principal distributors of the
Company’s movies, the amount of revenue that is recognized
from films in any given period is dependent on the timing, accuracy
and sufficiency of the information received from its distributors.
As is typical in the film industry, the Company's distributors may
make adjustments in future periods to information previously
provided to the Company that could have a material impact on the
Company’s operating results in later periods. Furthermore,
management may, in its judgment, make material adjustments to the
information reported by its distributors in future periods to
ensure that revenues are accurately reflected in the
Company’s financial statements. To date, the distributors
have not made, nor has the Company made, subsequent material
adjustments to information provided by the distributors and used in
the preparation of the Company’s historical financial
statements.
Fees from the
performance of professional services and billings for direct costs
reimbursed by clients 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.
Advertising revenue
is recognized over the period the advertisement is
displayed.
Investments
Investments
represents an investment in equity securities of The Virtual
Reality Company (“VRC”). The
Company’s $220,000 investment in VRC represents less than 1%
ownership interest in VRC. Accordingly, the Company accounts for
its investment under the cost method. Under the cost method, the
investor’s share of earnings or losses is not included in the
balance sheet or statement of operations. The net accumulated
earnings of the investee subsequent to the date of investment are
recognized by the investor only to the extent distributed by the
investee as dividends. However, impairment charges are
recognized in the statement of operations, if factors come to our
attention that indicate that a decrease in value of the investment
has occurred that is other than temporary.
Property, Equipment and Leasehold
Improvements
Property and
equipment is recorded at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. The
Company recorded depreciation expense of $4,635 and $5,658,
respectively for the three months ended March 31, 2017 and 2016.
When items are retired or otherwise disposed of, income is charged
or credited for the difference between net book value and proceeds
realized thereon. Ordinary maintenance and repairs are charged to
expense as incurred, and replacements and betterments are
capitalized. Leasehold improvements are amortized over the lesser
of the term of the related lease or the estimated useful lives of
the assets. The range of estimated useful lives to be used to
calculate depreciation and amortization for principal items of
property and equipment are as follow:
|
|
|
Depreciation/
|
|
|
|
|
|
Amortization
|
|
|
|
Asset
Category
|
|
Period
(Years)
|
|
|
|
F Furniture and
fixtures
|
|
|
5 - 7
|
|
|
Computer
equipment
|
|
|
3 - 5
|
|
|
Leasehold
improvements
|
|
|
5 - 8
|
|
Deferred Landlord
Reimbursement
Deferred landlord
reimbursement represents the landlord’s reimbursement for
tenant improvements of one of the Company’s office spaces.
Such amount is amortized on a straight-line basis over the term of
the lease.
F-50
Deferred Rent
Deferred rent
consists of the excess of the rent expense recognized on the
straight-line basis over the payments required under certain office
leases.
Intangible assets
In connection with
the acquisition of 42West that occurred during the quarter ended
March 31, 2017, the Company acquired an estimated $9,110,000 of
intangible assets with finite useful lives initially estimated to
range from 3 to 10 years. As indicated in note 4, the
purchase price allocation and related consideration are provisional
and subject to completion and adjustment. Intangible assets are
initially recorded at fair value and are amortized over their
respective estimated useful lives and reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
Goodwill
In connection with
the acquisition of 42West that occurred during the quarter ended
March 31, 2017 (note 4), the Company recorded $13,996,337 of
goodwill, which management has assigned to the Entertainment Public
Relations reporting unit. As indicated in note 4, the purchase
price allocation and related consideration are provisional and
subject to completion and adjustment. The Company accounts
for goodwill in accordance with FASB Accounting Standards
Codification No. 350, Intangibles—Goodwill and Other ("ASC
350"). ASC 350 requires goodwill to be reviewed for impairment
annually, or more frequently if circumstances indicate a possible
impairment. The Company evaluates goodwill in the fourth quarter or
more frequently if management believes indicators of impairment
exist. Such indicators could include, but are not limited to (1) a
significant adverse change in legal factors or in business climate,
(2) unanticipated competition, or (3) an adverse action or
assessment by a regulator.
The Company first
assesses qualitative factors to determine whether it is more likely
than not that the fair value of the reporting unit is less than its
carrying amount, including goodwill. If management concludes that
it is more likely than not that the fair value of the reporting
unit is less than its carrying amount, management conducts a
two-step quantitative goodwill impairment test. The first step of
the impairment test involves comparing the fair value of the
reporting unit with its carrying value (including goodwill). The
Company estimates the fair values of its reporting units using a
combination of the income, or discounted cash flows approach and
the market approach, which utilizes comparable companies’
data. If the fair value of the reporting unit exceeds its carrying
value, step two does not need to be performed. If the estimated
fair value of the reporting unit is less than its carrying value,
an indication of goodwill impairment exists for the reporting unit,
and the Company must perform step two of the impairment test
(measurement).
Under step two, an
impairment loss is recognized for any excess of the carrying amount
of the reporting unit’s goodwill over the implied fair value
of that goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation in acquisition accounting.
The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. To the extent that the
carrying amount of goodwill exceeds its implied fair value, an
impairment loss would be recorded.
Warrants
When the Company
issues warrants, it evaluates 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), the Company classifies 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 the Company 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 sheet at fair value
with any changes in its fair value recognized currently in the
statement of operations.
F-51
The Company has
outstanding warrants at March 31, 2017 and December 31, 2016
accounted for as derivative liabilities, because they contain
full-ratchet down round provisions (see notes 12 and 18). The
Company also has equity classified warrants outstanding at March
31, 2017 and December 31, 2016 (see note 12).
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 the Company. Unobservable
inputs reflect the Company’s 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.
|
To account for the
acquisition of 42West that occurred during the quarter ended March
31, 2017, the Company made a number of fair value measurements
related to the different forms of consideration paid for 42West and
of the identified assets acquired and liabilities assumed. See note
4 for disclosures regarding those fair value
measurements.
Certain warrants
issued in 2016 are measured and carried at fair value on a
recurring basis in the condensed consolidated financial statements.
See note 12 for disclosures regarding those fair value
measurements.
As of March 31,
2016, and for the three months then ended, the Company had no
assets or liabilities measured at fair value, on a recurring or
nonrecurring basis.
Business Segments
Through March 30,
2017 (the date the Company acquired 42West) (see note 4), 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. The Company derived all of its
revenues from this segment for the quarter ended March 31,
2016.
|
|
|
|
|
|
|
|
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 all of its revenues from
this segment during the quarter ended March 31, 2017.
|
Based on an
analysis of the Company’s operating segments and the
provisions of ASC 280, Segment Reporting (ASC 280), the Company
believes it meets the criteria for aggregating these operating
segments into a single reporting segment because they have similar
economic characteristics, similar nature of product sold,
(content), similar production process (the Company uses the same
labor force, and content) and similar type of customer (children,
teens, tweens and family).
F-52
Management is
currently reevaluating its operating segments and reporting
segments going forward after the acquisition of 42West in
accordance with the criteria for identification of operating and
reporting segments in ASC 280. The Company expects its evaluation
to be completed during the third quarter of 2017. Although, the
assessment has not been completed as of the end of first quarter of
2017, the Company may identify 42West as a second reportable
segment and will begin making the segment disclosures required by
ASC 280 starting in the second quarter of 2017.
NOTE
4 — ACQUISITION OF 42WEST
On March 30, 2017,
Dolphin Digital Media, Inc. (the “Company”) entered
into a Membership Interest Purchase Agreement (the “Purchase
Agreement”), by and among the Company and the Sellers.
Pursuant to the Purchase Agreement, on March 30, 2017, the Company
acquired from the Sellers 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
publicity, strategic communications and entertainment content
marketing.
The consideration
paid by the Company in connection with the 42West Acquisition was
$18,666,666 (less, the amount of 42West’s transaction
expenses paid by 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 $4.61 per share, plus the potential to earn up to
an additional $9.3 million (less payment of certain taxes) in
shares of Common stock, determined based on $4.61 per share.
Additionally, the Company paid $541,160 in shares of Common Stock,
determined based on $4.61 per share, to settle the Sellers’
42West capital accounts. As a result, the Company (i) issued
1,230,280 shares of Common Stock to the Sellers on the closing date
(the “Initial Consideration”), (ii) (a) issued 344,550
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)
may issue up to 118,655 shares of Common Stock as employee stock
bonuses (the “Employee Bonus Shares”) upon the
effectiveness of a registration statement on Form S-8 promulgated
under the Securities Act of 1933, as amended (the “Securities
Act”), registering the Employee Bonus Shares, and (c) will
issue approximately 1,535,125 shares of Common Stock to the
Sellers, and 426,696 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 1,712,828 shares of
Common Stock to the Sellers, and 250,298 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"). None of the Common Stock included in
the Stock Consideration have been registered under the Securities
Act.
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
118,655 Employee Bonus Shares and the potential issuance of 235,575
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 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, but will be recorded as
compensation cost in the Company’s consolidated statements of
operations over the employees’ requisite service
periods.
The Purchase
Agreement contains customary representations, warranties and
covenants.
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 2,374,187 of their shares of Common
Stock received as Stock Consideration for a purchase price equal to
$4.61 per share during certain specified exercise periods set forth
in the Put Agreements up until December 2020 (the “Put
Rights”).
F-53
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 are expected to
be 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 is eligible 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 $23,458,767, which consisted of the following:
|
Common Stock issued
at closing and in April 2017 (1,574,830 shares)
|
$6,693,028
|
|
Fair value of Common Stock issuable on
January 2, 2018 (1,961,821 shares)
|
8,337,739
|
|
Fair value of
Contingent Consideration
|
3,541,000
|
|
Fair value of Put
Rights
|
4,000,000
|
|
Sellers’
transaction costs paid at closing
|
260,000
|
|
Sellers’ tax
liabilities assumed
|
627,000
|
|
|
$23,458,767
|
The Company has
engaged an independent third party valuation expert to determine
the fair values of the various forms of consideration transferred,
which is not yet complete. The fair values of the Contingent
Consideration, Put Rights and Sellers’ tax liabilities
assumed are provisional pending receipt of the final valuations for
these items. The final amount of consideration may also potentially
change due to any working capital or other closing adjustments,
which have not yet been determined.
The fair values of
the 1,574,830 shares of Common Stock issued at closing and in April
2017 and the 1,961,821 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
$4.25 per share.
The Earn-Out
Consideration arrangement requires the Company to pay up to 1,727,551 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 at the acquisition date was
$3,541,000. 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 acquisition
date. The key assumptions in applying the Monte Carlo
Simulation model are as follows: a risk-free discount rate of 1.55%
based on the U.S government treasury obligation with a term similar
to that of the contingent consideration, an annual asset volatility
estimate of 65%, and an estimated adjusted EBITDA figure of
$3,200,000 million as of the acquisition date.
F-54
The provisional
fair value of the Put Rights at the acquisition date of was
$4,000,000 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 80%
based on the stock price volatility of the Company and certain
publicly traded companies operating in the advertising services
industry.
The fair value of
the sellers’ tax liabilities assumed of $627,000 is made up
of (a) estimates of taxes to be payable upon the issuance of the
Initial Consideration and Post-Closing Consideration, of $242,000
and $261,000, respectively, based on an estimated tax rate of 3% on
estimated taxable amounts, and (b) an estimated fair value of
possible tax liabilities to be owed by the Sellers related to the
shares which may be issued as part of the Contingent Consideration
(the “Contingent Tax Liability”). The fair
value of the Contingent Tax Liability was estimated by applying a
3% estimated tax rate to the estimated fair value of the Contingent
Consideration, which as described above, was estimated using the
Monte Carlo Simulation model incorporating significant inputs that
are not observable in the market. Thus, the estimated fair value of
the Contingent Tax Liability represents a Level 3 measurement as
defined in ASC 820. Since the 3% tax rate and the taxable amounts
are estimates based on the information that is obtainable at the
acquisition date, the estimated fair values of the sellers’
tax liabilities assumed are provisional and are subject to
change.
The following table
summarizes the estimated fair values of the assets acquired and
liabilities assumed at the acquisition date, March 30, 2017. The
Company’s independent third party valuation expert is in the
process of determining the fair values of the consideration
transferred to acquire 42West and certain intangible assets
acquired; thus, the provisional measurements of accounts
receivable, other assets, rental liabilities, accounts payable and
accrued expenses, intangible assets, goodwill, property, equipment
and leasehold improvements and deferred income tax liabilities in
the table below are subject to change.
|
Cash
|
$273,625
|
|
Accounts
receivable
|
1,706,644
|
|
Property, equipment
and leasehold improvements
|
1,087,962
|
|
Other
assets
|
265,563
|
|
Intangible
assets
|
9,110,000
|
|
Total identifiable
assets acquired
|
12,443,794
|
|
|
|
|
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
|
9,462,430
|
|
Goodwill
|
13,996,337
|
|
Net assets
acquired
|
$23,458,767
|
Of the $9,110,000
of acquired intangible assets, $5,980,000 was assigned to customer
relationships (10-year useful life), $2,760,000 was assigned to the
trade name (10-year useful life), and $370,000 was assigned to
non-competition agreements (3-year useful life), that were
recognized at fair value on the acquisition date. The fair value of
the acquired identifiable intangible assets is provisional pending
receipt of the final valuations for these assets.
F-55
The provisional
fair value of accounts receivable acquired is $1,706,644, with the
gross contractual amount being $1,941,644. The Company expects
$235,000 to be uncollectible.
The provisional
fair values of property 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 provisional
$13,996,337 of goodwill was assigned to the Entertainment Public
Relations reporting unit. 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
recognized $287,708 of acquisition related costs that were expensed
in the three months ended March 31, 2017. These costs are included
in the condensed consolidated statements of operations in the line
item entitled “acquisition related costs.”
The impact of
42West’s revenue and earnings, for the one day between the
acquisition date (March 30, 2017) and March 31, 2017, to revenues
and net loss recorded in the condensed consolidated statement of
operations for the three months ended March 31, 2017 is de
minimis.
The following
represents the pro forma consolidated operations for the three
months ended March 31, 2017 and 2016 as if 42West had been acquired
on January 1, 2016 and its results had been included in the
consolidated results of the Company:
|
Pro
Forma Consolidated Statements of Operations
|
||
|
|
Three months ended
March 31,
|
|
|
|
2017
|
2016
|
|
Revenues
|
$5,222,422
|
$4,925,286
|
|
Net income
(loss)
|
5,678,194
|
(2,906,009)
|
These amounts have
been calculated after applying the Company’s accounting
policies and adjusting the results of 42West to reflect the
amortization that would have been charged assuming the intangible
assets had been recorded on January 1, 2006, together with the
consequential tax effects. The 2017 pro forma earnings were
adjusted to exclude $287,708 of acquisition related costs that were
expensed during 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
months ended March 31, 2017, revenues earned from motion pictures
were $532,866 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. The Company did not earn any revenues
from motion pictures during the three months ended March 31,
2016. The Company amortized capitalized production
costs (included as direct costs) in the condensed consolidated
statements of operations using the individual film forecast
computation method in the amount of $517,303 during the three
months ended March 31, 2017, related to Max Steel. Subsequent to the
release of the movie, 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 March 31, 2017,
and December 31, 2016, the Company had a balance of $3,760,652, and
$4,189,930, respectively recorded as capitalized production costs
related to Max
Steel.
F-56
The Company has
purchased scripts, including one from a related party, for other
motion picture productions and has capitalized $230,000 and
$215,000 in capitalized production costs as of March 31, 2017 and
December 31, 2016 associated with these scripts. The Company
intends to produce these projects but they were not yet in
production as of March 31, 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 and the distributor
will assist the Company in releasing its completed motion picture.
As of March 31, 2017, the Company had not been notified by the
distributer that it intends to produce the motion
picture.
As of March 31,
2017, and December 31, 2016, respectively, the Company has total
capitalized production costs of $3,990,652 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 began production of a new
digital project showcasing favorite restaurants of NFL players
throughout the country. The Company entered into a co-production
agreement and is responsible 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. During the three months ended March
31, 2017 and 2016, the Company did not earn any revenues related to
digital projects.
As of March
31, 2017, and December 31, 2016, respectively, the Company has
total capitalized production costs of $251,444 and $249,083, net of
accumulated amortization, tax incentives and impairment charges,
recorded on its condensed consolidated balance sheet related to the
digital project.
The Company has
assessed events 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 capitalized and did
not identify indicators of impairment, other than those noted above
related to Max
Steel.
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. As of March 31, 2017 and December 31, 2016,
the Company had a balance of $1,716,219 and $3,668,646,
respectively, in accounts receivable related to the revenues of
Max Steel.
The Company’s
trade accounts receivable related to its entertainment public
relations 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 March 31, 2017, the Company had a
balance of $1,706,644, net of $235,000 of allowance for doubtful
accounts of accounts receivable related to the entertainment PR
business as of March 31, 2017 (note 4).
Other Current
Assets
The Company had a
balance of $382,755 and $2,665,781 in other current assets on its
condensed consolidated balance sheets as of March 31, 2017 and
December 31, 2016, respectively. As of March 31, 2017,
these amounts were primarily comprised of prepaid loan
interest. As of December 31, 2016, these amounts were
primarily comprised of tax incentive receivables, and prepaid loan
interest.
Tax Incentives -The Company has
access to government programs that are designed to promote film
production in the jurisdiction. As of March 31, 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.
F-57
Prepaid Interest – The
Company entered into a loan and security agreement to finance the
distribution and marketing costs of a motion picture and prepaid
interest related to the agreement. As of March 31, 2017, and
December 31, 2016, there was a balance of $382,542 and $602,697 of
prepaid interest.
NOTE
6 —PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Property, equipment
and leasehold improvement consists of:
|
|
March
31,
2017
|
December
31,
2016
|
|
Furniture and
fixtures
|
$577,217
|
$65,310
|
|
Computers and
equipment
|
270,604
|
41,656
|
|
Leasehold
improvements
|
354,756
|
7,649
|
|
|
1,202,577
|
114,615
|
|
Less: accumulated
depreciation
|
(84,063)
|
(79,428)
|
|
|
$1,118,514
|
$35,187
|
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. The balances as of
March 31, 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 The
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% ownership interest in VRC. The Company had a balance
of $220,000 on its condensed consolidated balance sheet as of March
31, 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.
F-58
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 $5.00 per
share and issued 2,630,298 shares of Common Stock.
During the three
months ended March 31, 2017 and 2016, the Company expensed $0 and
$403,808, respectively in interest related to the First Loan and
Security Agreements. The Company did not have any debt outstanding
or accrued interest as of March 31, 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 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
840,910 shares of Common Stock at an exchange price of $5.00 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
three months ended March 31, 2016, the Company recorded a loss on
extinguishment of debt in the amount of $576,676 due to the market
price of the Common Stock being $6.00 per share on the date of the
exchange.
During the three
months ended March 31, 2017 and 2016, the Company recorded expense
of $0 and $243,254 respectively, in interest related to the Web
Series Loan and Security Agreements. The Company did not have any
debt outstanding or accrued interest as of March 31, 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 Dolphin Entertainment, 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.
F-59
During 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 $5.00 per share and issued
868,870 shares of Common Stock. During 2016, the Company
repaid one of the Second Loan and Security Noteholders its
principal investment of $300,000.
During the three
months ended March 31, 2017 and 2016, the Company recorded interest
expense of $0 and $263,190, respectively, related to the Second
Loan and Security Agreements. The Company did not have
any debt outstanding or accrued interest as of March 31, 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. The Company does not
purport the arrangements to be a sale and the Company has
significant continuing involvement in the generation of cash flows
due to the noteholders.
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 $14,500,000 non-revolving credit facility that
matures on August 25, 2017. The proceeds of the credit facility
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 Loan and Security Agreement, 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,
but without recourse to the assets of the Company. During the three
months ended March 31, 2017, the Company agreed to allow the lender
to apply the balance held as Restricted Cash to the loan balance.
The loan is also partially secured by a $4,500,000 corporate
guaranty from a party associated with the film. The lender has
retained a reserve of $1,531,871 for loan fees and interest (the
"Reserve"). Amounts borrowed under the credit facility will accrue
interest at either (i) a fluctuating per annum rate equal to the
5.5% plus a base rate or (ii) a per annum rate equal to 6.5% plus
the LIBOR determined for the applicable interest period. As March
31, 2017 and December 31, 2016, the Company had an outstanding
balance of $9,688,855 and $12,500,000, respectively, including the
Reserve, related to this agreement recorded on the condensed
consolidated balance sheets. On its condensed consolidated
statement of operations for the three months ended March 31, 2017,
the Company recorded (i) interest expense of $220,155 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
film, 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 $1,296,499 and $1,147,520, respectively, as of
March 31, 2017 and December 31, 2016 in other current 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.
F-60
As of March 31,
2017, and December 31, 2016 the Company had outstanding balances of
$3,211,387 and $6,243,069, respectively, related to this debt on
its condensed consolidated balance sheets.
Line
of Credit
The Company’s
subsidiary, 42West has a $1,500,000 revolving credit line agreement
with City National Bank (“City National”), which
matures on August 31, 2017. The Company has notified
City National of its intention to renew the credit line on
substantially identical terms. Borrowings bear
interest at the bank’s prime lending rate plus 0.875%. The
debt, including letters of credit outstanding, is collateralized by
substantially all of the assets of 42West and guaranteed by the
Principal Sellers of 42West. The credit agreement
requires the Company to meet certain covenants and includes
limitations on distributions to members. The outstanding
loan balance as of March 31, 2017 is $500,000.
NOTE
9 — 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 all of the convertible note into Common Stock. The
convertible note had a conversion price of $5.00 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 632,800 shares of Common
Stock were issued in satisfaction of the convertible note payable.
For the three months ended March 31, 2017 and 2016, the Company
recorded interest expense of $0 and $31,207 on its condensed
consolidated statements of operations.
NOTE
10— NOTES PAYABLE
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
payments were made on the note during the three months ended March
31, 2017. The Company recorded accrued interest of
$142,192 and $134,794 as of March 31, 2017 and December 31, 2016,
respectively related to this note. As of each March 31, 2017 and
December 31, 2016, the Company had a balance of $300,000 on its
condensed consolidated balance sheets related to this note
payable.
The Company
expensed $7,397 and $7,479, respectively for the years ended March
31, 2017 and December 31, 2016, respectively for interest related
to this note.
During 2011, 42West
entered into an agreement to purchase the interest of one of its
members. Pursuant to the agreement, the outstanding
principal, along with any accrued interest, shall be payable
immediately if 42West sells, assigns, transfers, or otherwise
disposes all or substantially all of its assets and/or businessa
prior to December 31, 2018. As of March 31, 2017, the Company
had a balance of $525,000 related to ths agreement. In
connection with the Company’s acquisition of the membership
interest 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 March 31, 2017 of $525,000 has been included
in current liabilities on the accompanying balance sheet.
F-61
NOTE
11 — LOANS FROM RELATED PARTY
On December 31, 2011, the Company issued an
unsecured revolving promissory note (the “DE Note”) to
Dolphin Entertainment, an entity wholly owned by the Company's CEO.
The DE Note accrued interest at a rate of 10% per annum. Dolphin
Entertainment had the right at any time to demand that all
outstanding principal and accrued interest be repaid with a ten-day
notice to the Company. On March 4, 2016, the Company entered into a
subscription agreement (the “Subscription Agreement”)
with Dolphin Entertainment. Pursuant to the terms of the
Subscription Agreement, the Company and Dolphin Entertainment
agreed to convert the $3,073,410 aggregate amount of principal and
interest outstanding under the DE Note into 614,682 shares of
Common Stock. The shares were converted at a price of $5.00
per share. On the date of the conversion that market price of the
shares was $6.00 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 three months ended
March 31, 2016. During the three months ended March 31, 2016,
the Company recorded interest expense in the amount of $32,008 on
its condensed consolidated statement of
operations.
In addition, Dolphin Entertainment 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’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 Dolphin Entertainment by
Dolphin Films. During 2016, Dolphin Films entered into a promissory
note with Dolphin Entertainment (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 three months ended March 31, 2017, the Company agreed to
include certain script costs and other payables totaling $594,315
that were owed to Dolphin Entertainment as part of the New DE Note.
During the three months ended March 31, 2017, the Company received
proceeds related to the New DE Note from Dolphin Entertainment in
the amount of $672,000 and repaid Dolphin Entertainment
$456,330. As of March 31, 2017, and December 31, 2016,
Dolphin Films owed Dolphin Entertainment $1,244,310 and $684,326,
respectively, that was recorded on the condensed consolidated
balance sheets. Dolphin Films recorded interest expense of $23,287
for the three months ended March 31,
2017.
NOTE
12 — FAIR VALUE MEASUREMENTS
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 18), for
which a liability is recorded in the aggregate and measured at fair
value in the consolidated balance sheets on a recurring basis, and
the change in fair value from one reporting period to the next is
reported as income or expense in the consolidated statements of
operations. On March 30, 2017, Warrants J and K were
exercised.
The Company records
the fair value of the liability in the condensed consolidated
balance sheets under the caption “Warrant liability”
and records changes to the liability against earnings or loss under
the caption “Changes in fair value of warrant
liability” in the condensed consolidated statements of
operations. The carrying amount at fair value of the
aggregate liability for the Warrants recorded on the condensed
consolidated balance sheet at March 31, 2017 and December 31, 2016
is $3,636,865 and $20,405,190. Due to the decrease in
the fair value of the Warrant Liability for the period in which the
Warrants were outstanding during the three months ended March 31,
2017, the Company recorded a gain on the warrant liability of $
6,823,325 in the condensed consolidated statement of operations for
the three months ended March 31, 2017.
F-62
The Warrants
outstanding at March 31, 2017 have the following
terms:
|
|
Issuance
Date
|
Number of Common
Shares
|
Per Share
Exercise Price
|
Remaining Term
(Month)
|
Expiration
Date
|
|
Series G
Warrants
|
November 4,
2016
|
1,500,000
|
$4.61
|
9
|
January 31,
2018
|
|
Series H
Warrants
|
November 4,
2016
|
500,000
|
$4.61
|
21
|
January 31,
2019
|
|
Series I
Warrants
|
November 4,
2016
|
500,000
|
$4.61
|
31
|
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 March 31,
2017:
|
|
As of March 31,
2017
|
||
|
Inputs
|
Series
G
|
Series
H
|
Series
I
|
|
Volatility
(1)
|
62.9%
|
81.0%
|
73.0%
|
|
Expected term
(years)
|
.83
|
1.83
|
2.83
|
|
Risk free interest
rate
|
.990%
|
1.230%
|
1.462%
|
|
Common stock
price
|
$4.25
|
$4.25
|
$4.25
|
|
Exercise
price
|
$4.61
|
$4.61
|
$4.61
|
(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.
F-63
For the Warrants,
which measured at fair value categorized within Level 3 of the fair
value hierarchy, the following is a reconciliation of the fair
values from December 31, 2016 to March 31, 2017:
|
|
Warrants
“G”,
“H” and “I”
|
Warrants
“J”
and “K”
|
Total
|
|
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
|
(2,757,071)
|
(4,066,254)
|
(6,823,325)
|
|
Exercise of
“J” and “K” Warrants
|
-
|
(9,945,000)
|
(9,945,000)
|
|
Ending fair value
balance reported in the condensed consolidated balance sheet at
March 31, 2017
|
$3,636,865
|
$-
|
$3,636,865
|
There were no
assets or liabilities carried at fair value on a recurring basis at
March 31, 2016.
NOTE
13— LICENSING AGREEMENT - RELATED PARTY
The Company has
entered into a ten-year licensing agreement with Dolphin
Entertainment, a related party. Under the license, the Company is
authorized to use Dolphin Entertainment’s brand properties in
connection with the creation, promotion and operation of
subscription based Internet social networking websites for children
and young adults. The license requires that the Company pays to
Dolphin Entertainment, Inc. royalties at the rate of fifteen
percent of net sales from performance of the licensed activities.
The Company did not use any of the brand properties related to this
agreement and as such, there was no royalty expense for the three
months ended March 31, 2017 and 2016.
NOTE
14 — DEFERRED REVENUE
During the year
ended December 31, 2014, 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 distributors and recorded $1,371,687 of
revenue from production from these deposits. As of March
31, 2017 and December 31, 2016, the Company recorded $26,428 and
$46,681 as deferred revenue on its condensed consolidated balance
sheets.
NOTE
15 – 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.
F-64
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 March 31, 2017 and
December 31, 2016, and in the statements of operations and
statements of cash flows presented herein for the three months
ended March 31, 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
|
JB
Believe LLC
|
||||
|
(in
USD)
|
As
of and for the three ended March 31, 2017
|
As
of December 31, 2016
|
As
of and for the three ended March 31, 2016
|
As
of and for the three ended March 31, 2017
|
As
of December 31, 2016
|
As
of and for the three ended March 31, 2016
|
|
Assets
|
8,839,208
|
12,327,887
|
18,293,811
|
-
|
240,269
|
132,564
|
|
Liabilities
|
(13,063,380)
|
(15,922,552)
|
(19,711,156)
|
(6,762,058)
|
(7,014,098)
|
(6,770,943)
|
|
Revenues
|
517,303
|
9,233,520
|
-
|
15,563
|
133,331
|
-
|
|
Expenses
|
(1,146,810)
|
(11,627,444)
|
(216,707)
|
(3,792)
|
(395,374)
|
(126.881)
|
NOTE
16 — STOCKHOLDERS’ DEFICIT
A)
Preferred
Stock
The Company’s
Amended 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.
F-65
On October 14,
2015, the Company amended its Articles of Incorporation to
designate 4,000,000 preferred shares, as “Series B
Convertible Preferred Stock” with a $0.10 par value. Each
share of Series B Convertible Preferred Stock is convertible, at
the holders request, into 0.95 shares of Common
Stock. Holders of Series B Convertible Preferred Stock
do not have any voting rights.
On October 16,
2015, the Company and T Squared Partners LP ("T Squared") entered
into a Preferred Stock Exchange Agreement whereby 1,042,753 shares
of Series A Convertible Preferred Stock were to be exchanged for
1,000,000 shares of Series B Convertible Preferred Stock upon
satisfaction of certain conditions. On March 7, 2016, all
conditions were satisfied and, pursuant to the Preferred Stock
Exchange Agreement, the Company issued to T Squared Partners LP
1,000,000 shares of Series B Convertible Preferred Stock. The
Company retired the 1,042,753 shares of Series A Convertible
Preferred Stock it received in the exchange. The Company recorded a
preferred stock dividend in additional paid in capital of
$5,227,247 related to this exchange. On November 14, 2016, T
Squared notified the Company that it would convert 1,000,000 shares
of Series B Preferred Stock into 950,000 shares of the Common Stock
effective November 16, 2016.
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”. Each share of Series C Convertible Preferred
Stock will be convertible into one-twentieth (1/20) of a share of
common stock, subject to adjustment for each issuance of common
stock (but not upon issuance of common stock equivalents) that
occurred, or occurs, from the date of issuance of the Series C
Convertible Preferred Stock (the “issue date”) until
the fifth (5th) anniversary of the issue date (i) upon the
conversion or exercise of any instrument issued on the issued date
or thereafter issued (but not upon the conversion of the Series C
Convertible Preferred Stock), (ii) upon the exchange of debt for
shares of common stock, or (iii) in a private placement, such that
the total number of shares of common stock held by an
“Eligible Class C Preferred Stock Holder” (based on the
number of shares of common stock held as of the date of issuance)
will be preserved at the same percentage of shares of common stock
outstanding held by such Eligible Class C Preferred Stock Holder on
such date. An Eligible Class C Preferred Stock Holder means any of
(i) Dolphin Entertainment for so long as Mr. O’Dowd continues
to beneficially own at least 90% 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. The Certificate of Designation also provides for
dividend rights of the Series C Convertible Preferred Stock on
parity with the Company’s Common Stock.
On March 7, 2016,
as the Merger Consideration related to the Company’s merger
with Dolphin Films, Dolphin Entertainment was issued 2,300,000
shares of Series B Convertible Preferred Stock and 1,000,000 shares
of Series C Convertible Preferred Stock. On November 15, 2016, Mr.
O’Dowd converted 2,300,000 shares of Series B Convertible
Preferred Stock into 2,185,000 shares of the Company’s Common
Stock.
F-66
As
of March 31, 2017 and December 31, 2016, the Company did not have
any Series A or Series B Convertible Preferred Stock outstanding
and 1,000,000 shares of Series C Convertible Preferred Stock issued
and outstanding.
B)
Common
Stock
The Company’s
Articles of Incorporation previously authorized the issuance of
200,000,000 shares of Common Stock. 500,000 shares have been
designated for the 2012 Omnibus Incentive Compensation Plan (the
“2012 Plan”). As of March 31, 2017, and December 31,
2016, no awards have been issued in connection with this
plan. On February 23, 2016, the Company filed Articles of
Amendment to the Amended Articles of Incorporation with the
Secretary of State of the State of Florida to increase the number
of authorized shares of its Common Stock from 200,000,000 to
400,000,000.
On February 16,
2017, the Company entered into a subscription agreement pursuant to
which the Company issued and sold to an investor 100,000 shares of
Common Stock at a price of $5.00 per Share. This transaction
provided $500,000 in proceeds for the Company.
On March 30, 2017,
the Company entered into a Membership Interest Purchase Agreement
to acquire a 100% membership interest in 42West. The
Company issued 1,230,280 shares of Common Stock at a price of $4.61
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 K to
purchase 2,170,000 and 170,000, respectively, of shares of Common
Stock at a purchase price of $0.015 per share. This
transaction provided $35,100 in proceeds for the Company. See note
12 for further discussion.
As of March 31,
2017, and December 31, 2016, the Company had 18,065,801 and
14,395,521 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 during 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” and the
Company was responsible for paying all associated operating
expenses. On December 29, 2016, as part of a global agreement with
the 25% member of Dolphin Kids Clubs, the Company entered into a
Purchase Agreement and acquired the 25% noncontrolling interest of
Dolphin Kids Clubs. In exchange for the 25% interest,
the Company issued Warrant “J” that entitles the
warrant holder to purchase shares of common stock at a price of
$0.015 per share. See notes 12 and 18 for further
discussion of Warrant “J”.
F-67
NOTE
17 —EARNINGS (LOSS) PER SHARE
The following table
sets forth the computation of basic and diluted income (loss) per
share:
|
|
Three months ended
March 31,
|
|
|
|
2017
|
2016
|
|
Numerator:
|
|
|
|
Net income
(loss)
|
$4,961,788
|
$(3,448,848)
|
|
Preferred stock
deemed dividend
|
-
|
(5,227,247)
|
|
Change in fair
value of Warrants "J" and "K" (note 12)
|
4,066,254
|
-
|
|
Numerator for basic
and diluted income (loss) per share – income (loss) available
to common stockholders
|
$895,534
|
$(8,676,095)
|
|
|
|
|
|
Denominator:
|
|
|
|
Denominator for
basic EPS — weighted–average shares
|
14,477,413
|
4,678,469
|
|
Effect of dilutive
securities:
|
|
|
|
Warrants
|
2,757,071
|
-
|
|
Shares issuable in
January 2018 and Employee Bonus Shares issuable in connection with
the 42West acquisition (Note 4)
|
71,133
|
-
|
|
Denominator for
diluted EPS — adjusted weighted-average shares assuming
exercise of warrants
|
17,305,617
|
4,678,469
|
|
|
|
|
|
Basic income (loss)
per share
|
$0.34
|
$(1.85)
|
|
Diluted Income
(loss) per share
|
$0.05
|
$(1.85)
|
The Company
reflected the preferred stock deemed dividend related to exchange
of Series A for Series B Preferred Stock of $5,227,247 recorded in
the three months ended March 31, 2016 (note 16) in the numerator
for calculating basic and diluted loss per share for the three
months ended March 31, 2016, as the loss for holders of Common
Stock would be increased by that amount.
Warrants to
purchase 5,890,000 shares and of common stock were outstanding at
December 31, 2016. During the three months ended March 31, 2017,
warrants for 2,340,000 shares were exercised. (See note 18)
The denominator used to compute diluted income per share for the
three months ended March 31, 2017 includes the effect of assumed
exercises of dilutive warrants during the quarter. The numerator
for diluted earnings (loss) per share for the three months ended
March 31, 2017 subtracts the gain for the change in fair value of
warrant liability of $4,066,254 related to the Warrants
“J” and Warrants “K” included in net income
for the quarter that would not have been recorded had the warrants
been exercised at the beginning of the period.
Due to the net loss
reported for the three months ended March 31, 2016, the denominator
used to compute diluted loss per share did not include the effect
of 1,050,000 warrant shares outstanding during the quarter, as
inclusion would be anti-dilutive.
NOTE
18 — WARRANTS
A summary of
warrants outstanding at December 31, 2016 and issued, exercised and
expired during the three months ended March 31, 2017 is as follows
(amounts have been adjusted to reflect the reverse stock
split):
|
|
|
Weighted
|
|
|
|
Avg.
|
|
|
|
Exercise
|
|
Warrants:
|
Shares
|
Price
|
|
Balance at December
31, 2016
|
5,890,000
|
$2.99
|
|
Issued
|
—
|
—
|
|
Exercised
|
2,340,000
|
.02
|
|
Expired
|
—
|
—
|
|
Balance at March
31, 2017
|
3,550,000
|
$4.95
|
F-68
On March 10, 2010,
T Squared Investments, LLC (“T Squared”) was issued
Warrant “E” for 350,000 shares of the Company. at an
exercise price of $5.00 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 $0.002 per share. Each time a
payment by T Squared is made to Dolphin, a side letter will be
executed by both parties that states 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 $0.002 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”. T Squared did not make any payments
during the three months ended March 31, 2017 to reduce the exercise
price of the warrants. As such, the current exercise price is $0.22
per share.
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
350,000 warrants to T Squared (“Warrant “F”) with
an exercise price of $5.00 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 $0.002 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 three months ended March 31, 2017 to reduce the exercise
price of the warrants.
On September 13,
2012, the Company sold 350,000 warrants with an exercise price of
$5.00 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 $0.002 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 three months ended March 31, 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:
|
Number of
Shares
|
Exercise price
at
March 31,
2017
|
Original
Exercise Price
|
Fair Value as
of
March 31,
2017
|
Fair Value as of
December 31, 2016
|
Expiration
Date
|
|
Warrant
“G”
|
1,500,000
|
$4.61
|
$5.00
|
$1,607,173
|
$3,300,671
|
January 31,
2018
|
|
Warrant
“H”
|
500,000
|
$4.61
|
$6.00
|
971,121
|
1,524,805
|
January 31,
2019
|
|
Warrant
“I”
|
500,000
|
$4.61
|
$7.00
|
1,058,571
|
1,568,460
|
January 31,
2020
|
|
|
2,500,000
|
|
|
$3,636,865
|
$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 $0.01 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 $0.01 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.
F-69
On March 31, 2016,
the Company issued shares of Common Stock at a purchase price of
$4.61 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 $4.61.
Due to the
existence of the antidilution provision, the Warrants
“G”, “H” and “I” are carried in
the condensed consolidated financial statements as of March 31,
2017 and December 31, 2016 as derivative liabilities at fair value
(see note 12)
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 $0.15 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 12). On March 30, 2017, the holders of Warrants J and K
exercised their warrants and were issued 2,340,000 shares of Common
Stock. The Company received $35,100 of proceeds from the
transaction.
NOTE
19— 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
his agreement, he received a $1,000,000 signing bonus in 2012 that
is recorded in accrued compensation on the condensed consolidated
balance sheets. Any unpaid and accrued compensation due to the CEO
under this agreement will accrue interest on the principal amount
at a rate of 10% per annum from the date of this agreement until it
is paid. The agreement included provisions for disability,
termination for cause and without cause by the Company, voluntary
termination by executive and a non-compete clause. The Company
accrued $2,312,500 and $2,250,000 of compensation as accrued
compensation and $791,210 and $735,211 of interest in other current
liabilities on its condensed consolidated balance sheets as of
March 31, 2017 and December 31, 2016, respectively, in relation to
Mr. O’Dowd’s employment. For the three months ended
March 31, 2017 and 2016, the Company recorded interest expense of
$55,999 and $50,382, respectively, on the condensed consolidated
statements of operations.
On October 14,
2015, the Company and Merger Subsidiary, a wholly owned subsidiary
of the Company, entered into a merger agreement with Dolphin Films
and Dolphin Entertainment, 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 three months ended March 31, 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 1,000,000 shares of Series C Convertible Preferred
Stock, par value $0.001 per share to Dolphin
Entertainment.
On March 30, 2017, in connection with the 42West
Acquisition, the Company and Mr. O’Dowd, as personal
guarantor, entered into four separate Put Agreements with each of
the Sellers of 42West, pursuant to which the Company has granted
each of the Sellers the right to cause the Company to purchase up
to an aggregate of 2,374,187 of their shares of Common Stock
received as Consideration for a purchase price equal to $4.61 per
share during certain specified exercise periods up until December
2020.
On March 30, 2017,
KCF Investments LLC and BBCF2011 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 2,340,000 shares of the Company’s
Common Stock at an exercise price of $0.015 per share.
F-70
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 Stockdale in the Superior Court of Justice in Ontario (Canada)
alleging breach of a commercial lease and breach of a personal
guaranty. On or about March 18, 2010, Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale filed a Statement of Defense
and Crossclaim. In the Statement of Defense, Winterman Group
Limited, Malcolm Stockdale and Sara Stockdale denied any liability
under the lease and guaranty. In the Crossclaim filed against
Dolphin Digital Media (Canada) Ltd., Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale seek contribution or indemnity
against Dolphin Digital Media (Canada) Ltd. alleging that Dolphin
Digital Media (Canada) agreed to relieve Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale from any and all liability
with respect to the lease or the guaranty. On or about March 19,
2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale
filed a Third-Party Claim against the Company seeking contribution
or indemnity against the Company, formerly known as Logica
Holdings, Inc., alleging that the Company agreed to relieve
Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from
any and all liability with respect to the lease or the guaranty.
The Third-Party Claim was served on the Company on April 6, 2010.
On or about April 1, 2010, Dolphin Digital Media (Canada) filed a
Statement of Defense and Crossclaim. In the Statement of Defense,
Dolphin Digital Media (Canada) denied any liability under the lease
and in the Crossclaim against Winterman Group Limited, Malcolm
Stockdale and Sara Stockdale, Dolphin Digital Media (Canada) seeks
contribution or indemnity against Winterman Group Limited, Malcolm
Stockdale and Sara Stockdale alleging that the leased premises were
used by Winterman Group Limited, Malcolm Stockdale and Sara
Stockdale for their own use. On or about April 1, 2010, Dolphin
Digital Media (Canada) also filed a Statement of Defense to the
Crossclaim denying any liability to indemnify Winterman Group
Limited, Malcolm Stockdale and Sara Stockdale. The ultimate results
of these proceedings against the Company cannot be predicted with
certainty. On or about March 12, 2012, the Court served a Status
Notice on all the parties indicating that since more than (2) years
had passed since a defense in the action had been filed, the case
had not been set for trial and the case had not been terminated,
the case would be dismissed for delay unless action was taken
within ninety (90) days of the date of service of the notice. The
Company has not filed for a motion to dismiss and no further action
has been taken in the case. The ultimate results of these
proceedings against the Company could result in a loss ranging from
0 to $325,000. On March 23, 2012, Dolphin Digital Media (Canada)
Ltd filed for bankruptcy in Canada. The bankruptcy will not protect
the Company from the Third-Party Claim filed against it. However,
the Company has not accrued for this loss because it believes that
the claims against it are without substance and it is not probable
that they will result in loss. As of March 31, 2017, the Company
has not received any other notifications related to this
action.
Tax Filings
For the year ended
December 31, 2011, 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 returns for the year ended December 31,
2009. The Company responded with a letter stating reasonable cause
for the noncompliance and requested that penalties be abated.
During 2012, the Company received a notice stating that the
reasonable cause had been denied. The Company decided to pay the
penalties and not appeal the decision for the 2009 Internal Revenue
Service notification. There is no associated interest expense as
the tax filings are for information purposes only and would not
result in further income taxes to be paid by the Company. The
Company made payments in the amount of $40,000 during the year
ended December 31, 2012 related to these penalties. At each of
March 31, 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 months
ended March 31, 2017 and 2016.
F-71
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. The Company intends to continue
promoting the online kids club with the remaining partners and it
does not anticipate any material change in the operations of the
online kids club.
The Company
recorded revenues of $0 and $17,278 related to the onlilne kids
clubs during the three months ended March 31, 2017 and 2016,
respectively.
Incentive Compensation Plan
During the year
ended December 31, 2012, the Company’s Board and a majority
of its shareholders approved the 2012 Plan. The 2012 Plan was
enacted as a way of attracting and retaining exceptional employees
and consultants by enabling them to share in the long term growth
and financial success of the Company. The 2012 Plan will be
administered by the Board or a committee designated by the Board.
As part of an increase in authorized shares approved by the Board
in 2012, 500,000 shares of Common Stock were designated for the
2012 Plan. No awards have been issued and, as such, the Company has
not recorded any liability or equity related to the 2012 Plan as of
March 31, 2017 and December 31, 2016.
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.
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.
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 be 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 Stock in the first year, no more than 1/3 of the Initial
Consideration 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 and Producer Participations
Per agreements with
talent, directors and producers on certain projects, the Company
will be responsible 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. As of March 31, 2017 and December 31, 2016,
the Company had not recorded any liability related to these
participations.
F-72
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 March 31, 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 September 30, 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% for the remainder of the lease.
The Company is also entitled to four half months of free rent over
the life of the agreement.
Future minimum
annual rent payments are as follows:
|
Period ended March 31,
|
|
|
April 1, 2017
– December 31, 2017
|
$1,166,410
|
|
2018
|
1,488,298
|
|
2019
|
1,436,981
|
|
2020
|
1,433,403
|
|
2021
|
1,449,019
|
|
Thereafter
|
4,675,844
|
|
|
$11,649,955
|
Rent expense,
including escalation charges, amounted to approximately $138,531
and $228,813 for the first three months ended March 31, 2017 and
2016 respectively.
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, 2016 in connection with the alleged
contribution obligations to the Plans. Based on a recent audit for
periods prior to June 7, 2011, 42West expects that the Plan may
seek to collect approximately $300,000 in pension plan
contributions, health and welfare plan contributions and union once
the audit is completed. The Company believes the
exposure to be probable and has recognized this liability in other
current liabilities on the condensed consolidated balance sheets as
of March 31, 2017.
NOTE
21 – SUBSEQUENT EVENTS
On April 10, 2017,
the Company signed two separate promissory notes and received
aggregate amount of $300,000. The promissory notes bear interest at
10% per annum and mature on October 10, 2017.
On April 13, 2017,
the Company issued the following shares of Common Stock as per the
42West Acquisition agreement; (i) 344,550 to certain designated
employees and (ii) 100,000 shares as an estimate for the Purchase
Consideration withheld on the date of closing related to the
working capital.
On April 13, 2017,
the Company issued 6,508 shares 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
$4.61 per share.
On April 13, 2017,
T Squared partially exercised Class E Warrants and acquired 325,770
shares of our common stock pursuant to the cashless exercise
provision in the related warrant agreement. T Squared had
previously paid down $1,675,000 for these shares.
On April 14, 2017, the
Principal Sellers of 42West, exercised put options in the aggregate
amount of 86,764 shares of Common Stock and were paid an aggregate
total of $400,000.
On April 18,
2017 the Company signed a promissory note and received $250,000.
The promissory note bears interest at 10% per annum and matures on
October 18, 2017.
On April 27, 2017, the
Company drew $250,000 from the line of credit to be used for
working capital.
Financial
Statements
For the
Years Ended December 31, 2016 and 2015
42
West, LLC
Chief
Operating Officer
42West,
LLC
220
West 42nd Street
12th
Floor
New
York, NY 10036
We have
audited the accompanying financial statements of 42 West, LLC,
which comprise the balance sheets as of December 31, 2016 and
2015, and the related statements of operations, changes in
members’ equity, and cash flows for the years then ended, and
the related notes to the financial statements.
Management’s Responsibility for the Financial
Statements
Management is
responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of
the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 42 West, LLC as
of December 31, 2016 and 2015, and the results of its
operations and its cash flows for the years then ended in
accordance with accounting principles generally accepted in the
United States of America.
/s/
BDO USA, LLP
June 7,
2017
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
Assets
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$1,279,056
|
$2,161,073
|
|
Accounts receivable
(net of allowance for doubtful accounts of $184,000 and $165,000,
respectively)
|
1,337,806
|
1,168,921
|
|
Shares
receivable
|
-
|
220,000
|
|
Prepaid income
taxes
|
26,150
|
-
|
|
Total
Current Assets
|
2,643,012
|
3,549,994
|
|
Property,
Equipment and Leasehold Improvements, Net
|
1,115,515
|
785,733
|
|
Investments
|
220,000
|
-
|
|
Security
Deposits
|
45,563
|
45,563
|
|
Total
Assets
|
$4,024,090
|
$4,381,290
|
|
Liabilities
and Members’ Equity
|
|
|
|
Current
Liabilities:
|
|
|
|
Bank loans
payable
|
$350,000
|
$-
|
|
Current portion of
note payable to a former member
|
300,000
|
300,000
|
|
Accounts
payable
|
435,110
|
350,441
|
|
Accrued
expenses
|
261,053
|
712,792
|
|
Settlement accrual,
current portion
|
300,000
|
340,000
|
|
Income taxes
payable
|
-
|
94,817
|
|
Deferred rent,
current portion
|
47,774
|
112,477
|
|
Deferred landlord
reimbursement, current portion
|
98,501
|
98,501
|
|
Deferred tax
liability
|
1,000
|
13,000
|
|
Total
Current Liabilities
|
1,793,438
|
2,022,028
|
|
Long-Term
Liabilities:
|
|
|
|
Note payable to a
former member, net of current portion
|
225,000
|
525,000
|
|
Settlement accrual,
noncurrent portion
|
-
|
260,000
|
|
Deferred rent,
noncurrent portion
|
383,502
|
356,080
|
|
Deferred landlord
reimbursement, noncurrent portion
|
385,794
|
484,295
|
|
Total
Long-Term Liabilities
|
994,296
|
1,625,375
|
|
Total
Liabilities
|
2,787,734
|
3,647,403
|
|
Members’
Equity
|
1,236,356
|
733,887
|
|
Total
Liabilities and Members’ Equity
|
$4,024,090
|
$4,381,290
|
See accompanying notes to financial statements.
|
|
Year Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Revenue
|
$18,563,749
|
$19,769,891
|
|
Operating
Expenses
|
13,593,299
|
13,413,057
|
|
Operating
Income Before Guaranteed Payments, Expenses Billed to Clients and
Settlement Expense
|
4,970,450
|
6,356,834
|
|
Guaranteed
Payments
|
1,197,660
|
1,197,660
|
|
Expenses
Billed to Clients
|
1,234,064
|
1,633,701
|
|
Settlement
Expense
|
40,000
|
60,000
|
|
Operating
Income
|
2,498,726
|
3,465,473
|
|
Other
Expenses:
|
|
|
|
Loss on disposal of
equipment
|
-
|
43,138
|
|
Interest
expense
|
21,505
|
14,825
|
|
Total
Other Expenses
|
21,505
|
57,963
|
|
Income
before Provision for Income Taxes
|
2,477,221
|
3,407,510
|
|
Provision
for Income Taxes
|
59,752
|
225,140
|
|
Net
Income
|
$2,417,469
|
$3,182,370
|
See accompanying notes to financial statements.
|
|
Year
Ended December 31,
|
|
|
|
2016
|
2015
|
|
Members’
Equity, Beginning of Period
|
$733,887
|
$17,517
|
|
Net
income
|
2,417,469
|
3,182,370
|
|
Less:
Members’ distributions
|
(1,915,000)
|
(2,466,000)
|
|
Members’
Equity, End of Period
|
$1,236,356
|
$733,887
|
See accompanying notes to financial statements.
|
|
Year Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Cash
Flows From Operating Activities:
|
|
|
|
Net
income
|
$2,417,469
|
$3,182,370
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
|
Depreciation and
amortization
|
213,846
|
211,794
|
|
Deferred
rent
|
(37,280)
|
(51,901)
|
|
Amortization of
landlord reimbursement
|
(98,501)
|
(98,501)
|
|
Loss on disposal of
equipment
|
-
|
43,138
|
|
Shares
receivable
|
-
|
(220,000)
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(168,885)
|
189,310
|
|
Accounts
payable
|
84,668
|
132,373
|
|
Accrued
expenses
|
(451,739)
|
(118,642)
|
|
Settlement
accrual
|
(300,000)
|
60,000
|
|
Deferred
taxes
|
(12,000)
|
22,000
|
|
Income taxes
payable/receivable
|
(120,967)
|
55,699
|
|
Net
Cash Provided By Operating Activities
|
1,526,611
|
3,407,640
|
|
Cash
Flows From Investing Activities:
|
|
|
|
Purchase of
equipment and leasehold improvements
|
(543,628)
|
(78,495)
|
|
Net
Cash Used In Investing Activities
|
(543,628)
|
(78,495)
|
|
Cash
Flows From Financing Activities:
|
|
|
|
Repayment of note
payable to a former member
|
(300,000)
|
(300,000)
|
|
Proceeds from
revolving credit facility
|
350,000
|
-
|
|
Distributions
|
(1,915,000)
|
(2,466,000)
|
|
Net
Cash Used In Financing Activities
|
(1,865,000)
|
(2,766,000)
|
|
Net
(Decrease) Increase in Cash
|
(882,017)
|
563,145
|
|
Cash,
Beginning of Period
|
2,161,073
|
1,597,928
|
|
Cash,
End of Period
|
$1,279,056
|
$2,161,073
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
Interest
|
$21,505
|
$14,825
|
|
Income
taxes
|
123,950
|
147,441
|
|
Supplemental
Disclosure of Noncash Investing Activities:
|
|
|
|
Conversion of
shares receivable
|
$220,000
|
$-
|
See accompanying notes to financial statements.
42 West, LLC
Notes to Financial Statements
1. Principal Business Activities
Organization and Business Activities
42
West, LLC (the “Company”) was organized, pursuant to
the laws of the State of Delaware in March 2005, as a public
relations firm specializing in “A” list entertainment
industry clientele with offices in New York and California. The
Company will continue in operation as provided for in the operating
agreement.
Basis of Presentation
The
accompanying financial statements for the years ended
December 31, 2016 and 2015 are stated in conformity with
generally accepted accounting principles. The operating results for
the periods presented are not necessarily indicative of results
that may be expected for any other period or for the full year. In
the opinion of management, the accompanying financial statements
contain all necessary adjustments, consisting only of those of a
recurring nature, and disclosures to present fairly the
Company’s financial position and the results of its
operations and cash flows for the periods presented.
2. Summary of Significant Accounting Policies
Use of Estimates in Financial Statements
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash
The
Company maintains an account in a bank located in the New York
metropolitan area. The excess of deposit balances reported by the
bank over amounts that would have been covered by federal insurance
was approximately $355,000 and $1,404,000 at December 31, 2016
and 2015, respectively.
Accounts Receivable and Allowance for Doubtful
Accounts
The
Company’s trade accounts receivable 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.
The policy for determining the past due status of receivables is
based on how recently payments have been received. Receivables are
charged off when they are deemed uncollectible.
Depreciation and Amortization
Property,
equipment, and improvements are stated at cost. Depreciation is
computed on the straight-line method over the estimated useful
lives of the related assets. Leasehold improvements are amortized
over the lesser of the term of the related lease or the estimated
useful lives of the assets.
Revenue
Recognition
Revenue
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.
Income Taxes
The
Company is taxed as a partnership for federal, New York State, and
California state tax purposes, whereby the Company’s income
is reported by the members. Accordingly, no provision has been made
for federal, New York State, and California State income taxes. The
Company remains liable for New York City Unincorporated Business
tax.
The
Company accounts for income taxes under the asset and liability
method, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined on the basis of
the differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment
date.
The
Company recognizes deferred tax assets to the extent that it
believes these assets are more likely than not to be realized. In
making such a determination, the Company considers all available
positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable
income, tax-planning strategies, and results of recent operations.
If the Company determines that it would be able to realize deferred
tax assets in the future in excess of their recorded amount, it
would make an adjustment to the deferred tax asset valuation
allowance, which would reduce the provision for income
taxes.
Guaranteed Payments
Guaranteed payments
to members that are intended as compensation for services rendered
are accounted for as Company expenses rather than as allocations of
the Company’s net income.
Deferred Landlord Reimbursement
Deferred landlord
reimbursement represents the landlord’s reimbursement for
tenant improvements of the Company’s office space. Such
amount is amortized on a straight-line basis over the term of the
lease.
Deferred Rent
Deferred rent
consists of the excess of the rent expense recognized on the
straight-line basis over the payments required under certain office
leases.
Investments
Investments in
equity securities are recorded at cost. Under this method, the
Company’s share of earnings or losses of such investee
companies is not included in the balance sheet or statement of
operations. However, impairment changes are recognized in the
statement of operations. If circumstances suggest that the value of
the investee company has subsequently been recovered, such recovery
is not recorded.
Advertising Costs
Advertising costs,
which are included in operating expenses, are charged to expense as
incurred. Advertising expense amounted to approximately $32,000 and
$72,000 for the years ended December 31, 2016 and 2015,
respectively.
3. Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, “Revenue from Contracts
with Customers.” ASU 2014-09 represents a comprehensive new
revenue recognition model that requires a company to recognize
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
Company expects to be entitled to receive in exchange for those
goods or services. This ASU sets forth a new five-step revenue
recognition model which replaces the prior revenue recognition
guidance in its entirety and is intended to eliminate numerous
industry-specific pieces of revenue recognition guidance that have
historically existed. In August 2015, the FASB issued
ASU 2015-14, “ Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date,” which deferred
the effective date of ASU 2014-09 by one year, but permits entities
to adopt one year earlier if they choose (i.e., the original
effective date). As such, ASU 2014-09 will be effective for annual
and interim reporting periods beginning after December 15,
2018. In addition, during March 2016, April 2016, May 2016 and
December 2016, the FASB issued ASU 2016-08, “Revenue
from Contracts with Customers (Topic 606): Principal versus Agent
Consideration (Reporting Revenue Gross versus Net,” ASU
No. 2016-10, “Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and
Licensing,” ASU 2016-12 “Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients” and ASU 2016-20, “Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers
(Topic 606),” respectively. These additional amendments
clarified the revenue recognition guidance on reporting revenue as
a principal versus agent, identifying performance obligations,
accounting for intellectual property licenses and on transition,
collectability, noncash consideration and the presentation of sales
and other similar taxes. The Company is currently evaluating the
impact of this standard on the Company’s results of
operations and financial position including possible transition
alternatives.
In
February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842).” The new standard establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU
asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as
either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. ASU 2016-02
is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with
early adoption permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases
existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with
certain practical expedients available. The Company is currently
evaluating the potential impact of the adoption of this
standard.
4. Property, Equipment and Leasehold Improvements
Property, equipment
and leasehold improvements consist of:
|
|
December
31,
2016
|
December
31,
2015
|
|
Furniture and
fixtures
|
$611,893
|
$234,195
|
|
Computers and
equipment
|
626,611
|
460,680
|
|
Leasehold
improvements
|
804,770
|
804,770
|
|
|
2,043,274
|
1,499,645
|
|
Less: Accumulated
depreciation
|
(927,759)
|
(713,912)
|
|
|
$1,115,515
|
$785,733
|
The
Company depreciates furniture and fixtures over a useful life of
seven years, computer and equipment over a useful life of five
years, and leasehold improvements over the remaining term of the
related lease (Note 12).
5. Accrued Expenses
Accrued
expenses consist of:
|
|
December
31,
2016
|
December
31,
2015
|
|
Bonuses
|
$61,357
|
$583,437
|
|
Commissions
|
151,000
|
73,316
|
|
Credit card
liabilities
|
-
|
30,318
|
|
Other accrued
expenses
|
48,696
|
25,721
|
|
|
$261,053
|
$712,792
|
6. Line of Credit
The
Company has a $1,500,000 revolving credit line agreement with City
National Bank, which matures on April 1, 2017. Borrowings bear
interest at the bank’s prime lending rate plus 0.875% (4.625%
at December 31, 2016). The debt, including letters of credit
outstanding, is collateralized by substantially all of the
Company’s assets, and guaranteed by certain members of the
Company. The credit agreement requires the Company to meet certain
covenants and includes limitations on distributions to members. The
Company is in compliance with covenants. At December 31, 2016,
the outstanding loan balance was $350,000 and there was no
outstanding loan balance at December 31, 2015. The Company incurred
interest expense of $21,505 and $14,825 for the years ended
December 31, 2016 and 2015, respectively.
7. Note Payable to a Former Member
Effective
August 31, 2011, the Company redeemed the interest of a member
for $2,625,000. The redemption agreement includes certain terms
relating to the adjustment of purchase price for failure to collect
certain account receivables and provisions for acceleration of
scheduled payments under conditions described in the agreement. As
of December 31, 2012, all stated accounts receivable were
collected. The note is payable in quarterly installments, as
defined in the agreement, through September 30, 2018. In the
event the Company defaults under the obligation, the former member
will be entitled to receive a membership interest in proportion to
the unpaid balance. The outstanding principal, along with any
accrued interest, shall be payable in full if any of the
following transactions occur prior to December 31, 2018: (i) four
or more of the current members sell at least 50% of their
membership interest in the Company to any party other than a trust,
current members, or employees; (ii) one or more third parties
acquire more than 50% of membership interest in the Company, (iii)
the Company sells, assigns, transfers, or otherwise disposes all or
substantially all of its assets and/or business, or (iv) the
Company is merged into another party whereby the Company ceases to
exist, or the members no longer own a controlling interest in the
Company.
Future
payments on this redemption are as follows:
|
Period ended December 31,
|
|
|
2017
|
$300,000
|
|
2018
|
225,000
|
|
|
$525,000
|
8. Investments
Investments, at
cost, consist of the following:
|
|
December
31,
2016
|
December
31,
2015
|
|
The Virtual Reality
Company (“VRC”)
|
$220,000
|
$-
|
In
exchange for services rendered to VRC throughout the year ended
December 31, 2015, the Company received both cash
consideration and a promissory note that was convertible into
common stock of VRC. On April 7, 2016, VRC closed an equity
financing round for approximately $22,700,000 of common stock
issued to a third party investor, which triggered the conversion of
all outstanding promissory notes into common stock of VRC. The
Company’s $220,000 investment in VRC represents 344,890
shares of common stock, a less than 1% ownership interest in
VRC. Investment in VRC is recorded at cost.
9. Income Taxes
The
components of income tax expense are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Current
|
$71,252
|
$203,140
|
|
Deferred
|
(12,000)
|
22,000
|
|
|
$59,752
|
$225,140
|
|
|
|
|
The
Company is a partnership and is not subject to federal or state
income tax in general. It is only subject to tax in New
York City which has a statutory rate of 4%. Net deferred
assets and liabilities are as follows:
|
|
December
31,
2016
|
December
31,
2015
|
|
Deferred tax
assets:
|
|
|
|
Effect of cash
basis accounting adjustments
|
$54,000
|
$34,000
|
|
Deferred tax
liabilities:
|
|
|
|
Effect of cash
basis accounting adjustments
|
(55,000)
|
(47,000)
|
|
Net deferred tax
liability
|
$(1,000)
|
$(13,000)
|
The
Company may be subject to examination by the Internal Revenue
Service (“IRS”) as well as states for calendar years
2013 through 2016. The Company has not been notified of any
federal or state income tax examinations.
10. Employee Benefits Plan
The
Company has a 401(k) profit sharing plan that covers substantially
all employees. Contributions to the plan are at the discretion of
the Company’s management. The Company’s contributions
were approximately $228,000 and $221,000 for the years ended
December 31, 2016 and 2015, respectively.
11. Members’ Agreement
In the
event of death, disability or withdrawal of a member, the Company
is obligated to purchase the entire membership interest owned by
such member, according to the terms as defined by the operating
agreement.
In
addition, the Company maintains key man life insurance and
disability insurance for each member.
12. Commitments and Contingencies
Leases
The
Company is obligated under a sublease operating agreement for
office space in New York expiring in December 2016. The lease
provides for increases in rent for real estate taxes and building
operating costs, all of which is personally guaranteed by certain
members of the Company so long as the Company remains in possession
of the subleased premises. On July 19, 2016, the Company
entered into an operating lease agreement for new office space in
New York commencing December 1, 2016. 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.
The
Company 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, 2016. 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.
Future
minimum annual rent payments are as follows:
|
Period ended December 31,
|
|
|
2017
|
$1,289,187
|
|
2018
|
1,303,478
|
|
2019
|
1,326,535
|
|
2020
|
1,433,403
|
|
2021
|
1,449,019
|
|
Thereafter
|
4,675,845
|
|
|
$11,477,467
|
Rent
expense, including escalation charges, amounted to approximately
$1,115,000 and $941,000 for the years ended December 31, 2016
and 2015, respectively.
Employment Contract
The
Company entered into seven new three-year employment contracts with
senior level management employees during 2015, none of which are
equity partners. The contracts defined 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 the Company was sold during the term of
their contract. The percentages vary by executive. Termination by
cause, death, or by the employee would terminate the
Company’s commitment on each contract. Each employee is
entitled to severance compensation if terminated without
cause.
13. Settlement Expense
The
Company 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. In the
past, the Company had disputed that certain employees were not
union members and, as such, were not eligible to participate in the
Plans. Pursuant to audit results that were settled during the year
ended December 31, 2016 between the Plans and the Company, the
employees were determined to be union members. Based on the
Plans’ audit results for the period from June 6, 2007
through June 6, 2011, the Company was liable to the Plans for
delinquent pension plan contributions, health and welfare plan
contributions, and union dues in the amount of $340,000, which was
expensed prior to January 1, 2014 and paid in August
2016.
The
Plans intend to conduct a second audit of the Company’s books
and records for the period from June 7, 2011 through
August 20, 2016 in connection with the Company’s alleged
contribution obligations to the Plans. Based on the settled audit
by the Plans for the period from June 6, 2007 through
June 6, 2011, the Company expects that the Plans may seek to
collect approximately $300,000 in delinquent pension plan
contributions, health and welfare plan contributions, and union
dues from the Company after the audit is completed. The Company
believes this exposure to be probable and, therefore, has recorded
this liability and recognized the expenses ratably throughout the
period under audit.
14. Subsequent Events
On
March 30, 2017 the Company and its members (the
“Sellers”) entered into a Membership Interest Purchase
Agreement (the “Agreement”) with Dolphin Digital Media,
Inc. (“Dolphin”), a Florida corporation, whereby
Dolphin agreed to purchase 100% of the membership interests of the
Sellers in exchange for shares of common stock in
Dolphin. As of March 30, 2017, the Company became a
wholly-owned subsidiary of Dolphin.
Simultaneous with
the execution of the Agreement, the Sellers transferred their
membership interests in exchange for shares of Dolphin common
stock, based on purchase price of (i) $18,666,667 (based on the
Dolphin’s 30-trading-day average stock price prior to the
closing date of $4.61 per share); (ii) minus the Company’s
indebtedness at the time of closing; (iii) minus the
Company’s transaction expenses; and (iv) plus the
Company’s working capital at the time of closing in excess of
$500,000, or minus the excess of $500,000 over the Company’s
working capital at the time of closing. Pursuant to the Agreement,
Dolphin issued 1,230,280 shares of common stock on the closing date
to the Sellers, and will issue an additional 1,961,821 shares of
common stock to the Sellers and certain employees on January 2,
2018. Dolphin also issued 344,550 shares of common stock to certain
employees on April 13, 2017, and may issue up to 118,655 shares of
common stock as bonuses to certain employees during
2017.
The
Agreement provides for additional shares of Dolphin common stock to
be calculated and issued to the selling members based on EBITDA of
the Company’s business segment for each of the calendar years
2017, 2018, and 2019, subject to certain thresholds as defined in
the Agreement. Pursuant to a promissory note agreement with a
former member (Note 8), upon closing of this transaction the
Company paid $300,000 in cash to the former member with the
remaining $225,000 is to be paid in January 2018 as repayment of
the promissory note, the total of which decreased the amount of
common stock issued to the selling members.
Upon
closing, three of the Sellers entered into employment agreements
with Dolphin, and all of the Sellers entered into put agreements
with Dolphin. Pursuant to the terms and subject to the
conditions set forth in the put agreements, Dolphin has granted the
Sellers the right, but not obligation, to cause Dolphin to purchase
up to an aggregate of 2,374,187 of their shares of common stock
received as consideration for a purchase price equal to $4.61 per
share during certain specified exercise periods set forth in the
put agreements through December 2020.
In
addition, in connection with the transaction, on March 30, 2017,
Dolphin 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 of 1933, as amended (the
“Securities Act”). All fees, costs and expenses of
underwritten registrations under the Registration Rights Agreement
will be borne by Dolphin. At any time after the one-year
anniversary of the Registration Rights Agreement, Dolphin will be
required, upon the request of such Sellers holding at least a
majority of the consideration received by the Sellers, to file a
registration statement on Form S-1 and use its reasonable efforts
to effect a registration covering up to 25% of the consideration
received by the Sellers. In addition, if Dolphin is eligible to
file a registration statement on Form S-3, upon the request of such
Sellers holding at least a majority of the consideration received
by the Sellers, Dolphin will be required to use its reasonable
efforts to effect a registration of such shares on Form S-3
covering up to an additional 25% of the consideration received by
the Sellers. Dolphin 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 consideration received by the Sellers
registered on Form S-1 or Form S-3 is subject to other specified
conditions and limitations.
On
April 27, 2017, the Company drew $250,000 from the Line of Credit
to be used for working capital. In addition, the
maturity date of the Line of Credit was extended to August 1, 2017.
All other terms of the Line of Credit remain the same.
Subsequent events
have been evaluated through June 7, 2017, which is the date the
financial statements were available to be issued.
DOLPHIN DIGITAL MEDIA, INC.
Common Stock
Warrants
PROSPECTUS
, 2017
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The
following table lists the costs and expenses payable by us in
connection with the offering of securities covered by this
prospectus, other than any sales commissions or discounts. All
amounts shown are estimates except for the SEC registration fee and
the FINRA filing fee, and all of the fees and expenses will be
borne by us.
|
Securities and
Exchange Commission Registration Fee
|
$2,897.50
|
|
FINRA Filing
Fee
|
$*
|
|
Accounting Fees and
Expenses
|
$*
|
|
Legal Fees and
Expense
|
$*
|
|
Transfer Agent and
Registrar Fee
|
$*
|
|
Printing and
Engraving Expenses
|
$*
|
|
Blue Sky Fees and
Expenses
|
$*
|
|
Miscellaneous
|
$*
|
|
Total
|
$*
|
Item 14. Indemnification of Directors and Officers
The
Florida Business Corporation Act (the “Florida Act”)
authorizes the indemnification of officers, directors, employees
and agents under specified circumstances. Under Section 607.0831 of
the Florida Act, a director is not personally liable for monetary
damages to the corporation or any other person for any statement,
vote, decision, or failure to act regarding corporate management or
policy unless (1) the director breached or failed to perform his or
her duties as a director and (2) the director’s breach of, or
failure to perform, those duties constitutes: (a) a violation of
the criminal law, unless the director had reasonable cause to
believe his or her conduct was lawful or had no reasonable cause to
believe his or her conduct was unlawful, (b) a transaction from
which the director derived an improper personal benefit, either
directly or indirectly, (c) a circumstance under which the
liability provisions of Section 607.0834 of the Florida Act are
applicable, (d) in a proceeding by or in the right of the
corporation to procure a judgment in its favor or by or in the
right of a shareholder, conscious disregard for the best interest
of the corporation, or willful misconduct, or (e) in a proceeding
by or in the right of someone other than the corporation or a
shareholder, recklessness or an act or omission which was committed
in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety, or property.
A judgment or other final adjudication against a director in any
criminal proceeding for a violation of the criminal law estops that
director from contesting the fact that his or her breach, or
failure to perform, constitutes a violation of the criminal law;
but does not estop the director from establishing that he or she
had reasonable cause to believe that his or her conduct was lawful
or had no reasonable cause to believe that his or her conduct was
unlawful.
Under
Section 607.0850 of the Florida Act, a corporation has power to
indemnify any person who was or is a party to any proceeding (other
than an action by, or in the right of the corporation), by reason
of the fact that he or she is or was a director, officer, employee
or agent of the corporation or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise against liability incurred in connection with such
proceeding, including any appeal thereof, if he or she acted in
good faith and in a manner he or she reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The termination
of any proceeding by judgment, order, settlement or conviction or
upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in,
or not opposed to, the best interests of the corporation or, with
respect to any criminal action or proceeding, has reasonable cause
to believe that his or her conduct was unlawful.
In
addition, under Section 607.0850 of the Florida Act, a corporation
has the power to indemnify any person, who was or is a party to any
proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or
was a director, officer, employee, or agent of the corporation or
is or was serving at the request of the corporation as a director,
officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses and
amounts paid in settlement not exceeding, in the judgment of the
board of directors, the estimated expense of litigating the
proceeding to conclusion, actually and reasonably incurred in
connection with the defense or settlement of such proceeding,
including any appeal thereof. Such indemnification shall be
authorized if such person acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall
be made under this subsection in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be
liable unless, and only to the extent that, the court in which such
proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the
case, such person is fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper.
Under
Section 607.0850 of the Florida Act, the indemnification and
advancement of expenses provided pursuant to Section 607.0850 of
the Florida Act are not exclusive, and a corporation may make any
other or further indemnification or advancement of expenses of any
of its directors, officers, employees, or agents, under any bylaw,
agreement, vote of shareholders or disinterested directors, or
otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding such office. However,
indemnification or advancement of expenses shall not be made to or
on behalf of any director, officer, employee or agent if a judgment
or other final adjudication establishes that his or her actions, or
omissions to act, were material to the cause of action so
adjudicated and constitute: (a) a violation of the criminal law,
unless the director, officer, employee or agent had reasonable
cause to believe his or her conduct was lawful or had no reasonable
cause to believe his or her conduct was unlawful; (b) a transaction
from which the director, officer, employee or agent derived an
improper personal benefit; (c) in the case of a director, a
circumstance under which the above liability provisions of Section
607.0834 of the Florida Act are applicable; or (d) willful
misconduct or a conscious disregard for the best interests of the
corporation in a proceeding by or in the right of the corporation
to procure a judgment in its favor or in a proceeding by or in the
right of a stockholder.
Section
607.0850 of the Florida Act also provides that a corporation shall
have the power to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against the person and
incurred by him or her in any such capacity or arising out of his
status as such, whether or not the corporation would have the power
to indemnify him against such liability under the provisions of
Section 607.0850 of the Florida Act.
Our
Articles of Incorporation provide that we shall, to the fullest
extent provided, authorized, permitted or not prohibited by the
Florida Act and our Bylaws, indemnify our directors and officers,
from and against any and all of the expenses or liabilities
incurred in defending a civil or criminal proceeding or other
specified matters in the manner provided in our Articles of
Incorporation. Our Bylaws also provide for indemnification of our
directors and officers to the fullest extent permitted by law. We
maintain directors' and officers' liability insurance for the
benefit of our officers and directors.
Item 15. Recent Sales of Unregistered Securities
The
following list sets forth information regarding all securities sold
by us within the past three years that were not registered under
the Securities Act:
(1)
On October 14,
2015, we entered into a merger agreement pursuant to which we
acquired Dolphin Films from Dolphin
Entertainment. Pursuant to the terms of the merger
agreement, upon consummation of the Dolphin Films acquisition on
March 7, 2016, we issued to Dolphin Entertainment 2,300,000 shares
of Series B Convertible Preferred Stock and 1,000,000 shares of
Series C Convertible Preferred Stock as consideration. Our issuance
of Series B and Series C Convertible Preferred Stock was made in
reliance upon the exemption from registration requirements in
Section 4(a)(2) of the Securities Act. On November 15, 2016,
Dolphin Entertainment converted all of the shares of Series B
Convertible Preferred Stock into 2,185,000 shares of our common
stock. Our issuance of common stock to Dolphin Entertainment upon
conversion of the Series B Convertible Preferred Stock was made,
and any future issuances of Series C Convertible Preferred Stock
will be made, in reliance upon the exemption from registration
requirements in Section 3(a)(9) of the Securities Act.
(2)
In connection with
the Dolphin Films acquisition, on October 16, 2015, we entered into
a preferred stock exchange agreement with T Squared. Pursuant to
the agreement, on March 7, 2016, we exchanged 1,042,753 previously
issued shares of Series A Convertible Preferred Stock for 1,000,000
newly issued shares of Series B Convertible Preferred Stock. Our
issuance of Series B Convertible Preferred Stock was made in
reliance upon the exemption from registration requirements in
Section 3(a)(9) of the Securities Act. On November 16, 2016, T
Squared converted all of the shares of Series B Convertible
Preferred Stock into 950,000 shares of our common
stock.
(3)
On December 7,
2015, we entered into a subscription agreement with an investor
pursuant to which we issued to the investor a convertible note 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 all
of its convertible note into the number of shares of common stock
determined by dividing (a) the aggregate sum of the (i) principal
amount of the convertible note to be converted, and (ii) amount of
any accrued but unpaid interest with respect to such portion of the
convertible note to be converted; and (b) the conversion price then
in effect. The initial conversion price was $0.25 per share,
subject to adjustment ($5.00 per share post-split). The outstanding
principal amount and all accrued interest of the convertible note
were to mandatorily and automatically convert into common stock
upon occurrence of a specified triggering event. On February
5, 2016, a triggering event occurred and the entire principal
amount of the convertible note mandatorily and automatically
converted into 632,800 shares of common stock.
(4)
On March 4, 2016,
we entered into a subscription agreement with Dolphin
Entertainment, holder of an outstanding promissory note dated
December 31, 2011. Pursuant to the subscription agreement, Dolphin
Entertainment converted an aggregate amount of principal and
interest outstanding under the note of $3,073,410 into 614,682
shares of common stock as payment in full of the note. Our
issuance of common stock to Dolphin Entertainment to satisfy the
note was made in reliance upon the exemption from registration
requirements in Section 3(a)(9) of the Securities Act.
(5)
On March 29, 2016,
we entered into ten individual subscription agreements with each of
ten subscribers. The subscribers were holders of outstanding
promissory notes issued pursuant to certain loan and security
agreements in 2014 and 2015. Pursuant to the terms of the
subscription agreements we converted the $2,883,377 aggregate
amount of principal and interest outstanding under the notes into
an aggregate of 576,676 shares of common stock at $0.25 per share
($5.00 per share post-split) as payment in full of each of the
notes. Our issuance of common stock to each of the subscribers was
made in reliance on Section 3(a)(9) of the Securities
Act.
(6)
On April 1, 2016,
we entered into substantially identical subscription agreements
with certain investors. Pursuant to the agreements, we issued and
sold to the investors in a private placement an aggregate of
1,075,000 shares of common stock, at a purchase price of $0.25 per
share ($5.00 per share post-split), which provided $5,375,000 of
aggregate gross proceeds to us. Under the terms of the
subscription agreements, each investor had the option to purchase
additional shares of common stock at the purchase price, not to
exceed the number of such investor’s initial number of
subscribed shares, during each of the second, third and fourth
quarters of 2016. We refer to such investors as quarterly
investors.
(7)
On May 31, 2016, we
entered into substantially identical debt exchange agreements with
certain investors. Pursuant to the agreements, we issued and sold
to the investors in a private placement an aggregate of 846,509
shares of our common stock in exchange for the cancellation of an
aggregate amount of $4,732,540 in outstanding debt and interest
under certain notes held by the investors, at an exchange rate of
$5.00 per share.
(8)
On June 22, 2016,
we entered into a subscription agreement with an investor whereby
we issued and sold to the investor in a private placement an
aggregate of 50,000 shares of our common stock at a purchase price
of $5.00 per share. The private placement provided
$250,000 of gross proceeds to us.
(9)
On June 28, 2016,
we received notice from a quarterly investor and $500,000 to
exercise the option of purchasing shares of our common stock at
$5.00 per share. We issued 100,000 shares of common stock related
to this exercise.
(10)
On June 30, 2016,
we entered into a subscription agreement with an investor, pursuant
to which we issued and sold to the investor in a private placement
an aggregate of 20,000 shares of common stock at a price of $5.00
per share. The private placement provided $100,000 of aggregate
proceeds for us.
(11)
On June 30, 2016,
we entered into a web series debt exchange agreement with a
promissory noteholder with a principal amount of $50,000. Pursuant
to the agreement, we converted an aggregate of $55,640 of principal
and interest into 11,128 shares of common stock at a price of $5.00
per share.
(12)
On June 30, 2016,
we entered into substantially identical debt exchange agreements
with certain investors. Pursuant to the agreements, we issued and
sold to the investors in a private placement an aggregate of
2,552,659 shares of our common stock in exchange for the
cancellation of an aggregate amount of $12,763,299 in outstanding
debt and interest under certain notes held by the investors, at an
exchange rate of $5.00 per share.
(13)
On October 3, 2016,
we entered into a debt exchange agreement pursuant to which we
agreed to issue 12,000 shares of common stock at an exchange price
of $5.00 per share to terminate the remaining kids club agreement
for (i) $10,000 plus (ii) the original investment of
$50,000.
(14)
On October 13,
2016, we received notice from a quarterly investor and $600,000 to
exercise the option of purchasing shares of our common stock at
$5.00 per share. We issued 120,000 shares of common stock related
to this exercise.
(15)
On October 3, 2016,
October 13, 2016 and October 27, 2016, we entered into three
substantially identical debt exchange agreements to issue 66,200
shares of common stock at an exchange price of $5.00 per share to
terminate three equity finance agreements for a cumulative original
investment amount of $331,000.
(16)
On October 13,
2016, we entered into six substantially identical subscription
agreements, pursuant to which we issued 25,000 shares of common
stock at $5.00 per share and received $125,000.
(17)
On November 4,
2016, we entered into a warrant purchase agreement with T Squared
pursuant to which we issued (i) 1,500,000 Series G Warrants with an
exercise price of $5.00 per share of our common stock, and an
expiration date of January 31, 2018, (ii) 500,000 Series H Warrants
with an exercise price of $6.00 per share of common stock and an
expiration date of January 31, 2019, and (iii) 500,000 Series I
Warrants with an exercise price of $7.00 per share of common stock
and an expiration date of January 31, 2020. As consideration for
the Warrants, T Squared agreed to make a $50,000 cash payment to us
to reduce the aggregate exercise price of the 7,000,000 Series E
Warrants that were issued to it on March 10, 2010 and amended on
September 10, 2015 to extend their expiration date until December
31, 2018.
(18)
On November 15,
2016, we entered into a subscription agreement with an investor,
pursuant to which we issued and sold to such investor 100,000
shares of common stock at a price of $5.00 per Share. This
transaction provided $500,000 in proceeds for us.
(19)
On November 17,
2016, we received notice from a quarterly investor and $600,000 to
exercise the option of purchasing shares of our common stock at
$5.00 per share. We issued 120,000 shares of common stock related
to this exercise.
(20)
On November 22,
2016, we entered into a subscription agreement with an investor
pursuant to which we issued 10,000 shares of common stock at $5.00
per share and received gross proceeds in the amount of
$50,000.
(21)
On December 15,
2016 and December 20, 2016, we entered into two separate
subscription agreements with two individual subscribers. The
subscribers each held outstanding promissory notes of our company,
issued pursuant to certain loan and security agreements dated
January 15, 2015 and May 4, 2015, respectively. Pursuant to the
subscription agreements, we and each of the subscribers agreed to
convert their respective aggregate amounts of principal and
interest outstanding under the notes into shares of common stock.
On December 15, 2016, one of the subscribers converted the
principal balance of such subscriber’s notes together with
accrued interest, in the aggregate amount of $1,154,246, into
230,849 shares of common stock at $5.00 per share as payment in
full of the notes. On December 20, 2016, the other subscriber
converted the principal balance of such subscriber’s notes
together with accrued interest, in the aggregate amount of $111,281
into 22,257 shares of common stock at $5.00 per share as payment in
full of the notes.
(22)
On December 29,
2016, we and KCF Investments, LLC entered into (i) a purchase
agreement pursuant to which we purchased from KCF the remaining 25%
outstanding membership interests of Dolphin Kids Club in exchange
for the issuance of a common stock purchase warrant exercisable for
600,000 shares of common stock and (ii) a debt exchange agreement
pursuant to which we exchanged an aggregate principal amount of
$6,470,990 owing under certain loan and security agreements for a
common stock purchase warrant exercisable for 1,570,000 shares of
common stock. In connection with the agreements, we and KCF entered
into a Common Stock Purchase Warrant “J” Agreement
pursuant to which we agreed to issue to KCF an aggregate of up to
2,170,000 shares of common stock (as adjusted from time to
time as provided in the Warrant “J” Agreement) with an
initial exercise price of $0.015 per share of common stock, and an
expiration date of December 29, 2020.
In
addition, on December 29, 2016, we and BBCF 2011, LLC, an affiliate
of KCF, entered into a termination agreement pursuant to which we
agreed to terminate all of BBCF’s rights to profit
distributions from Dolphin Digital Studios arising under equity
finance agreements dated March 14, 2011 and June 29, 2011, in
exchange for the issuance of a common stock purchase warrant
exercisable for 170,000 shares of common stock. In connection with
the termination agreement, we and BBCF entered into a Common Stock
Purchase Warrant “K” Agreement pursuant to which the
Company agreed to issue to BBCF up to 170,000 shares of common
stock (as adjusted from time to time as provided in the Warrant
“K” Agreement) with an initial exercise price of $0.015
per share of common stock and an expiration date of December 29,
2020.
(23)
On February 16,
2017, we entered into a subscription agreement with an investor,
pursuant to which we issued and sold to the investor 100,000 shares
of common stock, at a purchase price of $5.00 per
share. We received $500,000 of gross proceeds as a
result of the sale of shares.
(24)
On March 30,
2017, as consideration for our acquisition of 42West, we paid to
the sellers approximately $18.7 million in shares of common stock,
par value $0.015, based on our company’s 30-trading-day
average stock price prior to the closing date of $4.61 per share
(less certain working capital and closing adjustments, transaction
expenses and payments of indebtedness), plus the potential to earn
up to an additional $9.3 million in shares of common stock. As a
result, we (i) issued 1,230,280 shares of common stock on the
closing date and 344,550 shares of common stock to certain 42West
employees on April 13, 2017, (ii) may issue up to 118,655 shares of
common stock as employee stock bonuses during 2017 and (iii) will
issue 1,961,821 shares of common stock on January 2, 2018. In
addition, we may issue up to 1,963,126 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. We issued, or will issue, 5,499,777 shares of
the consideration in reliance upon the exemption from registration
provided by Section 4(a)(2) of the Securities Act and/or Rule 506
of Regulation D promulgated thereunder.
(25)
On April 13, 2017,
we issued 6,508 shares of common stock to a consultant as
consideration for services rendered during the month of March 2017,
valued at $30,000. The shares were issued at a purchase
price of $4.61 per share, based on the 30-trading-day average stock
price prior to March 30, 2017.
All
of the foregoing issuances were, or will be, made in reliance
upon the exemption from registration under Section 4(a)(2) of the
Securities Act and/or Rule 506 of Regulation D promulgated
thereunder, except (i) as noted in numbers (1), (2), (4), and (5)
where issuances were made in reliance upon the exemption from
registration under Section 3(a)(9) of the Securities Act and (ii)
with respect to the 118,655 shares of common stock noted in number
(24), which we expect to register on a Form S-8. Except with
respect to the 118,655 shares, 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.
Item 16. Exhibits and Financial Statement Schedules
The
exhibits filed with this registration statement are set forth on
the “Exhibit Index” set forth elsewhere
herein.
Item 17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
supplement the prospectus, after the expiration of the subscription
period, to set forth the results of the subscription offer, the
transactions by the underwriters during the subscription period,
the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering thereof.
If any public offering by the underwriters is to be made on terms
differing from those set forth on the cover page of the prospectus,
a post-effective amendment will be filed to set forth the terms of
such offering.
(2) For the
purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective.
(3) For the
purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar
as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Miami,
State of Florida, on this 28th day of June, 2017.
|
|
DOLPHIN DIGITAL MEDIA, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ William
O’Dowd, IV
|
|
|
|
Name:
|
William
O’Dowd, IV
|
|
|
|
Title:
|
Chief
Executive Officer
|
|
|
|
|
|
|
POWER OF ATTORNEY
Each
person whose signature appears below hereby constitutes and
appoints William O’Dowd, IV and Mirta A Negrini, and each of
them, with full power to act without the other, as his or her true
and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for such person and in his or her
name, place and stead, in any and all capacities, to execute all
amendments and supplements to this registration statement on Form
S-1 relating to the registration of securities, including
post-effective amendments, and any additional registration
statement pursuant to Rule 462(b) and other instruments necessary
or appropriate in connection therewith, and to file the same, with
all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, and hereby grants to
said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary or desirable to be done, and to take or cause to be
taken any and all such further actions in connection with such
registration statement as such attorneys-in-fact and agents, in
each of their sole discretion, deems necessary or appropriate, as
fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the
requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
||
|
/s/
William O’Dowd, IV
William
O’Dowd, IV
|
|
Chairman,
President and Chief Executive Officer
(Principal
Executive Officer)
|
|
June
28, 2017
|
|
|
|
|
||
|
/s/
Mirta A Negrini
Mirta A
Negrini
|
|
Chief
Financial and Operating Officer and Director
(Principal
Financial Officer)
|
|
June
28, 2017
|
|
|
|
|
||
|
/s/
Michael Espensen
Michael
Espensen
|
|
Director
|
|
June
28, 2017
|
|
|
|
|
||
|
/s/
Nelson Famadas
Nelson
Famadas
|
|
Director
|
|
June
28, 2017
|
|
|
|
|
||
|
/s/
Nicholas Stanham
Nicholas
Stanham
|
|
Director
|
|
June
28, 2017
|
|
|
|
|
||
EXHIBIT INDEX
The
following exhibits are filed as part of, or incorporated by
reference into, this registration statement.
|
Exhibit No.
|
|
Description
|
|
Incorporated by Reference
|
|
|
|
|
|
|
|
1.1
|
|
Underwriting
Agreement.**
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger by and among the Company, DDM Merger Sub, Inc.,
Dolphin Films, Inc. and Dolphin Entertainment, Inc. dated October
14, 2015.
|
|
Incorporated
herein by reference to Exhibit 2.2 to the Company’s Current
Report on Form 8-K, filed on October 19, 2015.
|
|
|
|
|
|
|
|
2.2
|
|
Membership
Interest Purchase Agreement, dated as of March 30, 2017, by and
among the Company and Leslee Dart, Amanda Lundberg, Allan Mayer and
The Beatrice B. Trust.*
|
|
Incorporated
herein by reference to Exhibit 2.2 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2016.
|
|
|
|
|
|
|
|
3.1(a)
|
|
Amended
Articles of Incorporation of Dolphin Digital Media, Inc. (conformed
copy incorporating all amendments through May 10,
2016).
|
|
Incorporated
herein by reference to Exhibit 3.1(a) to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31,
2016.
|
|
|
|
|
|
|
|
3.2
|
|
Bylaws
of Dolphin Digital Media, Inc. dated December 3, 2014.
|
|
Incorporated
herein by reference to Exhibit 3.2 to the Company’s Current
Report on Form 8-K, filed on December 9, 2014.
|
|
|
|
|
|
|
|
4.1
|
|
Registration
Rights Agreement, dated as of March 30, 2017 by and among the
Company and Leslee Dart, Amanda Lundberg, Allan Mayer and the
Beatrice B. Trust.
|
|
Incorporated
herein by reference to Exhibit 4.1 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2016.
|
|
|
|
|
|
|
|
4.2
|
|
Warrant
Purchase Agreement, dated November 4, 2016, between the Company and
T Squared Partners LP.
|
|
Incorporated
herein by reference to Exhibit 4.5 to the Company’s Current
Report on Form 8-K, filed on November 10, 2016.
|
|
|
|
|
|
|
|
4.3
|
|
Form of
Common Stock Purchase Warrant.
|
|
Incorporated
herein by reference to Exhibit 4.6 to the Company’s Current
Report on Form 8-K, filed on January 5, 2017.
|
|
|
|
|
|
|
|
4.4
|
|
Form of
Warrant.**
|
|
|
|
|
|
|
|
|
|
5.1
|
|
Opinion
of Greenberg Traurig, P.A.**
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Amendment
to Preferred Stock Purchase Agreement, dated December 30, 2010,
between the Company and T Squared Investment LLC.
|
|
Incorporated
herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed on January 5, 2011.
|
|
|
|
|
|
|
|
10.2
|
|
Preferred
Stock Exchange Agreement, dated October 16, 2015, between the
Company and T Squared Partners LP.
|
|
Incorporated
herein by reference to Exhibit 10.7 to the Company’s Current
Report on Form 8-K, filed on October 19, 2015.
|
|
|
|
|
|
|
|
10.3
|
|
Executive
Employment Agreement, dated September 13, 2012, between the Company
and William O’Dowd.†
|
|
Incorporated
herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed on November 19, 2012.
|
|
|
|
|
|
|
|
10.4
|
|
Executive
Employment Agreement Letter of Extension, dated December 31,
2014.†
|
|
Incorporated
herein by reference to Exhibit 10.4 in the Company’s Annual
Report on Form 10-K for the year ended December 31,
2014.
|
|
|
|
|
|
|
|
10.5
|
|
Revolving
Promissory Note, dated December 31, 2011, in favor of William
O’Dowd.
|
|
Incorporated
herein by reference to Exhibit 10.2 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2014.
|
|
|
|
|
|
|
|
10.6
|
|
Form of
Loan and Security Agreement.
|
|
Incorporated
herein by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2014.
|
|
|
|
|
|
|
|
10.7
|
|
Form of
Equity Purchase Agreement.
|
|
Incorporated
herein by reference to Exhibit 10.6 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2014.
|
|
|
|
|
|
|
|
10.8
|
|
Form of
Subscription Agreement.
|
|
Incorporated
herein by reference to Exhibit 10.8 to the Company’s Current
Report on Form 8-K, filed on December 15, 2015.
|
II-7
|
|
|
|
|
|
|
10.9
|
|
Form of
Convertible Note.
|
|
Incorporated
herein by reference to Exhibit 10.9 to the Company’s Current
Report on Form 8-K, filed on December 15, 2015.
|
|
|
|
|
|
|
|
10.10
|
|
Form of
Subscription Agreement.
|
|
Incorporated
herein by reference to Exhibit 10.11 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2015.
|
|
|
|
|
|
|
|
10.11
|
|
Subscription
Agreement dated March 4, 2016, between the Company and Dolphin
Entertainment, Inc.
|
|
Incorporated
herein by reference to Exhibit 10.10 to the Company’s Current
Report on Form 8-K, filed on March 11, 2016.
|
|
|
|
|
|
|
|
10.12
|
|
Form of
Subscription Agreement.
|
|
Incorporated
herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed on April 7, 2016.
|
|
|
|
|
|
|
|
10.13
|
|
Form of
Debt Exchange Agreement.
|
|
Incorporated
herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed on June 3, 2016.
|
|
|
|
|
|
|
|
10.14
|
|
Form of
Subscription Agreement.
|
|
Incorporated
herein by reference to Exhibit 10.13 to the Company’s Current
Report on Form 8-K, filed on June 28, 2016.
|
|
|
|
|
|
|
|
10.15
|
|
2012
Omnibus Incentive Compensation Plan.†
|
|
Incorporated
herein by reference to Annex B to the Definitive Information
Statement on Schedule 14C filed with the SEC on September 28,
2012.
|
|
|
|
|
|
|
|
21.1
|
|
List of
Subsidiaries of the Company.
|
|
Incorporated
herein by reference to Exhibit 21.1 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2016.
|
|
|
|
|
|
|
|
23.1
|
|
Consent
of BDO USA, LLP (Dolphin Digital Media, Inc. Consolidated Financial
Statements).
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
23.2
|
|
Consent
of BDO USA, LLP (42West, LLC Financial Statements).
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
23.3
|
|
Consent
of Greenberg Traurig, P.A. (contained in Exhibit 5.1
hereto).**
|
|
|
|
|
|
|
|
|
|
24.1
|
|
Power
of Attorney (contained on signature page to this registration
statement).
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document.
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document.
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document.
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document.
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document.
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document.
|
Filed
herewith.
|
† Management contract or compensatory plan or
arrangement.
*
Schedules (and similar attachments) have been omitted pursuant to
Item 601(b)(2) of Regulation S-K. The Company agrees to furnish
supplementally a copy of any omitted schedule to the Securities and
Exchange Commission upon request.
**To be
filed by pre-effective amendment.