EXHIBIT 3.1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
———————
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-38331
DOLPHIN ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
———————
| Florida | 86-0787790 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
150 Alhambra Circle, Suite 1200, Coral Gables, Florida 33134
(Address of principal executive offices, including zip code)
(305) 774-0407
(Registrant's telephone number)
———————
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.015 par value per share | DLPN | The Nasdaq Capital Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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 checkmark 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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding was 7,941,234 as of November 17, 2021
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
September 30,
2021 |
December 31,
2020 |
|||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 12,652,902 | $ | 7,923,280 | ||||
| Restricted cash | 541,883 | 714,096 | ||||||
| Accounts receivable, net of allowance of $391,575 and $653,272, respectively | 6,227,162 | 5,027,101 | ||||||
| Other current assets | 529,133 | 231,890 | ||||||
| Total current assets | 19,951,080 | 13,896,367 | ||||||
| Capitalized production costs, net | 251,087 | 271,139 | ||||||
| Right-of-use asset | 6,614,616 | 7,106,279 | ||||||
| Goodwill | 20,015,800 | 19,627,856 | ||||||
| Intangible assets, net of accumulated amortization of $6,932,935 and $5,747,941, respectively | 6,537,065 | 7,452,059 | ||||||
| Property, equipment and leasehold improvements, net | 532,485 | 800,071 | ||||||
| Deposits and other assets | 231,542 | 198,180 | ||||||
| Total Assets | $ | 54,133,675 | $ | 49,351,951 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
|
September 30,
2021 |
December 31,
2020 |
|||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 810,167 | $ | 1,190,184 | ||||
| Term loan | 600,195 | 900,292 | ||||||
| Notes payable, current portion | 305,037 | 846,749 | ||||||
| Convertible notes payable at fair value, current portion | — | 580,000 | ||||||
| Paycheck Protection Program loan, current portion | 304,169 | 582,438 | ||||||
| Contingent consideration | 600,000 | — | ||||||
| Loan from related party | — | 1,107,873 | ||||||
| Accrued interest – related party | 1,812,315 | 1,783,121 | ||||||
| Accrued compensation – related party | 2,625,000 | 2,625,000 | ||||||
| Put rights | — | 1,544,029 | ||||||
| Lease liability | 1,724,404 | 1,791,773 | ||||||
| Contract liabilities | 4,266,539 | 1,855,209 | ||||||
| Other current liabilities | 2,368,488 | 2,045,844 | ||||||
| Total current liabilities | 15,416,314 | 16,852,512 | ||||||
| Notes payable | 896,894 | 426,645 | ||||||
| Convertible notes payable | 4,750,000 | 1,445,000 | ||||||
| Convertible notes payable at fair value | 1,253,689 | 947,291 | ||||||
| Paycheck Protection Program loan | — | 2,517,431 | ||||||
| Contingent consideration | 1,240,000 | 530,000 | ||||||
| Loan from related party | 1,107,873 | — | ||||||
| Lease liability | 5,531,736 | 5,964,275 | ||||||
| Warrant liability | 205,000 | 450,000 | ||||||
| Other noncurrent liabilities | 200,000 | 550,000 | ||||||
| Total noncurrent liabilities | 15,185,192 | 12,830,642 | ||||||
| Total Liabilities | 30,601,506 | 29,683,154 | ||||||
| Commitments and contingencies (Note 16) | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Common stock, $0.015 par value, 200,000,000 shares authorized, 7,768,684, issued and outstanding at September 30, 2021 and 40,000,000 shares authorized, 6,618,785, issued and outstanding at December 31, 2020 | 116,528 | 99,281 | ||||||
| Preferred stock, Series C, $0.001 par value, 50,000 shares authorized, issued and outstanding at September 30, 2021 and December 31, 2020 | 1,000 | 1,000 | ||||||
| Additional paid in capital | 125,167,074 | 117,540,557 | ||||||
| Accumulated deficit | (101,752,433 | ) | (97,972,041 | ) | ||||
| Total Stockholders' Equity | 23,532,169 | 19,668,797 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 54,133,675 | $ | 49,351,951 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
For the three months ended September 30, |
For the nine months ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Entertainment publicity and marketing | $ | 9,399,432 | $ | 5,527,943 | $ | 25,219,793 | $ | 17,356,468 | ||||||||
| Content production | — | — | — | — | ||||||||||||
| Total revenues | 9,399,432 | 5,527,943 | 25,219,793 | 17,356,468 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs | 991,708 | 575,243 | 2,578,295 | 1,790,468 | ||||||||||||
| Payroll and benefits | 5,875,755 | 3,604,852 | 16,770,091 | 11,384,791 | ||||||||||||
| Selling, general and administrative | 1,519,812 | 953,993 | 4,234,309 | 3,247,474 | ||||||||||||
| Depreciation and amortization | 475,207 | 514,097 | 1,436,189 | 1,531,561 | ||||||||||||
| Legal and professional | 498,661 | 372,943 | 1,301,267 | 945,257 | ||||||||||||
| Total expenses | 9,361,143 | 6,021,128 | 26,320,151 | 18,899,551 | ||||||||||||
| Income (loss) from operations | 38,289 | (493,185 | ) | (1,100,358 | ) | (1,543,083 | ) | |||||||||
| Other income (expenses): | ||||||||||||||||
| Gain on extinguishment of debt, net | 1,733,400 | 51,333 | 2,689,010 | 3,311,198 | ||||||||||||
| Loss on disposal of fixed assets | — | — | (48,461 | ) | — | |||||||||||
| Loss on the deconsolidation of Max Steel VIE | — | — | — | (1,484,591 | ) | |||||||||||
| Change in fair value of convertible notes and derivative liabilities | (223,923 | ) | 8,730 | (826,398 | ) | (540,231 | ) | |||||||||
| Change in fair value of warrants | (55,000 | ) | 145,559 | (2,552,877 | ) | (265,445 | ) | |||||||||
| Change in fair value of put rights | — | 159,457 | (71,106 | ) | 1,677,267 | |||||||||||
| Change in fair value of contingent consideration | (1,110,000 | ) | 140,000 | (1,310,000 | ) | (330,000 | ) | |||||||||
| Acquisition costs | — | (61,196 | ) | (22,907 | ) | (61,196 | ) | |||||||||
| Interest expense and debt amortization | (241,115 | ) | (270,815 | ) | (576,146 | ) | (1,953,790 | ) | ||||||||
| Total other income (expense), net | 103,362 | 173,068 | (2,718,885 | ) | 353,212 | |||||||||||
| Income (loss) before income taxes | 141,651 | (320,117 | ) | (3,819,243 | ) | (1,189,871 | ) | |||||||||
| Income tax benefit | — | 182,487 | 38,851 | 182,487 | ||||||||||||
| Net income (loss) | $ | 141,651 | $ | (137,630 | ) | $ | (3,780,392 | ) | $ | (1,007,384 | ) | |||||
| Earnings (loss) per share: | ||||||||||||||||
| Basic | $ | 0.02 | $ | (0.02 | ) | $ | (0.50 | ) | $ | (0.19 | ) | |||||
| Diluted | $ | 0.02 | $ | (0.04 | ) | $ | (0.50 | ) | $ | (0.45 | ) | |||||
| Weighted average number of shares outstanding: | ||||||||||||||||
| Basic | 7,740,085 | 6,676,405 | 7,551,974 | 5,223,441 | ||||||||||||
| Diluted | 7,740,085 | 6,912,011 | 7,551,974 | 5,975,610 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
For the nine months ended
September 30, |
||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,780,392 | ) | $ | (1,007,384 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 1,436,189 | 1,531,561 | ||||||
| Loss on deconsolidation of Max Steel VIE | — | 1,484,591 | ||||||
| Bonus payment issued in shares | 17,858 | — | ||||||
| Beneficial conversion feature of convertible notes payable | — | 1,327,993 | ||||||
| Interest owed on convertible debt settled with shares of common stock upon conversion | — | 10,812 | ||||||
| Amortization of debt discount | — | 59,669 | ||||||
| Gain on extinguishment of debt | (2,689,010 | ) | (3,311,198 | ) | ||||
| Loss on disposal of fixed assets | 48,461 | — | ||||||
| Impairment of capitalized production costs | 115,881 | 30,000 | ||||||
| Bad debt and recovery of account receivable written off, net | 232,100 | 283,028 | ||||||
| Change in fair value of put rights | 71,106 | (1,677,267 | ) | |||||
| Change in fair value of contingent consideration | 1,310,000 | 330,000 | ||||||
| Change in fair value of warrants | 2,552,877 | 265,445 | ||||||
| Change in fair value of convertible notes and derivative liabilities | 826,398 | 540,231 | ||||||
| Change in deferred tax | (38,851 | ) | (182,487 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,278,000 | ) | (41,431 | ) | ||||
| Other current assets | (206,762 | ) | (222,507 | ) | ||||
| Capitalized production costs, net | (95,829 | ) | (74,540 | ) | ||||
| Deposits and other assets | (9,744 | ) | (94,561 | ) | ||||
| Contract liability | 2,354,336 | (49,944 | ) | |||||
| Accounts payable | (484,741 | ) | 138,464 | |||||
| Accrued interest – related party, net | 29,194 | — | ||||||
| Lease liability, net | (8,245 | ) | 60,486 | |||||
| Other current liabilities | 117,134 | (8,668 | ) | |||||
| Net cash provided by (used in) operating activities | 519,960 | (607,707 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of fixed assets | — | (11,878 | ) | |||||
| Acquisition of B/HI Communications, Inc, net of cash acquired | (525,856 | ) | — | |||||
| Acquisition of Be Social Public Relations LLC, net of cash acquired | — | (1,048,646 | ) | |||||
| Net cash used in investing activities | (525,856 | ) | (1,060,524 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repayment of the line of credit | — | (500,000 | ) | |||||
| Proceeds from convertible notes payable | 5,950,000 | 2,895,000 | ||||||
| Repayment of convertible notes payable | — | (1,702,064 | ) | |||||
| Repayment of term loan | (300,097 | ) | (200,065 | ) | ||||
| Repayment of notes payable | (71,463 | ) | (64,911 | ) | ||||
| Proceeds from PPP loans | — | 2,795,700 | ||||||
| Exercise of put rights | (1,015,135 | ) | (1,266,000 | ) | ||||
| Proceeds from sale of common stock through registered direct offering | — | 7,602,297 | ||||||
| Installment payment to seller of Shore Fire | — | (624,836 | ) | |||||
| Installment payment to seller of Viewpoint | — | (250,000 | ) | |||||
| Net cash provided by financing activities | 4,563,305 | 8,685,121 | ||||||
| Net increase in cash and cash equivalents and restricted cash | 4,557,409 | 7,016,890 | ||||||
| Cash and cash equivalents and restricted cash, beginning of period | 8,637,376 | 2,910,338 | ||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 13,194,785 | $ | 9,927,228 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(unaudited)
|
For the nine months ended
September 30, |
||||||||
| 2021 | 2020 | |||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: | ||||||||
| Interest paid | $ | 495,722 | $ | 256,504 | ||||
| SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW INFORMATION: | ||||||||
| Principal balance of convertible notes converted into shares of common stock | $ | 3,745,000 | $ | 3,510,000 | ||||
| Issuance of shares of common stock related to the acquisitions | $ | 350,000 | $ | 314,581 | ||||
| Liability for contingent consideration for the acquisitions | $ | — | $ | 805,000 | ||||
| Liability for put rights to the Sellers of 42West | $ | — | $ | 1,897,780 | ||||
| Put rights exchanged for shares of common stock | $ | 600,000 | $ | — | ||||
| Interest on notes paid in stock | $ | 8,611 | $ | 10,812 | ||||
| Employee bonus paid in stock | $ | 17,858 | $ | — | ||||
Reconciliation of cash, cash equivalents and restricted cash. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statements of cash flows that sum to the total of the same such amounts shown in the statements of cash flows:
|
For the nine months ended
September 30, |
||||||||
| 2021 | 2020 | |||||||
| Cash and cash equivalents | $ | 12,652,902 | $ | 9,213,083 | ||||
| Restricted cash | 541,883 | 714,145 | ||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows | $ | 13,194,785 | $ | 9,927,228 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
| For the three and nine months ended September 30, 2021 | ||||||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2020 | 50,000 | $ | 1,000 | 6,618,785 | $ | 99,281 | $ | 117,540,557 | $ | (97,972,041 | ) | $ | 19,668,797 | |||||||||||||||
| Net loss for the three months ended March 31, 2021 | — | — | — | — | — | (5,271,985 | ) | (5,271,985 | ) | |||||||||||||||||||
| Issuance of shares related to conversion of note payable | — | — | 663,155 | 9,948 | 2,543,664 | — | 2,553,612 | |||||||||||||||||||||
| Issuance of shares related to cashless exercise of warrants | — | — | 146,027 | 2,190 | 2,795,687 | — | 2,797,877 | |||||||||||||||||||||
| Issuance of shares issued to seller of Be Social | — | — | 103,245 | 1,549 | 348,451 | — | 350,000 | |||||||||||||||||||||
| Consideration for acquisition of B/HI Communications, Inc | — | — | 31,158 | — | 31,158 | |||||||||||||||||||||||
| Issuance of shares related to exchange of Put Rights for stock | — | — | 77,519 | 1,163 | 356,199 | — | 357,362 | |||||||||||||||||||||
| Shares retired from exercise of puts | — | — | (3,254 | ) | (51 | ) | 51 | — | — | |||||||||||||||||||
| Balance March 31, 2021 | 50,000 | $ | 1,000 | 7,605,477 | $ | 114,080 | $ | 123,615,767 | $ | (103,244,026 | ) | $ | 20,486,821 | |||||||||||||||
| Net income for the three months ended June 30, 2021 | — | — | — | — | — | 1,349,942 | 1,349,942 | |||||||||||||||||||||
| Issuance of shares related to acquisition of The Door | — | — | 10,238 | 154 | (154 | ) | — | — | ||||||||||||||||||||
| Issuance of shares related to exchange of Put Rights for stock | — | — | 37,847 | 568 | 348,759 | — | 349,327 | |||||||||||||||||||||
| Shares retired from exercise of puts | — | — | (15,093 | ) | (227 | ) | (13,203 | ) | — | (13,430 | ) | |||||||||||||||||
| Balance June 30, 2021 | 50,000 | $ | 1,000 | 7,638,469 | $ | 114,575 | $ | 123,951,169 | $ | (101,894,084 | ) | $ | 22,172,660 | |||||||||||||||
| Net income for the three months ended September 30, 2021 | — | — | — | — | — | 141,651 | 141,651 | |||||||||||||||||||||
| Issuance of shares for employee bonus | — | — | 1,935 | 29 | 17,829 | — | 17,858 | |||||||||||||||||||||
| Issuance of shares related to conversion of note payable | — | — | 128,280 | 1,924 | 1,198,076 | — | 1,200,000 | |||||||||||||||||||||
| Balance September 30, 2021 | 50,000 | $ | 1,000 | 7,768,684 | $ | 116,528 | $ | 125,167,074 | $ | (101,752,433 | ) | $ | 23,532,169 | |||||||||||||||
| 6 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
| For the three and nine months ended September 30, 2020 | ||||||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2019 | 50,000 | $ | 1,000 | 3,578,580 | $ | 53,679 | $ | 106,680,619 | $ | (97,158,766 | ) | $ | 9,576,532 | |||||||||||||||
| Net income for the three months ended March 31, 2020 | — | — | — | — | — | 2,073,847 | 2,073,847 | |||||||||||||||||||||
| Deconsolidation of Max Steel VIE | — | — | — | — | — | 1,125,917 | 1,125,917 | |||||||||||||||||||||
| Issuance of shares related to acquisition of Viewpoint | — | — | 49,747 | 746 | (746 | ) | — | — | ||||||||||||||||||||
| Issuance of shares related to financing agreement | — | — | 10,000 | 150 | (150 | ) | — | — | ||||||||||||||||||||
| Beneficial conversion of convertible promissory note | — | — | 301,781 | — | 301,781 | |||||||||||||||||||||||
| Issuance of shares related to conversion of notes payable | — | — | 375,562 | 5,633 | 1,169,788 | — | 1,175,421 | |||||||||||||||||||||
| Shares retired from exercise of puts | — | — | (6,507 | ) | (98 | ) | (1,637,102 | ) | — | (1,637,200 | ) | |||||||||||||||||
| Balance March 31, 2020 | 50,000 | $ | 1,000 | 4,007,382 | $ | 60,110 | $ | 106,514,190 | $ | (93,959,002 | ) | $ | 12,616,298 | |||||||||||||||
| Net loss for the three months ended June 30, 2020 | — | — | — | — | — | (2,943,601 | ) | (2,943,601 | ) | |||||||||||||||||||
| Issuance of shares related to acquisition of Viewpoint | — | — | 685 | 10 | (10 | ) | — | — | ||||||||||||||||||||
| Issuance of shares related to conversion of notes payable | — | — | 473,900 | 7,109 | 1,288,951 | — | 1,296,060 | |||||||||||||||||||||
|
Beneficial conversion of convert ible promissory note |
— | — | — | — | 856,863 | — | 856,863 | |||||||||||||||||||||
| Issuance of shares related to cashless exercise of warrants | — | — | 75,403 | 1,131 | 368,344 | — | 369,475 | |||||||||||||||||||||
| Issuance of earnout shares to sellers of 42West | — | — | 186,573 | 2,799 | (302,799 | ) | — | (300,000 | ) | |||||||||||||||||||
| Issuance of shares related to direct registered sale of common stock | — | — | 1,580,000 | 23,700 | 7,620,650 | — | 7,644,350 | |||||||||||||||||||||
| Shares retired from exercise of puts | — | — | (2,162 | ) | (32 | ) | 32 | — | — | |||||||||||||||||||
| Balance June 30, 2020 | 50,000 | $ | 1,000 | 6,321,781 | $ | 94,827 | $ | 116,346,221 | $ | (96,902,603 | ) | $ | 19,539,445 | |||||||||||||||
| Net loss for the three months ended September 30, 2020 | — | — | — | — | — | (137,630 | ) | (137,630 | ) | |||||||||||||||||||
| Issuance of shares related to conversion of notes payable | — | — | 204,183 | 3,063 | 898,499 | — | 901,562 | |||||||||||||||||||||
| Beneficial conversion of convertible promissory note | — | — | — | — | 100,000 | — | 100,000 | |||||||||||||||||||||
| Issuance of shares to seller of Be Social | — | — | 69,907 | 1,049 | 313,532 | — | 314,581 | |||||||||||||||||||||
| Legal fees related to direct registered offering | — | — | — | — | (42,085 | ) | — | (42,085 | ) | |||||||||||||||||||
| Shares retired from exercise of puts | — | — | (35,528 | ) | (533 | ) | (199,768 | ) | — | (200,301 | ) | |||||||||||||||||
| Balance September 30, 2020 | 50,000 | $ | 1,000 | 6,560,343 | $ | 98,406 | $ | 117,416,399 | $ | (97,040,233 | ) | $ | 20,475,572 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
NOTE 1 – GENERAL
Dolphin Entertainment, Inc., a Florida corporation (the “Company,” “Dolphin,” “we,” “us” or “our”), is a leading independent entertainment marketing and premium content development company. Through its acquisitions of 42West LLC (“42West”), The Door Marketing Group, LLC (“The Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation Incorporated (“Viewpoint”), Be Social Public Relations, LLC (“Be Social”) and B/HI Communications, Inc. (“B/HI”), the Company provides expert strategic marketing and publicity services to all of the major film studios and many of the leading independent and digital content providers, A-list celebrity talent, including actors, directors, producers, celebrity chefs, social media influencers and recording artists. The Company also provides strategic marketing publicity services and creative brand strategies for prime hotel and restaurant groups and consumer brands. The strategic acquisitions of 42West, The Door, Shore Fire, Viewpoint, Be Social and B/HI bring together premium marketing services, including digital and social media marketing capabilities, with premium content production, creating significant opportunities to serve respective constituents more strategically and to grow and diversify the Company’s business. Dolphin’s content production business is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. Dolphin produces original feature films and digital programming primarily aimed at family and young adult markets.
Impact of COVID-19
On March 11, 2020, the World Health Organization categorized a novel coronavirus (“COVID-19”) as a pandemic, and it has spread throughout the United States. The pandemic has had and continues to have a significant effect on economic conditions in the United States, and continues to cause significant uncertainties in the U.S. and global economies, particularly as a result of new Delta and other variants of COVID-19, which appear to be causing an increase in COVID-19 cases. Public health officials and medical professionals have warned that a resurgence of COVID-19 cases may continue, particularly if vaccination rates do not quickly increase or if additional, potent variants emerge. It is unclear how long a resurgence may last, how severe it may be, and what safety measures governments may impose in response to it.
The extent to which the COVID-19 pandemic affects our business, operations and financial results depends, and will continue to depend, on numerous evolving factors that we may not be able to accurately predict. Since the outbreak of COVID-19 began and public and private sector measures to reduce its transmission were implemented, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, the demand for certain of the services the Company offers was adversely affected resulting in decreased revenues and cash flows.
One of our subsidiaries operates in the food and hospitality sector, which was negatively impacted by the orders to either suspend or reduce operations of restaurants and hotels. Similarly, another subsidiary represents talent, such as actors, directors and producers, and revenues from these clients was negatively impacted by the suspension of content production. The television and streaming consumption around the globe has increased since the outbreak of COVID-19, as well as the demand for consumer products. Revenues from the marketing of these shows and products somewhat offset the decrease in revenue from the sectors discussed above.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
Between April 19, 2020 and April 23, 2020, the Company and its subsidiaries received five separate unsecured loans for an aggregate amount of $2.8 million (the “PPP Loans”) under the Paycheck Protection Program (the “PPP”) which was established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Through our acquisition of Be Social, the Company assumed a PPP Loan of $304,169. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments and covered utilities during the measurement period beginning on the date of first disbursement of the PPP Loans. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount can be attributable to non-payroll costs. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of the PPP Loans based on its adherence to the forgiveness criteria. Throughout 2021, the Company and its subsidiaries applied for forgiveness of all PPP Loans received. On June 28, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loans for 42West and Dolphin, which in aggregate amounted to $1.1 million. Between July 1, 2021 and August 17, 2021, the Company was notified that the SBA had approved our applications to forgive the entire amounts of the loans for Viewpoint, Shore Fire and The Door, which in aggregate amounted to $1.7 million, which were recorded as a gain on extinguishment in the condensed consolidated statements of operations. Subsequent to September 30, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loan for Be Social, which amounted to $0.3 million.
Depending on the extent and duration of the pandemic and the related economic impacts, COVID-19 may continue to impact our business and financial results, as well as significant judgments and estimates, including those related to goodwill and other asset impairments and allowances for doubtful accounts.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films, Inc. (“Dolphin Films”), Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC (“Max Steel Holdings”), Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The Door, Viewpoint, Shore Fire, Be Social and B/HI.
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 economic performance 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 is deemed to be the primary beneficiary and as such it has included JB Believe, LLC, formed on December 4, 2012 in the State of Florida, in its condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 as a VIE.
On September 24, 2021, the Company filed an amendment to its Amended and Restated Articles of Incorporation with the Secretary of the State of the State of Florida to increase its authorized shares of Common Stock to 200,000,000 from 40,000,000 as adopted by the shareholders of the Company on September 23, 2021.
On November 23, 2020, the Company filed an amendment to its Amended and Restated Articles of Incorporation with the Secretary of State of the State of Florida to effect a 1-for-5 reverse stock split (the “Reverse Stock Split”) of the authorized, issued and outstanding shares of the Common Stock. The Reverse Stock Split was effective as of 12:01 a.m. (Eastern Time) on November 27, 2020 (the “Effective Time”). At the Effective Time, the number of authorized shares of Common Stock was reduced from 200,000,000 shares to 40,000,000. The par value per share of Common Stock remains unchanged. As a result, each shareholder’s percentage ownership interest in the Company and proportional voting power remained unchanged. Any fractional shares resulting from the Reverse Stock Split were rounded up to the nearest whole share of Common Stock. All references to Common Stock or common stock price in these condensed consolidated financial statements have been retroactively adjusted to reflect the Reverse Stock Split.
The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2021, and its results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020. All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021. The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
Reclassifications
Reclassifications have been made to our unaudited condensed consolidated financial statements for the prior period to conform to classifications used in 2021. These reclassifications had no impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows.
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 estimates of the measurement of assets and liabilities at fair value, including amounts recognized in business combinations and items measured at fair value on a non-recurring basis, such as intangible assets, goodwill, the amount of the deferred tax, valuation allowance; and the estimate of contingent liabilities, and other allowances, such as the provisions for doubtful accounts. Management bases its estimates on historical experience and on other various assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from such estimates under different assumptions and conditions.
Additionally, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. However, management has made appropriate accounting estimates on certain accounting matters, which include the allowance for doubtful accounts, carrying value of the goodwill and other intangible assets, carrying amount of certain convertible notes payable and embedded derivatives and warrant liabilities, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in material impacts to the Company’s financial statements in future reporting periods.
Update to Significant Accounting Policies
The Company’s significant accounting policies are detailed in "Note 3: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020. Significant changes to our accounting policies as a result of adopting ASU 2020-06 during the nine months ended September 30, 2021 is discussed below. Other than the below, There were no significant changes to our accounting policies during the three and nine months ended September 30, 2021.
Convertible Notes
On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2020-06 that simplifies the accounting for convertible instruments. ASU 2020-06 (i) reduced the number of accounting models for convertible instruments, by eliminating the models that require separation of cash conversion or beneficial conversion features from the host and (ii) revised derivative scope exception and (iii) provided targeted improvements for EPS. The adoption of ASU 2020-06 did not have a material impact on the Company’s outstanding convertible debt instruments as of September 30, 2021.
Recent Accounting Pronouncements
Accounting Guidance Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The guidance simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted this new guidance on January 1, 2021 using the modified retrospective approach without a material impact on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes.” to simplify the accounting for income taxes by removing certain exceptions and amending certain exceptions related to the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This ASU also clarifies and simplifies other aspects of the accounting for income taxes. This amended guidance was effective for the Company beginning January 1, 2021. The Company adopted this new guidance on January 1, 2021 without a material impact on its condensed consolidated financial statements.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
Accounting Guidance Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The guidance is effective for annual reporting periods beginning after December 15, 2022, including interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its Condensed Consolidated Financial Statements in connection with any future business combinations.
In June 2016, the FASB issued new guidance on measurement of credit losses (ASU 2016-13, Measurement of Credit Losses on Financial Instruments) with subsequent amendments issued in November 2018 (ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the accounting for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. It is applicable to trade accounts receivable. The guidance is effective for fiscal years beginning after December 15, 2022 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company's consolidated financial statements and disclosures.
NOTE 2 — GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP and contemplate the continuation of the Company as a going concern. The Company has suffered recurring losses, including a net loss of $3,780,392 for the nine months ended September 30, 2021, and had an accumulated deficit of $101,752,433 as of September 30, 2021. Several of our subsidiaries operate in industries that have been adversely affected by the government mandated work-from-home, stay-at-home and shelter-in-place orders as a result of the COVID-19. As these industries continue to gradually reopen, we have seen signs of improvement on demand for their services. We have noted an increase in demand for our services and noted signs of improvement in the results of our operations; for the three months ended September 30, 2021 we noted increased revenues, cash flows from operations and reported net income as compared to the same period in prior year and the prior quarterly periods ending March 31, 2021 and June 30, 2021.
Since the beginning of the pandemic, the Company implemented certain measures to mitigate the effects of the pandemic on the Company, such as a freezes on hiring, salary reductions, staff reductions and cuts in non-essential spending. In addition, the Company has taken other measures to strengthen its financial position, which is evidenced by a positive working capital for two straight quarters, as of June 30, 2021 and September 30, 2021.
The Company is dependent upon funds from the issuance of debt securities, securities convertible into shares of its common stock, par value $0.015, (“Common Stock”), sales of shares of Common Stock and financial support of certain shareholders. The continued spread of COVID-19 and uncertain market conditions may limit the Company’s ability to access capital. If the Company is unable to obtain funding from these sources within the next 12 months, it could be forced to curtail its business operations or liquidate.
These factors raise substantial doubt about the ability of the Company to continue as a going concern within one year after these condensed consolidated financial statements are issued. The condensed consolidated financial statements, of which these notes form a part, do not include any adjustments that might result from the outcome of these uncertainties. The Company’s management currently plans to raise any necessary additional funds through additional issuances of its Common Stock, securities convertible into its Common Stock and/or debt securities, as well as available bank and non-bank financing, or a combination of such financing alternatives. There is no assurance that the Company will be successful in raising additional capital. Any issuance of shares of Common Stock or securities convertible into Common Stock would dilute the equity interests of our existing shareholders, perhaps substantially.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
As of September 30, 2021, in connection with its acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social and B/HI, the Company has a balance of $20,015,800 of goodwill on its condensed consolidated balance sheet which management has assigned to the entertainment publicity and marketing segment. 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. There were no triggering events noted during the three month period ended September 30, 2021 that would require the Company to reassess goodwill for impairment outside of its regular annual impairment test.
Goodwill
All of the Company’s goodwill is related to the entertainment, publicity and marketing segment. Changes in the carrying value of goodwill were as follows:
| Schedule of Changes In Carrying Value of Goodwill | |||||
| Balance as of December 31, 2020 | $ | 19,627,856 | |||
| Measurement period adjustments(1) | (82,651 | ) | |||
| Business Acquisitions(2) | 470,595 | ||||
| Balance as of September 30, 2021 | $ | 20,015,800 |
———————
| (1) | Working Capital adjustment recorded in June 2021 in connection with the Be Social acquisition. (See Note 4) |
| (2) | Acquisition of B/HI in January 2021. |
Intangible Assets
Intangible assets consisted of the following as of September 30, 2021 and December 31, 2020:
| Schedule of Intangible Assets | ||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
|
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
|||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||
| Customer relationships | $ | 8,290,000 | $ | 4,609,768 | $ | 3,680,232 | $ | 8,130,000 | $ | 3,787,406 | $ | 4,342,593 | ||||||||||||
| Trademarks and trade names | 4,490,000 | 1,678,167 | 2,811,833 | 4,440,000 | 1,330,535 | 3,109,465 | ||||||||||||||||||
| Non-compete agreements | 690,000 | 645,000 | 45,000 | 630,000 | 630,000 | — | ||||||||||||||||||
| $ | 13,470,000 | $ | 6,932,935 | $ | 6,537,065 | $ | 13,200,000 | $ | 5,747,941 | $ | 7,452,059 | |||||||||||||
Amortization expense associated with the Company’s intangible assets was $394,998 and $423,412 for the three months ended September 30, 2021 and 2020, respectively, and $1,184,994 and $1,254,402 for the nine months ended September 30, 2021 and 2020, respectively.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
Amortization expense related to intangible assets for the next five years is as follows:
NOTE 4 — MERGERS AND ACQUISITIONS
B/HI Communications, Inc.
On January 8, 2021, but effective January 1, 2021, the Company acquired all of the issued and outstanding shares of B/HI, a California corporation, (the “B/HI Purchase”) pursuant to a share purchase agreement (the “B/HI Share Purchase Agreement”) between the Company and Dean G. Bender and Janice L. Bender, as co-trustees of the Bender Family Trust dated May 6, 2013 (collectively, the “B/HI Sellers). B/HI is an entertainment public relations agency that specializes in corporate and product communications programs for interactive gaming, esports, entertainment content and consumer product organizations.
The total consideration paid to the B/HI Seller in respect to the B/HI Purchase is $0.8 million of shares of Common Stock based on a 30-day trailing trading average closing price immediately prior to, but not including, the applicable payment date adjusted for working capital, cash targets and the B/HI indebtedness as defined in the B/HI Share Purchase Agreement. The B/HI Sellers may also earn up to an additional $1.2 million of which 50% will be paid in cash and 50% will be paid in Common Stock upon achieving certain specified financial performance targets during the years ended December 31, 2021 and 2022. The Common Stock that will be issued as part of the consideration has not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Acquisition related costs for the B/HI purchase amounted to $22,907 and are included in Acquisition costs in the condensed consolidated statement of operations.
The following table summarizes the provisional fair value of the consideration transferred:
| Summary of provisional fair value of consideration transferred | ||||
| Payments made to settle final indebtedness, net of minimum operating cash as defined in the B/HI Share Purchase Agreement | $ | 575,856 | ||
| Provisional working capital adjustment | 192,986 | |||
| Provisional amount of Common Stock to be issued to the B/HI Sellers | 31,158 | |||
| Provisional fair value of the consideration transferred | $ | 800,000 |
As a condition to the B/HI Purchase, Dean Bender, one of the sellers and Shawna Lynch, a key employee of B/HI entered into employment agreements with the Company to continue as employees after the closing of the B/HI Purchase. Mr. Bender’s agreement is for a period of two years through December 31, 2022 and he will serve as Co-President of B/HI during that term. Ms. Lynch’s agreement is for a period of four years and may be renewed on the same terms for two successive two-year terms. Ms. Lynch will serve as Co-President of B/HI during the term of her agreement.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the B/HI Purchase. Amounts in the table are estimates that may change, as described below.
| Schedule of Assets Acquired and Liabilities AssumedSchedule of Assets Acquired and Liabilities Assumed | ||||
| Cash | $ | 65,465 | ||
| Accounts receivable | 154,162 | |||
| Other current assets | 15,262 | |||
| Property, equipment and leasehold improvements | 24,639 | |||
| Right-of-use asset | 1,044,864 | |||
| Other assets | 23,617 | |||
| Intangibles | 270,000 | |||
| Total identifiable assets acquired | 1,598,009 | |||
| Accrued payable | (104,724 | ) | ||
| Accrued expenses and other current liabilities | (259,936 | ) | ||
| Lease liability | (1,044,864 | ) | ||
| Deferred revenue | (56,994 | ) | ||
| Line of credit | (456,527 | ) | ||
| Deferred tax liability | (38,851 | ) | ||
| Loans payable | (75,550 | ) | ||
| Total liabilities assumed | (2,037,446 | ) | ||
| Net identifiable liabilities acquired | (439,437 | ) | ||
| Goodwill | 470,595 | |||
| Net assets acquired | $ | 31,158 |
Unaudited Pro Forma Consolidated Statements of Operations
For the three and nine months ended September 30, 2021, the Company’s statements of operations includes revenue pertaining to B/HI amounting to $1,082,856 and $2,509,697, respectively, and net income of $263,681 and $420,751, respectively. The following represents the Company’s unaudited pro forma consolidated operations after giving effect to the Be Social and B/HI acquisitions for the three and nine months ended September 30, 2020 as if the Company had completed both acquisitions on January 1, 2020 and its results had been included in the consolidated results of the Company for the three and nine months ending September 30, 2020.
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisitions to reflect the amortization that would have been charged, assuming the intangible assets had been recorded on January 1, 2020.
The impact of the acquisition of Be Social and B/HI on the Company’s actual results for periods following the acquisition may differ significantly from that reflected in this unaudited pro forma information for a number of reasons. As a result, this unaudited pro forma information is not necessarily indicative of what the combined company’s financial condition or results of operations would have been had the acquisitions been completed on January 1, 2020, as provided in this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition and results of operations of the combined company.
Be Social
In August 2020, the Company acquired all of the issued and outstanding membership interest of Be Social. During June 2021, the Company recorded a measurement period adjustment amounting to $82,651 of working capital adjustments.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
NOTE 5 — DEBT
Total debt of the Company was as follows as of September 30, 2021 and December 31, 2020:
| Schedule of debt | ||||||||
| Debt Type |
September 30,
2021 |
December 31,
2020 |
||||||
| Convertible notes payable | $ | 4,750,000 | $ | 1,445,000 | ||||
| Convertible notes payable - fair value option | 1,253,689 | 1,527,293 | ||||||
| Notes payable | 1,201,931 | 1,273,394 | ||||||
| Term loan | 600,195 | 900,292 | ||||||
| Paycheck Protection Program loans | 304,169 | 3,099,869 | ||||||
| Total debt | $ | 8,109,984 | $ | 8,245,848 | ||||
| Less current portion of debt | (1,057,317 | ) | (2,909,479 | ) | ||||
| Noncurrent portion of debt | $ | 7,052,667 | $ | 5,336,369 | ||||
The table below details the maturity dates for the Company’s debt as of September 30, 2021:
| Schedule of Future Annual Contractual Principal Payment Commitments of Debt | ||||||||||||||||||||||||||
| Debt Type | Maturity Date | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | |||||||||||||||||||
| Convertible notes payable | Ranging between June 2023 and March 2030 | $ | — | $ | — | $ | 4,750,000 | $ | — | $ | — | $ | 500,000 | |||||||||||||
| Nonconvertible promissory notes | Ranging between January 2022 and December 2023 | 25,287 | 307,685 | 868,959 | — | — | — | |||||||||||||||||||
| Term loan Bank United | March 31, 2023 | 100,033 | 400,130 | 100,032 | — | — | — | |||||||||||||||||||
| Paycheck Protection Program loans | May 5, 2022 | 114,063 | 190,106 | — | — | — | — | |||||||||||||||||||
| $ | 239,383 | $ | 897,921 | $ | 5,718,991 | $ | — | $ | — | $ | 500,000 | |||||||||||||||
Convertible Notes Payable
On March 2021, April 2021, June 2021, August 2021 and September 2021 the Company issued ten convertible promissory notes to four noteholders in the aggregate amount of $5,950,000. The convertible promissory notes bear interest at a rate of 10% per annum and mature on the second anniversary of their respective issuances. The balance of each convertible promissory note and any accrued interest may be converted at the noteholder’s option at any time at a purchase price based on a 90-day average closing market price per share of the Common Stock but not at a price less than $2.50 per share.
During the nine months ended September 30, 2021, the holders of nine convertible notes issued during 2020 and 2021 converted the principal balance of $2,645,000 plus accrued interest of $11,944 into 509,881 shares of Common Stock at conversion prices ranging between $3.69 and $9.46 per share.
The Company recorded interest expense related to these convertible notes payable of $88,000 and $130,482 during the three and nine months ended September 30, 2021, respectively, and made cash interest payments amounting to $109,176 during the nine months ended September 30, 2021 related to the convertible promissory notes.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
As of September 30, 2021 and December 31, 2020, the principal balance of the convertible promissory notes of $4,750,000 and $1,445,000, respectively, was recorded in noncurrent liabilities under the caption convertible promissory notes on the Company’s condensed consolidated balance sheets.
The following is a summary of the Company’s convertible notes payable as of September 30, 2021:
| Schedule of convertible notes payable | ||||||||||||||||
| Fair Value | ||||||||||||||||
| Principal Amount |
Net Carrying
Amount |
Amount | Level | |||||||||||||
| 10% convertible notes due in June 2023 | $ | 1,850,000 | $ | 1,850,000 | $ | 1,812,000 | 3 | |||||||||
| 10% convertible notes due in August 2023 | 2,000,000 | 2,000,000 | 1,955,000 | 3 | ||||||||||||
| 10% convertible notes due in September 2023 | 900,000 | 900,000 | 876,000 | 3 | ||||||||||||
| $ | 4,750,000 | $ | 4,750,000 | $ | 4,643,000 | |||||||||||
Subsequent to September 30, 2021, the holders of three convertible notes converted the principal balance of $1,850,000 into 172,550 shares of Common Stock at conversion prices ranging between $10.71 and $10.74 per share.
Convertible Notes Payable at Fair Value
The Company had convertible promissory notes outstanding with aggregate principal amounts of $1,600,000 as of December 31, 2020 for which it elected the fair value option. As such, the estimated fair value of each note was recorded on their respective issue dates. At each balance sheet date, the Company records the fair value of the convertible promissory notes with any changes in the fair value recorded in the condensed consolidated statements of operations.
On each of January 13, 2021 and January 27, 2021, notes with a remaining aggregate principal balance of $1,100,000 were converted into 281,554 shares of Common Stock at purchase prices ranging between $3.90 and $3.91 per share. The Company had a balance of $1,253,689 and $947,291 in noncurrent liabilities as of September 30, 2021 and December 31, 2020, respectively, and $580,000 in current liabilities as of December 31, 2020 recorded on its condensed consolidated balance sheets related to the convertible promissory notes measured at fair value. The Company recorded a loss in fair value of $223,923 and a gain of $8,730 for the three months ended September 30, 2021 and 2020, respectively, and losses in fair value of $826,398 and $540,231 for the nine months ended September 30, 2021 and 2020, respectively, on its condensed consolidated statements of operations.
The Company recorded interest expense of $9,863 and $29,589 in its condensed consolidated statements of operations during the three and nine months ended September 30, 2021, respectively, and made cash interest payments amounting to $29,589 during the nine months ended September 30, 2021 related to these convertible promissory notes.
Nonconvertible Promissory Notes
As of September 30, 2021, the Company has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $1,201,933, which bear interest at a rate of 10% per annum and mature between January 15, 2022 and December 10, 2023.
As of September 30, 2021 and December 31, 2020, the Company had a balance of $305,037 and $846,749, respectively, recorded as current liabilities and $896,894 and $426,645, respectively in noncurrent liabilities on its condensed consolidated balance sheets related to these nonconvertible promissory notes. The Company recorded interest expense related to these nonconvertible promissory notes of $30,317 and $32,668 for the three months ended September 30, 2021 and 2020, respectively, and $92,765 and $99,648 for the nine months ended September 30, 2021 and 2020, respectively. The Company made interest payments of $93,186 and $100,028 during the nine months ended September 30, 2021 and 2020, respectively, related to the nonconvertible promissory notes.
Term Loan
On March 31, 2020, 42West and The Door, as co-borrowers, entered into a three-year term loan (the “Term Loan”) with Bank United, N.A, which bears interest at a rate of 0.75% points over the Lender’s Prime Rate, provides for monthly repayment of principal and interest and matures on March 15, 2023. For the three and nine months ended September 30, 2021, the Company made principal payments in the amount of $100,033 and $300,098, respectively. During the three and nine months ended September 30, 2021, the Company recorded interest expense and paid interest of $6,813 and $23,334. As of September 30, 2021, the outstanding balance on the Term Loan was $600,195.
| 16 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
The Term Loan contains both customary affirmative and negative covenants. The bank tests for compliance with debt covenants on an annual basis based on the financial statements of 42West and The Door as of and for the year ended December 31. Based on current economic factors and uncertainties due to COVID-19, the Company believes it is out of compliance with certain debt covenants as of and for the three and nine months ended September 30, 2021. As such, the Company classified the entire balance of the Term Loan in current liabilities on its condensed consolidated balance sheet as of September 30, 2021.
Paycheck Protection Program Loan
In April 2020, the Company and its subsidiaries received an aggregate amount of $2.8 million of PPP Loans established under the CARES Act. Through our acquisition of Be Social in August 2020, the Company assumed a PPP Loan of $304,169. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of the PPP Loans based on its adherence to the forgiveness criteria. Throughout 2021, the Company and its subsidiaries applied for forgiveness of all PPP Loans received. On June 28, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loans for 42West and Dolphin, which in aggregate amounted to $1.1 million. Between July 1, 2021 and August 17, 2021, the Company was notified that the SBA had approved our applications to forgive the entire amounts of the loans for Viewpoint, Shore Fire and The Door, which in aggregate amounted to $1.7 million. Subsequent to September 30, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loan for Be Social, which amounted to $0.3 million. As of the date of this Quarterly Report on Form 10-Q, all PPP Loans have been forgiven.
As of September 30, 2021, the principal balance of the loan in the amount of $304,169 was recorded in current liabilities on the Company’s condensed consolidated balance sheet.
NOTE 6 — LOANS FROM RELATED PARTY
Dolphin Entertainment, LLC (“DE LLC”), an entity wholly owned by the Company’s Chief Executive Officer, William O’Dowd (the “CEO”), previously advanced funds for working capital to Dolphin Films. In prior years, Dolphin Films entered into a promissory note with DE LLC (the “Original DE LLC Note”) in the principal amount of $1,009,624, which was payable on demand. On June 15, 2021 the Company exchanged the Original DE LLC Note for a new note maturing on July 31, 2023 (“New DE LLC Note”). Other than the change in maturity date, there were no other changes to the principal, interest or any other terms of the Original DE LLC Note.
For the three and nine months ended September 30, 2021, the Company did not repay any principal balance of the New DE LLC Note. The Company recorded interest expense related to the New DE LLC Note amounting to $27,924 for both the three months ended September 30, 2021 and 2020, and $82,863 and $83,166 for the nine months ended September 30, 2021 and 2020, respectively.
As of both September 30, 2021 and December 31, 2020, the Company had a principal balance of $1,107,873, and accrued interest amounted to $27,925 and $26,683 as of September 30, 2021 and December 31, 2020, respectively. During the nine months ended September 30, 2021, the Company made cash payments for interest amounting to $81,621 in aggregate related to the Original DE LLC Note and the New DE LLC Note.
NOTE 7 — FAIR VALUE MEASUREMENTS
Put Rights
In connection with the 42West acquisition, the Company entered into put agreements, pursuant to which it granted Put Rights to the sellers and certain 42West employees. During the nine months ended September 30, 2021, the sellers and certain employees exercised their Put Rights for an aggregate amount of 22,867 shares of Common Stock and were paid $1,015,135 for Put Rights. An additional $600,000 of put rights were converted into 115,366 shares of Common Stock during the nine months ended September 30, 2021. As of September 30, 2021, there were no amounts due to the sellers of 42West and certain 42West employees from the exercise of these Put Rights.
| 17 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
The following is a reconciliation of the fair value of the Put Rights from December 31, 2020 to September 30, 2021:
| Schedule of Fair Value Assumptions Used to Value Liabilities | ||||
| Beginning fair value balance reported on the consolidated balance sheet at December 31, 2020 | $ | 1,544,029 | ||
| Put rights paid in 2021 | (1,015,135 | ) | ||
| Loss in fair value reported in condensed consolidated the statements of operations | 71,106 | |||
| Put rights converted into common stock | (600,000 | ) | ||
| Ending fair value of put rights reported in the condensed consolidated balance sheet at September 30, 2021 | $ | – |
Contingent consideration
The Company records the fair value of the contingent consideration liability in the condensed consolidated balance sheets under the caption “Contingent Consideration” and records changes to the liability against earnings or loss under the caption “Changes in fair value of contingent consideration” in the condensed consolidated statements of operations.
The Company utilized a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the contingent consideration as of the acquisition date. The Company determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:
| Schedule of Liability Fair Value Categorized Within Level 3Schedule of Liability Fair Value Categorized Within Level 3 | ||||||||||||||||||
| The Door | Be Social | B/HI (1) | ||||||||||||||||
| Inputs |
As of
September 30,
|
As of
December 31, 2020 |
As of
September 30, 2021 |
As of
December 31, 2020 |
As of
September 30, 2021 |
As of
December 31, 2020 |
||||||||||||
| Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the contingent consideration) | 0.04 | % | 0.16 | % | 0.14% – 0.34 | % | 0.13% - 0.17 | % | 0.04% - 0.14 | % | n/a | % | ||||||
| Annual Asset Volatility Estimate | 72.5 | % | 60.0 | % | 90 | % | 73.5 | % | 85 | % | n/a | % | ||||||
| (1) | In connection with the Company’s acquisition of B/HI, the seller of B/HI has the potential to earn up to $1,200,000 of contingent consideration, of which 50% is payable in cash, and 50% in shares of Common Stock, upon achievement of adjusted net income targets based on the operations of B/HI over the fiscal years ending December 31, 2021 and 2022. The fair value of this contingent consideration at the acquisition date was determined to be zero as the Company did not believe it was likely the adjusted net income targets would be met. The increase in the three and nine months ended September 30, 2021 related to a change in the likelihood of achieving the established targets in the B/HI acquisition. |
For the contingent consideration, which are 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, 2020 to September 30, 2021:
| Schedule of fair value categorized within Level 3 | The Door | Be Social | B/HI | |||||||
| Beginning fair value balance reported on the consolidated balance sheet at December 31, 2020 | $ | 370,000 | $ | 160,000 | $ | – | ||||
| (Gain) Loss in fair value reported in the condensed consolidated statements of operations |
(100,000) |
270,000 | 1,140,000 | |||||||
| Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2021 | $ | 270,000 | $ | 430,000 | $ | 1,140,000 | ||||
Fair Value Option (“FVO”) Election – Convertible notes payable and freestanding warrants
2020 convertible notes payable
During 2020, the Company issued three convertible notes payable: a convertible note with a principal amount of $1.3 million (the “January 3rd Note”), face value of $500,000 (the “March 4th Note”) and face value of $560,000 (the “March 25th Note”) (together “the 2020 convertible notes”), which are all accounted for under the ASC 825-10-15-4 FVO election. Under the FVO election the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The estimated fair value adjustment is presented as a single line item within other income (expense) in the accompanying condensed consolidated statements of operations under the caption “change in fair value of convertible notes and derivative liabilities”.
| 18 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
The 2020 convertible notes are 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, 2020 to September 30, 2021:
| Schedule of Fair Value Assumptions Used to Value Liabilities | ||||||||||||
| January 3rd Note | March 4th Note | March 25th Note | ||||||||||
| Beginning fair value balance reported on the consolidated balance sheet at December 31, 2020 | $ | 436,155 | $ | 511,136 | $ | 580,000 | ||||||
| (Gain) loss in fair value reported in the condensed consolidated statements of operations | 103,845 | 742,553 | (20,000 | ) | ||||||||
| Exercised during the nine months ended September 30, 2021 | (540,000 | ) | — | (560,000 | ) | |||||||
| Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2021 | $ | — | $ | 1,253,689 | $ | — | ||||||
The estimated fair value of the January 3rd Note and the March 25th Note was computed using a Monte Carlo simulation, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the note reflects management’s own assumptions about the assumptions that market participants would use in valuing the note as of the acquisition date and subsequent reporting periods.
The estimated fair value of the March 4th Note as of September 30, 2021 and as of December 31, 2020, was computed using a Black-Scholes simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:
| Schedule of estimated fair value | ||||||||
| Fair Value Assumptions - March 4th Note |
September 30,
2021 |
December 31,
2020 |
||||||
| Face value principal payable | $ | 500,000 | $ | 500,000 | ||||
| Original conversion price | $ | 3.91 | $ | 3.91 | ||||
| Value of Common Stock | $ | 12.16 | $ | 3.40 | ||||
| Expected term (years) | 8.43 | 9.18 | ||||||
| Volatility | 100 | % | 100 | % | ||||
| Risk free rate | 1.42 | % | 0.93 | % | ||||
Warrants
During the nine months ended September 30, 2021, the Series E, F, G, and H Warrants were all exercised and the Company issued 146,027 shares of Common Stock via a cashless exercise formula pursuant to the warrant agreement.
The warrants are measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2020 to September 30, 2021:
| Schedule of warrants are measured at fair value | ||||||||
| Fair Value: | Series E, F, G and H | Series I | ||||||
| Beginning fair value balance reported on the consolidated balance sheet at December 31, 2020 | $ | 400,000 | $ | 50,000 | ||||
| Loss in fair value reported in the condensed consolidated statements of operations | 2,397,877 | 155,000 | ||||||
| Exercise of warrants during the nine months ended September 30, 2021 | (2,797,877 | ) | — | |||||
| Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2021 | $ | — | $ | 205,000 | ||||
| 19 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
The estimated fair value of the Series “I” Warrants was computed using a Black-Scholes valuation model, using the following assumptions:
| Schedule of estimated fair value | ||||||||
| Fair Value Assumption - Series “I” Warrants |
September 30,
2020 |
December 31,
2020 |
||||||
| Aggregate Fair Value | $ | 205,000 | $ | 50,000 | ||||
| Exercise Price per share | $ | 3.91 | $ | 3.91 | ||||
| Value of Common Stock | $ | 12.16 | $ | 3.40 | ||||
| Expected term (years) | 3.92 | 4.67 | ||||||
| Volatility | 100 | % | 100 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
| Risk free rate | 0.74 | % | 0.31 | % | ||||
Term Loan and PPP Loans
The estimated fair value of the Term Loan and PPP Loans approximates their carrying amount based on the arrangement of the financing of the debt and pursuant to the terms of the CARES ACT, respectively. The Company applied for the PPP Loans to be forgiven by the SBA. (See Note 5)
NOTE 8 — CONTRACT LIABILITIES
The Company receives advance payments from customers for public relations projects or as deposits for promotional or brand-support video projects, that it records as contract liabilities. Once the work is performed or the projects are delivered to the customer, the contract liabilities are deemed earned and recorded as revenue. Advance payments received are generally for short duration and are recognized once the performance obligation of the contract is met. As of September 30, 2021 and December 31, 2020, the Company had balances of $4,266,539 and $1,855,209, respectively, in contract liabilities in its condensed consolidated balance sheets.
NOTE 9 —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 Company evaluated the entities in which it did not have a majority voting interest and determined that it had (1) the power to direct the activities of the entities that most significantly impact their economic performance and (2) had the obligation to absorb losses or the right to receive benefits from these entities. As such the financial statements of JB Believe, LLC are consolidated in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, and in the condensed consolidated statements of operations and statements of cash flows presented herein for the three and nine months ended September 30, 2021 and 2020. This entity was previously under common control and has been accounted for at historical costs for all periods presented.
| Summary of Financial Information for Variable Interest Entities | JB Believe LLC | |||||||||||||||||||||||
| (in USD) |
For the
three months ended September 30, 2021 |
For the
three months ended September 30, 2020 |
For the
nine months ended September 30, 2021 |
For the
nine months ended September 30, 2020 |
As of
September 30, 2021 |
As of
December 31, 2020 |
||||||||||||||||||
| Assets | $ | n/a | $ | n/a | $ | n/a | $ | n/a | $ | 251,671 | $ | 190,347 | ||||||||||||
| Liabilities | $ | n/a | $ | n/a | $ | n/a | $ | n/a | $ | (6,750,088 | ) | $ | (6,749,914 | ) | ||||||||||
| Revenues | $ | — | $ | — | $ | — | — | n/a | n/a | |||||||||||||||
| Expenses | $ | — | $ | — | $ | — | — | n/a | n/a | |||||||||||||||
| 20 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
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 on historical cost. A gain or loss may be recognized upon deconsolidation of a VIE depending on the amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
JB Believe LLC (“Believe”), an entity owned by Believe Film Partners LLC, of which the Company owns a 25% membership interest, was formed for the purpose of recording the production costs of the motion picture “Believe”. The Company was given unanimous consent by the members to enter into domestic and international distribution agreements for the licensing rights of the motion picture, Believe, until such time as the Company had been repaid $3,200,000 for the investment in the production of the film and $5,000,000 for the P&A to market and release the film in the US. The Company has not been repaid these amounts and as such is still in control of the distribution of the film. For the three and nine months ended September 30, 2021 and 2020, the Company did not record any revenues related to the distribution of Believe. The capitalized production costs related to Believe were either amortized or impaired in previous years. Believe’s primary liability is to the Company which it owes $6,301,314 and eliminates in consolidation.
NOTE 10 — STOCKHOLDERS’ EQUITY
| A. | Preferred Stock |
The Company’s Amended and Restated Articles of Incorporation authorize the issuance of 10,000,000 shares of preferred stock. The Company’s Board of Directors (the “Board”) has the power to designate the rights and preferences of the preferred stock and issue the preferred stock in one or more series.
On July 6, 2017, the Company amended its Articles of Incorporation to designate 50,000 preferred shares as Series C with a $0.001 par value which may be issued only to an “Eligible Series C Preferred Stock Holder”. Pursuant to the Certificate of Designation of the Series C, each share of Series C will be convertible into one share of Common Stock, subject to adjustment for each issuance of Common Stock upon the occurrence of certain event(s) described in further detail in “Note 16: Stockholders’ Equity” within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020 At a meeting of the Board on November 12, 2020, a majority of the independent directors of the Board determined that the “optional conversion threshold” had been met. As a result, the Series C became immediately convertible and as of September 30, 2021 is convertible into 4,738,940 shares of Common Stock, subject to the restriction discussed below. Additionally, DE LLC, as the holder of the Series C is entitled to 14,216,819 votes, which are equal to approximately 65% of the voting securities of the Company.
At the meeting of the Board on November 12, 2020, the Board and Mr. O’Dowd agreed to restrict the conversion of the Series C until the Board approved its conversion. Therefore, on November 16, 2020, the Company and DE, LLC entered into a Stock Restriction Agreement pursuant to which the conversion of the Series C is prohibited until such time as a majority of the independent directors of the Board approves the removal of the prohibition. The Stock Restriction Agreement also prohibits the sale or other transfer of the Series C until such transfer is approved by a majority of the independent directors of the Board. The Stock Restriction Agreement shall terminate upon a Change of Control (as such term is defined in the Stock Restriction Agreement) of the Company.
The Certificate of Designation also provides for a liquidation value of $0.001 per share and dividend rights of the Series C on parity with the Company’s Common Stock.
| 21 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
| B. | Common Stock |
The following table summarizes the movement of the common stock outstanding for the nine months ended September 30,2021:
| Schedule of common stock outstanding | ||||
| Common Stock Outstanding | Shares | |||
| Balance at December 31, 2020 | 6,618,785 | |||
| Issuance of shares: | ||||
| Conversion of note payable | 791,435 | |||
| Cashless exercise of warrants | 146,027 | |||
| Issued to seller of Be Social | 103,245 | |||
| Exchange of Put Rights for stock | 115,366 | |||
| Issued to seller of The Door | 10,238 | |||
| Issued as earnout consideration to employees of 42West | 3,886 | |||
| Employee bonus | 1,935 | |||
| Shares retired from exercise of puts | (22,233 | ) | ||
| Balance at September 30, 2021 | 7,768,684 | |||
| C. | Incentive Compensation Plan |
On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). During the three and nine months ended September 30, 2021 and 2020, the Company did not issue any Awards under the 2017 Plan.
NOTE 11 — EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| Schedule of Basic and Diluted Income (Loss) Per Share | ||||||||||||||||
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator | ||||||||||||||||
| Net income (loss) | $ | 141,651 | $ | (137,630 | ) | $ | (3,780,392 | ) | $ | (1,007,384 | ) | |||||
| Net income attributable to participating securities | 5,833 | — | — | — | ||||||||||||
| Net income (loss) attributable to Dolphin Entertainment common stock shareholders and numerator for basic earnings (loss) per share | 135,817 | (137,630 | ) | (3,780,392 | ) | (1,007,384 | ) | |||||||||
| Change in fair value of put rights | — | (159,457 | ) | — | (1,677,267 | ) | ||||||||||
| Change in fair value of derivative liability | — | — | — | — | ||||||||||||
| Change in fair value of warrants | — | — | — | — | ||||||||||||
| Interest expense | — | — | — | — | ||||||||||||
| Numerator for diluted earnings (loss) per share | $ | 135,817 | $ | (297,087 | ) | $ | (3,780,392 | ) | $ | (2,684,651 | ) | |||||
| Denominator | ||||||||||||||||
| Denominator for basic EPS - weighted-average shares | 7,740,085 | 6,676,405 | 7,551,974 | 5,223,441 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Put rights | — | 235,606 | — | 752,169 | ||||||||||||
| Warrants | — | — | — | — | ||||||||||||
| Convertible notes payable | — | — | — | — | ||||||||||||
| Denominator for diluted EPS - adjusted weighted-average shares | 7,740,085 | 6,912,011 | 7,551,974 | 5,975,610 | ||||||||||||
| Basic earnings (loss) per share | $ | 0.02 | $ | (0.02 | ) | $ | (0.50 | ) | $ | (0.19 | ) | |||||
| Diluted earnings (loss) per share | $ | 0.02 | $ | (0.04 | ) | $ | (0.50 | ) | $ | (0.45 | ) | |||||
| 22 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
Basic earnings (loss) per share is computed by dividing income (loss) attributable to the shareholders of Common Stock (the numerator) by the weighted-average number of shares of Common Stock outstanding (the denominator) for the period. Diluted earnings (loss) per share assumes that any dilutive equity instruments, such as put rights, warrants and convertible notes payable were exercised and outstanding Common Stock adjusted accordingly.
Certain of the Company’s convertible notes payable, warrants and the Series C Preferred Stock have clauses that entitle the holder to participate if dividends are declared to the common stockholders as if the instruments had been converted into shares of Common Stock. As such, the Company uses the two-class method to compute earnings per share and attribute a portion of the Company’s net income to these participating securities. For the three months ended September 30, 2021, the Company attributed $12,271 of the Company’s net income to these participating securities and reduced the net income available to common shareholders by that amount when calculating earnings per share. For the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020, the Company had a net loss, and as such, the two-class method is not presented since the securities do not participate in losses.
In periods when the Put Rights are assumed to have been settled at the beginning of the period in calculating the denominator for diluted earnings (loss) per share, the related change in the fair value of Put Right liability recognized in the condensed consolidated statements of operations for the period, is added back or subtracted from net income (loss) during the period. The denominator for calculating diluted earnings (loss) per share for the three and nine months ended September 30, 2020 assumes the Put Rights had been settled at the beginning of the period, and therefore, the related income (loss) due to the decrease in the fair value of the Put Right liability during the three and nine months ended September 30, 2020 is subtracted from net income (loss). The number of shares added to the denominator for the Put Rights is calculated using the reverse treasury stock method that assumes the Company issues and sells sufficient shares at the average period trading price to satisfy the Put Right contracts. For the nine months ended September 30, 2021, Put Rights in the aggregate amount of 43,620 shares were not included in the calculation of diluted loss per share since inclusion would be considered antidilutive.
For the three months ended September 30, 2021, convertible promissory notes in the aggregate of 326,702 weighted average shares were not included in the calculation of diluted earnings per share and for the nine months ended September 30, 2021, convertible promissory notes and warrants in the aggregate of 273,594 weighted average shares were not included in the calculation of diluted loss per share because inclusion was considered to be anti-dilutive. For the three and nine months ended September 30, 2020, the convertible promissory notes and warrants were not included in diluted loss per share because inclusion was considered to be anti-dilutive.
NOTE 12 — WARRANTS
A summary of the warrants activity during the nine months ended September 30, 2021 is as follows:
| Summary of Warrants IssuedSummary of Warrants Issued | |||||||||
| Warrants: | Shares |
Weighted Avg.
Exercise Price |
|||||||
| Balance at December 31, 2020 | 221,513 | $ | 7.08 | ||||||
| Issued | — | — | |||||||
| Exercised | (166,072 | ) | 0.00 | ||||||
| Expired | (35,441 | ) | 23.70 | ||||||
| Balance at September 30, 2021 | 20,000 | $ | 3.91 | ||||||
On March 4, 2020, in connection with the March 4th Note, the Company issued Series “I” Warrant to purchase up to 20,000 shares of Common Stock at a purchase price of $3.91 per share. The warrants become exercisable on the six-month anniversary and for a period of five years thereafter. If a resale registration statement covering the shares of Common Stock underlying the warrants is not effective and available at the time of exercise, the warrants may be exercised by means of a “cashless” exercise formula. The Company determined that the Series “I” Warrant should be classified as a freestanding financial instrument that meets the criteria to be accounted for as a derivative liability and recorded a fair value at issuance of $40,000. The Company recorded losses of $55,000 and of $155,000 in its condensed consolidated statements of operations due to change in fair value for the three and nine months ending September 30, 2021, respectively. The fair value recorded on the Company’s condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 was $205,000 and $50,000, respectively.
| 23 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
The Company recorded a loss of $2,397,877 in its condensed consolidated statements of operations due to change in fair value for the nine months ending September 30, 2021 in connection with the Series E, F, G and H warrants which were exercised in March 2021 using a cashless exercise formula pursuant to the warrant agreement.
NOTE 13 — RELATED PARTY TRANSACTIONS
On September 7, 2012, the Company entered into an employment agreement with its CEO, which provides for annual compensation of $250,000 and an annual discretionary bonus as determined by the Board. Unpaid compensation accrues interest at a rate of 10% per annum. In 2019, the Compensation Committee approved an increase in Mr. O’Dowd’s annual salary to $300,000. On May 17, 2021, the Compensation Committee of the Board approved an increase in the base salary of Mr. O’Dowd from $300,000 to $400,000 per year. The increase was effective January 1, 2021.
As of September 30, 2021 and December 31, 2020, the Company had accrued $2,625,000 of compensation as accrued compensation and has balances of $1,784,394 and $1,756,438 respectively, in accrued interest in current liabilities on its condensed consolidated balance sheet, related to the CEO’s employment. Amounts owed under this arrangement are payable on demand. The Company recorded interest expense related to the accrued compensation in the condensed consolidated statements of operations amounting to $66,164 for both the three months ended September 30, 2021 and 2020, and $196,336 and $197,055 for the nine months ended September 30, 2021 and 2020, respectively. During the three and nine months ended September 30, 2021, the Company paid interest amounting to $168,379 in connection with the accrued compensation to the CEO.
The Company entered into the New DE LLC Note with an entity wholly owned by our CEO. See Note 6 for further discussion.
In connection with the acquisition of 42West, the Company and its CEO, as personal guarantor, entered into the Put Agreements with each of the sellers of 42West, pursuant to which the Company granted the Put Rights. During the nine months ended September 30, 2021, the Company made payments amounting to $400,000 to Ms. Leslee Dart, while she was a member of the Board, related to the Put Rights. No payments were made to Ms. Dart during the three months ended September 30, 2021. Pursuant to the terms of one such Put Agreement, Ms. Dart exercised 6,507 Put Rights at a purchase price of $46.10 per share during the nine months ended September 30, 2021. As of September 30, 2021, the Company does not owe Ms. Dart any amounts related to the exercise of these Put Rights. On May 16, 2021, Ms. Dart resigned from her position as a member of the Board effective as of such date.
NOTE 14 — SEGMENT INFORMATION
The Company operates in two reportable segments, Entertainment Publicity and Marketing Segment (“EPD”) and Content Production Segment (“CPD”). The Entertainment Publicity and Marketing segment is composed of 42West, The Door, Viewpoint, Shore Fire, Be Social, and B/HI, and provides clients with diversified services, including public relations, entertainment and hospitality content marketing and strategic marketing consulting. The Content Production segment is composed of Dolphin Entertainment and Dolphin Films and engages in the production and distribution of digital content and feature films. The activities of our Content Production segment also include all corporate overhead activities.
The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating segment performance is operating income (loss) which is the same as Income (Loss) before other income (expenses) on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2021. Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. Legal and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees.
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
In connection with the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, and B/HI, the Company assigned $6,537,065 of intangible assets, net of accumulated amortization of $6,932,935, and goodwill of $20,015,800 as of September 30, 2021 to the Entertainment Publicity and Marketing segment. The balances reflected as of September 30, 2020 for Entertainment Publicity and Marketing segment comprise 42West, The Door, Viewpoint, and Shore Fire.
| Schedule of Revenue and Assets by SegmentSchedule of Revenue and Assets by Segment | ||||||||||||||||
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| EPD | $ | 9,399,432 | $ | 5,527,943 | $ | 25,219,793 | $ | 17,356,468 | ||||||||
| CPD | — | — | — | — | ||||||||||||
| Total | $ | 9,399,432 | $ | 5,527,943 | $ | 25,219,793 | $ | 17,356,468 | ||||||||
| Segment Operating Income (Loss): | ||||||||||||||||
| EPD | $ | 1,617,658 | $ | 695,763 | $ | 1,820,984 | $ | 489,107 | ||||||||
| CPD | (1,579,369 | ) | (1,188,948 | ) | (2,921,342 | ) | (2,032,190 | ) | ||||||||
| Total operating income (loss) | 38,289 | (493,185 | ) | (1,100,358 | ) | (1,543,083 | ) | |||||||||
| Interest expense | (241,115 | ) | (270,815 | ) | (576,146 | ) | (1,953,790 | ) | ||||||||
| Other income, net | 344,477 | (443,883 | ) | (2,142,739 | ) | 2,307,002 | ||||||||||
| Income (Loss) before income taxes | $ | 141,651 | $ | (320,117 | ) | $ | (3,819,243 | ) | $ | (1,189,871 | ) | |||||
|
As of
September 30, 2021 |
As of
December 31, 2020 |
|||||||
| Total assets: | ||||||||
| EPD | $ | 49,163,240 | $ | 45,266,315 | ||||
| CPD | 4,970,435 | 4,085,636 | ||||||
| Total | $ | 54,133,675 | $ | 49,351,951 | ||||
NOTE 15 — LEASES
The Company and its subsidiaries are party to various office leases with terms expiring at different dates through December 2026. The amortizable life of the right-of-use asset is limited by the expected lease term. Although certain leases include options to extend the Company did not include these in the right-of-use asset or lease liability calculations because it is not reasonably certain that the options will be executed.
The table below shows the lease income and expenses recorded in the condensed consolidated statements of operations incurred during the three and nine months ended September 30, 2021 and 2020.
| Schedule of Lease Income and ExpensesSchedule of Lease Income and Expenses | ||||||||||||||||||
| Lease costs | Classification |
Three months ended
September 30, 2021 |
Three months ended
September 30, 2020 |
Nine months ended
September 30, 2021 |
Nine months ended
September 30, 2020 |
|||||||||||||
| Operating lease costs | Selling, general and administrative expenses | $ | 620,121 | $ | 543,045 | $ | 2,029,524 | $ | 1,601,364 | |||||||||
| Operating lease costs | Direct costs | — | 60,861 | 60,861 | 182,583 | |||||||||||||
| Sublease income | Selling, general and administrative expenses | — | (2,397 | ) | — | (7,191 | ) | |||||||||||
| Net lease costs | $ | 620,121 | $ | 601,509 | $ | 2,090,385 | $ | 1,776,756 | ||||||||||
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DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2021
Lease Payments
For the three and nine months ended September 30, 2021, the Company made payments in cash related to its operating leases in the amounts of $664,650 and $2,067,546, respectively.
Future maturities lease payments for operating leases for the remainder of 2021 and thereafter, were as follows:
As of September 30, 2021, the Company’s weighted average remaining lease terms on its operating lease is 4.27 years and the Company’s weighted average discount rate is 7.58% related to its operating leases.
NOTE 16 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. In the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows. The Company is not aware of any pending litigation as of the date of this report.
Letter of Credit
Pursuant to the lease agreements of 42West’s New York and Los Angeles office locations, the Company is required to issue letters of credit to secure the leases. On July 24, 2018, the Company renewed the letter of credit issued by City National Bank for the 42West office space in New York. The original letter of credit was for $677,354 and originally expired on August 1, 2018. This letter of credit renews automatically annually unless City National Bank notifies the landlord 60-days prior to the expiration of the bank’s election not to renew the letter of credit. In connection with the annual renewal in 2021, the letter of credit was reduced to $541,833. The Company granted City National Bank a security interest in bank account funds totaling $541,883 pledged as collateral for the letter of credit. The letters of credit commit the issuer to pay specified amounts to the holder of the letter of credit under certain conditions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit.
The Company is not aware of any other claims relating to its outstanding letters of credit as of September 30, 2021.
NOTE 17 — SUBSEQUENT EVENTS
As discussed in Note 5, on October 7, 2021 the Company was notified that the SBA had approved the application to forgive the entire amount of the PPP loan related to Be Social, which amounted to $0.3 million.
As also discussed in Note 5, subsequent to September 30, 2021, the holders of three convertible notes converted the principal balance of $1,850,000 into 172,550 shares of Common Stock at conversion prices ranging between $10.71 and $10.74 per share.
On October 12, 2021, the Company announced it had invested in an ownership position in the Midnight Theatre, a state-of-the-art contemporary variety theater and restaurant experience in the heart of Manhattan, New York City. The Company will manage all aspects of publicity and marketing for the venue, as well as facilitate talent and commercial relationships within the entertainment and culinary industries.
On November 15, 2021, the Company, as lender, advanced $0.5 million in a convertible note to the borrower, JDDC Elemental LLC, related to its investment in Midnight Theater. Interest on this note shall accrue annually at a simple rate equal to ten percent (10.0%) per annum. The outstanding principal and accrued but unpaid interest on this note shall be paid in full on May 15, 2022, its maturity date, unless earlier converted.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading independent entertainment marketing and premium content production company. Through our subsidiaries, 42West, The Door, Shore Fire, Viewpoint, Be Social and B/HI, we provide expert strategic marketing and publicity services to many of the top brands, both individual and corporate, in the entertainment, hospitality and music industries. 42West, The Door and Shore Fire are each recognized global leaders in the PR services for the industries they serve. Viewpoint adds full-service creative branding and production capabilities to our marketing group and Be Social provides influencer marketing capabilities through its roster of highly engaged social media influencers. Dolphin’s legacy content production business, founded by our Emmy-nominated Chief Executive Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital series, primarily aimed at family and young adult markets. Our Common Stock trades on The Nasdaq Capital Market under the symbol “DLPN”.
On January 8, 2021, we acquired all of the issued and outstanding shares of B/HI Communications, Inc, a California corporation, referred to as B/HI, from Dean G Bender and Janice L Bender as co-trustees of the Bender Family Trust dated May 6, 2013, the Seller. The acquisition was effective January 1, 2021. B/HI is an entertainment public relations agency that specializes in corporate and product communications programs for interactive gaming, esports, entertainment content and consumer product organizations. As consideration for the acquisition of the shares of B/HI, we agreed with the Seller to pay, $0.8 million of shares of our common stock based on a 30-day trailing trading average closing price immediately prior to, but not including, the applicable payment date adjusted for working capital, cash targets and the B/HI indebtedness of approximately $0.5 million, net of minimum operating cash as defined in the purchase agreement. We may also pay up to an additional $1.2 million of which 50% will be paid in cash and 50% will be paid in shares of our common stock upon B/HI achieving certain specified financial performance targets during the years ended December 31, 2021 and 2022.
We have established an acquisition strategy based on identifying and acquiring companies that complement our existing entertainment publicity and marketing services and content production businesses. We believe that complementary businesses, such as data analytics and digital marketing, can create synergistic opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion with such targets. We intend to complete one additional acquisition during 2021, but there is no assurance that we will be successful in doing so, whether in 2021 or at all.
We operate in two reportable segments: our entertainment publicity and marketing segment and our content production segment. The entertainment publicity and marketing segment comprises 42West, The Door, Shore Fire, Viewpoint, Be Social and B/HI and provides clients with diversified services, including public relations, entertainment content marketing, strategic marketing consulting, digital marketing capabilities, creative branding and in-house production of content for marketing. The content production segment comprises Dolphin Films and Dolphin Digital Studios and specializes in the production and distribution of digital content and feature films.
COVID Update
During March 2020, the World Health Organization categorized a novel coronavirus (“COVID-19”) as a pandemic, and it has spread throughout the United States. The pandemic has had and continues to have a significant effect on economic conditions in the United States, and continues to cause significant uncertainties in the U.S. and global economies, particularly as a result of a new Delta variant of COVID-19, which appears to be causing an increase in COVID-19 cases. Public health officials and medical professionals have warned that a resurgence of COVID-19 cases may continue, particularly if vaccination rates do not quickly increase or if additional, potent variants emerge. It is unclear how long a resurgence may last, how severe it may be, and what safety measures governments may impose in response to it.
The extent to which the COVID-19 pandemic affects our business, operations and financial results depends, and will continue to depend, on numerous evolving factors that we may not be able to accurately predict. Since the outbreak of COVID-19 began and public and private sector measures to reduce its transmission were implemented, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, the demand for certain of the services the Company offers was adversely affected resulting in decreased revenues and cash flows.
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One of our subsidiaries operates in the food and hospitality sector, which was negatively impacted by the orders to either suspend or reduce operations of restaurants and hotels. Similarly, another subsidiary represents talent, such as actors, directors and producers, and revenues from these clients was negatively impacted by the suspension of content production. The television and streaming consumption around the globe has increased since the outbreak of COVID-19, as well as the demand for consumer products. Revenues from the marketing of these shows and products somewhat offset the decrease in revenue from the sectors discussed above.
Going Concern
In the audit opinion for our financial statements as of and for the year ended December 31, 2020, our independent registered public accountants included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern based upon our accumulated deficit as of December 31, 2020 and our working capital deficit. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The Company has suffered recurring losses, including a net loss of $3.8 million for the nine months ended September 30, 2021, and had an accumulated deficit of $101.8 million as of September 30, 2021. Several of our subsidiaries operate in industries that have been adversely affected by the government mandated work-from-home, stay-at-home and shelter-in-place orders as a result of the novel coronavirus COVID-19.
Management concluded that these factors raise substantial doubt about our ability to continue as a going concern within one year after these condensed consolidated financial statements are issued. As these industries continue to gradually reopen, we have seen signs of improvement on demand for their services. We have noted an increase in demand for our services and noted signs of improvement in the results of our operations for three consecutive quarters; for the three months ended September 30, 2021 we noted increased revenues, cash flows from operations and reported net income. In addition, we operate in industries that have been adversely affected by COVID-19 (e.g. food, hospitality and talent PR). The condensed 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 additional sales of our common stock, securities convertible into our common stock, debt securities, as well as available bank and non-bank financing, or a combination of such financing alternatives; however, there can be no assurance that we will be successful in raising any necessary additional capital or securing loans. If we are unable to raise additional funds from the sale of common stock, securities convertible into our common stock, debt securities, bank and non-bank financing or any combination of such financing securities, we may be forced to curtail our business operations or liquidate.
Revenues
For the three and nine months ended September 30, 2021 and 2020, we derived all of our revenues from our entertainment publicity and marketing segment. The entertainment publicity and marketing segment generates its revenues from providing public relations services for celebrities, musicians and brands, entertainment and targeted content marketing for film and television series, strategic communications services for corporations, public relations, marketing services and brand strategies for hotels and restaurants and digital marketing through its roster of social media influencers. Refer to discussion under Revenues in the Results of Operations section below for further discussion on the revenues from the content production segment.
Entertainment Publicity and Marketing
Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and we have continued to grow organically through referrals and actively soliciting new business, as well as through acquisition of new businesses within the same industry. We earn revenues primarily from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers and (viii) content productions of marketing materials on a project contract basis. For these revenue streams, we collect fees through either fixed fee monthly retainer agreements, fees based on a percentage of contracts or project-based fees.
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We earn entertainment publicity and marketing revenues primarily through the following:
| ● | Talent – We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs and Grammy winning recording artists. Our services in this area include ongoing strategic counsel, media relations, studio and/or network liaison work, and event and tour support. |
| ● | Entertainment Marketing and Brand Strategy – We earn fees from providing marketing direction, public relations counsel and media strategy for entertainment content (including theatrical films, television programs, DVD and VOD releases, and online series) from all the major studios, as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. In addition, we provide entertainment marketing services in connection with film festivals, food and wine festivals, awards campaigns, event publicity and red-carpet management. As part of our services, we offer marketing and publicity services tailored to reach diverse audiences. We also provide marketing direction targeted to the ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups. Our clients for this type of service include major studios, streaming services, independent producers and leading hotel and restaurant groups. We expect that increased digital streaming marketing budgets at several large key clients will drive growth of revenue and profit in 42West’s Entertainment Marketing division over the next several years. |
| ● | Strategic Communications – We earn fees by advising companies looking to create, raise or reposition their public profiles, primarily in the entertainment industry. We believe that growth in Strategic Communications division will be driven by increasing demand for these services by traditional and non-traditional media clients who are expanding their activities in the content production, branding, and consumer products PR sectors. We expect that this growth trend will continue for the next three to five years. We also help studios and filmmakers deal with controversial movies, as well as high-profile individuals address sensitive situations. |
| ● | Creative Branding and Production – We offer clients creative branding and production services from concept creation to final delivery. Our services include brand strategy, concept and creative development, design and art direction, script and copyrighting, live action production and photography, digital development, video editing and composite, animation, audio mixing and engineering, project management and technical support. We expect that our ability to offer these services to our existing clients in the entertainment and consumer products industries, will be accretive to our revenue. |
| ● | Digital Media Influencer Marketing Campaigns – We arrange strategic marketing agreements between brands and social media influencers, for both organic and paid campaigns. We also offer services for social media activations at events, as well as editorial work on behalf of brand clients. Our services extend beyond our own captive influencer network, and we manage custom campaigns targeting specific demographics and locations, from ideation to delivery of results reports. We expect that our relationship with social media influencers will provide us the ability to offer these services to our existing clients in the entertainment and consumer products industries and will be accretive to our revenue. |
Content Production
Project Development and Related Services
We have a team that dedicates a portion of its time to identifying scripts, story treatments and novels for acquisition, development and production. The scripts can be for either digital or motion picture productions. We have acquired the rights to certain scripts that we intend to produce and release in the future, subject to obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical distribution.
Our pipeline of feature films includes:
| ● | Youngblood, an updated version of the 1986 hockey classic; |
| ● | Out of their League, a romantic comedy pitting husband versus wife in the cut-throat world of fantasy football; |
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We have completed development of each of these feature films, which means that we have completed the script and can begin pre-production once financing is obtained. We are planning to fund these projects through third-party financing arrangements, domestic distribution advances, pre-sales, and location-based tax credits, and if necessary, sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there is no assurance that we will be able to obtain the financing necessary to produce any of these feature films.
Expenses
Our expenses consist primarily of: (1) direct costs; (2) selling, general and administrative expenses; (3) depreciation and amortization expense; (4) legal and professional fees and (5) payroll expenses.
| (1) | Direct costs include certain cost of services, as well as certain production costs, related to our entertainment publicity and marketing business. Included within direct costs are immaterial impairments for any of our content production projects. |
| (2) | Selling, general and administrative expenses include all overhead costs except for payroll, depreciation and amortization and legal and professional fees that are reported as a separate expense item. |
| (3) | Depreciation and amortization include the depreciation of our property and equipment and amortization of intangible assets and leasehold improvements. |
| (4) | Legal and professional fees include fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants. |
| (5) | Payroll expenses include wages, payroll taxes and employee benefits. |
Other Income and Expenses
For the three and nine months ended September 30, 2021 and 2020, other income and expenses consisted primarily of: (1) gain on extinguishment of debt; (2) changes in the fair value of put rights; (3) changes in fair value of contingent consideration; (4) changes in fair value of warrants; (5) changes in fair value of convertible notes and derivative liabilities and (6) interest expense. For the nine months ended September 30, 2020, we also had a loss on the deconsolidation of our Max Steel variable interest entity.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2021 as compared to three and nine months ended September 30, 2020
Revenues
For the three and nine months ended September 30, 2021 and 2020 revenues were as follows:
|
For the three months ended
September 30, |
For the nine months ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Entertainment publicity and marketing | $ | 9,399,432 | $ | 5,527,943 | $ | 25,219,793 | $ | 17,356,468 | ||||||||
| Total revenue | $ | 9,399,432 | $ | 5,527,943 | $ | 25,219,793 | $ | 17,356,468 | ||||||||
Revenues from entertainment publicity and marketing increased by approximately $3.9 million and $7.9 million for the three and nine months ended September 30, 2021, as compared to the same periods in the prior year primarily due to the revenues of Be Social, B/HI and increased revenues from all of our subsidiaries, as customers were resuming spending for services we provide. During the three and nine months ended September 30, 2020, the Company’s revenues were adversely affected by government-imposed orders to either reduce or completely shut down the in-restaurant service and shut down of movie content production due to COVID-19 that caused our clients to reduce or suspend the services we provided to them. We did not derive any revenues from the content production segment as we have not produced and distributed any of the projects discussed above and the projects that were produced and distributed in 2013 and 2016 have mostly completed their normal revenue cycles.
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Expenses
For the three and nine months ended September 30, 2021 and 2020, our expenses were as follows:
|
For the three months ended
September 30, |
For the nine months ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Expenses: | ||||||||||||||||
| Direct costs | $ | 991,708 | $ | 575,243 | $ | 2,578,295 | $ | 1,790,468 | ||||||||
| Payroll and benefits | 5,875,755 | 3,604,852 | 16,770,091 | 11,384,791 | ||||||||||||
| Selling, general and administrative | 1,519,812 | 953,993 | 4,234,309 | 3,247,474 | ||||||||||||
| Depreciation and amortization | 475,207 | 514,097 | 1,436,189 | 1,531,561 | ||||||||||||
| Legal and professional | 498,661 | 372,943 | 1,301,267 | 945,257 | ||||||||||||
| Total expenses | $ | 9,361,143 | $ | 6,021,128 | $ | 26,320,151 | $ | 18,899,551 | ||||||||
Direct costs increased by approximately $0.4 million and $0.8 million for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020. The increase in direct costs is primarily related to an increase in Viewpoint’s revenue. Direct costs for Viewpoint are primarily costs attributable to the production costs of each of their projects. In addition, during the three months ended September 30, 2021, we impaired production costs of approximately $0.1 million related to a content production project.
Payroll and benefits expenses increased by approximately $2.3 million and $5.4 million for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020, primarily due to including payroll costs of Be Social acquired in August 2020 and B/HI acquired in January 2021. In addition, during the three and nine months ended September 30, 2020, the Company made salary and staff reductions related to decreases in revenues due to COVID-19. All employees’ salaries were restored by the three and nine months ended September 30, 2021.
Selling, general and administrative expenses increased by approximately $0.6 million and $1.0 million for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020. The increase is primarily related to including the selling, general and administrative costs of Be Social acquired on August 17, 2020 and B/HI acquired on January 1, 2021, for the three and nine months ended September 30, 2021. For the three months ended September 30, 2021, the Company impaired approximately $0.1 million of accounts receivable that it deemed to be uncollectible.
Legal and professional fees increased by approximately $0.1 million and $0.4 million for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020 due primarily to including legal and professional fees for Be Social acquired August 17, 2020 and B/HI acquired January 1, 2021 in the three and nine months ended September 30, 2021 and consulting and audit fees related to our restatement of the September 30, 2020 10-Q included in our form 10-K filed on April 15, 2021.
Depreciation and amortization remained consistent for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020.
Other Income and Expenses
|
For the three months ended
September 30, |
For the nine months ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Other Income and expenses: | ||||||||||||||||
| Gain on extinguishment of debt, net | $ | 1,733,400 | $ | 51,333 | $ | 2,689,010 | $ | 3,311,198 | ||||||||
| Loss on disposal of fixed assets | — | — | (48,461 | ) | — | |||||||||||
| Loss on deconsolidation of Max Steel VIE | — | — | — | (1,484,591 | ) | |||||||||||
| Change in fair value of convertible notes and derivative liabilities | (223,923 | ) | 8,730 | (826,398 | ) | (540,231 | ) | |||||||||
| Change in fair value of warrants | (55,000 | ) | 145,559 | (2,552,877 | ) | (265,445 | ) | |||||||||
| Change in fair value of put rights | — | 159,457 | (71,106 | ) | 1,677,267 | |||||||||||
| Change in fair value of contingent consideration | (1,110,000 | ) | 140,000 | (1,310,000 | ) | (330,000 | ) | |||||||||
| Acquisition costs | — | (61,196 | ) | (22,907 | ) | (61,196 | ) | |||||||||
| Interest expense and debt amortization | (241,115 | ) | (270,815 | ) | (576,146 | ) | (1,953,790 | ) | ||||||||
| Total other income (expense), net | $ | 103,362 | $ | 173,068 | $ | (2, 718,885 | ) | $ | 353,212 | |||||||
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During the three and nine months ended September 30, 2021, we recorded a gain on extinguishment of debt of approximately $1.7 million in connection with forgiveness of the PPP Loans of 42West, Dolphin, Viewpoint, Shore Fire and The Door offset by a loss on extinguishment of debt of $57,400 related to the exchange of certain put rights for shares of our common stock. During the nine months ended September 30, 2020, we recorded a gain on extinguishment of debt of $3.3 million primarily related to the Max Steel VIE. In February 2020, the lender of the production service agreement confirmed that the Max Steel VIE did not owe them any debt. We reassessed our status as the primary beneficiary of the Max Steel VIE and concluded that we were no longer the primary beneficiary of the Max Steel VIE. As a result, we deconsolidated the Max Steel VIE and recorded a loss on deconsolidation of approximately $1.5 million during the nine months ended September 30, 2020.
We elected the fair value option for certain convertible notes issued in 2020. The embedded conversion feature of a convertible note issued in 2019 met the criteria for a derivative. The fair value of these convertible notes and embedded conversion feature are remeasured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. For the three months ended September 30, 2021 and 2020, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a loss of $0.2 million and a gain of $8,730, respectively. For the nine months ended September 30, 2021 and 2020, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a losses of $0.8 million and $0.5 million, respectively. None of the decrease in the value of the convertible notes was attributable to instrument specific credit risk and as such all of the gain in the change in fair value was recorded within net income.
Warrants issued with convertible notes payable issued in 2020, were initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant liability recognized as other income or expense. In March 2021, one of the warrant holders exercised 146,027 warrants via a cashless exercise formula. The price of our common stock on the exercise date was $19.16 per share and we recorded a change in fair value of the exercised warrants of $2.4 million on our condensed consolidated statement of operations. The fair value of the 2020 warrants that were not exercised increased by approximately $55,000 and we recorded a change in the fair value of the warrants for the three months ended September 30, 2021 for that amount on our condensed consolidated statement of operations.
The fair value of put rights related to the 42West acquisition were recorded on our condensed consolidated balance sheet on the date of the acquisition. The fair value of the put rights are measured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. The fair value of the put rights decreased by approximately $71,000 for the nine months ended September 30, 2021 and increased by approximately $159,500 and $1.7 million for the three and nine months ended September 30, 2020. The final put rights were settled in March of 2021 and we did not have a liability related to the put rights as of September 30, 2021.
Contingent consideration related to our acquisitions of The Door, Be Social and B/HI was recorded at fair value on our condensed consolidated balance sheet as of the respective acquisition dates. The fair value of the related contingent consideration is measured at every balance sheet date and any changes recorded on our condensed consolidated statements of operations. The fair value of the contingent consideration increased by approximately $1.1 million and $1.3 million for the three and nine months ended September 30, 2021, respectively, and decreased by approximately $0.1 million and increased by $0.3 million for the three and nine months ended September 30, 2020, respectively. The increase in the three and nine months ended September 30, 2021 related to a change in the likelihood of achieving the established targets in the B/HI acquisition.
Interest expense and debt amortization expense decreased by $29,700 and $1.4 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in prior year. The main drivers of the changes were
| · | $0.1 million and $1.3 million of debt amortization recorded during the three and nine months ended September 30, 2020, related to beneficial conversion features of certain convertible notes payable converted during that period, which did not reoccur in 2021; and |
| · | Increase of $70,300 and decreased on $49,700 for the three and nine months ended September 30, 2021, respectively as compared to the same periods in prior year primarily due to the timing of conversion of convertible notes during the three and nine months ended September 30, 2021. |
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Income Taxes
We recorded an income tax benefit of $38,851 for the nine months ending September 30, 2021 and $0.2 million for the three and nine months ended September 30, 2020. There was no income tax expense or benefit for the three months ended September 30, 2021. The income tax benefit is due to a reduction of the valuation allowance against the deferred tax liability recorded as a result of the B/HI acquisition.
Net Income (Loss)
Net income was approximately $0.1 million or $0.02 per share based on 7,740,085 weighted average shares outstanding for both basic and fully diluted earnings per share for the three months ended September 30, 2021. Net loss was approximately $0.1 million or $0.02 per share based on 6,676,405 weighted average shares outstanding for basic earnings per share and $0.04 per share based on 6,912,011 weighted average shares outstanding for fully diluted earnings per share, respectively, for the three months ended September 30, 2020. The change in net income (loss) for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, is related to the factors discussed above.
Net loss was approximately $3.8 million or $(0.50) per share based on 7,551,974 weighted average shares outstanding for both basic earnings and fully diluted loss per share for the nine months ended September 30, 2021. Net loss was approximately $1.0 million or $(0.19) per share based on 5,223,441 weighted average shares outstanding for basic loss per share and $(0.45) per share based on 5,975,610 weighted average shares outstanding on a fully diluted basis for the nine months ended September 30, 2020. The change in net loss for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, is related to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
|
Nine Months Ended
September 30, |
||||||||
| 2021 | 2020 | |||||||
| Statement of Cash Flows Data: | ||||||||
| Net cash provided by (used in) operating activities | $ | 519,960 | $ | (607,707 | ) | |||
| Net cash used in investing activities | (525,856 | ) | (1,060,524 | ) | ||||
| Net cash provided by financing activities | 4,563,305 | 8,685,121 | ||||||
| Net increase in cash and cash equivalents and restricted cash | 4,557,409 | 7,016,890 | ||||||
| Cash and cash equivalents and restricted cash, beginning of period | 8,637,376 | 2,910,338 | ||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 13,194,785 | $ | 9,927,228 | ||||
Operating Activities
Cash provided by operating activities was $0.5 million for nine months ended September 30, 2021, a change of $1.1 million from cash used in operating activities $0.6 million for nine months ended September 30, 2020.
Our net loss of $3.8 million for nine months ended September 30, 2021 was adjusted for the following items to arrive at cash provided by operating activities:
| · | $5.0 million of non-cash items such changes in the fair value of liabilities; | |
| · | $0.4 million of changes in operating assets and liabilities and | |
| · | $1.6 million of depreciation and amortization and other items such as impairments of fixed assets and capitalized production costs. |
The above were offset by a
| · | $2.7 million of a gain on extinguishment of debt, primarily related to the forgiveness of PPP Loans. |
| 33 |
Our net loss of $1.0 million for nine months ended September 30, 2020 was adjusted for the following items to arrive at cash provided by operating activities:
| · | $1.9 million of depreciation and amortization and other items such as impairments of fixed assets and capitalized production costs; | |
| · | $1.5 million non-cash loss on deconsolidation of the Max Steel VIE; and | |
| · | $1.3 million primarily for the beneficial conversion feature related to convertible notes payable. |
The above were offset by a
| · | $3.3 million gain on extinguishment of debt, primarily related to the Max Steel VIE; | |
| · | $0.7 million of non-cash items such changes in the fair value of liabilities; and | |
| · | $0.3 million of changes in operating assets and liabilities. |
Investing Activities
Cash flows used in investing activities for the nine months ended September 30, 2021 were $0.5 million entirely related to the acquisition of B/HI, net of cash acquired.
Cash flows used in investing activities for the nine months ended September 30, 2020 were $1.1 million and pertained primarily to the acquisitions of Be Social.
Financing Activities
Cash flows provided by financing activities for the nine months ended September 30, 2021 were $4.6 million which mainly related to:
Inflows:
| · | $6.0 million of proceeds from convertible notes payable. |
Outflows:
| · | $1.0 million from the exercise of put rights; | |
| · | $0.3 million of repayment of the term loan; and | |
| · | $0.1 of repayment of notes payable |
Cash flows provided by financing activities for the nine months ended September 30, 2020 were $8.7 million, which mainly related to:
Inflows:
| · | $7.6 million of proceeds from the sale of Common Stock through registered direct offering; | |
| · | $2.9 million proceeds from convertible notes payable; and | |
| · | $2.8 million of proceeds from PPP Loans. |
Outflows:
| · | $1.7 million of repayment of convertible notes; | |
| · | $1.3 million from the exercise of put rights; | |
| · | $0.9 million of installment payments to sellers on Shore Fire and Viewpoint acquisitions; | |
| · | $0.5 million of repayment of the line of credit; | |
| · | $0.2 million of repayment of the term loan; and | |
| · | $0.1 million of repayment of notes payable. |
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The Company has suffered recurring losses, including a net loss of $3.8 million for the nine months ended September 30, 2021, and had an accumulated deficit of $101.8 million as of September 30, 2021. In this regard, management is planning to raise any necessary additional funds through additional issuances of our common stock, securities convertible into our common stock, debt securities, as well as available bank and non-bank financing, or a combination of such financing alternatives. There is no assurance that we will be successful in raising additional capital. Such issuances of additional shares of our common stock or securities convertible into our common stock would further dilute the equity interests of our existing shareholders, perhaps substantially.
Our subsidiaries operate in industries that were adversely affected by the government mandated shelter-in-place, stay-at-home and work-from-home orders as a result of the novel coronavirus COVID-19. During 2021, we received $5.9 million of convertible notes payable. In addition, in the nine months ended September 30, 2021, we received notifications of the forgiveness of the PPP Loans of 42West, Dolphin, Viewpoint, Shore Fire and The Door which amounted to $2.8 million. In October 2021, we received notification of the forgiveness of the remaining outstanding PPP Loan in the amount of approximately $0.3 million.
In addition, we have a substantial amount of debt. 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 execute any of these remedies on satisfactory terms or at all and our indebtedness may affect our ability to continue to operate as a going concern.
Financing Arrangements
Term Loan
42West and The Door, as co-borrowers, entered into a three-year term loan (the “Term Loan”) with Bank United, N.A, which bears interest at a rate of 0.75% points over the Lender’s Prime Rate, provides for monthly repayment of principal and interest and matures on March 15, 2023. As of September 30, 2021, the outstanding balance on the Term Loan was $0.6 million. We expect to pay off the remaining balance of the term loan in the fourth quarter of 2021.
The Term Loan contains both customary affirmative and negative covenants. The bank tests for compliance with debt covenants on an annual basis based on the financial statements of 42West and The Door as of and for the year ended December 31. Based on current economic factors and uncertainties due to COVID-19, we believe we are out of compliance with certain debt covenants as of and for the three and nine months ended September 30, 2021. As such, we classified the entire balance of the Term Loan in current liabilities on our condensed consolidated balance sheet as of September 30, 2021.
Promissory Notes
Convertible Notes Payable
On March 2021, April 2021, June 2021, August 2021 and September 2021 we issued ten convertible promissory notes to four noteholders in the aggregate amount of $5,950,000. The convertible promissory notes bear interest at a rate of 10% per annum and mature on the second anniversary of their respective issuances. The balance of each convertible promissory note and any accrued interest may be converted at the noteholder’s option at any time at a purchase price based on a 90-day average closing market price per share of the Common Stock but not at a price less than $2.50 per share.
During the nine months ended September 30, 2021, the holders of nine convertible notes issued during 2020 and 2021 converted the principal balance of $2,645,000 plus accrued interest of $11,944 into 507,721 shares of Common Stock at conversion prices ranging between $3.69 and $9.46 per share.
We recorded interest expense related to these convertible notes payable of $88,000 and $130,482 during the three and nine months ended September 30, 2021, respectively, and made cash interest payments amounting to $109,176 during the nine months ended September 30, 2021 related to the convertible promissory notes.
As of September 30, 2021, the principal balance of the convertible promissory notes of $4,750,000, respectively, was recorded in noncurrent liabilities under the caption convertible promissory notes on the Company’s condensed consolidated balance sheets.
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Convertible Notes Payable at Fair Value
We had convertible promissory notes outstanding with aggregate principal amounts of $1,600,000 as of December 31, 2020 for which it elected the fair value option. As such, the estimated fair value of each note was recorded on their respective issue dates. At each balance sheet date, we record the fair value of the convertible promissory notes with any changes in the fair value recorded in the condensed consolidated statements of operations.
On each of January 13, 2021 and January 27, 2021, notes with a remaining aggregate principal balance of $1,100,000 were converted into 281,554 shares of Common Stock at purchase prices ranging between $3.90 and $3.91 per share. We had a balance of $1,253,689 and $947,293 in noncurrent liabilities as of September 30, 2021 and December 31, 2020, respectively, and $580,000 in current liabilities as of December 31, 2020 recorded on its condensed consolidated balance sheets related to the convertible promissory notes measured at fair value. We recorded a loss in fair value of $223,923 and a gain of $8,730 for the three months ended September 30, 2021 and 2020, respectively, and losses in fair value of $826,398 and $540,231 for the nine months ended September 30, 2021 and 2020, respectively, on its condensed consolidated statements of operations.
We recorded interest expense of $9,863 and $29,589 in its condensed consolidated statements of operations during the three and nine months ended September 30, 2021, respectively, and made cash interest payments amounting to $29,589 during the nine months ended September 30, 2021 related to these convertible promissory notes.
Nonconvertible Promissory Notes
As of September 30, 2021, we have outstanding unsecured nonconvertible promissory notes in the aggregate amount of $1,201,933 million, which bear interest at a rate of 10% per annum and mature between January 15, 2022 and December 10, 2023.
As of September 30, 2021, we had a balance of $305,037 and $896,894 recorded as current and noncurrent liabilities, respectively, related to these nonconvertible promissory notes. We recorded interest expense related to these nonconvertible promissory notes of $92,765 for the nine months ended September 30, 2021. We made interest payments of $93,186 during the nine months ended September 30, 2021, related to the nonconvertible promissory notes.
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. Refer to our critical accounting policies as disclosed in Note 3 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for a complete description of our significant accounting policies.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of September 30, 2021 and 2020, we did not have any material off-balance sheet arrangements.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, as well as statements, other than historical facts, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. These statements are often characterized by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” ‘intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “goal” or “continue” or the negative of these terms or other similar expressions.
Forward-looking statements are based on assumptions and assessments made in light of our experience and perception of historical trends, current conditions, expected and future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of our control. You should not place undue reliance on these forward-looking statements, which reflect our views only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update these forward-looking statements in the future, except as required by applicable law.
Risks that could cause actual results to differ materially from those indicated by the forward-looking statements include those described as “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as updated by our subsequently filed Quarterly Reports on Forms 10-Q and Current Reports on Forms 8-K.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on the Effectiveness of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to improve that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2021. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on April 15, 2021, which have not been remediated as of the date of the filing of this report. Further, in our evaluation as of September 30, 2021, the Company concluded that a material weakness had been identified related to the Company’s processes and controls over the valuation models utilized in measuring the fair value of certain financial instruments. Specifically, we determined that review and approval of significant inputs into the valuation models utilized by the Company are not appropriately documented and such deficiencies are identified as a material weakness in internal control.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
In order to remediate the material weaknesses in internal control over financial reporting, we are in the process of implementing the following improvements during fiscal year 2021, under the direction of our board of directors, as follows:
| ● | Our Board intends to review the COSO “Internal Control over Financial Reporting - Guidance for Smaller Public Companies” that was published in 2006 and updated in 2013, including the control environment, risk assessment, control activities, information and communication and monitoring. Based on this framework, the Board plans to implement controls as needed assuming a cost benefit relationship, focusing on risk management oversight function. In addition, our Board plans to evaluate the key concepts of the updated 2013 COSO “Internal Control – Integrated Framework” as it provides a means to apply internal control to any type of entity. |
| ● | Perform a comprehensive review of current procedures to ensure compliance with our newly documented accounting policies and procedures, including procedures to monitor and remediate deficiencies in internal controls; |
37
| ● | Review and enhance segregation of duties; |
| ● |
Review and document the period end procedures for analyzing complex transactions, including significant inputs into the valuation models. |
| ● | Beginning in the first quarter of 2021, we entered into an agreement with a third-party consulting firm that is assisting us in analyzing complex transactions and their appropriate accounting treatment. |
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting for the fiscal quarter covered by this report.
| 38 |
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. In the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows. The Company is not aware of any pending litigation as of the date of this report.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on April 15, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Recent Sales of Unregistered Securities
Between July and September 2021, the Company entered into three convertible promissory notes with three noteholders in the aggregate principal amount of $2,900,000. The convertible promissory notes bear interest at a rate of 10% per annum and mature, two years from their issuance dates. The noteholders may convert the principal balance and any accrued interest at any time before the maturity date of the convertible promissory note using the 90-day trailing trading average price of the Company’s Common Stock.
The securities referred to above were issued, and any shares of Common Stock to be issued upon conversion thereof will be issued, by the Company in reliance upon the exemption from registration provided by Section 4(a)2 of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 3.1* | ||
| 31.1* | Certification of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1# | Certification of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2# | Certification of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. |
| ** | Previously filed. |
| # | Furnished herewith. |
| 39 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized November 19, 2021.
| Dolphin Entertainment, Inc. | ||
| By: | /s/ William O’Dowd IV | |
| Name: William O’Dowd IV | ||
| Chief Executive Officer | ||
| By: | /s/ Mirta A Negrini | |
| Name: Mirta A Negrini | ||
| Chief Financial Officer |
| 40 |
EXHIBIT 3.1
Exhibit 31.1
CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO SECTION 302
I, William O’Dowd IV, Chief Executive Officer of Dolphin Entertainment Inc. (the “Registrant”), certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of the Registrant; | |
| 2. | Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report. | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: | |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and | |
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): | |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. | |
| Date: November 19, 2021 | /s/ William O’Dowd IV | |||
| William O’Dowd IV | ||||
|
Chief Executive Officer
|
||||
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICER
CERTIFICATION PURSUANT TO SECTION 302
I, Mirta A Negrini, Chief Financial Officer of Dolphin Entertainment Inc. (the “Registrant”), certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of the Registrant; | |
| 2. | Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report. | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the Registrant and have: | |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and | |
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): | |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. | |
| Date: November 19, 2021 | /s/ Mirta A Negrini | |||
| Mirta A Negrini | ||||
| Chief Financial Officer | ||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Dolphin Entertainment, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William O’Dowd IV, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: November 19, 2021 | By: | /s/ William O’Dowd IV | |
| William O’Dowd IV | |||
| Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Dolphin Entertainment, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mirta A Negrini, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: November 19, 2021 | By: | /s/ Mirta A Negrini | |
| Mirta A Negrini | |||
| Chief Financial Officer |