Exhibit 99.1
42
West, LLC
Financial
Statements
For the Years Ended
December 31, 2016 and 2015
Independent
Auditor’s Report
|
3-4
|
|
|
Financial
Statements:
|
|
|
|
Balance Sheets as
of December 31, 2016 and 2015
|
5
|
|
|
Statements of
Operations for the Years Ended December 31, 2016 and
2015
|
6
|
|
|
Statements of
Changes in Members’ Equity for the Years Ended
December 31, 2016 and 2015
|
7
|
|
|
Statements of Cash
Flows for Years Ended December 31, 2016 and 2015
|
8
|
|
|
Notes to Financial
Statements
|
9-17
|
Independent
Auditor’s Report
Chief Operating
Officer
42West,
LLC
220 West 42nd
Street
12th
Floor
New York, NY
10036
We have audited the
accompanying financial statements of 42 West, LLC, which comprise
the balance sheets as of December 31, 2016 and 2015, and the
related statements of operations, changes in members’ equity,
and cash flows for the years then ended, and the related notes to
the financial statements.
Management’s Responsibility for the Financial
Statements
Management is
responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our responsibility
is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free from material misstatement.
An audit involves
performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures
selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the
financial statements.
We believe that the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the
financial statements referred to above present fairly, in all
material respects, the financial position of 42 West, LLC as of
December 31, 2016 and 2015, and the results of its operations
and its cash flows for the years then ended in accordance with
accounting principles generally accepted in the United States of
America.
/s/ BDO USA, LLP
June 7,
2017
|
|
|
|
|
Assets
|
|
|
Current
Assets:
|
|
|
Cash
|
$
1,279,056
|
$
2,161,073
|
Accounts receivable
(net of allowance for doubtful accounts of $184,000 and $165,000,
respectively)
|
1,337,806
|
1,168,921
|
Shares
receivable
|
-
|
220,000
|
Prepaid income
taxes
|
26,150
|
-
|
Total
Current Assets
|
2,643,012
|
3,549,994
|
Property,
Equipment and Leasehold Improvements, Net
|
1,115,515
|
785,733
|
Investments
|
220,000
|
-
|
Security
Deposits
|
45,563
|
45,563
|
Total
Assets
|
$
4,024,090
|
$
4,381,290
|
Liabilities
and Members’ Equity
|
|
|
Current
Liabilities:
|
|
|
Bank loans
payable
|
$
350,000
|
$
-
|
Current portion of
note payable to a former member
|
300,000
|
300,000
|
Accounts
payable
|
435,110
|
350,441
|
Accrued
expenses
|
261,053
|
712,792
|
Settlement accrual,
current portion
|
300,000
|
340,000
|
Income taxes
payable
|
-
|
94,817
|
Deferred rent,
current portion
|
47,774
|
112,477
|
Deferred landlord
reimbursement, current portion
|
98,501
|
98,501
|
Deferred tax
liability
|
1,000
|
13,000
|
Total
Current Liabilities
|
1,793,438
|
2,022,028
|
Long-Term
Liabilities:
|
|
|
Note payable to a
former member, net of current portion
|
225,000
|
525,000
|
Settlement accrual,
noncurrent portion
|
-
|
260,000
|
Deferred rent,
noncurrent portion
|
383,502
|
356,080
|
Deferred landlord
reimbursement, noncurrent portion
|
385,794
|
484,295
|
Total
Long-Term Liabilities
|
994,296
|
1,625,375
|
Total
Liabilities
|
2,787,734
|
3,647,403
|
Members’
Equity
|
1,236,356
|
733,887
|
Total
Liabilities and Members’ Equity
|
$
4,024,090
|
$
4,381,290
|
See accompanying notes to financial statements.
|
|
|
|
|
Revenue
|
$
18,563,749
|
$
19,769,891
|
Operating
Expenses
|
13,593,299
|
13,413,057
|
Operating
Income Before Guaranteed Payments, Expenses Billed to Clients and
Settlement Expense
|
4,970,450
|
6,356,834
|
Guaranteed
Payments
|
1,197,660
|
1,197,660
|
Expenses
Billed to Clients
|
1,234,064
|
1,633,701
|
Settlement
Expense
|
40,000
|
60,000
|
Operating
Income
|
2,498,726
|
3,465,473
|
Other
Expenses:
|
|
|
Loss on disposal of
equipment
|
-
|
43,138
|
Interest
expense
|
21,505
|
14,825
|
Total
Other Expenses
|
21,505
|
57,963
|
Income
before Provision for Income Taxes
|
2,477,221
|
3,407,510
|
Provision
for Income Taxes
|
59,752
|
225,140
|
Net
Income
|
$
2,417,469
|
$
3,182,370
|
See accompanying notes to financial statements.
42
West, LLC
Statements
of Changes in Members’ Equity
|
|
|
|
|
Members’
Equity, Beginning of Period
|
$
733,887
|
$
17,517
|
Net
income
|
2,417,469
|
3,182,370
|
Less: Members’
distributions
|
(1,915,000
)
|
(2,466,000
)
|
Members’
Equity, End of Period
|
$
1,236,356
|
$
733,887
|
See accompanying notes to financial statements.
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
Net
income
|
$
2,417,469
|
$
3,182,370
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
Depreciation and
amortization
|
213,846
|
211,794
|
Deferred
rent
|
(37,280
)
|
(51,901
)
|
Amortization of
landlord reimbursement
|
(98,501
)
|
(98,501
)
|
Loss on disposal of
equipment
|
-
|
43,138
|
Shares
receivable
|
-
|
(220,000
)
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
(168,885
)
|
189,310
|
Accounts
payable
|
84,668
|
132,373
|
Accrued
expenses
|
(451,739
)
|
(118,642
)
|
Settlement
accrual
|
(300,000
)
|
60,000
|
Deferred
taxes
|
(12,000
)
|
22,000
|
Income taxes
payable/receivable
|
(120,967
)
|
55,699
|
Net
Cash Provided By Operating Activities
|
1,526,611
|
3,407,640
|
Cash
Flows From Investing Activities:
|
|
|
Purchase of
equipment and leasehold improvements
|
(543,628
)
|
(78,495
)
|
Net
Cash Used In Investing Activities
|
(543,628
)
|
(78,495
)
|
Cash
Flows From Financing Activities:
|
|
|
Repayment of note
payable to a former member
|
(300,000
)
|
(300,000
)
|
Proceeds from
revolving credit facility
|
350,000
|
-
|
Distributions
|
(1,915,000
)
|
(2,466,000
)
|
Net
Cash Used In Financing Activities
|
(1,865,000
)
|
(2,766,000
)
|
Net
(Decrease) Increase in Cash
|
(882,017
)
|
563,145
|
Cash,
Beginning of Period
|
2,161,073
|
1,597,928
|
Cash,
End of Period
|
$
1,279,056
|
$
2,161,073
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
Interest
|
$
21,505
|
$
14,825
|
Income
taxes
|
123,950
|
147,441
|
|
|
|
Supplemental
Disclosure of Noncash Investing Activities:
|
|
|
Conversion of
shares receivable
|
$
220,000
|
$
-
|
See accompanying notes to financial statements.
42
West, LLC
Notes
to Financial Statements
1.
Principal Business Activities
Organization
and Business Activities
42 West, LLC (the
“Company”) was organized, pursuant to the laws of the
State of Delaware in March 2005, as a public relations firm
specializing in “A” list entertainment industry
clientele with offices in New York and California. The Company will
continue in operation as provided for in the operating
agreement.
Basis
of Presentation
The accompanying
financial statements for the years ended December 31, 2016 and
2015 are stated in conformity with generally accepted accounting
principles. The operating results for the periods presented are not
necessarily indicative of results that may be expected for any
other period or for the full year. In the opinion of management,
the accompanying financial statements contain all necessary
adjustments, consisting only of those of a recurring nature, and
disclosures to present fairly the Company’s financial
position and the results of its operations and cash flows for the
periods presented.
2.
Summary of Significant Accounting Policies
Use of Estimates in Financial Statements
The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash
The Company
maintains an account in a bank located in the New York metropolitan
area. The excess of deposit balances reported by the bank over
amounts that would have been covered by federal insurance was
approximately $355,000 and $1,404,000 at December 31, 2016 and
2015, respectively.
Accounts
Receivable and Allowance for Doubtful Accounts
The Company’s
trade accounts receivable are recorded at amounts billed to
customers, and presented on the balance sheet net of the allowance
for doubtful accounts. The allowance is determined by various
factors, including the age of the receivables, current economic
conditions, historical losses and other information management
obtains regarding the financial condition of customers. The policy
for determining the past due status of receivables is based on how
recently payments have been received. Receivables are charged off
when they are deemed uncollectible.
Depreciation
and Amortization
Property,
equipment, and improvements are stated at cost. Depreciation is
computed on the straight-line method over the estimated useful
lives of the related assets. Leasehold improvements are amortized
over the lesser of the term of the related lease or the estimated
useful lives of the assets.
42
West, LLC
Notes
to Financial Statements
Revenue
Recognition
Revenue consists of
fees from the performance of professional services and billings for
direct costs reimbursed by clients. Fees are generally recognized
on a straight-line or monthly basis which approximates the
proportional performance on such contracts. Direct costs reimbursed
by clients are billed as pass-through revenue with no
mark-up.
Deferred revenue
represents customer advances or amounts allowed to be billed under
the contracts for work that has not yet been performed or expenses
that have not yet been incurred.
Income Taxes
The Company is
taxed as a partnership for federal, New York State, and California
state tax purposes, whereby the Company’s income is reported
by the members. Accordingly, no provision has been made for
federal, New York State, and California State income taxes. The
Company remains liable for New York City Unincorporated Business
tax.
The Company
accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined on the basis of
the differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment
date.
The Company
recognizes deferred tax assets to the extent that it believes these
assets are more likely than not to be realized. In making such a
determination, the Company considers all available positive and
negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income,
tax-planning strategies, and results of recent operations. If the
Company determines that it would be able to realize deferred tax
assets in the future in excess of their recorded amount, it would
make an adjustment to the deferred tax asset valuation allowance,
which would reduce the provision for income taxes.
Guaranteed Payments
Guaranteed payments
to members that are intended as compensation for services rendered
are accounted for as Company expenses rather than as allocations of
the Company’s net income.
Deferred Landlord Reimbursement
Deferred landlord
reimbursement represents the landlord’s reimbursement for
tenant improvements of the Company’s office space. Such
amount is amortized on a straight-line basis over the term of the
lease.
Deferred Rent
Deferred rent
consists of the excess of the rent expense recognized on the
straight-line basis over the payments required under certain office
leases.
42
West, LLC
Notes
to Financial Statements
Investments
Investments in
equity securities are recorded at cost. Under this method, the
Company’s share of earnings or losses of such investee
companies is not included in the balance sheet or statement of
operations. However, impairment changes are recognized in the
statement of operations. If circumstances suggest that the value of
the investee company has subsequently been recovered, such recovery
is not recorded.
Advertising Costs
Advertising costs,
which are included in operating expenses, are charged to expense as
incurred. Advertising expense amounted to approximately $32,000 and
$72,000 for the years ended December 31, 2016 and 2015,
respectively.
3.
Recent Accounting Pronouncements
In May 2014,
the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update
(“ASU”) 2014-09, “Revenue from Contracts
with Customers.” ASU 2014-09 represents a comprehensive new
revenue recognition model that requires a company to recognize
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
Company expects to be entitled to receive in exchange for those
goods or services. This ASU sets forth a new five-step revenue
recognition model which replaces the prior revenue recognition
guidance in its entirety and is intended to eliminate numerous
industry-specific pieces of revenue recognition guidance that have
historically existed. In August 2015, the FASB issued
ASU 2015-14, “ Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date,” which deferred
the effective date of ASU 2014-09 by one year, but permits entities
to adopt one year earlier if they choose (i.e., the original
effective date). As such, ASU 2014-09 will be effective for annual
and interim reporting periods beginning after December 15,
2018. In addition, during March 2016, April 2016, May 2016 and
December 2016, the FASB issued ASU 2016-08, “Revenue
from Contracts with Customers (Topic 606): Principal versus Agent
Consideration (Reporting Revenue Gross versus Net,” ASU
No. 2016-10, “Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and
Licensing,” ASU 2016-12 “Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients” and ASU 2016-20, “Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers
(Topic 606),” respectively. These additional amendments
clarified the revenue recognition guidance on reporting revenue as
a principal versus agent, identifying performance obligations,
accounting for intellectual property licenses and on transition,
collectability, noncash consideration and the presentation of sales
and other similar taxes. The Company is currently evaluating the
impact of this standard on the Company’s results of
operations and financial position including possible transition
alternatives.
In
February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842).” The new standard establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU
asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as
either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. ASU 2016-02
is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with
early adoption permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases
existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with
certain practical expedients available. The Company is currently
evaluating the potential impact of the adoption of this
standard.
42
West, LLC
Notes
to Financial Statements
4.
Property, Equipment and Leasehold Improvements
Property, equipment
and leasehold improvements consist of:
|
|
|
Furniture and
fixtures
|
$
611,893
|
$
234,195
|
Computers and
equipment
|
626,611
|
460,680
|
Leasehold
improvements
|
804,770
|
804,770
|
|
2,043,274
|
1,499,645
|
Less: Accumulated
depreciation
|
(927,759
)
|
(713,912
)
|
|
$
1,115,515
|
$
785,733
|
The Company
depreciates furniture and fixtures over a useful life of seven
years, computer and equipment over a useful life of five years, and
leasehold improvements over the remaining term of the related lease
(Note 12).
5.
Accrued Expenses
Accrued expenses
consist of:
|
|
|
Bonuses
|
$
61,357
|
$
583,437
|
Commissions
|
151,000
|
73,316
|
Credit card
liabilities
|
-
|
30,318
|
Other accrued
expenses
|
48,696
|
25,721
|
|
$
261,053
|
$
712,792
|
6.
Line of Credit
The Company has a
$1,500,000 revolving credit line agreement with City National Bank,
which matures on April 1, 2017. Borrowings bear interest at
the bank’s prime lending rate plus 0.875% (4.625% at
December 31, 2016). The debt, including letters of credit
outstanding, is collateralized by substantially all of the
Company’s assets, and guaranteed by certain members of the
Company. The credit agreement requires the Company to meet certain
covenants and includes limitations on distributions to members. The
Company is in compliance with covenants. At December 31, 2016,
the outstanding loan balance was $350,000 and there was no
outstanding loan balance at December 31, 2015. The Company incurred
interest expense of $21,505 and $14,825 for the years ended
December 31, 2016 and 2015, respectively.
42
West, LLC
Notes
to Financial Statements
7.
Note Payable to a Former Member
Effective
August 31, 2011, the Company redeemed the interest of a member
for $2,625,000. The redemption agreement includes certain terms
relating to the adjustment of purchase price for failure to collect
certain account receivables and provisions for acceleration of
scheduled payments under conditions described in the agreement. As
of December 31, 2012, all stated accounts receivable were
collected. The note is payable in quarterly installments, as
defined in the agreement, through September 30, 2018. In the
event the Company defaults under the obligation, the former member
will be entitled to receive a membership interest in proportion to
the unpaid balance. The outstanding principal, along with any
accrued interest, shall be payable in full if any of the
following transactions occur prior to December 31, 2018: (i) four
or more of the current members sell at least 50% of their
membership interest in the Company to any party other than a trust,
current members, or employees; (ii) one or more third parties
acquire more than 50% of membership interest in the Company, (iii)
the Company sells, assigns, transfers, or otherwise disposes all or
substantially all of its assets and/or business, or (iv) the
Company is merged into another party whereby the Company ceases to
exist, or the members no longer own a controlling interest in the
Company.
Future payments on
this redemption are as follows:
Period ended December 31,
|
|
2017
|
$
300,000
|
2018
|
225,000
|
|
$
525,000
|
8.
Investments
Investments, at
cost, consist of the following:
|
|
|
The Virtual Reality
Company (“VRC”)
|
$
220,000
|
$
-
|
In exchange for
services rendered to VRC throughout the year ended
December 31, 2015, the Company received both cash
consideration and a promissory note that was convertible into
common stock of VRC. On April 7, 2016, VRC closed an equity
financing round for approximately $22,700,000 of common stock
issued to a third party investor, which triggered the conversion of
all outstanding promissory notes into common stock of VRC. The
Company’s $220,000 investment in VRC represents 344,890
shares of common stock, a less than 1% ownership interest in
VRC. Investment in VRC is recorded at cost.
9.
Income Taxes
The components of
income tax expense are as follows:
42
West, LLC
Notes
to Financial Statements
|
|
|
|
|
Current
|
$
71,252
|
$
203,140
|
Deferred
|
(12,000
)
|
22,000
|
|
$
59,752
|
$
225,140
|
The Company is a
partnership and is not subject to federal or state income tax in
general. It is only subject to tax in New York City
which has a statutory rate of 4%. Net deferred assets
and liabilities are as follows:
|
|
|
Deferred tax
assets:
|
|
|
Effect of cash
basis accounting adjustments
|
$
54,000
|
$
34,000
|
Deferred tax
liabilities:
|
|
|
Effect of cash
basis accounting adjustments
|
(55,000
)
|
(47,000
)
|
Net deferred tax
liability
|
$
(1,000
)
|
$
(13,000
)
|
The Company may be
subject to examination by the Internal Revenue Service
(“IRS”) as well as states for calendar years 2013
through 2016. The Company has not been notified of any
federal or state income tax examinations.
10.
Employee Benefits Plan
The Company has a
401(k) profit sharing plan that covers substantially all employees.
Contributions to the plan are at the discretion of the
Company’s management. The Company’s contributions were
approximately $228,000 and $221,000 for the years ended
December 31, 2016 and 2015, respectively.
11.
Members’ Agreement
In the event of
death, disability or withdrawal of a member, the Company is
obligated to purchase the entire membership interest owned by such
member, according to the terms as defined by the operating
agreement.
In addition, the
Company maintains key man life insurance and disability insurance
for each member.
12.
Commitments and Contingencies
Leases
The Company is
obligated under a sublease operating agreement for office space in
New York expiring in December 2016. The lease provides for
increases in rent for real estate taxes and building operating
costs, all of which is personally guaranteed by certain members of
the Company so long as the Company remains in possession of the
subleased premises. On July 19, 2016, the Company entered into
an operating lease agreement for new office space in New York
commencing December 1, 2016. The lease is secured by a standby
letter of credit amounting to $677,354, and provides for increases
in rent for real estate taxes and building operating costs. The
lease also contains a renewal option for an additional five
years.
42
West, LLC
Notes
to Financial Statements
The Company is
obligated under an operating lease agreement for office space in
California, expiring in December 2021. The lease is secured by a
cash security deposit of $44,788 and a standby letter of credit
amounting to $100,000 at September 30, 2016. The lease also
provides for increases in rent for real estate taxes and operating
expenses, and contains a renewal option for an additional five
years, as well as an early termination option effective as of
February 1, 2019. Should the early termination option be
executed, the Company will be subject to a termination fee in the
amount of approximately $637,000. The Company does not expect to
execute such option.
Future minimum
annual rent payments are as follows:
Period ended December 31,
|
|
2017
|
$
1,289,187
|
2018
|
1,303,478
|
2019
|
1,326,535
|
2020
|
1,433,403
|
2021
|
1,449,019
|
Thereafter
|
4,675,845
|
|
$
11,477,467
|
Rent expense,
including escalation charges, amounted to approximately $1,115,000
and $941,000 for the years ended December 31, 2016 and 2015,
respectively.
The Company entered
into seven new three-year employment contracts with senior level
management employees during 2015, none of which are equity
partners. The contracts defined each individual’s
compensation, along with specific salary increases mid-way through
the term of each contract. Each individual was also guaranteed a
percentage of proceeds if the Company was sold during the term of
their contract. The percentages vary by executive. Termination by
cause, death, or by the employee would terminate the
Company’s commitment on each contract. Each employee is
entitled to severance compensation if terminated without
cause.
42
West, LLC
Notes
to Financial Statements
13.
Settlement Expense
The Company is a
contributing employer to the Motion Picture Industry Pension,
Individual Account, and Health Plans (collectively, the
“Plans”), two multiemployer pension funds and one
multiemployer welfare fund, respectively, that are governed by the
Employee Retirement Income Security Act of 1974, as amended. In the
past, the Company had disputed that certain employees were not
union members and, as such, were not eligible to participate in the
Plans. Pursuant to audit results that were settled during the year
ended December 31, 2016 between the Plans and the Company, the
employees were determined to be union members. Based on the
Plans’ audit results for the period from June 6, 2007
through June 6, 2011, the Company was liable to the Plans for
delinquent pension plan contributions, health and welfare plan
contributions, and union dues in the amount of $340,000, which was
expensed prior to January 1, 2014 and paid in August
2016.
The Plans intend to
conduct a second audit of the Company’s books and records for
the period from June 7, 2011 through August 20, 2016 in
connection with the Company’s alleged contribution
obligations to the Plans. Based on the settled audit by the Plans
for the period from June 6, 2007 through June 6, 2011,
the Company expects that the Plans may seek to collect
approximately $300,000 in delinquent pension plan contributions,
health and welfare plan contributions, and union dues from the
Company after the audit is completed. The Company believes this
exposure to be probable and, therefore, has recorded this liability
and recognized the expenses ratably throughout the period under
audit.
14.
Subsequent Events
On March 30, 2017
the Company and its members (the “Sellers”) entered
into a Membership Interest Purchase Agreement (the
“Agreement”) with Dolphin Digital Media, Inc.
(“Dolphin”), a Florida corporation, whereby Dolphin
agreed to purchase 100% of the membership interests of the Sellers
in exchange for shares of common stock in Dolphin. As of
March 30, 2017, the Company became a wholly-owned subsidiary of
Dolphin.
Simultaneous with
the execution of the Agreement, the Sellers transferred their
membership interests in exchange for shares of Dolphin common
stock, based on purchase price of (i) $18,666,667 (based on the
Dolphin’s 30-trading-day average stock price prior to the
closing date of $4.61 per share); (ii) minus the Company’s
indebtedness at the time of closing; (iii) minus the
Company’s transaction expenses; and (iv) plus the
Company’s working capital at the time of closing in excess of
$500,000, or minus the excess of $500,000 over the Company’s
working capital at the time of closing. Pursuant to the Agreement,
Dolphin issued 1,230,280 shares of common stock on the closing date
to the Sellers, and will issue an additional 1,961,821 shares of
common stock to the Sellers and certain employees on January 2,
2018. Dolphin also issued 344,550 shares of common stock to certain
employees on April 13, 2017, and may issue up to 118,655 shares of
common stock as bonuses to certain employees during
2017.
The Agreement
provides for additional shares of Dolphin common stock to be
calculated and issued to the selling members based on EBITDA of the
Company’s business segment for each of the calendar years
2017, 2018, and 2019, subject to certain thresholds as defined in
the Agreement. Pursuant to a promissory note agreement with a
former member (Note 8), upon closing of this transaction the
Company paid $300,000 in cash to the former member with the
remaining $225,000 is to be paid in January 2018 as repayment of
the promissory note, the total of which decreased the amount of
common stock issued to the selling members.
42
West, LLC
Notes
to Financial Statements
Upon closing, three
of the Sellers entered into employment agreements with Dolphin, and
all of the Sellers entered into put agreements with
Dolphin. Pursuant to the terms and subject to the
conditions set forth in the put agreements, Dolphin has granted the
Sellers the right, but not obligation, to cause Dolphin to purchase
up to an aggregate of 2,374,187 of their shares of common stock
received as consideration for a purchase price equal to $4.61 per
share during certain specified exercise periods set forth in the
put agreements through December 2020.
In addition, in
connection with the transaction, on March 30, 2017, Dolphin entered
into a registration rights agreement with the Sellers (the
“Registration Rights Agreement”) pursuant to which the
Sellers are entitled to rights with respect to the registration
under the Securities Act of 1933, as amended (the “Securities
Act”). All fees, costs and expenses of underwritten
registrations under the Registration Rights Agreement will be borne
by Dolphin. At any time after the one-year anniversary of the
Registration Rights Agreement, Dolphin will be required, upon the
request of such Sellers holding at least a majority of the
consideration received by the Sellers, to file a registration
statement on Form S-1 and use its reasonable efforts to effect a
registration covering up to 25% of the consideration received by
the Sellers. In addition, if Dolphin is eligible to file a
registration statement on Form S-3, upon the request of such
Sellers holding at least a majority of the consideration received
by the Sellers, Dolphin will be required to use its reasonable
efforts to effect a registration of such shares on Form S-3
covering up to an additional 25% of the consideration received by
the Sellers. Dolphin is required to effect only one registration on
Form S-1 and one registration statement on Form S-3, if eligible.
The right to have the consideration received by the Sellers
registered on Form S-1 or Form S-3 is subject to other specified
conditions and limitations.
On April 27, 2017,
the Company drew $250,000 from the Line of Credit to be used for
working capital. In addition, the maturity date of the
Line of Credit was extended to August 1, 2017. All other terms of
the Line of Credit remain the same.
Subsequent events
have been evaluated through June 7, 2017, which is the date the
financial statements were available to be issued.
Exhibit 99.2
DOLPHIN
DIGITAL MEDIA, INC
UNAUDITED
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro
forma consolidated financial information and related
notes present the historical combined financial
information of Dolphin Digital Media, Inc. and its wholly owned
subsidiaries (hereinafter referred to as “Dolphin” or
“the Company”) and 42West LLC (“42West”)
after giving effect to Dolphin’s acquisition of 42West that
was completed on March 30, 2017 (the “Acquisition
Date”). The pro forma adjustments are based upon
available information and assumptions that the Company believes are
reasonable.
The unaudited pro forma
combined balance sheet as of December 31, 2016 is presented as if
the acquisition of 42West had occurred on December 31,
2016. The unaudited pro forma combined consolidated
statements of operations for the year ended December 31, 2016 are
presented as if the acquisition had occurred on January 1,
2016. The historical financial information is adjusted
in the unaudited pro forma combined financial information to give
effect to pro forma events that are (1) directly attributable to
the proposed acquisition, (2) factually supportable, and (3) with
respect to the combined statements of operations, expected to have
a continuing impact of the combined results.
The determination and
preliminary allocation of the purchase consideration used in the
unaudited pro forma combined consolidated financial information are
based upon preliminary estimates, which are subject to change
during the measurement period (up to one year from the Acquisition
Date). Accordingly, the aggregate value of the
consideration paid by Dolphin to complete the acquisition was
allocated to the assets acquired and liabilities assumed from
42West based upon estimated fair value on the closing date of the
acquisition. Dolphin has not completed the detailed
valuations necessary to estimate the fair value of the assets
acquired and the liabilities assumed form 42West and the related
allocations of purchase price, nor has Dolphin identified all
adjustments necessary to conform 42West’s accounting policies
to Dolphin’s accounting policies. Accordingly, the pro forma
purchase price adjustments presented herein are preliminary, and
may not reflect any final purchase price adjustments
made. Dolphin estimated the fair value of 42West’s
assets and liabilities based on discussion with 42West’s
management, due diligence and preliminary work performed by
third-party valuation specialists. As the final valuations are
being performed, increases or decreases in fair value of relevant
balance sheet amounts will result in adjustments, which may result
in material differences from the information presented
herein.
The unaudited pro
forma adjustments are not necessarily indicative of or intended to
represent the results that would have been achieved had the
transaction been consummated as of the dates indicated or that may
be achieved in the future. The actual results reported
by the combined company in periods following the acquisition may
differ significantly from those reflected in these unaudited pro
forma combined financial information for a number of reasons,
including cost saving synergies from operating efficiencies and the
effect of incremental costs incurred to integrate the two
companies.
The unaudited pro
forma combined financial information should be read in conjunction
with our historical consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-K for
the year ended December 31, 2016 and the historical audited
financial statements of 42West for the year ended December 31, 2016
contained in this Form 8-K/A.
Unaudited Pro Forma
Combined Balance Sheet
|
|
|
|
|
|
|
|
|
Dolphin Digital
Media, Inc. (Historical)
|
42West - Acquiree
(Historical)
|
|
|
|
Cash and cash
equivalents
|
$
662,546
|
$
1,279,056
|
$
-
|
|
$
1,941,602
|
Restricted
cash
|
1,250,000
|
-
|
-
|
|
1,250,000
|
Accounts
receivable, net
|
3,668,646
|
1,337,806
|
-
|
|
5,006,452
|
Other current
assets
|
2,665,781
|
26,150
|
-
|
|
2,691,931
|
Total
current assets
|
8,246,973
|
2,643,012
|
-
|
|
10,889,985
|
Capitalized
production costs
|
4,654,013
|
-
|
-
|
|
4,654,013
|
Property, equipment
and leasehold improvements, net
|
35,188
|
1,115,515
|
-
|
|
1,150,703
|
Other
assets
|
1,261,067
|
265,563
|
-
|
|
1,526,630
|
Intangible
assets
|
-
|
-
|
9,110,000
|
(a)
|
9,110,000
|
Goodwill
|
-
|
-
|
13,112,411
|
(b)
|
13,112,411
|
Total
assets
|
$
14,197,241
|
$
4,024,090
|
$
22,222,411
|
|
$
40,443,742
|
|
|
|
|
|
|
Accounts
payable
|
$
677,249
|
$
435,110
|
$
-
|
|
$
1,112,359
|
Bank loan
payable
|
-
|
350,000
|
-
|
|
350,000
|
Warrant
liability
|
14,011,254
|
-
|
-
|
|
14,011,254
|
Accrued
compensation
|
2,250,000
|
-
|
-
|
|
2,250,000
|
Debt
|
18,743,069
|
-
|
-
|
|
18,743,069
|
Loan from related
party
|
684,326
|
-
|
-
|
|
684,326
|
Put
rights
|
-
|
-
|
4,000,000
|
(c)
|
4,000,000
|
Contingent
consideration
|
-
|
-
|
3,541,000
|
(d)
|
3,541,000
|
Deferred
revenue
|
46,681
|
-
|
-
|
|
46,681
|
Note
payable
|
300,000
|
300,000
|
-
|
|
600,000
|
Other current
liabilities
|
2,958,523
|
708,328
|
1,327,708
|
(e)
|
4,994,559
|
Total
current liabilities
|
39,671,102
|
1,793,438
|
8,868,708
|
|
50,333,248
|
Warrant
liability
|
6,393,936
|
-
|
|
|
6,393,936
|
Note
payable
|
-
|
225,000
|
-
|
|
225,000
|
Other noncurrent
liabilities
|
-
|
769,296
|
-
|
|
769,296
|
Total
liabilities
|
46,065,038
|
2,787,734
|
8,868,708
|
|
57,721,480
|
Total
stockholders' (deficit) equity
|
(31,867,797
)
|
1,236,356
|
13,353,703
|
(f)
|
(17,277,738
)
|
Total
liabilities and stockholders' deficit
|
$
14,197,241
|
$
4,024,090
|
$
22,222,411
|
|
$
40,443,742
|
|
|
|
|
|
|
See
accompanying notes to the Unaudited Pro Forma Combined Financial
Information
|
Unaudited Pro Forma
Combined Statements of Operations
|
For
the year ended December 31, 2016
|
|
|
|
|
|
|
|
Dolphin Digital
Media, Inc. (Historical)
|
42West - Acquiree
(Historical)
|
|
Notes
|
|
|
|
|
|
|
|
Revenues
|
$
9,395,625
|
$
18,563,749
|
$
-
|
|
$
27,959,374
|
|
|
|
|
|
|
Operating expenses
exclusive of depreciation and amortization
|
27,097,889
|
15,851,177
|
-
|
|
42,949,066
|
|
|
|
|
|
|
Operating
(loss) income
|
(17,702,264
)
|
2,712,572
|
-
|
|
(14,989,692
)
|
|
|
|
|
|
|
Depreciation and
amortization
|
(476,250
)
|
(213,846
)
|
(997,333
)
|
(A)
|
(1,687,429
)
|
Interest
expense
|
(4,241,841
)
|
(21,505
)
|
-
|
|
(4,263,346
)
|
Change in fair
value of warrant liability
|
2,195,542
|
-
|
-
|
|
2,195,542
|
Warrant issuance
expense
|
(7,372,593
)
|
-
|
-
|
|
(7,372,593
)
|
Loss on
extinguishment of debt
|
(9,601,933
)
|
-
|
-
|
|
(9,601,933
)
|
Other income
(expense)
|
9,660
|
$
(59,752
)
|
-
|
|
(50,092
)
|
Net (loss)
income
|
$
(37,189,679
)
|
$
2,417,469
|
$
(997,333
)
|
|
$
(35,769,543
)
|
|
|
|
|
|
|
Deemed dividend on
preferred stock
|
5,247,227
|
-
|
-
|
|
5,247,227
|
Net loss
attributable to common shareholders
|
$
(42,436,906
)
|
$
2,417,469
|
$
(997,333
)
|
|
$
(41,016,770
)
|
|
|
|
|
|
|
Basic and Diluted
Loss per Share
|
$
(4.83
)
|
|
|
|
$
(3.33
)
|
|
|
|
|
|
|
Weighted average
number of shares used in share calculation
|
8,778,193
|
|
|
(B)
|
12,314,850
|
|
|
|
|
|
|
See
accompanying notes to the Unaudited Pro Forma Combined Financial
Information
|
NOTES
TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION
NOTE
1 – DESCRIPTION OF THE TRANSACTION
On March 30, 2017, Dolphin
completed its acquisition of 42West. Pursuant to the
terms of the Membership Interest Purchase Agreement (the
“Purchase Agreement”), Dolphin acquired from the
members of 42West (the “Sellers”), 100% of the
membership interests of 42West and 42West became a wholly-owned
subsidiary of Dolphin (the “42West Acquisition”). The
consideration paid by Dolphin in connection with the 42West
Acquisition was approximately $18.7 million in shares of common
stock of Dolphin, par value $0.015 (the “Common
Stock”), based on the Company’s 30-trading-day average
stock price prior to the closing date of $4.61 per share (less
certain working capital and closing adjustments, transaction
expenses and payments of indebtedness), plus the potential to earn
up to an additional $9.3 million in shares of Common Stock based on
achieving certain financial targets.
Also in connection
with the 42West Acquisition, on March 30, 2017, the Company entered
into put agreements (the “Put Agreements”) with each of
the Sellers. Pursuant to the terms and subject to the conditions
set forth in the Put Agreements, the Company has granted the
Sellers the right, but not obligation, to cause the Company to
purchase up to an aggregate of 2,374,187 of the shares of Common
Stock received as consideration for a purchase price equal to $4.61
per share during certain specified exercise periods set forth in
the Put Agreements up until December 2020 (the “Put
Rights”).
NOTE
2 –BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma
combined balance sheet as of December 31, 2016 combines the
historical balance sheet of Dolphin with the historical balance
sheet of 42West and has been prepared as if the 42West Acquisition
had occurred on December 31, 2016. The unaudited pro
forma combined statement of operations for the year ended December
31, 2016 combines the historical statement of operations of Dolphin
with the historical statement of operations of 42West and was
prepared as if the 42West Acquisition had occurred on January 1,
2016. The historical financial information is adjusted
in the unaudited pro forma combined financial information to give
effect to pro forma events that are (1) directly attributable to
the proposed acquisition, (2) factually supportable, and (3) with
respect to the combined statement of operations, expected to have a
continuing impact on the combined results.
Dolphin accounted for the
acquisition in the unaudited pro forma combined financial
information using the acquisition method of accounting in
accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 805 “Business
Combinations” (“ASC 805”). In
accordance with ASC 805, the Company used its best estimates and
assumptions to assign fair value to the tangible and intangible
assets acquired and liabilities assumed at the Acquisition
Date. Goodwill as of the Acquisition Date is measured as
the excess of purchase consideration over the fair value of the net
tangible and identifiable assets acquired.
The pro forma adjustments
described below were developed based on Dolphin management’s
assumptions and estimates, including assumptions relating to the
consideration paid and the allocation thereof to the assets
acquired and liabilities assumed from 42West based on preliminary
estimates to fair value. The final purchase
consideration and allocation of the purchase consideration will
differ from that reflected in the unaudited pro forma combined
financial information after the final valuation procedures are
performed and the amounts are finalized.
The unaudited pro forma
combined financial information is provided for illustrative
purposes only and does not purport to represent what the actual
consolidated results of operations or the consolidated financial
position of the combined company would have been had the
acquisition occurred on the dates assumed, nor are the necessarily
indicative of future consolidated results of operations or
financial position.
Dolphin expects to incur
costs and realize benefits associated with integrating the
operations of Dolphin and 42West. The unaudited pro
forma combined financial statements do not reflect the costs of any
integration activities or any benefits that may result from
operating efficiencies or revenue synergies. The
unaudited pro forma combined statement of operations does not
reflect any non-recurring charges directly related to the
acquisition that the combined companies incurred upon completion of
the 42West Acquisition.
NOTE
3 – ESTIMATED PRELIMINARY PURCHASE PRICE
CONSIDERATION
The table below represents
the total estimated preliminary purchase price
consideration:
Common Stock issued
at closing and in April 2017 (1,574,830 shares)
|
$
6,693,028
|
Fair value of Common Stock issuable on
January 2, 2018 (1,961,821 shares)
|
8,337,739
|
Fair value of Contingent
Consideration
|
3,541,000
|
Fair value of Put
Rights
|
4,000,000
|
Sellers’
transaction costs paid at closing
|
260,000
|
Sellers’ tax
liabilities assumed
|
627,000
|
|
$
23,458,767
|
NOTE
4 – ESTIMATED PRELIMINARY PURCHASE PRICE
ALLOCATION
The table below represents
the estimated preliminary purchase price allocation to the net
assets acquired based on their estimated fair values, as well as
the associated estimated useful lives of the acquired intangible
assets. Such amounts were estimated using the most
recent audited financial statements of 42West as of December 31,
2016. Dolphin does not believe that using 42West’s balances
as of December 31, 2016 instead of March 30, 2017 will result in a
materially different allocation, however, certain amounts, such as
the balances of cash, accounts receivable, other
assets, the net balance of property, equipment and
leasehold improvements, accounts payable, bank loan,
note payable and other liabilities will vary based upon changes in
42West’s balances between December 31, 2016 and March 30,
2017, with offsetting changes to goodwill. As the final
valuations are being performed, increases or decreases in the fair
value of relevant balance sheet accounts will result in
adjustments, which may result in material differences from the
information presented herein.
Assets
acquired
|
|
Cash
|
$
1,279,056
|
Accounts
receivable, net
|
1,337,806
|
Property, equipment
and leasehold improvements
|
1,115,515
|
Other
assets
|
291,713
|
Intangibles
|
9,110,000
|
Total identifiable
assets acquired
|
13,134,090
|
|
|
Liabilities
assumed
|
|
Accounts
payable
|
(435,110
)
|
Accrued
expenses
|
(561,053
)
|
Bank
loan
|
(350,000
)
|
Note
payable
|
(525,000
)
|
Other
liabilities
|
(916,571
)
|
Total liabilities
assumed
|
(2,787,734
)
|
Net identifiable
assets
|
10,346,356
|
Goodwill
|
13,112,411
|
Purchase price
allocated
|
$
23,458,767
|
NOTE
5 – PRO FORMA ADJUSTMENTS
The following is a
description of the unaudited pro forma adjustments reflected in the
unaudited pro forma combined financial statements:
Adjustments
to the pro forma combined balance sheet:
(a)
The addition of
intangible assets as a result of the estimated preliminary purchase
price allocation is comprised of the following:
|
Acquisition Date
Opening Balance
|
|
Intangible
assets:
|
|
|
Customer
relationships
|
$
5,980,000
|
10
|
Trade
name
|
2,760,000
|
10
|
Non-competition
agreements
|
370,000
|
3
|
Total purchased
intangible assets
|
$
9,110,000
|
|
(b)
To record
$13,112,411 of preliminary goodwill based on the excess of purchase
consideration of the 42West Acquisition over the preliminary fair
value of the net identifiable assets acquired. In
accordance with ASC 805, goodwill will not be amortized but instead
will be tested for impairment at least annually and more frequently
if certain indicators of impairment are present. In the
event that goodwill has become impaired, we will record an expense
for the amount impaired during the fiscal quarter in which the
determination is made.
(c)
To record
$4,000,000 as the preliminary fair value of the Put
Rights. As discussed above the Sellers have the right to
cause the Company to purchase up to 2,374,187 shares of Common
Stock at a purchase price of $4.61 per share at certain specified
dates up until December 2020.
(d)
Per the Purchase
Agreements, the Sellers have the right to earn up to an additional
$9.3 million of consideration (the “Contingent
Consideration”) for the 42West Acquisition, contingent on
achieving certain financial targets over a three year period, as
specified in the Purchase Agreement. The Contingent
Consideration is payable in shares of Common Stock at a purchase
price of $4.61 per share. The preliminary fair value of the
Contingent Consideration is $3,541,000.
(e)
The preliminary
fair value of other current liabilities is comprised of the
following:
Seller's tax
liability
|
$
627,000
|
Legal
|
425,708
|
Consulting
|
275,000
|
Other current
liabilities
|
$
1,327,708
|
The preliminary
fair value of the sellers tax liabilities assumed of $627,000 is
made up of (a) estimates of taxes to be payable upon the issuance
of the shares of Common Stock to the Sellers based on an estimated
tax rate of 3% on estimated taxable amounts, and (b) an estimated
fair value of possible tax liabilities to be owed by the Sellers
related to the shares of Common Stock to be issued as part of the
Contingent Consideration.
The legal and
consulting fees are non-recurring acquisition related
costs. These costs are not reflected on the pro forma
statement of operations because they would not be expenses that the
combined entity would expect to incur on an ongoing
basis.
(f)
The pro forma
adjustment to total equity include the
following:
Elimination of
42West pre-acquisition member equity balances
|
$
(1,236,356
)
|
Impact of shares of
Common Stock to be delivered as purchase consideration
|
14,590,059
|
Total pro forma
adjustment to total equity
|
$
13,353,703
|
|
|
Adjustments
to the pro forma combined statements of operations:
(A)
The amortization of
the acquired intangible assets pro forma adjustments are as
follows:
|
Acquisition Date
Opening Balance
|
|
|
Intangible
assets:
|
|
|
|
Customer
relationships
|
$
5,980,000
|
10
|
$
598,000
|
Trade
name
|
2,760,000
|
10
|
276,000
|
Non-competition
agreements
|
370,000
|
3
|
123,333
|
|
$
9,110,000
|
|
$
997,333
|
(B)
Per the terms of
the Purchase Agreement, (i) 1,230,280 shares of Common Stock were
issued on March 30, 2017, (ii) 344,550 shares of Common Stock were
issued on April 13, 2017 and up to 118,655 shares of Common Stock
may be issued during 2017, and (iii) 1,961,827 shares of Common
Stock will be issued on January 2, 2018. The Company
recalculated the weighted average shares as if the shares of Common
Stock had been issued on January 1, 2016.