RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before deciding to purchase our securities. If any of the events, contingencies, circumstances or conditions described in the risks below actually occur, our business, financial condition or results of operations could be seriously harmed. The trading price of our securities could, in turn, decline and you could lose all or part of your investment.

 

Risks Related to our Business and Financial Condition

 

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

 

For each of the years ended December 31, 2016 and 2015, our independent auditors issued an explanatory paragraph in their audit report expressing substantial doubt about our ability to continue as a going concern based upon our net losses and negative cash flows from operations for the years ended December 31, 2016 and 2015 and our levels of working capital as of December 31, 2016 and 2015. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is planning to raise any necessary additional funds to fund our operating expenses through loans and additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives, including the proceeds from this offering; however, there can be no assurance that we will be successful in raising any necessary additional capital. If we are not successful in raising additional capital, we may not have enough financial resources to support our business and operations and, as a result, may not be able to continue as a going concern and could be forced to liquidate.

 

We have a history of net losses and may continue to incur net losses.

 

We have a history of net losses and may be unable to generate sufficient revenue to achieve profitability in the future. For the fiscal year ended December 31, 2016, our net loss was $37,189,679. Although we had net income of $3,402,623 for the six months ended June 30, 2017, it was primarily due to a change in the fair value of the warrant liability. Our accumulated deficit was $96,409,581 and $99,812,204 at June 30, 2017 and December 31, 2016, respectively. Our ability to generate net profit in the future will depend on our ability to successfully produce and commercialize multiple web series and films, as no single project is likely to generate sufficient revenue to cover our operating expenses, and to realize the financial benefits from the operations of 42West. If we are unable to generate net profit at some point, we will not be able to meet our debt service requirements or our working capital requirements. As a result we may need to (i) issue additional equity, which could dilute the value of your share holdings, (ii) sell a portion or all of our assets, including any project rights which might have otherwise generated revenue, or (iii) cease operations.

 

We currently have substantial indebtedness which may adversely affect our cash flow and business operations and may affect our ability to continue to operate as a going concern.

 

We currently have a substantial amount of debt.  We do not currently have sufficient assets to repay such debt in full when due, and our available cash flow may not be adequate to maintain our current operations if we are unable to repay, extend or refinance such indebtedness.  The table below sets forth our total principal amount of debt and stockholders’ equity as of December 31, 2016 and June 30, 2017.  Approximately $4 million of the total debt as of June 30, 2017 represents the fair value of the put options in connection with the 42West acquisition, which may or may not be exercised by the sellers. Approximately $12.9 million of our current indebtedness ($9.7 million outstanding under the prints and advertising loan agreement plus $3.2 million outstanding under the production service agreement) was incurred by our subsidiary Max Steel Holdings LLC and Max Steel Productions, a variable interest entity (or VIE) created in connection with the financing and production of Max Steel (the "Max Steel VIE"). Repayment of these loans was intended to be made from revenues generated by Max Steel in the U.S. and outside of the U.S. These loans are non-recourse to us. Max Steel did not generate sufficient funds to repay either of these loans prior to the maturity date. As a result, we may lose the copyright for Max Steel and, consequently, may no longer receive any revenues from Max Steel .

 

 

 

 

	As of	As of
	December 31, 2016	June 30, 2017
Related party debt	$ 684,326	$  1,818,659
Max Steel debt	$  18,743,069	$  12,892,544
Total Debt (including related party debt)	$ 19,727,395	$  20,611,203
Total Stockholders’ Deficit	$ 31,867,797	$  3,024,560

 

Our indebtedness could have important negative consequences, including:

 

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our ability to obtain additional financing for working capital, capital expenditures, future productions or other purposes may be impaired or such financing may not be available on favorable terms or at all;

 

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we may have to pay higher interest rates upon obtaining future financing, thereby reducing our cash flows; and

 

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we may need a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, reducing the funds that would otherwise be available for operations and future business opportunities.

 

Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance and our ability to obtain additional financing, which will be affected by prevailing economic conditions, the profitability of our content production and entertainment publicity businesses and other factors contained in these Risk Factors , some of which are beyond our control.

 

If we are not able to generate sufficient cash to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying digital or film productions, selling assets, restructuring or refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms or at all and our indebtedness may affect our ability to continue to operate as a going concern.

 

  Litigation or legal proceedings could expose us to significant liabilities.

 

We are, and in the future may become, party to litigation claims and legal proceedings.  For example, 42West was named as one of the defendants in a putative class action alleging fraudulent misrepresentation, negligent misrepresentation, fraud in the inducement, breach of contract, and violation of various state consumer protection laws.  The putative class action, which was filed in the U.S. District Court for the Southern District of Florida on May 5, 2017, alleged that 42West and the other defendants made false and misleading representations in promoting the “Fyre Festival”, which did not live up to the luxury experience that it was represented to be. The plaintiffs seek to certify a nationwide class action and seek damages in excess of $5,000,000 on behalf of themselves and the class.  A class action lawsuit would require significant management time and attention and would result in significant legal expenses.  While we believe the claims against 42West are without merit, regardless of the merit or ultimate results of any litigation, such claims could divert management’s attention and resources from our business, which could harm our financial condition and results of operations.

 

Our management has determined that our disclosure controls and procedures are not effective and we have identified material weaknesses in our internal control over financial reporting.

 

In connection with the preparation of our financial statements for the years ended December 31, 2016 and 2015, our management concluded that our internal control over financial reporting was not effective and we identified several material weaknesses. A material weakness is a   deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In addition, as of December 31, 2016 and June 30, 2017, our management concluded that our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting. The material weaknesses result from the following:

 

 

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Design deficiencies related to the entity level control environment, including risk assessment, information and communication and monitoring controls:

 

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There is no documented fraud risk assessment or risk management oversight function.

 

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There are no documented procedures related to financial reporting matters (both internal and external) to the appropriate parties.

 

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There is no budget prepared and therefore monitoring controls are not designed effectively as current results cannot be compared to expectations.

 

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There is no documented process to monitor and remediate deficiencies in internal controls.

 

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Inadequate documented review and approval of certain aspects of the accounting process including the documented review of accounting reconciliations and journal entries that they considered to be a material weakness in internal control. Specifically:

 

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There is no documented period end closing procedures, specifically the individuals that are responsible for preparation, review and approval of period end close functions.

 

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Reconciliations are performed on all balance sheet accounts, including noncontrolling interest on at least a quarterly basis; however there is no documented review and approval by a member of management that is segregated from the period end financial reporting process.

 

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There is no review and approval for the posting of journal entries.

 

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Inadequate segregation of duties within the accounting process, including the following:

 

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One individual has the ability to add vendors to the master vendor file. This individual also has access to the company checkbook that is maintained in a secured location.

 

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One individual has sole access to our information technology system to initiate, process and record financial information. We have not developed any internal controls related to information technology systems including change management, physical security, access or program development.

 

In order to remediate the other material weaknesses in internal control over financial reporting, we are in the process of finalizing a remediation plan, under the direction of our Board, and intend to implement improvements during fiscal year 2017 as follows:

 

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Our Board will review the COSO “Internal Control over Financial Reporting - Guidance for Smaller Public Companies” that was published in 2006 including the control environment, risk assessment, control activities, information and communication and monitoring. Based on this framework, the Board will implement controls as needed assuming a cost benefit relationship. In addition, our Board will also evaluate the key concepts of the updated 2013 COSO “Internal Control – Integrated Framework” as it provides a means to apply internal control to any type of entity

 

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Document all significant accounting policies and ensure that the accounting policies are in accordance with accounting principles generally accepted in the U.S. and that internal controls are designed effectively to ensure that the financial information is properly reported. Management will engage independent accounting specialists, if necessary, to ensure that there is an independent verification of the accounting positions taken.

 

 

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We will implement a higher standard for document retention and support for all items related to revenue recognition. All revenue arrangements that are entered into by us will be evaluated under the applicable revenue guidance and management should document their position based on the facts and circumstances of each agreement.

 

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In connection with the reported inadequately documented review and approval of certain aspects of the accounting process, management has plans to assess the current review and approval processes and implement changes to ensure that all material agreements, accounting reconciliations and journal entries are reviewed and approved on a timely basis and that this review process is documented by a member of management separate from the preparer. A documented quarter end close procedure will be established whereby management will review and approve reconciliations and journal entries. Management will formally approve new vendors that are added to the master vendor file.

 

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In connection with the reported inadequate segregation of duties, management intends to hire additional personnel in the accounting and finance area. This will allow for adequate segregation of duties in performing the accounting processes.

 

Each of the material weaknesses described above could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses described above or avoid potential future material weaknesses. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, our stock price could be negatively impacted and we could be subject to, among other things, regulatory or enforcement actions by the Securities and Exchange Commission, which we refer to as the SEC or the Commission. 

 

The operation of our business could be adversely affected if Max Steel VIE goes bankrupt or becomes subject to a dissolution or liquidation proceeding.  

 

Max Steel VIE holds certain of our intellectual property and film distribution rights which are security for certain of the Max Steel VIE’s debt obligations.  Max Steel VIE is currently in default on all or a portion of those debt obligations.  If Max Steel VIE is unable to repay such debts and the debt holders foreclose on such debts and take control of  the intellectual property and film distribution rights, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. In addition, if Max Steel VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our future revenue from such film.

 

 

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Entertainment Publicity Business

 

Our business could be adversely affected if we fail to retain the principal sellers, and other key employees of 42West and the clients they serve.

 

The success of our 42West business substantially depends on our ability to retain the services of Leslee Dart, Amanda Lundberg and Allan Mayer, each a former owner of 42West, who we refer to as the principal sellers. If we lose the services of one or more of these individuals, our ability to successfully implement our business plan with respect to our entertainment publicity business and the value of our common stock could be materially adversely affected. Although we entered into three-year employment agreements with each of the principal sellers in connection with the 42West acquisition, there can be no assurance that they will serve the term of their employment agreements or choose to remain with us following the expiration of such terms. In addition, the employees of 42West, and their skills and relationships with clients, are among our most valuable assets. An important aspect of the business’ competitiveness is its ability to retain these key employees. If 42West fails to hire and retain a sufficient number of these key employees, it may have a material adverse effect on our overall business and results of operations.

 

42West’s talent roster currently includes some of the best known and most highly respected members of the entertainment community in addition to major studios and networks, corporations and well-known consumer brands. These clients often form highly loyal relationships with certain public relations and marketing professionals rather than with a particular firm. The employment agreements with the principal sellers currently contain non-competition provisions that will prevent the principal sellers from continuing to provide services to such clients should they leave our company, however, clients are free to engage other public relations and marketing professionals and there can be no assurance that they will choose to remain with our company. The success of the 42West acquisition, therefore, depends on our ability to continue to successfully maintain such client relationships should the principal sellers or other key employees leave our company. If we are unable to retain the current 42West clients or attract new clients, we may lose all of the benefits of the acquisition which would materially adversely affect our business and results of operations.

 

42West operates in a highly competitive industry.

 

The entertainment publicity business is highly competitive. Through 42West, we must compete with other agencies, and with other providers of entertainment publicity services, in order to maintain existing client relationships and to win new clients. The client’s perception of the quality of an agency’s creative work and the agency’s reputation are critical factors in determining its competitive position. 

 

The success of our 42West business depends on its ability to consistently and effectively deliver marketing and public relations services to its clients.

 

42West’s success depends on its ability to effectively and consistently staff and execute client engagements to achieve the clients’ unique personal or professional goals. 42West works to design customized communications or publicity campaigns tailored to the particular needs and objectives of particular projects. In some of its engagements, 42West relies on other third parties to provide some of the services to its clients, and we cannot guarantee that these third parties will effectively deliver their services or that we will have adequate recourse against these third parties in the event they fail to effectively deliver their services. Other contingencies and events outside of our control may also impact 42West’s ability to provide its services. 42West’s failure to effectively and timely staff, coordinate and execute its client engagements may adversely impact existing client relationships, the amount or timing of payments from clients, its reputation in the marketplace and ability to secure additional business and our resulting financial performance. In addition, our contractual arrangements with our clients may not provide us with sufficient protections against claims for lost profits or other claims for damages.

 

If we are unable to adapt to changing client demands, social and cultural trends or emerging technologies, we may not remain competitive and our business, revenues and operating results could suffer.

 

We operate in an industry characterized by rapidly changing client expectations, marketing technologies, and social mores and cultural trends that impact our target audiences. The entertainment industry continues to undergo significant developments as advances in technologies and new methods of message delivery and consumption emerge. These developments drive changes in our target audiences’ behavior to which we must adapt in order to reach our target audiences. In addition, our success depends on our ability to anticipate and respond to changing social mores and cultural trends that impact the entertainment industry and our target audiences. We must adapt our business to these trends, as well as shifting patterns of content consumption and changing behaviors and preferences of our target audiences, through the adoption and exploitation of new technologies. If we cannot successfully exploit emerging technologies or if the marketing strategies we choose misinterpret cultural or social trends and prove to be incorrect or ineffective, any of these could have   a material adverse effect on our business, financial condition, operating results, liquidity and prospects.

 

 

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  A significant labor dispute in our clients’ industries could have a material adverse effect on our business.

 

An industry-wide strike or other job action by or affecting the Writers Guild, Screen Actors Guild or other major entertainment industry union could reduce the supply of original entertainment content, which would in turn reduce the demand for our talent and entertainment marketing services. An extensive work stoppage would affect feature film production as well as television and commercial production and could have a material adverse effect on our clients and the motion picture production industry in general. For example, on November 5, 2007, the Writers Guild declared a strike affecting the script writing for television shows and films. The strike, which lasted until February 12, 2008, significantly affected the entertainment industry which consequently, had a material adverse impact on revenue generated by public relations and entertainment marketing agencies. Contracts between entertainment industry unions and the Alliance of Motion Picture and Television Producers, which we refer to as AMPTP, expire from time to time. The failure to finalize and ratify a new agreement with the AMPTP or the failure to enter into new commercial contracts upon expiration of the current contracts could lead to a strike or other job action. Any such severe or prolonged work stoppage could have an adverse effect on the television and/or motion picture production industries and could severely impair our clients’ prospects. Any resulting decrease in demand for our talent and entertainment marketing and other public relations services would have a material adverse effect on our cash flows and results of operations.

 

Clients may terminate or reduce their relationships with us on short notice.

 

42West’s entertainment clients may choose to reduce their relationships with us, on a relatively short time frame and for any reason and can terminate their contracts with us with 30 days’ notice. If a significant number of the 42West clients were to terminate their relationships with us, this could have a material adverse effect upon our business and results of operations.

 

42West’s ability to generate new business from new and existing clients may be limited.

 

To increase its revenues, 42West needs to obtain additional clients or generate demand for additional services from existing clients. 42West’s ability to generate initial demand for its services from new clients and additional demand from existing clients is subject to such clients’ and potential clients’ needs, trends in the entertainment industry, financial conditions, strategic plans and internal resources of corporate clients, as well as the quality of 42West’s employees, services and reputation. To the extent 42West cannot generate new business from new or existing clients due to these limitations, the ability of 42West to grow its business, and our ability to increase our revenues, will be limited.

 

42West’s revenues are susceptible to declines as a result of unfavorable economic conditions.

 

Economic downturns often severely affect the marketing services industry. Some of our corporate clients may respond to weak economic performance by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in the short-term than other expenses related to operations. In addition, economic downturns could lead to reduced public demand for varying forms of entertainment for which we are engaged to provide public relations and media strategy and promotional services. Such reduced demand for our services could have a material adverse effect on our revenues and results of operations.

 

Content Production Business

 

Our content production business requires a substantial investment of capital and failure to access sufficient capital while awaiting delayed revenues will have a material adverse effect on our results of operation.

 

The production, acquisition and distribution of film or digital media content require a significant amount of capital. The budget for the projects we plan to produce will require between $6 and $8 million to produce. In addition, if a distributor does not provide the funds for the distribution and marketing of our film, we will require additional capital to distribute and market the film. We estimate distribution and marketing fees to be approximately $10,000 per theatrical screen. A significant amount of time may elapse between our expenditure of funds and the receipt of revenues from our productions. Our content production business does not have a traditional credit facility with a financial institution on which to depend for our liquidity needs and a time lapse may require us to fund a significant portion of our capital requirements through related party transactions with our CEO or other financing sources. There can be no assurance that any additional financing resources will be available to us as and when required, or on terms that will be acceptable to us. Our inability to raise capital necessary to sustain our operations while awaiting delayed revenues would have a material adverse effect on our liquidity and results of operations.

 

 

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Our success is highly dependent on audience acceptance of our films and digital media productions, which is extremely difficult to predict and, therefore, inherently risky.

 

We cannot predict the economic success of any of our films because the revenue derived from the distribution of a film (which does not necessarily directly correlate with the production or distribution costs incurred) depends primarily upon its acceptance by the public, which cannot be accurately predicted. The economic success of a film also depends upon the public’s acceptance of competing films, the availability of alternative forms of entertainment and leisure-time activities, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty.

 

The economic success of a film is largely determined by our ability to produce content and develop stories and characters that appeal to a broad audience and by the effective marketing of the film. The theatrical performance of a film is a key factor in predicting revenue from post-theatrical markets. If we are unable to accurately judge audience acceptance of our film content or to have the film effectively marketed, the commercial success of the film will be in doubt, which could result in costs not being recouped or anticipated profits not being realized. Moreover, we cannot assure you that any particular feature film will generate enough revenue to offset its distribution, fulfillment services and marketing costs, in which case we would not receive any revenues for such film from our distributors.

  

In addition, changing consumer tastes affect our ability to predict which digital media productions will be popular with web audiences. As we invest in various digital projects, stars and directors, it is highly likely that at least some of the digital projects in which we invest will not appeal to our target audiences. If we are unable to produce web content that appeals to our target audiences the costs of such digital media productions could exceed revenues generated and anticipated profits may not be realized. Our failure to realize anticipated profits could have a material adverse effect on our results of operations.

 

We may incur significant write-offs if our feature films and other projects do not perform well enough to recoup production, marketing, distribution and other costs.

 

We are required to amortize capitalized production costs over the expected revenue streams as we recognize revenue from our films or other projects. The amount of production costs that will be amortized each quarter depends on, among other things, how much future revenue we expect to receive from each project. Unamortized production costs are evaluated for impairment each reporting period on a project-by-project basis. If estimated remaining revenue is not sufficient to recover the unamortized production costs, the unamortized production costs will be written down to fair value. In any given quarter, if we lower our previous forecast with respect to total anticipated revenue from any individual feature film or other project, we may be required to accelerate amortization or record impairment charges with respect to the unamortized costs, even if we have previously recorded impairment charges for such film or other project. For example, in the year ended December 31, 2016, we recorded a $2 million impairment of the capitalized production costs for our feature film, Max Steel . Such impairment charges have had and in the future could have, a material adverse impact on our business, operating results and financial condition.

 

In the past, we purchased several scripts and project ideas for our digital media productions totaling approximately $0.6 million that failed to generate interest among distributors or advertisers. As a result of the write off of the costs incurred in purchasing such scripts and project ideas, our operating results were negatively impacted.

 

Our content production business is currently substantially dependent upon the success of a limited number of film releases and digital media productions each year and the unexpected delay or commercial failure of any one of them could have a material adverse effect on our financial results and cash flows.

 

We generally expect to release one to two feature films and one digital production in the next year. The unexpected delay in release or commercial failure of just one of these films or digital media productions could have a significant adverse impact on our results of operations and cash flows in both the year of release and in the future. Historically, feature films that are successful in the domestic theatrical market are generally also successful in the international theatrical and ancillary markets, although each film is different and there is no way to guarantee such results. If our films fail to achieve domestic box office success, their success in the international box office and ancillary markets and our business, results of operations and financial condition could be adversely affected. Further, we can make no assurances that the historical correlation between results in the domestic box office and results in the international box office and ancillary markets will continue in the future. If our feature films do not perform well in the domestic or international theatrical markets and ancillary markets, or our digital media productions do not perform as anticipated, the failure of any one of these could a material adverse effect on our financial results and cash flows.

 

 

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Delays, cost overruns, cancellation or abandonment of the completion or release of our web series or films may have an adverse effect on our business.

 

There are substantial financial risks relating to production, completion and release of web series and films. Actual costs may exceed their budgets due to factors   such as labor disputes, unavailability of a star performer, equipment shortages, disputes with production teams or adverse weather conditions, any of which may cause cost overruns and delay or hamper film completion. We are typically responsible for paying all production costs in accordance with a budget and receive a fixed producer’s fee for our services plus a portion of any project income. However to the extent that delays or cost overruns result in us not completing the web series or film within budget, there may not be enough funds left to pay us our producer’s fee, to generate any project income or complete the project at all. If this were to occur, it would significantly and adversely affect our revenue and results of operations.

 

We rely on third party distributors to distribute our films and their failure to perform or promote our films could negatively impact our ability to generate revenues and have a material adverse effect on our operating results.

 

Our films are primarily distributed and marketed by third party distributors. If any of these third party distributors fails to perform under their respective arrangements, such failure could negatively impact the success of our films and have a material adverse effect on our business, reputation and ability to generate revenues.

 

We generally do not control the timing and manner in which our distributors distribute our films; their decisions regarding the timing of release and promotional support are important in determining success. Any decision by those distributors not to distribute or promote one of our films or to promote our competitors’ films or related products to a greater extent than they promote ours could have a material adverse effect on our business, cash flows and operating results.

 

We rely on third party relationships with online digital platforms for our advertising revenue and we may be unable to secure such relationships.

 

We anticipate entering into distribution agreements containing revenue share provisions with online digital platforms to distribute our digital media productions. Pursuant to these revenue share provisions, we will earn a portion of advertising revenues once our digital media productions are distributed online. If we fail to secure such relationships with online digital platforms, we will not be able to earn advertising revenues from our digital projects, which could have a material adverse effect on our liquidity and results of operations. In addition, some of our distributors have moved from an advertisement-based model to a subscription-based model which makes it more difficult for us to use our funding and distribution methods.

 

We may be unable to attract or retain advertisers, which could negatively impact our results of operation.

 

Typically, online digital platforms are responsible for securing advertisers and, as such, our ability to earn advertising revenues would depend on their success in doing so. However, at times we have, and may continue to, proactively secure advertising commitments against anticipated web series. Our ability to retain advertisers is contingent on our ability to successfully complete and deliver online projects which are commercially successful, which we may fail to do. Advertising revenues could also be adversely impacted by factors outside our control such as failure of our digital media productions to attract our target viewer audiences, lack of future demand for our digital media productions, the inability of third party online digital platforms to deliver ads in an effective manner, competition for advertising revenue from existing competitors or new digital media companies, declines in advertising rates, adverse legal developments relating to online advertising, including legislative and regulatory developments and developments in litigation. The existence of any of these factors could result in a decrease of our anticipated advertising revenues.

 

Our success depends on the services of our CEO.

 

Our success greatly depends on the skills, experience and efforts of our CEO, Mr. O’Dowd. We do not have an employment agreement with Mr. O’Dowd.  If Mr. O’Dowd resigns or becomes unable to continue in his present role and is not adequately replaced, the loss of his services could have a material adverse effect on our business, operating results or financial condition.

 

 

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Risks Related to our Industry

 

The popularity and commercial success of our digital media productions and films are subject to numerous factors, over which we may have limited or no control.

 

The popularity and commercial success of our digital media productions and films depends on many factors including, but not limited to, the key talent involved, the timing of release, the promotion and marketing of the digital media production or film, the quality and acceptance of other competing productions released into the marketplace at or near the same time, the availability of alternative forms of entertainment, general economic conditions, the genre and specific subject matter of the digital media production or film, its critical acclaim and the breadth, timing and format of its initial release. We cannot predict the impact of such factors on any digital media production or film, and many are factors that are beyond our control. As a result of these factors and many others, our digital media productions and films may not be as successful as we anticipate, and as a result, our results of operations may suffer. 

 

The creation of content for the entertainment industry is highly competitive and we will be competing with companies with much greater resources than we have.

 

The business in which we engage is highly competitive. Our primary business operations are subject to competition from companies which, in many instances, have greater development, production and distribution and capital resources than us. We compete for the services of writers, producers, directors, actors and other artists to produce our digital media and motion picture content, as well as for advertisement dollars. Larger companies have a broader and more diverse selection of scripts than we do, which translates to a greater probability that they will be able to more closely fit the demands and interests of advertisers than we can.

 

As a small independent producer, we compete with major U.S. and international studios. Most of the major U.S. studios are part of large diversified corporate groups with a variety of other operations that can provide both the means of distributing their products and stable sources of earnings that may allow them better to offset fluctuations in the financial performance of their film and other operations. In addition, the major studios have more resources with which to compete for ideas, storylines and scripts created by third parties, as well as for actors, directors and other personnel required for production. Such competition for the industry’s talent and resources may negatively affect our ability to acquire, develop, produce, advertise and distribute digital media and motion picture content.

 

We must successfully respond to rapid technological changes and alternative forms of delivery or storage to remain competitive.

 

The entertainment industry continues to undergo significant developments as advances in technologies and new methods of product delivery and storage, and certain changes in consumer behavior driven by these developments emerge. New technologies affect the demand for our content, the manner in which our content is distributed to consumers, the sources and nature of competing content offerings and the time and manner in which consumers acquire and view our content. We and our distributors must adapt our businesses to shifting patterns of content consumption and changing consumer behavior and preferences through the adoption and exploitation of new technologies. If we cannot successfully exploit these and other emerging technologies, it could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.

 

We rely on information technology systems and could face cybersecurity risks.

 

We rely on information technologies and infrastructure to manage our business, including digital storage of marketing strategies, client information, films and digital programming and delivery of digital marketing services. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. The incidence of malicious technology-related events, such as cyberattacks, computer hacking, computer viruses, worms or other destructive or disruptive software, denial of service attacks or other malicious activities is on the rise worldwide. Power outages, equipment failure, natural disasters (including extreme weather), terrorist activities or human error may also affect our systems and result in disruption of our services or loss or improper disclosure of personal data, business information or other confidential information.

 

 

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Likewise, data privacy breaches, as well as improper use of social media, by employees and others may pose a risk that sensitive data, such as personally identifiable information, strategic plans and trade secrets, could be exposed to third parties or to the general public. We also utilize third parties, including third-party “cloud” computing services, to store, transfer or process data, and system failures or network disruptions or breaches in the systems of such third parties could adversely affect its reputation or business. Any such breaches or breakdowns could expose us to legal liability, be expensive to remedy, result in a loss of clients or clients’ proprietary information and damage our reputation. Efforts to develop, implement and maintain security measures are costly, may not be successful in preventing these events from occurring and require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated.

 

We have and may in the future be adversely affected by union activity.

 

We retain the services of actors who are covered by collective bargaining agreements with Screen Actors Guild – American Federation of Television and Radio Artists, which we refer to as SAG-AFTRA, and we may also become signatories to certain guilds such as Directors Guild of America and Writers Guild of America in order to allow us to hire directors and talent for our productions. Collective bargaining agreements are industry-wide agreements, and we lack practical control over the negotiations and terms of these agreements. In addition, our digital projects fall within SAG-AFTRA’s definition of “new media”, which is an emerging category covered by its New Media and Interactive Media Agreements for actors. As such, our ability to retain actors is subject to uncertainties that arise from SAG-AFTRA’s administration of this relatively new category of collective bargaining agreements. Such uncertainties have resulted and may continue to result in delays in production of our digital projects.

 

In addition, if negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the union could take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns or work stoppages or the possibility of such actions could result in delays in production of our digital projects. We could also incur higher costs from such actions, new collective bargaining agreements or the renewal of collective bargaining agreements on less favorable terms. Depending on their duration, union activity or labor disputes could have an adverse effect on our results of operations.

 

Others may assert intellectual property infringement claims or liability claims for digital media or film content against us which may force us to incur substantial legal expenses.

 

There is a possibility that others may claim that our productions and production techniques misappropriate or infringe the intellectual property rights of third parties with respect to their previously developed web series, films, stories, characters, other entertainment or intellectual property. In addition, as distributors of digital media and film content, we may face potential liability for such claims as defamation, invasion of privacy, negligence, copyright or trademark infringement or other claims based on the nature and content of the materials distributed. If successfully asserted, our insurance may not be adequate to cover any of the foregoing claims. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and diversion of resources in defending against them, which could have a material adverse effect on our operating results.

 

If we fail to protect our intellectual property and proprietary rights adequately, our business could be adversely affected.

 

Our ability to compete depends, in part, upon successful protection of our intellectual property. We attempt to protect proprietary and intellectual property rights to our productions through available copyright and trademark laws and distribution arrangements with companies for limited durations. Unauthorized parties may attempt to copy aspects of our intellectual property or to obtain and use property that we regard as proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. Intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to steal our intellectual property. Our failure to protect adequately our intellectual property and proprietary rights could adversely affect our business and results of operations.

 

 

13

 

 

Our online activities are subject to a variety of laws and regulations relating to privacy and child protection, which, if violated, could subject us to an increased risk of litigation and regulatory actions.

 

In addition to our company websites and applications, we use third-party applications, websites, and social media platforms to promote our digital media productions and engage consumers, as well as monitor and collect certain information about users of our online forums. A variety of laws and regulations have been adopted in recent years aimed at protecting children using the internet such as the Children’s Online Privacy and Protection Act of 1998, which we refer to as COPPA. COPPA sets forth, among other things, a number of restrictions on what website operators can present to children under the age of 13 and what information can be collected from them. Many foreign countries have adopted similar laws governing individual privacy, including safeguards which relate to the interaction with children. If our online activities were to violate any applicable current or future laws and regulations, we could be subject to litigation and regulatory actions, including fines and other penalties.

 

  Risks Related to Acquisitions

 

We are subject to risks associated with acquisitions and we may not realize the anticipated benefits of such acquisitions.

 

We have in the past completed acquisitions, and may in the future engage in discussions and activities with respect to possible acquisitions, intended to complement or expand our business, some of which may be significant transactions for us. For example, in March 2016, we acquired Dolphin Films, a content producer of motion pictures, and on March 30, 2017, we acquired 42West, a full-service entertainment marketing agency. Identifying suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis or at all.

 

Even if we complete an acquisition, we may not realize the anticipated benefits of such transaction. Our recent acquisitions have required, and any similar future transactions may also require, significant efforts and expenditures, including with respect to integrating the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection with acquisition activities and integration efforts, which include:

 

●

diversion of management attention from managing our historical core business;

 

●

potential disruption of our historical core business or of the acquired business;

 

●

the strain on, and need to continue to expand, our existing operational, technical, financial and administrative infrastructure;

 

●

inability to achieve synergies as planned;

 

●

challenges in controlling additional costs and expenses in connection with and as a result of the acquisition;

 

●

dilution to existing shareholders from the issuance of equity securities;

 

●

becoming subject to adverse tax consequences or substantial depreciation;

 

●

difficulties in assimilating employees and corporate cultures or in integrating systems and controls;

 

●

difficulties in anticipating and responding to actions that may be taken by competitors;

 

●

difficulties in realizing the anticipated benefits of the transaction;

 

 

 

14

 

 

●

inability to generate sufficient revenue from acquisitions to offset the associated acquisition costs;

 

●

potential loss of key employees, key clients or other partners of the acquired business as a result of the change of ownership; and

 

●

the assumption of and exposure to unknown or contingent liabilities of the acquired businesses.

 

If any of our acquisitions do not perform as anticipated for any of the reasons noted above or otherwise, there could be a negative impact on our results of operations and financial condition.

 

Any due diligence by us in connection with potential future acquisition may not reveal all relevant considerations or liabilities of the target business, which could have a material adverse effect on our financial condition or results of operations.

 

We intend to conduct such due diligence as we deem reasonably practicable and appropriate based on the facts and circumstances applicable to any potential acquisition. The objective of the due diligence process will be to identify material issues which may affect the decision to proceed with any one particular acquisition target or the consideration payable for an acquisition. We also intend to use information revealed during the due diligence process to formulate our business and operational planning for, and our valuation of, any target company or business. While conducting due diligence and assessing a potential acquisition, we may rely on publicly available information, if any, information provided by the relevant target company to the extent such company is willing or able to provide such information and, in some circumstances, third party investigations.

 

There can be no assurance that the due diligence undertaken with respect to an acquisition, including the Dolphin Films acquisition or the 42West acquisition, will reveal all relevant facts that may be necessary to evaluate such acquisition including the determination of the price we may pay for an acquisition target or to formulate a business strategy. Furthermore, the information provided during due diligence may be incomplete, inadequate or inaccurate. As part of the due diligence process, we will also make subjective judgments regarding the results of operations, financial condition and prospects of a potential target. For example, the due diligence we conducted in connection with the Dolphin Films acquisition and the 42West acquisition may not have been complete, adequate or accurate and may not have uncovered all material issues and liabilities to which we are now subject. If the due diligence investigation fails to correctly identify material issues and liabilities that may be present in a target company or business, or if we consider such material risks to be commercially acceptable relative to the opportunity, and we proceed with an acquisition, we may subsequently incur substantial impairment charges or other losses.

 

 In addition, following an acquisition, including the Dolphin Films acquisition and the 42West acquisition, we may be subject to significant, previously undisclosed liabilities of the acquired business that were not identified during due diligence and which could contribute to poor operational performance, undermine any attempt to restructure the acquired company or business in line with our business plan and have a material adverse effect on our financial condition and results of operations.

 

Claims against us relating to any acquisition may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed the seller’s indemnification obligations.

 

As discussed above, there may be liabilities assumed in any acquisition that we did not discover or that we underestimated in the course of performing our due diligence. Although a seller generally will have indemnification obligations to us under an acquisition or merger agreement, these obligations usually will be subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations, as was the case in the 42West acquisition. We cannot assure you that our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any undiscovered or underestimated liabilities that we may incur. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and operating results. 

 

 

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Risks Related to our Common Stock and Preferred Stock

 

We have recently issued, and may in the future issue, a significant amount of equity securities and, as a result, your ownership interest in our company has been, and may in the future be, substantially diluted and your investment in our common stock could suffer a material decline in value.

 

From January 1, 2016 to October 2, 2017, the number of shares of our common stock issued and outstanding has increased from 2,047,309 (adjusted for a 1-to-20 reverse stock split on May 10, 2016 and further adjusted for a 1-to-2 reverse stock split on September 14, 2017) to 9,367,057 shares. Of this amount, approximately 2,832,880 shares of common stock have been issued in private placements as payment to certain holders of our Company’s debt pursuant to debt exchange agreements. Consequently, we have not received any cash proceeds in connection with such issuances of common stock. In addition, 762,500 shares of common stock were issued in private placements pursuant to subscription agreements. Generally, these subscription agreements and debt exchange agreements provide for past or future purchases of, or exchanges of debt for, our common stock at a price of $10.00 per share which, upon each exercise or exchange thus far, has been below the market price of our common stock. In addition, during 2016, we issued Warrants G, H, I, J and K. Warrants G, H and I are exercisable for an aggregate of 1,250,000 shares of common stock and originally had exercise prices ranging from $10.00 to $14.00 per share. As of June 30, 2017, Warrants G, H and I were exercisable at a price of $9.22 per share. Warrants J and K were issued in exchange for debt, and to purchase the remaining membership interests in Dolphin Kids Club, and were exercised for an aggregate of 1,170,000 shares of common stock at an exercise price of $0.03 per share. Furthermore, as consideration for our 42West acquisition, we (i) issued 615,140 shares of common stock on the closing date, 172,275 shares of common stock to certain 42West employees on April 13, 2017 and 59,320 shares of common stock as employee stock bonuses on August 21, 2017 and (ii) will issue 980,911 shares of common stock on January 2, 2018. In addition, we may issue up to 981,563 shares of common stock based on the achievement of specified financial performance targets over a three-year period. Subsequent to the quarter ended June 30, 2017, we also issued seven convertible promissory notes in the aggregate amount of $725,000   that are convertible into 78,757 shares of our common stock (calculated based on the 90-trading day average price per share as of October 2, 2017) . As a result of these past issuances and potential future issuances, your ownership interest in our company has been, and may in the future be, substantially diluted. The market price for our common stock has been volatile in the past, and these issuances could cause the price of our common stock to fluctuate substantially in the future. In addition, we have historically experienced significantly low trading volumes. Once restricted stock issued in the private placements and in the 42West acquisition becomes freely tradable, these current or future shareholders may decide to trade their shares of common stock and, if our stock is thinly traded, this could have a material adverse effect on its market price.

 

In the near term, we will need to raise additional capital and may seek to do so by conducting one or more private placements of equity securities, securities convertible into equity securities or debt securities, selling additional securities in a registered public offering, or through a combination of one or more of such financing alternatives, including the proceeds from this offering. Such issuances of additional securities would further dilute the equity interests of our existing shareholders, perhaps substantially, and may further exacerbate any or all of the above risks.

 

  The Series C Convertible Preferred Stock has anti-dilution protections and super voting rights that may adversely affect our shareholders.

 

For a period of five years from March 7, 2016, the date of issuance, the Series C Convertible Preferred Stock, which are all held by Mr. O’Dowd, will have certain anti-dilution protections. Upon triggers specified in the Series C Certificate of Designation, the number of shares of common stock into which Series C Convertible Preferred Stock held by Mr. O’Dowd (or any entity directly or indirectly controlled by Mr. O’Dowd) can be converted will be increased, such that the total number of shares of common stock held by Mr. O’Dowd (or any entity directly or indirectly controlled by Mr. O’Dowd) (based on the number of shares of common stock held as of the date of issuance) will be preserved at the same percentage of shares of common stock outstanding held by such persons on such date. As a result, your ownership interests may be further diluted.

 

Except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold (as defined in the Series C Certificate of Designation) has occurred. Upon such determination by the Board, a holder of Series C Convertible Preferred Stock (Mr. O’Dowd) will be entitled to super voting rights of three votes for each share of common stock into which such holder’s shares of Series C Convertible Preferred Stock could then be converted. Holders of Series C Convertible Preferred Stock will be entitled to vote together as a single class on all matters upon which common stock holders are entitled to vote. Your voting rights will be diluted as a result of these super voting rights. In addition, the anti-dilution protections may result in an increase in the number of shares of common stock into which Series C Convertible Preferred Stock held by Mr. O’Dowd and certain eligible persons can be converted, which could further dilute your percentage of voting rights. 

 

 

16

 

 

If you purchase the securities sold in this offering, the exercise price of certain outstanding warrants will be reduced and you will experience immediate dilution in your investment.

 

As of September 30, 2017, we have 1,262,115 warrants to purchase shares of our common stock which contain full ratchet anti-dilution price protection (the “Warrants”).  This generally means that if we issue certain additional securities while the Warrants are outstanding at a price or with an exercise price less than the then current exercise price of the Warrants, the exercise price of those Warrants would be reduced to this lower sale price or exercise price. The Warrants were initially exercisable at $10.00 to $14.00 per share. The initial exercise price of the Warrants was reset to $9.22 per share in connection with the acquisition of 42West described elsewhere in this prospectus. If the price paid in this offering is below $9.22 per share, the exercise price of the Warrants will be reduced to such price making it more likely that the Warrants will be exercised which will result in additional dilution to our shareholders and may make it more difficult to raise additional capital in future periods.

 

Changes in the fair value of warrants to purchase shares of our common stock may have a material impact on, and result in significant volatility in, our reported operating results.

 

We have determined that our Series G Warrants, Series H Warrants and Series I Warrants to purchase shares of our common stock should be accounted for as derivatives. These warrants require us to “mark to market” (i.e., record the derivatives at fair value) based on the price as of the end of each reporting period as liabilities on our balance sheet and to record the change in fair value during each period as income or expense in our current period consolidated statements of operations. The fair value is most sensitive to changes, at each valuation date, in our common stock price, the volatility rate assumption, and the exercise price, which could change if we were to do a dilutive future financing (such as this offering). This accounting treatment could have a material impact on, and could significantly increase the volatility of, our reported operating results, even though there is no related cash flow impact to us.

 

Accounting for the put rights could cause variability in the results we report.

 

In connection with the 42West acquisition, we granted put rights to the sellers to cause us to purchase up to an aggregate of 1,187,094 of their shares of common stock received as consideration for a purchase price equal to $9.22 per share during certain specified exercise periods set forth in the put agreements up until December 2020. As of the date of this prospectus, we have repurchased an aggregate of 116,591 shares of common stock from the sellers pursuant to the put rights. The put rights are an embedded equity derivative within our common stock requiring certain fair value measurements at each reporting period. We record the fair value of the liability in the consolidated balance sheets and we record changes to the liability against earnings or loss in the consolidated statements of operations. The put rights are inherently difficult to value. Additionally, derivative accounting for the put rights also affects the accounting for other items in our financial statements, including our exercisable warrants, and these effects are inherently difficult to determine, require difficult estimates and are very subjective. We could have substantial variability in the related periodic fair value measurements, which would affect our operating results and in turn could impact our stock price.

 

Our common stock is quoted only on the OTC Pink Marketplace, which may have an unfavorable impact on our stock price and liquidity.

 

Our common stock is quoted on the OTC Pink Marketplace. The OTC Pink Marketplace is a significantly more limited market than the New York Stock Exchange or NASDAQ system. The quotation of our shares on the OTC Pink Marketplace may result in an illiquid market available for existing and potential shareholders to trade shares of our common stock and depress the trading price of our common stock, and may have a long-term adverse impact on our ability to raise capital in the future.

 

You may experience additional dilution as a result of future equity offerings.

 

In order to raise additional capital, we have issued equity securities in the past and may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per unit in this offering. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions, may be lower than the price per share paid by investors in this offering.

 

 

17

 

 

Risks Related to the Offering

 

We will have broad discretion as to the use of the net proceeds from this offering, and we may not use the proceeds effectively.

 

We currently intend to use the net proceeds received from the sale of the securities for (i) growth initiatives of our entertainment publicity business, including acquisitions of comparable businesses and groups with public relations expertise, (ii) the budget for our content production business and (iii) general corporate purposes, including working capital. Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. Pending the use of the proceeds in this offering, we will invest them. However, the proceeds may not be invested in a manner that yields a favorable or any return.

 

You will experience immediate and substantial dilution in the book value of the shares you purchase in this offering.

 

The offering price is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, based on our capitalization as of June 30, 2017, you will incur immediate dilution in the book value of the shares you purchase in the offering. Based upon the issuance and sale of the units on an assumed closing date of      , 2017 at an assumed public offering price of $     per unit, you will incur immediate dilution of approximately $      in the net tangible book value per share if you purchase units in this offering. In addition to this offering, subject to market conditions and other factors, we may pursue additional financings in the future, as we continue to build our business, which may result in further dilution to you.

 

Future sales of our common stock by our existing shareholders may negatively impact the trading price of our common stock.

 

If a substantial number of our existing shareholders decide to sell shares of their common stock in the public market following the completion of this offering, the price at which our common stock trades could decline. Additionally, the public market’s perception that such sales might occur may also depress the price of our common stock.

 

The warrants may not have any value.

 

The warrants will be exercisable for      years from the date of the closing of the offering at an initial exercise price per share equal to $       . In the event that the price of a share does not exceed the exercise price of the warrants during the period when the warrants are exercisable, the warrants may not have any value.

 

Holders of the warrants will have no rights as a shareholder until they acquire our common stock.

 

Until you acquire shares upon exercise of your warrants, you will have no rights with respect to our common stock. Upon exercise of your warrants, you will be entitled to exercise the rights of a common shareholder only as to matters for which the record date occurs after the exercise date.

 

An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants at that time.

 

No warrant held by an investor will be exercisable and we will not be obligated to issue common stock unless at the time such holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current (or an exemption from registration is available) and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants (and an exemption from registration is not available), holders will be unable to exercise their warrants and we will not be required to net cash settle any such warrant exercise. If we are unable to issue the shares upon exercise of the warrants by an investor because there is no current prospectus relating to the common stock issuable upon exercise of the warrant (and an exemption from registration is not available) or the common stock has not been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants, the warrants will not expire until ten days after the date we are first able to issue the shares. Nevertheless, because an investor may not be able to exercise the warrants at the most advantageous time, the warrants held by an investor may have no value, the market for such warrants may be limited and such warrants may expire worthless.

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus may contain “forward-looking statements” that involve certain risks and uncertainties. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and intentions and are not historical facts and typically are identified by use of terms such as “may,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar words, although some forward-looking statements are expressed differently. You should be aware that the forward-looking statements included herein represent management’s current judgment and expectations, but our actual results, events and performance could differ materially from those in the forward-looking statements. Specifically, this prospectus contains forward-looking statements regarding:

 

●

our expectations regarding the potential benefits and synergies we can derive from our acquisitions;

 

●

our expectations to offer clients a broad array of interrelated services, the impact of such strategy on our future profitability and growth and our belief regarding our resulting market position;

 

●

our expectations regarding the growth potential of the content marketing, development and production markets;

 

●

our intention to expand into television production in the near future;

 

●

our belief regarding the transferability of 42West’s skills and experience to related business sectors and our intention to expand our involvement in those areas;

 

●

our intention to grow and diversify our portfolio of film and digital content and our beliefs regarding our strategies to accomplish such growth and diversification;

 

●

our beliefs regarding the impact of our strategic focus on content and creation of innovative content distribution strategies on our competitive position in the industry, use of capital, growth and long-term shareholder value;

 

●

our plan to balance our financial risks against the probability of commercial success for each project;

 

●

our intention to selectively pursue complementary acquisitions to enforce our competitive advantages, scale and grow and our belief that such acquisitions will create synergistic opportunities and increased profits and cash flows;

 

●

our expectations concerning our ability to derive future cash flows and revenues from the production, release and advertising of future web series on online platforms, and the timing of receipt of such cash flows and revenues;

 

●

our expectations concerning the timing of production and distribution of future feature films and digital projects;

 

●

our intention to source potential distribution partners for our web series, South Beach – Fever, and to enter into distribution agreements for future digital productions;

 

●

our expectation that we will continue to receive revenues from our motion picture, Max Steel from (i) international revenues expected to be derived through license agreements with international distributors and (ii) other secondary distribution revenues;

 

●

our intention to use our purchased scripts for future motion picture and digital productions;

 

 

 

19

 

 

●

our expectations to raise funds through loans, additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of financing alternatives, including the proceeds from this offering;

 

●

our beliefs regarding the merits of claims asserted in the class action against 42West and other defendants and our defenses against such claims; and

 

●

our intention to implement improvements to address material weaknesses in internal control over financial reporting.

 

 These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:

 

●

our ability to realize the anticipated benefits of the 42West acquisition, including synergies, expanded interrelated service offerings, growth and increased revenues;

 

●

our ability to accurately predict 42West’s clients’ acceptance of our differentiated business model that offers interrelated services;

 

●

our ability to profitably exploit the transferability of 42West’s skills and experience to related business sectors;

 

●

our ability to successfully identify and complete acquisitions in line with our growth strategy, and to realize the anticipated benefits of those acquisitions;

 

●

our ability to accurately interpret trends and predict future demand in the digital media and film industries;

 

●

our ability to repay our P&A Loan in accordance with the terms of the agreement so that we will be able to continue to receive revenues from Max Steel ;

 

●

adverse trends and changes in the entertainment or entertainment marketing industries that could negatively impact 42West’s operations and ability to generate revenues;

 

●

unpredictability of the commercial success of our current and future web series and motion pictures;

 

●

economic factors that adversely impact the entertainment industry, as well as advertising, production and distribution revenue in the online and motion picture industries;

 

●

our ability to identify, produce and develop online digital entertainment and motion pictures that meet industry and customer demand;

 

●

competition for talent and other resources within the industry and our ability to enter into agreements with talent under favorable terms;

 

●

our ability to attract and/or retain the highly specialized services of the 42West executives and employees and our CEO;

 

●

availability of financing from our CEO and other investors under favorable terms;

 

●

our ability to adequately address material weaknesses in internal control over financial reporting;

 

●

uncertainties regarding the outcome of pending litigation; and

 

●

the factors included under "Risk factors" in this prospectus.

 

Any forward-looking statement speaks only as to the date on which that statement is made. We assume no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.

 

 

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 UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

 

              The following unaudited pro forma combined statements of operations and related notes present our historical combined statements of operations with that of 42West, after giving effect to our acquisition of 42West that was completed on March 30, 2017.  The pro forma adjustments are based upon available information and assumptions that we believe are reasonable.

 

The unaudited pro forma combined statements of operations for the year ended December 31, 2016 are presented as if the acquisition had occurred on January 1, 2016. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2017 are presented as if the acquisition had occurred on January 1, 2017.  The historical statements of operations are adjusted in the unaudited pro forma combined statements of operations to give effect to pro forma events that are (1) directly attributable to the proposed acquisition, (2) factually supportable and (3) expected to have a continuing impact on the combined results.

 

Dolphin has not completed the detailed valuations necessary to estimate the fair value of the assets acquired and the liabilities assumed from 42West and the related allocations of purchase price, nor has Dolphin identified all adjustments necessary to conform 42West’s accounting policies to Dolphin’s accounting policies. Although the unaudited pro forma financial information presented herein do not contain a pro forma balance sheet, the preliminary estimated fair value of intangible assets was used to prepare certain adjustments to the combined statements of operations presented herein. Dolphin’s preliminary estimates of  the fair value of 42West’s assets and liabilities is based on discussions with 42West’s management, due diligence and preliminary work performed by third-party valuation specialists.  As the final valuations are being performed, increases or decreases in fair value of relevant balance sheet amounts will result in adjustments, some of which may affect the statement of operations, and may result in material differences from the information presented herein.

 

The unaudited pro forma adjustments are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated as of the dates indicated or that may be achieved in the future.  The actual results reported by the combined company in periods following the acquisition may differ significantly from those reflected in these unaudited pro forma combined financial information for a number of reasons, including cost saving synergies from operating efficiencies and the effect of incremental costs incurred to integrate the two companies.

 

The unaudited pro forma combined financial information should be read in conjunction with our historical consolidated financial statements and accompanying notes and the historical financial statements of 42West as of and for the years ended December 31, 2016 and 2015 included elsewhere in this prospectus.

 

 

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  Unaudited Pro Forma Combined Statements of Operations

For the year ended December 31, 2016

 

	Dolphin Digital Media, Inc. (Historical)	42West - Acquiree (Historical)	Pro Forma Adjustments	Notes	Pro Forma Combined
Revenues	$ 9,395,625	$ 18,563,749	$ —		$ 27,959,374
Operating expenses exclusive of depreciation and amortization	27,097,889	15,851,177	—		42,949,066
Operating (loss) income	(17,702,264 )	2,712,572	—		(14,989,692 )
Depreciation and amortization(1)	(476,250 )	(213,846 )	(997,333 )	(A)	(1,687,429 )
Interest expense	(4,241,841 )	(21,505 )			(4,263,346 )
Change in fair value of warrant liability	2,195,542	—	—		2,195,542
Warrant issuance expense	(7,372,593 )	—	—		(7,372,593 )
Loss on extinguishment of debt	(9,601,933 )	—	—		(9,601,933 )
Other income (expense)	9,660	(59,752 )	—		(50,092 )
Net (loss) income	$ (37,189,679 )	$ 2,417,469	$ (997,333 )		$ (35,769,543 )
Deemed dividend on preferred stock	5,247,227	—	—		5,247,227
Net loss attributable to common shareholders	$ (42,436,906 )	$ 2,417,469	$ (997,333 )		$ (41,016,770 )
Basic and Diluted Loss per Share	$ (9.67 )	—	—		$ (6.66 )
Weighted average number of shares used in share calculation	4,389,096	—	—	(E)	6,157,425

 

(1) Depreciation and amortization have been reclassified from operating (loss) income for presentation purposes.

 

See accompanying notes to the Unaudited Pro Forma Combined Statements of Operations

 

 

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Unaudited Pro Forma Condensed Combined Statements of Operations

For the six months ended June 30, 2017

 

	Dolphin Entertainment, Inc. (Historical)	42West - Acquiree (Historical)	Pro Forma Adjustments	Notes	Pro Forma Combined
Revenues	$ 3,226,962	$ 9,827,112	$ -		$ 13,054,074
					-
Operating expenses	4,687,734	8,497,452	-		13,185,186
					-
Operating (loss) income	(1,460,772 )	1,329,660	-		(131,112 )
					-
Amortization of intangible assets	-	-	(498,667 )	(A)	(498,667 )
Interest expense	(838,242 )	(14,318 )	-		(852,560 )
Loss on extinguishment of debt	(4,167 )	-	-		(4,167 )
Change in fair value of warrant liability	6,289,513	-	-		6,289,513
Change in fair value of put rights	-	-	(100,000 )	(B)	(100,000 )
Change in fair value of contingent consideration	-	-	(116,000 )	(B)	(116,000 )
Acquistion related expense	(537,708 )	(207,564 )	745,272	(C)	-
Loss on disposal of furniture, office equipment and leasehold improvements	(28,025 )	-	-		(28,025 )
Other expense	(16,000 )	$ -	-		(16,000 )
Total other income (expenses)	4,865,371	$ (221,882 )	$ 30,605		4,674,094
Provision for Income Taxes		(268,743 )	268,743	(D)	-
Net Income	$ 3,404,599	$ 839,035	$ 299,348		$ 4,542,982
Income Per Share:
Basic	$ 0.41				$ 0.52
Diluted	$ (0.30 )				$ (0.18 )
Weighted average number of share used in per share calculation:
Basic	8,293,343			(E)	8,661,185
Diluted	9,542,846				9,910,688

  

See accompanying notes to the Unaudited Pro Forma Combined Financial Information

 

 

23

 

 

NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

 

NOTE 1 – DESCRIPTION OF THE TRANSACTION

 

 On March 30, 2017, we completed our acquisition of 42West.  Pursuant to the terms of the purchase agreement we acquired from the members of 42West, 100% of the membership interests of 42West and 42West became our wholly-owned subsidiary. The consideration paid by us in connection with the 42West acquisition was approximately $18.7 million in shares of common stock, based on our 30-trading-day average stock price prior to the closing date of $9.22 per share as adjusted for the 1-to-2 reverse stock split (less certain working capital and closing adjustments, transaction expenses and payments of indebtedness), plus the potential to earn up to an additional $9.3 million in shares of common stock based on achieving certain financial targets. Pursuant to the terms of the purchase agreement, (i) 615,140 shares of common stock were issued on March 30, 2017, 172,275 shares of common stock were issued on April 13, 2017 and 59,320 shares of common stock were issued as employee stock bonuses on August 21, 2017 and (ii) 980,911 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, 2017.

 

Also in connection with the 42West acquisition, on March 30, 2017, we entered into put agreements with each of the sellers. Pursuant to the terms and subject to the conditions set forth in the put agreements, we granted the sellers the right, but not obligation, to cause us to purchase up to an aggregate of 1,187,094 of the shares of common stock received as consideration for a purchase price equal to $9.22 per share as adjusted for the 1-to-2 reverse stock split during certain specified exercise periods set forth in the put agreements up until December 2020.

 

NOTE 2 –BASIS OF PRO FORMA PRESENTATION

 

The unaudited pro forma combined statement of operations for the year ended December 31, 2016 and the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2017 combine our historical statement of operations with the historical statement of operations of 42West and (i) for the year ended December 31, 2016, was prepared as if the acquisition occurred on January 1, 2016 and (ii) for the six months ended June 30, 2017, was prepared as if the acquisition occurred on January 1, 2017.  The historical statements of operations are adjusted in the unaudited pro forma combined statements of operations to give effect to pro forma events that are (1) directly attributable to the proposed acquisition, (2) factually supportable, and (3) expected to have a continuing impact on the combined results. 

 

              We accounted for the acquisition in the unaudited pro forma combined statements of operations using the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations” or “ASC 805”.  In accordance with ASC 805, we used our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.  Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of the net tangible and identifiable assets acquired. 

 

The pro forma adjustments described below were developed based on management’s assumptions and estimates, including assumptions relating to the consideration paid and the allocation thereof to the assets acquired and liabilities assumed from 42West based on preliminary estimates to fair value.  The final purchase consideration and allocation of the purchase consideration will differ from that reflected in the unaudited pro forma combined statements of operations after the final valuation procedures are performed and the amounts are finalized. 

 

The unaudited pro forma combined statements of operations are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations of the combined company would have been had the acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations. 

 

              We expect to incur costs and realize benefits associated with integrating our operations and those of 42West.  The unaudited pro forma combined statements of operations do not reflect the costs of any integration activities or any benefits that may result from operating efficiencies or revenue synergies.  The unaudited pro forma combined statement of operations for the year ended December 31, 2016 and the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2017 do not reflect any non-recurring charges directly related to the acquisition that the combined companies incurred upon completion of the 42West acquisition. 

 

 

24

 

 

NOTE 3 – PRO FORMA ADJUSTMENTS

 

The following is a description of the unaudited pro forma adjustments reflected in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2016 and the six months ended June 30, 2017:

 

(A)

The Company adjusted the amortization of the acquired intangible asset to reflect annual amortization for the year ended December 31, 2016 and six months of amortization for the six months ended June 30, 2017. The amortization of the acquired intangible assets are calculated as follows:

 

	Acquisition Date Opening Balance	Useful Live (Years)	Annual Amortization	Quarterly Amortization
Intangible assets:
Customer relationships	$ 5,980,000	10	$ 598,000	$ 149,500
Trade name	2,760,000	10	$ 276,000	$ 69,000
Non-competition agreements	370,000	3	$ 123,833	$ 30,833
	$ 9,110,000		$ 997,333	$ 249,333

 

(B)

The Company adjusted the pro forma statement of operations for the six months ended June 30, 2017 to reflect changes in the fair value of the put rights in the amount of $100,000 and contingent consideration in the amount of $116,000.

 

(C)

The Company adjusted the pro forma statement of operations for the six months ended June 30, 2017 to eliminate $745,272 of acquisition related costs since they are not expected to have a continuing impact on the operating results of the combined entities.

 

(D)

The Company adjusted the pro forma statement of operations for the six months ended June 30, 2017 to eliminate $268,743 of provision for income taxes that was reflected on the historical statement of operations of 42West because the Company expects to have sufficient net accumulated operating tax losses to offset the net taxable revenues.

 

(E)

The Company recalculated income per share to give effect to the acquisition as if it had occurred on January 1, 2017.

 

	Historical	Pro Forma
Numerator	6/30/2017	6/30/2017
Net income (loss) attributable to Dolphin shareholders	$ 3,402,623	$ 4,542,982
Numerator for basic earnings per share	3,402,623	4,542,982
Change in fair value of G, H and I warrants	(6,289,513 )	(6,289,513 )
Numerator for diluted earnings per share	(2,886,890 )	(1,746,531 )
Denominator
Denominator for basic EPS - weighted-average shares	8,293,343	8,661,185
Effect of dilutive securities:
Warrants	756,338	756,338
Shares issuable in January 2018 as part of the Additional Consideration for the 42West acquisition	493,165	493,165
Denominator for diluted EPS - adjusted weighted-average shares assuming exercise of warrants	9,542,846	9,910,688
Basic income (loss) per share	$ 0.41	$ 0.52
Diluted income (loss) per share	$ (0.30 )	$ (0.18 )

   

 

25

 

USE OF PROCEEDS

 

We estimate that the net proceeds from our sale of the units in this offering, assuming a public offering price of $      per unit and all securities are sold, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $        million. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $       million. This amount does not include the proceeds which we may receive in connection with the exercise of the warrants. We cannot predict when or if the warrants will be exercised, and it is possible that the warrants may expire and never be exercised. The principal reason for this offering is to raise capital for general corporate purposes, including working capital.

 

We intend to use the net proceeds from this offering for (i) growth initiatives of our entertainment publicity business, including acquisitions of comparable businesses and groups with public relations expertise, (ii) the budget for our content production business and (iii) general corporate purposes, including working capital.

 

A $0.50 increase or decrease in the assumed public offering price of $      per unit would increase or decrease the net proceeds from this offering by approximately $     million, assuming that the number of units offered by us, as set forth on the cover page of this prospectus, and the assumed public offering price remain the same and after deducting the estimated underwriting discounts and commissions.

 

We will have broad discretion over the manner in which the net proceeds of the offering will be applied, and we may not use these proceeds in a manner desired by our shareholders. Although we have no present intention of doing so, future events may require us to reallocate the offering proceeds.

 

 

 

26

 

 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market for our Common Stock

 

Our common stock currently trades on the over-the-counter market and is quoted on the OTC Pink Marketplace under the symbol “DPDM”. The high and low bid information for each quarter since January 1, 2015, as quoted on the OTC Pink Marketplace, is as follows:

 

Quarter	High Bid	Low Bid
2017:
October 1 to 4	$ 8.15	$ 8.00
Third Quarter	$ 10.00	$ 6.06
Second Quarter	$ 10.50	$ 6.00
First Quarter	$ 12.00	$ 7.00
2016:
Fourth Quarter	$ 13.50	$ 4.00
Third Quarter	$ 14.50	$ 8.00
Second Quarter	$ 16.54	$ 10.80
First Quarter	$ 15.20	$ 3.20
2015:
Fourth Quarter	$ 12.00	$ 1.20
Third Quarter	$ 2.00	$ 1.20
Second Quarter	$ 2.40	$ 1.60
First Quarter	$ 3.60	$ 1.60

  

The over-the-counter quotations above reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not reflect actual transactions. Such quotes are not necessarily representative of actual transactions or of the value of our securities, and are, in all likelihood, not based upon any recognized criteria of securities valuation as used in the investment banking community.

 

The trading volume for our common stock is relatively limited. There is no assurance that an active trading market will continue to provide adequate liquidity for our existing shareholders or for persons who may acquire our common stock in the future.

 

The closing price per share of our common stock on October 4, 2017 was $ 8.00 , as reported by the OTC Pink Marketplace.

 

Holders of our Common Stock

 

As of October 2, 2017, an aggregate of 9,367,057 shares of our common stock were issued and outstanding and were owned by approximately 360 shareholders of record, based on information provided by our transfer agent.

 

Dividends

 

We have never paid dividends on our common stock and do not anticipate that we will do so in the near future.

 

 

27

 

 

DETERMINATION OF OFFERING PRICE

 

In determining the offering price for the units, and the exercise price of the warrants, we will consider a number of factors including, but not limited to, the current market price of our common stock, trading prices of our common stock over a period of time, the illiquidity and volatility of our common stock, prevailing market conditions, our historical performance, our future prospects and the future prospects of our industry in general, our capital structure, estimates of our business potential and earnings prospects, the present state of our development and an assessment of our management and the consideration of the above factors in relation to market valuation of companies engaged in businesses and activities similar to ours.

 

It is also possible that after the offering, the shares of common stock will not trade in the public market at or above the offering price.

 

 

 

 

 

 

28

 

  CAPITALIZATION

 

The following table summarizes our capitalization and cash and cash equivalents as of June 30, 2017:

 

●

on an actual basis; and

 

●

on an as adjusted basis to reflect (i) the sale by us of units in this offering on an assumed closing date of      , 2017, based on an assumed public offering price of $       per unit, assuming no exercise of the underwriters’ option to purchase additional units, and (ii) the deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as well as our financial statements and related notes and the other financial information, appearing elsewhere in this prospectus.

 

	As of June 30, 2017
	(Unaudited)
	Actual	As Adjusted
Cash and cash equivalents	$  1,071,813	$
Debt:
Current line of credit	$  750,000	$  750,000
Current debt (1)	12,892,544	12,892,544
Current loan from related party	1,818,659	1,818,659
Current note payable	850,000	850,000
Current put rights (2)	750,343	750,343
Non-current put rights (2)	3,149,657	3,149,657
Note payable	400,000	400,000
Total debt	$  20,611,203	$  20,611,203
Common stock, $0.015 par value, 200,000,000 shares authorized, 9,345,396 issued and outstanding, actual, and , issued and outstanding, as adjusted	$  140,181
Series C Convertible Preferred stock, $0.001 par value, 50,000 shares authorized, 50,000 issued and outstanding	1,000	1,000
Additional paid in capital	93,243,840
Accumulated deficit	(96,409,581 )
Total stockholders’ deficit	(3,024,560 )
Total capitalization	$  17,186,643	$

_________

(1)	Consists of debt of our subsidiaries used to produce and pay the print and advertising expenses of Max Steel .
(2)	Consists of our obligation to purchase up to 1,070,503 shares of our common stock from the sellers of 42West during certain specified exercise periods up until December 2020, pursuant to put agreements. For a discussion of the terms of the put agreements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The number of shares of our outstanding common stock, actual and as adjusted, excludes:

 

●

1,612,115 shares of our common stock issuable upon the exercise of outstanding warrants having exercise prices ranging from $6.20 to $10.00 per share;

●

shares of our common stock issuable upon the conversion of 50,000 shares of Series C Convertible Preferred Stock outstanding. For a discussion of the conditions upon which the shares of Series C Convertible Preferred Stock become convertible, and the number of shares of common stock into which such preferred stock would be convertible upon satisfaction of such conditions, see “Description of Securities—Series C Convertible Preferred Stock”;

●

shares of our common stock issuable in connection with the 42West acquisition as follows: (i) 980,911 shares of our common stock that we will issue to the sellers on January 2, 2018 and (ii) up to 981,563 shares of our common stock that we may issue to the sellers based on the achievement of specified financial performance targets over a three-year period as set forth in the membership interest purchase agreement;

●

78,757 shares of our common stock issuable upon the conversion of seven convertible promissory notes in the aggregate principal amount of $725,000 (calculated based on the 90-trading day average price per share as of October 2, 2017). For a discussion of the terms of conversion of the promissory notes and the number of common stock into which such promissory notes would be convertible, see “Description of Securities—Convertible Promissory Notes;” and

●

940,680 shares of our common stock reserved for future issuance under our 2017 Equity Incentive Plan.

  

 

29

 

 DILUTION

 

If you invest in the securities being offered by this prospectus, you will suffer immediate and substantial dilution in the net tangible book value per share of common stock. Our net tangible deficit as of June 30, 2017 was approximately $(26.2) million, or approximately $(2.81) per share. Net tangible deficit per share represents our total tangible assets less total tangible liabilities, divided by the number of shares of common stock outstanding as of June 30, 2017.

 

Dilution in net tangible book value per share represents the difference between the public offering price per unit paid by purchasers in this offering, attributing no value to the warrants offered hereby, and the net tangible book value per share of our common stock immediately after this offering. After giving effect to the sale by us of units in this offering, assuming all units are sold, at a public offering price of $      per unit and attributing no value to the warrants, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of June 30, 2017 would have been approximately $     million, or approximately $    per share of common stock. This represents an immediate increase of $    in net tangible book value per share to our existing shareholders and an immediate dilution of $     per share to purchasers of securities in this offering. The following table illustrates this per share dilution:

 

Assumed public offering price per unit		$
Net tangible book value deficit per share as of June 30, 2017		$	(2.81)
Increase in net tangible book value per share attributable to new investors		$
Adjusted net tangible book value deficit per share as of June 30, 2017, after giving effect to the offering		$
Dilution per share to new investors in the offering		$

 

If the underwriters exercise their over-allotment option in full, the adjusted net tangible book value will increase to $     per share, representing an immediate dilution of $       per share to new investors, assuming that the assumed public offering price remains the same and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. Investors exercising their warrants may experience additional dilution.

 

The above discussion and tables do not include the following:

 

●

shares of common stock issuable upon the exercise of the warrants offered hereby;

●

1,612,115 shares of our common stock issuable upon the exercise of outstanding warrants having exercise prices ranging from $6.20 to $10.00 per share;

●

shares of our common stock issuable upon the conversion of 50,000 shares of Series C Convertible Preferred Stock outstanding. For a discussion of the conditions upon which the shares of Series C Convertible Preferred Stock become convertible, and the number of shares of common stock into which such preferred stock would be convertible upon satisfaction of such conditions, see “Description of Securities—Series C Convertible Preferred Stock”;

●

Shares of our common stock issuable in connection with the 42West acquisition as follows: (i) 980,911 shares of our common stock that we will issue to the sellers on January 2, 2018 and (ii) up to 981,563 shares of our common stock that we may issue to the sellers based on the achievement of specified financial performance targets over a three-year period as set forth in the membership interest purchase agreement;

●

78,757 shares of our common stock issuable upon the conversion of seven convertible promissory notes in the aggregate principal amount of $725,000 (calculated based on the 90-trading day average price per share as of October 2, 2017). For a discussion of the terms of conversion of the promissory notes and the number of common stock into which such promissory notes would be convertible, see “Description of Securities—Convertible Promissory Notes;” and

●

940,680 shares of our common stock reserved for future issuance under our 2017 Equity Incentive Plan.

 

In addition, we may be required to purchase up to 1,070,503 shares of our common stock from the sellers during certain specified exercise periods up until December 2020, pursuant to put agreements.  For a discussion of the terms of the put agreements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

30

 

SELECTED FINANCIAL DATA

 

The following table includes our selected historical financial data. The historical financial data as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015 have been derived from our audited financial statements, which are included elsewhere in this prospectus. The historical financial data as of December 31, 2014 and for the year ended December 31, 2014 have been derived from our audited financial statements, which are not included in this prospectus. The historical financial data as of June 30, 2017 and for the six months ended June 30, 2017 and 2016 have been derived from our unaudited financial statements, which are included elsewhere in this prospectus. Our financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. The results indicated below are not necessarily indicative of our future performance.

 

	For the year ended December 31,			For the six months ended June 30,
	2014	2015(1)	2016	2016	2017
	(audited)			(unaudited)
Revenues:
Production and distribution	51,192	3,031,073	9,367,222	4,157	3,226,962
Entertainment publicity	—	—	—	—	5,137,556
Service	2,000,000	—	—	—	—
Membership	19,002	69,761	28,403	21,028	—
Total Revenue	2,070,194	3,100,834	9,395,625	25,185	8,364,518
Expenses:
Direct costs	159,539	2,587,257	10,661,241	2,429	2,500,772
Distribution and marketing	—	213,300	11,322,616	—	629,493
Selling, general and administrative	1,533,211	1,845,088	1,245,689	562,576	1,213,400
Legal and professional	—	2,392,556	2,405,754	967,531	997,434
Payroll	1,630,369	1,435,765	1,462,589	751,202	3,802,511
Loss before other income (expense)	(1,252,925 )	(5,373,132 )	(17,702,264 )	(2,258,553 )	(779,092 )
Other Income (Expenses):
Other income	40,000	96,302	9,660	9,660	(16,000 )
Amortization of loan fees	—	—	(476,250 )	—	—
Amortization of intangible assets	—	—	—	—	(249,333 )
Change in fair value of warrant liability	—	—	2,195,542	—	6,289,513
Change in fair value of put rights	—	—	—	—	(100,000 )
Loss on disposal of furniture, office equipment and leasehold improvements	—	—	—	—	(28,025 )
Change in fair value of contingent consideration	—	—	—	—	(116,000 )
Warrant issuance expense	—	—	(7,372,593 )	—	—
Loss on extinguishment of debt	—	—	(9,601,933 )	(5,843,811 )	(4,167 )
Acquisition related costs	—	—	—	—	(745,272 )
Interest expense	(660,580 )	(3,559,532 )	(4,241,841 )	(3,155,076 )	(849,001 )
Total Other Income (Expenses)	(620,580 )	(3,463,230 )	(19,487,415 )	(8,989,227 )	4,181,715
Net Income (Loss)	$ (1,873,505 )	$ (8,836,362 )	$ (37,189,679 )	$  (11,247,780 )	$  3,402,623
Net Income attributable to noncontrolling interest	4,750	17,440	—	5,257	—
Net Loss attributable to Dolphin Films, Inc.	—	(4,786,341 )	—	—	—
Net Loss attributable to Dolphin Digital Media, Inc.	(1,878,255 )	(4,067,461 )	(37,189,679 )	(11,253,037 )	3,402,623
	$ (1,873,505 )	$ (8,836,362 )	$ (37,189,679 )	$  (11,247,780 )	$  3,402,623
Deemed dividend on preferred stock	—	—	5,247,227	(5,227,247 )	—
Net loss attributable to common shareholders	$ (1,873,505 )	$ (8,836,362 )	$ (42,436,906 )	$  (16,475,027 )	$  3,402,623
Income (Loss) Per Share
Basic	$ (0.92 )	$ (4.32 )	$ (9.67 )	$  (5.45 )	$  0.41
Diluted	$ (0.92 )	$ (4.32 )	$ (9.67 )	$  (5.45 )	$  (0.30 )
Weighted average number of shares used in per share calculation:
Basic	2,047,309	2,047,309	4,389,097	3,025,448	8,293,343
Diluted	2,047,309	2,047,309	4,389,097	3,025,448	9,542,846

 

 

31

 

 

	As of December 31,			As of June 30,
	2014	2015(1)	2016	2017
	(audited)			(unaudited)
Balance Sheet Data:
Cash and cash equivalents	$ 198,470	$ 2,392,685	$ 662,546	$  1,071,813
Restricted cash	—	—	1,250,000	—
Capitalized production costs	693,526	15,170,768	4,654,013	2,626,461
Intangible assets	—	—	—	8,860,667
Goodwill	—	—	—	14,336,919
Total Assets	$ 1,493,240	$ 21,369,113	$ 14,197,241	$  35,544,894
Total Liabilities	10,285,083	54,233,031	46,065,038	38,569,454
Total Stockholders’ Deficit	(8,791,843 )	(32,863,918 )	(31,867,797 )	(3,024,560 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

(1)	Financial information has been retrospectively adjusted for our acquisition of Dolphin Films. See Notes 1 and 4 to the consolidated financial statements included elsewhere in this prospectus.

 

 

32

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and the notes thereto, which are included elsewhere in this prospectus. The following discussion includes forward-looking statements that involve certain risks and uncertainties, including, but not limited to, those described in “Risk Factors”. Our actual results may differ materially from those discussed below. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors”.

 

Overview

 

We are a leading independent entertainment marketing and premium content development company. Through our recent acquisition of 42West, we provide expert strategic marketing and publicity services to all of the major film studios, and many of the leading independent and digital content providers, as well as for hundreds of A-list celebrity talent, including actors, directors, producers, recording artists, athletes and authors. The strategic acquisition of 42West brings together premium marketing services with premium content production, creating significant opportunities to serve our respective constituents more strategically and to grow and diversify our business. Our content production business is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. We produce original feature films and digital programming primarily aimed at family and young adult markets.

 

On March 30, 2017, we acquired 42West, an entertainment public relations agency offering talent publicity, strategic communications and entertainment content marketing. As consideration for the 42West acquisition, we paid approximately $18.7 million in shares of common stock, par value $0.015, based on our company’s 30-trading-day average stock price prior to the closing date of $9.22 per share, as adjusted for the 1-to-2 reverse stock split, (less certain working capital and closing adjustments, transaction expenses and payments of indebtedness), plus the potential to earn up to an additional $9.3 million in shares of common stock. As a result, we (i) issued 615,140 shares of common stock on the closing date, 172,275 shares of common stock to certain 42West employees on April 13, 2017 and 59,320 shares of common stock as employee stock bonuses on August 21, 2017 and (ii) will issue 980,911 shares of common stock on January 2, 2018. In addition, we may issue up to 981,563 shares of common stock based on the achievement of specified financial performance targets over a three-year period as set forth in the membership interest purchase agreement.

 

Prior to its acquisition, 42West was the largest independently-owned public relations firm in the entertainment industry. Among other benefits, we believe that the 42West acquisition will strengthen and complement our current content production business, while expanding and diversifying our operations.

 

The principal sellers have each entered into employment agreements with us and will continue as employees of our company until March 2020. The nonexecutive employees of 42West were retained as well. In connection with the 42West acquisition, pursuant to put agreements we granted the sellers the right, but not the obligation, to cause us to purchase up to an aggregate of 1,187,094 of their shares of common stock received as consideration for a purchase price equal to $9.22 per share, as adjusted for the 1-to-2 reverse stock split, during certain specified exercise periods up until December 2020. During the six months ended June 30, 2017, certain of the sellers exercised these rights and we purchased 75,919 shares of our common stock for an aggregate purchase price of $700,000. Subsequent to the six months ended June 30, 2017, we purchased an additional 40,672 shares of our common stock for $375,000 from certain of the sellers who exercised their put rights.

 

In connection with the 42West acquisition, we acquired an estimated $9.1 million of intangible assets and recorded approximately $14 million of goodwill. The purchase price allocation and related consideration for the intangible assets and goodwill are provisional and subject to completion and adjustment. We amortize our intangible assets over useful lives of between 3 and 10 years. We have recorded amortization in the amount of approximately $0.2 million during the six months ended June 30, 2017.

 

 

33

 

 

On March 7, 2016, we acquired Dolphin Films from Dolphin Entertainment, LLC, an entity wholly owned by our President, Chairman and Chief Executive Officer, Mr. William O’Dowd, IV. Dolphin Films is a content producer of family feature films. In 2016, we released our feature film, Max Steel , which was produced by Dolphin Films. All financial information has been retrospectively adjusted at the historical values of Dolphin Films, as the merger was between entities under common control.

 

Effective May 10, 2016, we amended our Articles of Incorporation to effectuate a 1-to-20 reverse stock split.

 

Effective July 6, 2017, we amended our Articles of Incorporation to (i) change our name to Dolphin Entertainment, Inc.; (ii) cancel previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock; (iii) reduce the number of Series C Convertible Preferred Stock (described below) outstanding in light of our 1-to-20 reverse stock split from 1,000,000 to 50,000 shares; and (iv) clarify the voting rights of the Series C Convertible Preferred Stock that, except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred.'

 

Effective September 14, 2017, we amended our Amended and Restated Articles of Incorporation to effectuate a 1-to-2 reverse stock split. Shares of common stock have been retrospectively adjusted to reflect the reverse stock split in the following management discussion and analysis.

 

As a result of the acquisition of 42West, we have determined that as of the second quarter of 2017, we operate in two reportable segments, the entertainment publicity division and the content production division. The entertainment publicity division is comprised of 42West and provides clients with diversified services, including public relations, entertainment content marketing and strategic marketing consulting. The content production division is comprised of Dolphin Films and Dolphin Digital Studios and specializes in the production and distribution of digital content and feature films.

  

Going Concern

 

In the audit opinion for our financial statements as of and for the year ended December 31, 2016, our independent auditors included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern based upon our net loss for the year ended December 31, 2016, our accumulated deficit as of December 31, 2016 and our level of working capital. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is planning to raise any necessary additional funds through loans and additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives, including the proceeds from this offering; however, there can be no assurance that we will be successful in raising any necessary additional loans or capital. Such issuances of additional securities would further dilute the equity interests of our existing shareholders, perhaps substantially.

 

Revenues

 

During the year ended December 31, 2015, we derived revenue through (1) the online distribution rights of our web series, South Beach – Fever and international distribution rights to our motion picture, Believe ; and (2) a portion of fees obtained from the sale of memberships to online kids clubs. During the year ended December 31, 2016, our primary source of revenue was from the release of our motion picture, Max Steel . During the six months ended June 30, 2016, we derived revenues from a portion of fees obtained from the sale of memberships to online kids clubs and international distribution rights of our motion picture, Believe . During the six months ended June 30, 2017, we derived the majority of our revenues from our recently acquired subsidiary 42West. 42West derives its revenues from providing talent publicity, strategic communications and entertainment content marketing. During the six months ended June 30, 2017, revenues from production and distribution were derived from the release of our motion picture, Max Steel . The table below sets forth the components of revenue for the years ended December 31, 2015 and 2016 and for the six months ended June 30, 2016 and 2017:

 

 

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	For the year ended   December 31,		For the six months ended June 30,
Revenues:	2015	2016	2016	2017
Production and distribution	98.0 %	99.7 %	16.5 %	38.6 %
Entertainment publicity	0.0 %	0.0 %	0.0 %	61.4 %
Membership	2.0 %	0.3 %	83.5 %	0.0 %
Total revenue	100.0 %	100.0 %	100.0 %	100.0 %

 

Dolphin Digital Studios

 

In April 2016, we entered into a co-production agreement to produce Jack of all Tastes , a digital project that showcases favorite restaurants of NFL players. The show was produced during 2016 throughout several cities in the U.S. The show was released on Destination America, a digital cable and satellite television channel, on September 9, 2017 and we do not expect to derive any revenues from this initial release. We are currently sourcing distribution platforms in which to release completed projects and those for which we have the rights, and which we intend to produce. We earn production and online distribution revenue solely through the following:

 

●

Producer’s Fees – We earn fees for producing each web series, as included in the production budget for each project. We either recognize producer’s fees on a percentage of completion or a completed contract basis depending on the terms of the producer agreements, which we negotiate on a project by project basis. During 2016, we began production of our new web series but it had not been completed as of June 30, 2017. In addition, we concentrated our efforts in identifying potential distribution partners.

●

Initial Distribution/Advertising Revenue – We earn revenues from the distribution of online content on advertiser supported video-on-demand, or AVOD, platforms. Distribution agreements contain revenue sharing provisions which permit the producer to retain a percentage of all domestic and international advertising revenue generated from the online distribution of a particular web series. Typically, these rates range from 30% to 45% of such revenue. We have previously distributed our productions on various online platforms including Yahoo!, Facebook, Hulu and AOL. No revenues from this source have been derived during the six months ended June 30, 2017 and 2016.

●

Secondary Distribution Revenue – Once our contractual obligation with the initial online distribution platform expires, we have the ability to derive revenues from distributions of the web series in ancillary markets such as DVD, television and subscription video-on-demand, or SVOD. No revenues from this source have been derived during the years ended December 31, 2015 and 2016 or during the six months ended June 30, 2016 and 2017. We intend to source potential secondary distribution partners for our web series, South Beach–Fever , that was released in 2015, once our agreement with the initial distributor expires.

 

 

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Dolphin Films

 

During the years ended December 31, 2015 and 2016, we derived revenues through the international distribution of the motion picture, Believe . During the six months ended June 30, 2017, we derived revenues from Dolphin Films primarily through the domestic and international distribution of our motion picture, Max Steel .

 

The production of the motion picture, Max Steel , was completed during 2015 and released in the United States on October 14, 2016. The motion picture did not perform as well as expected domestically but we have secured approximately $8.2 million in international distribution agreements. Unamortized film costs are to be tested for impairment whenever events or changes in circumstances indicate that the fair value of the film may be less than its unamortized costs. We determined that Max Steel’s domestic performance was an indicator that the capitalized production costs may need to be impaired. We used a discounted cash flow model to help determine the fair value of the capitalized production costs and determined that the carrying value of the capitalized production costs were below the fair value and recorded an impairment of $2 million during 2016.

 

Revenues from the motion picture, Max Steel , were generated from the following sources:

 

●

Theatrical – Theatrical revenues were derived from the domestic theatrical release of motion pictures licensed to a U.S. theatrical distributor that had agreements with theatrical exhibitors. The financial terms negotiated with the U.S. theatrical distributor provided that we receive a percentage of the box office results, after related distribution fees.

●

International – International revenues were derived through license agreements with international distributors to distribute our motion pictures in an agreed upon territory for an agreed upon time. Several of the international distribution agreements were contingent on a domestic wide release that occurred on October 14, 2016.

●

Other – Dolphin Films’ U.S. theatrical distributor has existing output arrangements for the distribution of productions to home entertainment, video-on-demand, or VOD, pay-per-view, or PPV, electronic-sell-through, or EST, SVOD and free and pay television markets. The revenues expected to be derived from these channels are based on the performance of the motion picture in the domestic box office. We anticipate that the revenues from these channels will be received in 2017 and thereafter.

 

Our ability to receive additional revenues from Max Steel depends on the ability to repay our loans under our production service agreement and prints and advertising loan agreement from the profits of Max Steel. MaxSteel did not generate sufficient funds to repay either of the loans when they became due. As a result, we may lose our copyright from the film and will, consequently, no longer receive revenues related to Max Steel . The film is not expected to generate sufficient funds to repay these loans. For a discussion of the terms of such agreements, see “Liquidity and Capital Resources” below.

 

Project Development and Related Services

 

We have a development team that dedicates a portion of its time and resources to sourcing scripts for future developments. The scripts can be for either digital or motion picture productions. During 2015 and 2016, we acquired the rights to certain scripts, one that we intend to produce in the fourth quarter of 2017 and the others in 2018. During the six months ended June 30, 2017, we acquired the rights to a book from which we intend to develop a script and produce in 2018. We have not yet determined if these projects would be produced for digital or theatrical distribution.

 

Entertainment Publicity

 

Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We have a stable client base and continue to grow organically through referrals and actively soliciting new business. Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We have a stable client base and continue to grow organically through referrals and actively soliciting new business. We earn revenues primarily from three sources. We provide entertainment marketing services under multiyear master service agreements in exchange for fixed project-based fees ranging from $25,000 to $300,000 per project. We have numerous projects per year per client for durations between three and six months. We provide talent publicity services in exchange for monthly fees of approximately $5,000 per client. We provide strategic communications services in exchange for monthly fees ranging from $10,000 to $30,000 per client.

 

 

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●

Entertainment Content Marketing – We earn fees from providing marketing direction, public relations counsel and media strategy for productions (including theatrical films, DVD and VOD releases, television programs, and online series) as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. Our capabilities include worldwide studio releases, independent films, television programming and web productions. In addition, we provide entertainment marketing services in connection with film festivals, awards campaigns, event publicity and red carpet management. As part of our services we offer marketing and publicity services that are tailored to reach diverse audiences. Our clients for this type of service may include major studios and independent producers for whom they create strategic multicultural marketing campaigns and provide strategic guidance aimed at reaching diverse audiences.

 

●

Talent Publicity – We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including television and film stars, recording artists, authors, models, athletes, and theater actors. Our talent roster includes Oscar- and Emmy-winning actors and Grammy-winning singers and musicians and New York Times best-selling authors. Our services in this area include ongoing strategic counsel, media relations, studio, network, charity, corporate liaison and event and tour support. Many of our clients have been with 42West since it was founded in 2004. Our services may be ongoing or related to a specific project that our talent is associated with.

   

●

Strategic Communication – We earn fees through our strategic communications team by advising high-profile individuals and companies faced with sensitive situations or looking to raise, reposition, or rehabilitate their public profiles. We also help studios and filmmakers deal with controversial movies.

 

Online Kids Clubs

 

We partnered with US Youth Soccer in 2012, and with United Way Worldwide in 2013, to create online kids clubs. Our online kids clubs derive revenue from the sale of memberships in the online kids clubs to various individuals and organizations. We shared in a portion of the membership fees as outlined in our agreements with the respective entities. During 2016, we terminated, by mutual accord, the agreement with United Way Worldwide. We have retained the trademark to the online kids club and will continue to operate the site. Pursuant to the terms of our agreement with US Youth Soccer, we notified them that we did not intend to renew our agreement that terminated on February 1, 2017. We operate our online kids club activities through our subsidiary, Dolphin Kids Clubs, LLC. On December 29, 2016, we entered into a purchase agreement to acquire the remaining 25% membership interest in Dolphin Kids Clubs and as a result, Dolphin Kids Clubs became our wholly owned subsidiary. As consideration for the purchase of the 25% membership interest, we issued Warrant J which was exercised to acquire 1,085,000 shares of our common stock at a purchase price of $0.03 per share. (See Note 10 to the consolidated financial statements included elsewhere in this prospectus for further discussion on the warrants).

 

For the years ended December 31, 2015 and 2016, we did not record significant revenues from the online kids clubs. For the six months ended June 30, 2016, we recorded $0.02 million of revenues from the online kids clubs. For the six months ended June 30, 2017, we did not derive any revenues from the online kids clubs. Membership revenues decreased during the six months ended June 30, 2017, as compared to the same period in the prior year mainly due to promotional efforts made by a consultant that we hired to promote Club Connect. That consultant is no longer providing services to our company. During the six months ended June 30, 2017, management decided to discontinue the online kids clubs at the end of this year to dedicate a majority of our time and resources to the entertainment publicity business and the production of feature films and digital content.

 

 

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Expenses

 

Our expenses consist primarily of (1) direct costs; (2) distribution and marketing; (3) selling, general and administrative expenses; (4) payroll expenses; and (5) legal and professional fees.

 

Direct costs include certain cost of services related to our entertainment publicity business, amortization of deferred production costs, impairment of deferred production costs, residuals and other costs associated with production. Residuals represent amounts payable to various unions or “guilds” such as the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, based on the performance of the digital production in certain ancillary markets. Included within direct costs are immaterial impairments for any of our projects. Capitalized production costs are recorded at the lower of their cost, less accumulated amortization and tax incentives, or fair value. If estimated remaining revenue is not sufficient to recover the unamortized capitalized production costs for that title, the unamortized capitalized production costs will be written down to fair value.

 

Distribution and marketing expenses were incurred during the years ended December 31, 2015 and 2016 and included the costs of theatrical, prints and advertising, or P&A, and of DVD/Blu-ray duplication and marketing. Theatrical P&A includes the costs of the theatrical prints delivered to theatrical exhibitors and the advertising and marketing cost associated with the theatrical release of the picture. DVD/Blu-ray duplication represents the cost of the DVD/Blu-ray product and the manufacturing costs associated with creating the physical products. DVD/Blu-ray marketing costs represent the cost of advertising the product at or near the time of its release.

 

Selling, general and administrative expenses include all overhead costs except for payroll and legal and professional fees that are reported as a separate expense item. For the years ended December 31, 2015 and 2016, selling, general and administrative expenses included the commissions that we pay our advertising and distribution brokers, which can range up to 25% of the distribution and advertising revenue that we receive.

 

Legal and professional fees include fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants.

 

Payroll expenses include wages, payroll taxes and employee benefits.

 

Other Income and Expenses

 

During the years ended December 31, 2015 and 2016, Other income and expenses consisted primarily of (1) interest to Dolphin Entertainment, LLC, in connection with loans made to our company; (2) interest payments related to the Loan and Security Agreements entered into to finance the production of certain digital content and motion pictures; (3) loss on extinguishment of debt; (4) amortization of loan fees; (5) warrant issuance expense; and (6) change in fair value of derivative liability.

 

During the year ended December 31, 2016, we entered into agreements with certain debtholders, including Dolphin Entertainment, LLC, to convert an aggregate of $25,164,798 principal and interest into 2,516,480 shares of common stock at a price of $10.00 per share. The conversions occurred on days when the market price of the stock was between $12.00 and $13.98 per share. As a result, we recorded a loss on the extinguishment of the debt of approximately $6.3 million. In addition, we entered into (i) a termination agreement to terminate an equity finance agreement, (ii) a purchase agreement for the acquisition of 25% membership interest of Dolphin Kids Clubs and (iii) a debt exchange agreement to convert certain notes. As consideration for the three agreements, we issued Warrant J and Warrant K that entitled the warrant holder to purchase up to 1,170,000 shares of common stock at a price of $0.03 per share. As a result of the issuance of the shares, we recorded a loss on extinguishment of debt of approximately $3.3 million. In addition to Warrants J and K, we entered into a warrant purchase agreement whereby we agreed to issue Warrants G, H and I in exchange for a $50,000 payment that was used to reduce the exercise price of Warrant E. The warrant purchase agreement entitles the warrant holder to purchase shares of common stock as follows: (i) up to 750,000 shares of common stock prior to January 31, 2018, at $10.00 per share (ii) up to 250,000 shares of common stock at $12.00 per share prior to January, 31, 2019, and (iii) up to 250,000 shares of common stock at $14.00 per share prior to January 31, 2020. As of June 30, 2017 Warrants G, H and I were exercisable at a price of $9.22 per share. We determined that Warrants G, H, I, J, and K, which we refer to, collectively, as the New Warrants, should be accounted for as a derivative for which a liability is recorded in the aggregate and measured fair value in the consolidated balance sheets and changes in the fair value from one reporting period to the next are reported as income or expense. As a result of the issuance of the New Warrants, we recorded a warrant issuance expense of approximately $7.4 million and income of approximately, $2.2 million from changes in the fair value of the New Warrants from the dates of issuance through December 31, 2016.

 

 

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During the quarters ended June 30, 2016 and 2017, other income and expenses consisted primarily of (1) interest payments to Dolphin Entertainment, LLC in connection with loans made to our company; (2) interest payments related to the loan and security agreements entered into to finance the production of certain digital content and motion pictures; (3) loss on extinguishment of debt; (4) amortization of loan fees; (5) changes in the fair value of warrant liabilities; (6) changes in the fair value of put rights; (7) changes in the fair value of contingent consideration; and (8) loss from disposal of furniture, office equipment and leasehold improvements.

 

RESULTS OF OPERATIONS

 

Six months ended June 30, 2017 as compared to six months ended June 30, 2016

 

Revenues

 

For the six months ended June 30, 2017, our revenues were as follows:

 

	For the six months ended June 30,
Revenues:	2017	2016
Production and distribution	$ 3,226,962	$ 4,157
Entertainment publicity	5,137,556	–
Membership	–	21,028
Total revenues:	$ 8,364,518	$ 25,185

 

Revenues from production and distribution increased by $3.2 million for the six months ended June 30, 2017, as compared to the same period in the prior year primarily due to the revenue generated by the domestic and international distribution of Max Steel .

 

Expenses

 

For the six months ended June 30, 2017 and 2016, our primary operating expenses were as follows:

 

	For the six months ended June 30,
Expenses:	2017	2016
Direct costs	$  2,500,772	$  2,429
Distribution and marketing	629,493	–
Selling, general and administrative	1,213,400	562,576
Payroll	3,802,511	751,202
Legal and professional	997,434	967,531
Total expenses	$  9,143,610	$  2,238,738

 

Direct costs increased by approximately $2.5 million for the six months ended June 30, 2017 as compared to the same period in the prior year, mainly due to (i) the amortization of capitalized production costs related to the revenues earned from our motion picture, Max Steel and (ii) approximately $0.4 million of cost of services attributed to 42West.

 

Distribution and marketing expenses increased by approximately $0.6 million for the six months ended June 30, 2017 as compared to the same period in the prior year due to expenses , such as distributor fees and residuals, related to the distribution of Max Steel.

 

 

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Selling, general and administrative expenses increased by approximately $0.6 million for the six months ended June 30, 2017 as compared to the same period in the prior year. The June 30, 2016 amounts do not include 42West and approximately $0.9 million of selling, general and administrative expenses incurred during the six months ended June 30, 2017 are attributable to 42West. We had a decrease in selling, general and administrative expense related to the content production business of approximately $0.3 million as compared to the same period in the prior year primarily attributable to (i) a charitable contribution of $0.1 million made during the six months ended June 30, 2016 and (ii) selling costs for Max Steel of $0.2 million prior to its release in 2016.

  

 Payroll expenses increased by approximately $3.1 million for the six months ended June 30, 2017 as compared to the same period in the prior year. For the six months ended June 30, 2017, approximately $3.1 million of payroll expenses are attributable to 42West, which were offset by a decrease of approximately $0.1 million in payroll expenses, as compared to the same period in the prior year, primarily due to a reduction of headcount during the second quarter of 2016.

 

Legal and professional expenses increased by approximately $0.3 million for the period ended June 30 2017, as compared to the same period in the prior year primarily due to (i) fees paid for due diligence work related to financing that was later abandoned (ii) fees paid for consulting related to accounting treatment of certain transactions and (iii) increase in audit-related fees.

 

Other Income and Expenses

 

	For the six months ended June 30,
Other (Income) Expense:	2017	2016
Other (income) and expenses	$ 16,000	$ (9,660 )
Amortization of intangible assets	249,333	–
Loss on extinguishment of debt	4,167	5,843,811
Loss on disposal of furniture, office equipment and leasehold improvements	28,025	–
Acquisition related costs	745,272	–
Change in fair value of warrant liability	(6,289,513 )	–
Change in fair value of contingent consideration	116,000	–
Change in fair value of put rights	100,000	–
Interest expense	849,001	3,155,076
Other (Income)/expense	$ (4,181,715 )	$ 8,989,227

 

Interest expense decreased by approximately $2.3 million for the six months ended June 30, 2017, as compared to the same period in the prior year and was directly related to the extinguishment, during 2016, of loan and security agreements related to the First Group Film Funding, Second Group Film Funding and the Web Series Funding, each described under “Liquidity and Capital Resources”.

 

Change in fair value of warrant liability increased by approximately $6.3 million for the six months ended June 30, 2017, as compared to the same period in the prior year due to warrants that were issued in the fourth quarter of 2016 that were accounted for as derivative liabilities. We recorded the warrants at their fair value on the date of issuance and will record any changes to fair value at each balance sheet date on our consolidated statements of operation.

 

Loss on extinguishment of debt decreased by approximately $5.8 million for the six months ended June 30, 2017, as compared to the same period in prior year as a result of extinguishment of certain debt of our company. On March 29, 2016, we entered into ten individual subscription agreements with each of ten subscribers. The subscribers were holders of outstanding promissory notes issued pursuant to loan and security agreements. Pursuant to the terms of the subscription agreements, we agreed to convert $2,883,377 aggregate amount of principal and interest outstanding under the notes into an aggregate of 288,338 shares of common stock at $10.00 per share as payment in full of each of the notes. On the date of the conversion, our market price was $12.00 per share and we recorded a loss on the extinguishment of the debt of $576,676 on our condensed consolidated statement of operations.

 

 

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In addition, on March 4, 2016, we entered into a subscription agreement with Dolphin Entertainment, LLC. Pursuant to the terms of the subscription agreement, we agreed to convert $3,073,410 of principal and interest outstanding on a revolving promissory note into 307,341 shares of common stock at $10.00 per share. On the date of conversion, our market price was $12.00 per share and we recorded a loss on the extinguishment of the debt of $614,682 on our condensed consolidated statement of operations.

 

On May 31, 2016 and June 30, 2016, we entered into thirteen individual debt exchange agreements with parties to loan and security agreements under which we issued promissory notes to each of the parties. Pursuant to the debt exchange agreements, we agreed to convert an aggregate $17,551,480 in principal and accrued interest under the promissory notes into an aggregate of 1,755,148 shares of common stock at a price of $10.00 per share as payment in full of each of the promissory notes. On May 31, 2016 and June 30, 2016, the market price per share of common stock was $13.98 and $12.16, respectively. As a result, we recorded a loss on the extinguishment of debt of $4,652,453 on our condensed consolidated statement of operations for the six months ended June 30, 2016.

 

 We incurred approximately $0.7 million of legal, consulting and auditing costs related to our acquisition of 42West during the six months ended June 30, 2017.

 

Net Income (Loss)

 

Net income was approximately $3.4 million or $0.41 per share based on 8,293,343 weighted average shares outstanding and $(0.30) per share on a fully diluted basis based on 9,542,846 weighted average shares for the six months ended June 30, 2017. Net loss for the six months ended June 30, 2016 was approximately $11.2 million or $(5.44) per share based on 3,025,448 weighted average shares for the six months ended June 30, 2016.   Net income and losses for the six months ended June 30, 2017 and 2016 were related to the factors discussed above.

 

Year ended December 31, 2016 as compared to year ended December 31, 2015

 

Revenues

 

For the year ended December 31, 2016, our revenues were as follows:

 

	For the year ended December 31,
Revenues:	2016	2015
Production and distribution	$ 9,367,222	$ 3,031,073
Membership	28,403	69,761
Total revenue	$ 9,395,625	$ 3,100,834

 

Revenues from production and distribution increased by $6.3 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily due to the release of our motion picture, Max Steel , on October 14, 2016 and the recognition of domestic box office revenues and recognition of revenue from international licensing agreements of the motion picture. During the same period in 2015, we derived revenues from the online release of our web series, South Beach–Fever , on Hulu.

 

Revenues from membership fees decreased by $0.04 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015, as a result of one individual that purchased memberships to the online kids club for a group of schools in Louisiana during the second quarter of 2015.

 

 

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Expenses

 

For the years ended December 31, 2016 and 2015, our operating expenses were as follows:

 

	For the year ended December 31,
Expenses:	2016	2015
Direct costs	$ 10,661,241	$ 2,587,257
Distribution and marketing	11,322,616	213,300
Selling, general and administrative	1,245,689	1,845,088
Legal and professional	2,405,754	2,392,556
Payroll	1,462,589	1,435,765
Total expenses	$ 27,097,889	$ 8,473,966

 

Direct costs increased by approximately $8.1 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015, mainly due to (i) amortization of capitalized production costs related to the release of our motion picture, Max Steel ; (ii) a $2 million impairment of the capitalized production costs of Max Steel ; (iii) international sales agent fees paid for the distribution of our motion picture in international territories; and (iv) the impairment of the cost of a script that we decided not to produce. During the year ended December 31, 2015, direct costs consisted primarily of (i) amortization of capitalized production costs for our web series, South Beach – Fever ; (ii) a fee paid to our distributor in 2015 related to the release date of our motion picture; and (iii) impairment of the costs of scripts that we do not intend to immediately produce.

  

Distribution and marketing expenses increased by approximately $11.1 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015, mainly due to costs associated with the distribution and marketing for the release of our motion picture, Max Steel .

 

Selling, general and administrative expenses decreased by approximately $0.6 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015, mainly due to a contract for international distribution back office services that ended on December 31, 2015 and was not renewed for 2016.

 

Legal and professional fees remained relatively consistent between the year ended December 31, 2016 and the year ended December 31, 2015. The majority of our professional fees are related to consulting fees and legal fees that would be considered in the normal course of business for our industry. During the year ended December 31, 2016, we incurred approximately $0.5 million of legal and consulting fees directly related to the release of our motion picture. By contrast during the year ended December 31, 2015, we incurred $0.5 million of fees for services rendered by our advertising and distribution broker related to our web series.

 

Payroll expenses increased by approximately $0.03 million during the year ended December 31, 2016, as compared to the year ended December 31, 2015, mostly due to certain payroll costs capitalized during the production of our web series in 2015 and cost of living salary increases made at the beginning of 2016.

 

Other Income and Expenses

 

	For the year ended December 31,
Other Income and expenses:	2016	2015
Other income	$ 9,660	$ 96,302
Amortization of loan fees	(476,250 )	–
Change in fair value of warrant liability	2,195,542	–
Warrant issuance expense	(7,372,593 )	–
Loss on extinguishment of debt	(9,601,933 )	–
Interest expense	(4,241,841 )	(3,559,532 )
Total	$ (19,487,415 )	$ (3,463,230 )

 

 

 

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Interest expense increased by $0.7 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015, and was directly related to (i) interest related to the conversion of certain notes payable to shares of our common stock and (ii) interest related to the production and distribution loans of our motion picture.

 

During the year ended December 31, 2016, we amortized approximately $0.5 million of certain loan fees related to the financing obtained for the distribution and marketing expenses for the release of Max Steel .

 

During the year ended December 31, 2016, we entered into subscription agreements, termination agreements and debt exchange agreements, which we refer to, collectively, as the Conversion Agreements, to convert debt into shares of our common stock or to warrants to purchase shares of our common stock. These Conversion Agreements resulted in a loss on extinguishment of debt in the aggregate amount of $9.6 million due to the difference in the price per share in the Conversion Agreement and the market price per share on the date of the conversion. The following details the various agreements we entered into during the year ended December 31, 2016:

 

a)

We entered into thirteen individual agreements with parties to loan and security agreements under which we issued promissory notes to each of the parties. Pursuant to the terms of the debt exchange agreements, we converted an aggregate $3.75 million of principal and approximately $0.4 million of interest under the promissory notes into an aggregate of 420,455 shares of common stock at $10.00 per share as payment in full of each of the promissory notes. The market price per share was between $12.00 and $12.90 per share at the time of the conversions. As a result, we recorded a loss on extinguishment of debt related to these loan and security agreements of $0.9 million on our consolidated statement of operations.

 

b)

We entered into three debt exchange agreements with parties to equity finance agreements. Pursuant to the terms of the agreements, we converted an aggregate $0.3 million of principal and interest into an aggregate of 33,100 shares of our common stock at $10.00 per share as payment in full for each equity finance agreement. The market price per share was between $12.50 and $13.50 per share at the time of the conversions. As a result, we recorded a loss on extinguishment of debt related to these equity finance agreements of $0.1 million on our consolidated statements of operations. We also entered into a settlement agreement with a separate party to an equity finance agreement. Pursuant to the terms of the settlement agreement, we agreed to pay $0.2 million and recorded a loss on extinguishment of debt on our consolidated statement of operations of approximately $0.1 million related to this settlement agreement.

 

c)

We entered into a debt exchange agreement with a party to a kids club agreement. Pursuant to the terms of the agreements, we converted $0.06 million on principal and interest into 6,000 shares of our common stock at $10.00 per share as payment in full of the kids club agreement. The market price per share was $13.50 per share at the time of the conversion. As a result, we recorded $0.02 million of loss on extinguishment of debt on our consolidated statements of operations, related to this kids club agreement.

  

d)

We entered into a subscription agreement with Dolphin Entertainment, LLC. Pursuant to the terms of the subscription agreement, we converted $3.0 million of principal and interest outstanding on a revolving promissory note into 307,341 shares of our common stock at a price of $10.00 per share. At the time of the conversion, market price per share of common stock was $12.00. As a result, we recorded a loss on the extinguishment of debt of $0.6 million on its condensed consolidated statement of operations for the year ended December 31, 2016.

 

e)

We entered into various individual debt exchange agreements with parties to loan and security agreements under which we issued promissory notes to each of the parties. Pursuant to the debt exchange agreements, we agreed to convert an aggregate $17.9 million in principal and interest under the promissory notes into an aggregate of 1.8 million shares of common stock at a price of $10.00 per share as payment in full of each of the promissory notes. On the dates of conversion the market price per share of common stock was between $12.16 and $13.98 and as a result, we recorded a loss on the extinguishment of debt of $4.6 million our consolidated statements of operations.

 

 

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f)

We entered into a termination agreement and a debt exchange agreement whereby we issued Warrants J and K that entitled the holder to purchase shares of our common stock at a price of $0.03. In exchange the warrant holder agreed to convert an aggregate of $6.5 million of debt. Warrant K entitled the warrant holder to purchase up to 85,000 shares of our common stock and Warrant J entitled the warrant holder to purchase up to 1,085,000 but also includes consideration for the purchase of a 25% interest in Dolphin Kids Clubs. We recorded loss on extinguishment of debt of $3.2 million related to these agreements.

 

In addition to Warrants J and K discussed above, as previously described, we entered into a warrant purchase agreement whereby we agreed to issue Warrants G, H and I. We recorded $7.4 million of warrant issuance expense with respect to Warrants G, H and I. All of the warrants issued during 2016 were recorded as a derivative liability. We recorded the warrants at their fair value on the date of issuance and will record any changes to fair value at each balance sheet date as a change in the fair value of a derivative liability on our consolidated statements of operation. For the year ended December 31, 2016, we recorded $2.2 million of a change in the fair value of the derivative liability.

 

Net Loss

 

Net loss was approximately $37.2 million or $(9.67) per share of common stock, including a preferred stock deemed dividend of approximately $5.2 million for the year ended December 31, 2016 based on 4,389,097 weighted average shares outstanding as of December 31, 2016 and approximately $8.8 million or $(4.32) per share for the year ended December 31, 2015 based on 2,047,309 weighted average shares outstanding as of December 31, 2015. The increase in net loss between the years ended December 31, 2016 and 2015 was related to the factors discussed above.

 

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

Six months ended June 30, 2017 as compared to Six months ended June 30, 2016

 

Cash flows provided by operating activities increased by approximately $5.0 million from approximately $(2.3) million used for operating activities during the six months ended June 30, 2016 to approximately $2.7 million provided by operating activities during the six months ended June 30, 2017. This increase was primarily due to (i) $2.1 million of production tax incentives received (ii) approximately $2 million received from accounts receivable related to Max Steel and (iii) cash flows provided by 42West.

 

Cash flows from investing activities increased by approximately $1.2 million during the six months ended June 30, 2017 as compared to the same period in the prior year primarily due to restricted cash that became available and was used to pay a portion of our debt.

 

Cash flows used for financing activities increased by approximately $8.4 million during the six months ended June 30, 2017 from approximately $4.8 million provided by financing activities during the six months ended June 30, 2016 to approximately $3.5 million used for financing activities during the six months ended June 30, 2017 mainly due to (i) approximately $5.8 million used to repay the debt related to the production, distribution and marketing loans for Max Steel, (ii) $0.7 million used to pay the put rights exercised by the sellers of 42West pursuant to the put agreements and (iii) $0.5 million repaid to our CEO for advances made to the Company for working capital. In addition, we raised a net of $1.3 million more through the sale of our common stock during the six months ended June 30, 2016 than through various financing activities during the six months ended June 30, 2017.

 

As previously discussed, in connection with the 42West acquisition, we may be required to purchase from the sellers up to an aggregate of 1,187,094 of their shares of common stock at a price equal to $9.22 per share, as adjusted for the 1-to-2 reverse stock split, during certain specified exercise periods up until December 2020. Of that amount we may be required to purchase up to 227,766 shares in 2017, for an aggregate of up to $3.1 million. On April 14, 2017, the sellers of 42West, exercised put options in the aggregate amount of 43,382 shares of common stock and were paid an aggregate total of $0.4 million. On June 1, 2017, the principal sellers exercised put options in the aggregate amount of 32,538 shares of common stock and were paid an aggregate of $0.3 million.

 

As of June 30, 2017 and 2016, we had cash available for working capital of approximately $1.0 million and approximately $4.9 million, respectively, and a working capital deficit of approximately $18.5 million and approximately $21.1 million, respectively.

 

These factors, along with an accumulated deficit of $96.4 million as of June 30, 2017, raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise any necessary additional funds through loans and additional issuances of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives, including the proceeds from this offering. There is no assurance that we will be successful in raising additional capital. Such issuances of additional securities would further dilute the equity interests of our existing shareholders, perhaps substantially. We currently have the rights to several scripts that we intend to obtain financing to produce during 2017 and 2018 and release during 2018. We will potentially earn a producer and overhead fee for each of these productions. There can be no assurances that such productions will be released or fees will be realized in future periods. We expect to begin to generate cash flows from our other sources of revenue, including the distribution of at least one web series that, as discussed earlier has gone into production. With the acquisition of 42West, we are currently exploring opportunities to expand the services currently being offered by 42West to the entertainment community. There can be no assurance that we will be successful in selling these services to clients.

 

 

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In addition, we have a substantial amount of debt. We do not currently have sufficient assets to repay such debt in full when due, and our available cash flow may not be adequate to maintain our current operations if we are unable to repay, extend or refinance such indebtedness. As of June 30, 2017, our total debt was $20.6 million and our total stockholders’ deficit was approximately $2.9 million. Approximately $4 million of the total debt as of June 30, 2017 represents the fair value of put options in connection with the 42West acquisition, which may or may not be exercised by the sellers. Approximately $12.9 million of our current indebtedness ($9.7 million outstanding under the prints and advertising loan agreement plus $3.2 million outstanding under the production service agreement) was incurred by our Max Steel subsidiary and the Max Steel VIE. Repayment of these loans was intended to be made from revenues generated by Max Steel in the U.S. and outside of the U.S. These loans are non-recourse to us. Max Steel did not generate sufficient funds to repay either of these loans prior to the maturity date. As a result, we may lose the copyright for Max Steel and, consequently, will no longer receive any revenues from Max Steel .

 

               If we are not able to generate sufficient cash to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying digital or film productions, selling assets, restructuring or refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms or at all and our indebtedness may affect our ability to continue to operate as a going concern.

 

Year ended December 31, 2016 as compared to year ended December 31, 2015

 

Cash flows used in operating activities increased by approximately $7.9 million from approximately $(7.0) million used during the year ended December 31, 2015 to approximately $(14.9) million used during the year ended December 31, 2016. This increase was primarily due to the use of cash flows related to the release of our motion picture, Max Steel , as follows: (i) distribution and marketing fees of approximately $11.3 million, (ii) $0.9 million of deposits used to pay certain distribution fees related to the release, and (iii) $1.4 million of accounts payable paid. These are offset by cash received for sales of the motion picture in the amount of $4.8 million, and tax incentives in the amount of $0.7 million. We also received $0.05 million from the sale of warrants.

 

Cash flows from investing activities decreased by approximately $1.2 million. This decrease was due to a provision in the Max Steel loan and security agreement that required us to keep as collateral, an account at the financial institution that provided the loan.

 

Cash flows from financing activities increased by approximately $5.4 million from approximately $9.1 million for year ended December 31, 2015 to approximately $13.2 million for year ended December 31, 2016. The increase was primarily due to financing for the distribution and marketing costs for the release of our motion picture and repayment of the production loan from proceeds received from the motion picture. In addition, during the year ended December 31, 2016, we entered into various subscription agreements for the sale of our common stock for a total of $7.5 million. In comparison, during the same period in prior year, we received $3.2 million from a convertible note payable and received $2.4 million more of advances from our CEO.

 

Financing Arrangements

 

Prints and Advertising Loan

 

On August 12, 2016, Dolphin Max Steel Holding, LLC, or Max Steel Holdings, a wholly owned subsidiary of Dolphin Films, entered into a loan and security agreement, or the P&A Loan, providing for a $14.5 million non-revolving credit facility that matured on August 25, 2017. The loan is not secured by any other Dolphin entity and the only asset held by Max Steel Holdings is the copyright for the motion picture. The proceeds of the credit facility were used to pay a portion of the P&A expenses of the domestic distribution of our feature film, Max Steel . To secure Max Steel Holding's obligations under the P&A Loan, we granted to the lender a security interest in bank account funds totaling $1,250,000 pledged as collateral. During the six months ended June 30, 2017, we agreed to allow the lender to apply the $1,250,000 to the loan balance. The loan is partially secured by a $4.5 million corporate guaranty from a party associated with the motion picture, of which we have agreed to backstop $620,000. The lender has retained a reserve of $1.5 million for loan fees and interest. Amounts borrowed under the credit facility accrue interest at either (i) a fluctuating per annum rate equal to the 5.5% plus a base rate or (ii) a per annum rate equal to 6.5% plus the LIBOR determined for the applicable interest period. As of December 31, 2016, we recorded $12.5 million, including the reserve, related to this agreement. Approximately $11.0 million was recorded as distribution and marketing costs on our consolidated statement of operations for the year ended December 31, 2016, related to the release of the motion picture. As of June 30, 2017, we had an outstanding balance of $9,688,855, including the reserve, related to this agreement recorded on our condensed consolidated balance sheets.  On our condensed consolidated statement of operations for the six months ended June 30, 2017, we recorded (i) interest expense of $425,472 related to the P&A Loan and (ii) $500,000 in direct costs from loan proceeds that were not used by the distributor for the marketing of the film and returned to the lender.  There is no recourse to our company for the debt other than the copyright of the film.

 

 

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Production Service Agreement

 

During 2014, we entered into a financing deal in the amount of $10.4 million to produce Max Steel . The loan is partially secured by international distribution agreements made prior to the commencement of principal photography and tax incentives. The agreement contains repayment milestones to be made during the year ended December 31, 2015, that if not met, accrue interest at a default rate of 8.5% per annum above the published base rate of HSBC Private Bank (UK) Limited until the maturity on January 31, 2016 or the release of the movie. Due to delays in the release of the film, we were unable to make some of the scheduled payments and, pursuant to the terms of the agreement, we have accrued $1.1 million of interest at the default rate. The film was released October 14, 2016 and delivery to the international distributors has begun. During the year ended December 31, 2016, an aggregate of $4.2 million was received from the international distributors and tax incentives from the jurisdiction in which a portion of the film was produced. As of December 31, 2016 and June 30, 2017, we had outstanding balances of $6.2 million and $3.2 million, respectively, related to this debt on our condensed consolidated balance sheets. One of our subsidiaries is party to this agreement and there is no recourse to our company for the debt other than the copyright of the film.

 

42West Line of Credit

 

In 2008, 42West entered into a revolving line of credit with City National Bank, which matured on August 31, 2017. City National Bank agreed to extend the line of Credit to November 1, 2017 on substantially the same terms. The purpose of the line of credit was to provide 42West with working capital as needed from time to time. The maximum amount that can be drawn on the line of credit is $1,500,000. The line of credit bears interest computed as the greater of (a) three and one half percent per year or (b) the prime rate of City National Bank less one quarter of one percent, provided that the rate per annum never exceed 16%.  On April 27, 2017, we drew an additional $0.3 million from the line of credit to be used for working capital. The balance as of June 30, 2017 was $0.7 million.

 

Promissory Notes

 

On April 10 and April 18, 2017, we issued three promissory notes, maturing six months after issuance, to two separate lenders and received $300,000. On June 14, 2017, we issued a promissory note that matures two years after issuance, to a lender and received $400,000. We may prepay the promissory note, with no penalty, after the initial six months. On September 20, 2017, we issued a promissory note, maturing one year after issuance, to one of our directors, Allan Mayer, and received $150,000. Each of the five notes bear interest at a rate of 10% per annum, payable in 30-day installments. The proceeds from the notes were used for working capital.

 

Kids Club Agreements

 

During February 2011, we entered into two kids clubs agreements with individual parties, for the development of a child fan club for the promotion of a local university and its collegiate athletic program, which we refer to as a Group Kids Club. Under each kids club agreement, each party paid us $50,000 in return for the participation of future revenue generated by the Group Kids Club. Pursuant to the terms of each of the kids club agreements, the amount invested by the individual investor was to be repaid by the Group Kids Club, with a specified percentage of the Group Kids Club’s net receipts, until the total investment was recouped. Each individual party was to recoup its investment with a percentage of net revenue based upon a fraction, the numerator of which was the amount invested ($50,000), and the denominator of which was $500,000, which we refer to as the investment ratio. Thereafter, each individual party would share in a percentage of the net revenue of the Group Kids Club, in an amount equal to one half of the investment ratio. During 2015 and 2016, we made aggregate payments of $45,000 to the party to one of the kids clubs agreements. On July 18, 2016, we paid such party $15,000 in full settlement of our remaining obligations under such kids club agreement, and the agreement was terminated. On October 3, 2016, we entered into a debt exchange agreement and issued 6,000 shares of our common stock at an exchange price of $10.00 per share to terminate the remaining kids club agreement for (i) $10,000 plus (ii) the original investment of $50,000. On the date of the exchange agreement, the market price of our common stock was $13.50 and we recorded a loss on extinguishment of debt in the amount of $21,000 on our consolidated statement of operations.

  

 

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Equity Finance Agreements

 

During the years ended December 31, 2012 and 2011, we entered into equity finance agreements, for the future production of web series and the option to participate in the production of future web series. The investors contributed a total equity investment of $1,000,000 and had the ability to share in the future revenues of the relevant web series, on a pro rata basis, until the total equity investment was recouped and then would have shared at a lower percentage of the additional revenues. The equity finance agreements stated that prior to December 31, 2012, we could utilize all, or any portion, of the total equity investment to fund any chosen production. Per the equity finance agreements, we were entitled to a producer’s fee, not to exceed $250,000, for each web series that we produced before calculating the share of revenues owed to the investors. We invested these funds in eleven projects. On January 1, 2013, the production “cycle” ceased and the investors were entitled to share in the future revenues of any productions for which the funds invested were used. Two of the productions were completed and there was no producer gross revenue as defined in the equity finance agreements. The remaining projects were impaired and there are no future projects planned with funds from the equity finance agreements. As a result, we were not required to pay the investors any amount in excess of the existing liability already recorded as of December 31, 2015.

 

On June 23, 2016, we entered into a settlement agreement with one of the investors that had originally contributed $0.1 million. Pursuant to the terms of the settlement agreement, we made a payment of $0.2 million to the investor on June 24, 2016. On October 3, 2016, October 13, 2016 and October 27, 2016 we entered into debt exchange agreements with three investors to issue an aggregate amount of 33,100 shares of our common stock at an exchange price of $10.00 per share to terminate each of their equity finance agreements for a cumulative original investment amount of $0.3 million. The market price of our common stock on the date of the debt exchange agreement was between $12.50 and $13.50 and, as such, we recorded a loss on extinguishment of debt on our consolidated statement of operations in the amount of $0.1 million.

  

On December 29, 2016, we entered into a termination agreement with the remaining investor, whereby we mutually agreed to terminate the equity finance agreement in exchange for the issuance of Warrant K. Warrant K entitles the holder to purchase up to 85,000 shares of our common stock at a price of $0.03 prior to December 29, 2020. We recorded a loss on extinguishment of debt in the amount of $0.5 million on our consolidated statement of operations for the difference between the outstanding amount of the equity finance agreement and the fair value of Warrant K.

 

Loan and Security Agreements

 

First Group Film Funding

 

During the years ended December 31, 2013 and 2014, we entered into various loan and security agreements with individual noteholders for an aggregate principal amount of notes of $11,945,219 to finance future motion picture projects. During the year ended December 31, 2015, one of the noteholders increased its funding under its loan and security agreement for an additional $500,000 investment and we used the proceeds to repay $405,219 to another noteholder. Pursuant to the terms of the loan and security agreements, we issued notes that accrued interest at rates ranging from 11.25% to 12% per annum, payable monthly through June 30, 2015. During 2015, we exercised our option under the loan and security agreements, to extend the maturity date of these notes until December 31, 2016. In consideration of our exercise of the option to extend the maturity date, we were required to pay a higher interest rate, increasing 1.25% to a range between 12.50% and 13.25%. The noteholders, as a group, were to receive our entire share of the proceeds from these projects, on a prorata basis, until the principal investment was repaid. Thereafter, the noteholders, as a group, had the right to participate in 15% of our future profits from these projects (defined as our gross revenues of such projects less the aggregate amount of principal and interest paid for the financing of such projects) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund specific motion picture productions.

 

 

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On May 31, 2016 and June 30, 2016, we entered into various debt exchange agreements on substantially similar terms with certain of the noteholders to convert an aggregate of $11.3 million of principal and $1.8 million of interest into shares of common stock. Pursuant to the terms of such debt exchange agreements, we agreed to convert the debt at $10.00 per share and issued 1,315,149 shares of common stock. On May 31, 2016, the market price of a share of common stock was $13.98 and on June 30, 2016 it was $12.16. As a result, we recorded a loss on the extinguishment of debt on our consolidated statement of operations of $3.3 million for the year ended December 31, 2016.

 

Please see “Warrants” below for a discussion of the satisfaction of the last remaining note. As of June 30, 2017 and December 31, 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our condensed consolidated balance sheets.

 

Web Series Funding

 

During the years ended December 31, 2014 and 2015, we entered into various loan and security agreements with individual noteholders for an aggregate principal amount of notes of $4.0 million which we used to finance production of our 2015 web series, South Beach–Fever . Under the loan and security agreements, we issued promissory notes that accrued interest at rates ranging from 10% to 12% per annum payable monthly through August 31, 2015, with the exception of one note that accrued interest through February 29, 2016. During 2015, we exercised our option under the loan and security agreements to extend the maturity date of these notes until August 31, 2016. In consideration for our exercise of the option to extend the maturity date, we were required to pay a higher interest rate, increasing 1.25% to a range between 11.25% and 13.25%. Pursuant to the terms of the loan and security agreements, the noteholders, as a group, had the right to participate in 15% of our future profits generated by the series (defined as our gross revenues of such series less the aggregate amount of principal and interest paid for the financing of such series) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund the series.

 

During the year ended December 31, 2016, we entered into thirteen individual debt exchange agreements on substantially similar terms with the noteholders. Pursuant to the terms of the debt exchange agreements, we and each noteholder agreed to convert an aggregate of $3.8 million of principal and $0.4 million of interest into an aggregate of 420,455 shares of common stock at $10.00 per share as payment in full for each of the notes. On the dates of the exchange, the market price of our common stock was between $12.00 and $12.90 per share. As a result, we recorded a loss on the extinguishment of debt on our consolidated statement of operations $0.9 million for the year ended December 31, 2016, related to this transaction.

 

Please see “Warrants” below for a discussion of the satisfaction of the last remaining note. As of June 30, 2017 and December 31, 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our condensed consolidated balance sheets.

 

Second Group Film Funding

 

During the year ended December 31, 2015, we entered into various loan and security agreements with individual noteholders for an aggregate principal amount of notes of $9.3 million to fund a new group of film projects. Of this amount, notes with an aggregate principal value of $8.8 million were issued in exchange for debt that had originally been incurred by Dolphin Entertainment, LLC, primarily related to the production and distribution of the motion picture, Believe . The remaining $0.5 million was issued as a note in exchange for cash. Pursuant to the loan and security agreements, we issued notes that accrued interest at rates ranging from 11.25% to 12% per annum, payable monthly through December 31, 2016. We had the option to extend the maturity date of these notes until July 31, 2018. If we chose to exercise our option to extend the maturity date, we would have been required to pay a higher interest rate, increasing 1.25% to a range between 11.25% and 13.25%. The noteholders, as a group, would have received our entire share of the proceeds from these projects, on a prorata basis, until the principal investment was repaid. Thereafter, the noteholders, as a group, had the right to participate in 15% of our future profits from such projects (defined as our gross revenues of such projects less the aggregate amount of principal and interest paid for the financing of such projects) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund specific motion picture productions.

 

 

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On May 31, 2016 and June 30, 2016, we entered into various debt exchange agreements on substantially similar terms with certain of the noteholders to convert an aggregate of $4.0 million of principal and $0.3 million of interest into shares of common stock. Pursuant to such debt exchange agreements, we agreed to convert the debt at $10.00 per share and issued 434,435 shares of common stock. On May 31, 2016, the market price of a share of the common stock was $13.98 and on June 30, 2016, it was $12.16. As a result, we recorded a loss on the extinguishment of debt on our consolidated statement of operations of $1.3 million for the year ended December 31, 2016. In addition, during 2016, we repaid one of our noteholders its principal investment of $0.3 million.

 

Please see “Warrants” below for a discussion of the satisfaction of the last remaining note. As of June 30, 2017 and December 31, 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements on our condensed consolidated balance sheets.

 

Subscription Agreements

 

2015 Convertible Note Agreement

 

On December 7, 2015 we entered into a subscription agreement with an investor to sell up to $7 million in convertible promissory notes of our company. Under the subscription agreement, we issued a convertible promissory note to the investor in the amount of $3,164,000 at a conversion price of $10.00 per share. The convertible promissory note was to bear interest on the unpaid balance at a rate of 10% per annum and became due and payable on December 7, 2016. The outstanding principal amount and all accrued interest were mandatorily and automatically convertible into common stock, at the conversion price, upon the average market price of the common stock being greater than or equal to the conversion price for twenty trading days. On February 5, 2016, this triggering event occurred pursuant to the convertible note agreement and 316,400 shares of common stock were issued in satisfaction of the convertible note payable.

 

April 2016 Subscription Agreements

 

On April 1, 2016, we entered into substantially identical subscription agreements with certain private investors, pursuant to which we issued and sold to the investors in a private placement an aggregate of 537,500 shares of common stock at a purchase price of $10.00 per share for aggregate gross proceeds of $5,375,000 in the private placement. On March 31, 2016, we received $1,500,000, in advance for one of these agreements. The amount was recorded as noncurrent debt on our condensed consolidated balance sheet. Under the terms of the April 2016 subscription agreements, each investor had the option to purchase additional shares of common stock at the purchase price, not to exceed the number of such investor’s initial number of subscribed shares, during each of the second, third and fourth quarters of 2016. One investor delivered notice of its election to purchase shares and (i) on June 28, 2016, we issued 50,000 shares for an aggregate purchase price of $0.5 million and (ii) on November 17, 2016, we issued 60,000 shares for an aggregate purchase price of $0.6 million.

 

June 2016 Subscription Agreements

 

On June 22, 2016 and June 30, 2016, we entered into two additional subscription agreements with two investors. Pursuant to the terms of the subscription agreements, we sold an aggregate of 35,000 shares of our common stock at a purchase price of $10.00 per share.

 

November 2016 Subscription Agreements

 

On November 15 and November 22, 2016, we entered into eight additional subscription agreements with four investors. Pursuant to the terms of the subscription agreements, we sold an aggregate of 67,500 shares of our common stock at a purchase price of $10.00 per share.

 

 

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2017 Convertible Promissory Notes

 

On each of July 18, July 26, August 1, August 4, 2017, August 31, 2017, September 6, 2017 and September 9, 2017, we entered into a subscription agreement pursuant to which we issued a convertible promissory note, each with substantially identical terms, for an aggregate principal amount of $725,000. Each of the convertible promissory notes matures one year from the date of issue and bears interest at a rate of 10% per annum. The principal and any accrued interest of the each of the convertible promissory notes are convertible by the respective holder at a price of either (i) the 90 trading day average price per share of common stock as of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as defined in each of the convertible promissory notes) of common stock is made, 95% of the Public Offering Share price (as defined in each of the convertible promissory notes).

 

Warrants

 

On December 29, 2016, we entered into a debt exchange agreement with an investor that held the following promissory notes with the following balances:

 

Notes:	Outstanding Balance
First Group Film Funding note	$ 1,160,000
Web Series Funding note	340,000
Second Group Film Funding note	4,970,990
	$ 6,470,990

 

In addition to the debt exchange agreement, we entered into a purchase agreement with the same investor to acquire 25% of the membership interest of Dolphin Kids Clubs to own 100% of the membership interest. Pursuant to the debt exchange agreement and the purchase agreement, we issued Warrant J that entitles the warrant holder to purchase shares up to 1,085,000 shares of our common stock at a price of $0.03 through December 29, 2020, its expiration date. We recorded a loss on extinguishment of debt $2.7 million on our consolidated statement of operations for the year ended December 31, 2016. The loss on extinguishment was calculated as the difference between the fair value of Warrant J and the outstanding debt under the notes described above.

 

Critical Accounting Policies, Judgments and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or “GAAP”. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

 

Capitalized Production Costs

 

Capitalized production costs represent the costs incurred to develop and produce a web series or feature films. These costs primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to scripts. Capitalized production costs are stated at the lower of cost, less accumulated amortization and tax credits, if applicable, or fair value. These costs are capitalized in accordance with Financial Accounting Standards Board, or “FASB”, Accounting Standards Codification, or “ASC”, Topic 926-20-50-2 “Other Assets – Film Costs”. Unamortized capitalized production costs are evaluated for impairment each reporting period on a title-by-title basis. If estimated remaining revenue is not sufficient to recover the unamortized capitalized production costs for that title, the unamortized capitalized production costs will be written down to fair value. Any project that is not greenlit for production within three years is written off.

 

 

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We are responsible for certain contingent compensation, known as participations, paid to certain creative participants such as writers, directors and actors. Generally, these payments are dependent on the performance of the web series and are based on factors such as total revenue as defined per each of the participation agreements. We are also responsible for residuals, which are payments based on revenue generated from secondary markets that are generally paid to third parties pursuant to a collective bargaining, union or guild agreement. These costs are accrued to direct operating expenses as the revenues, as defined in the participation agreements, are achieved and as sales to the secondary markets are made triggering the residual payment.

 

Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates are likely to differ to some extent in the future from actual results. Our management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized deferred production costs to its estimated fair value. Our management estimates the ultimate revenue based on existing contract negotiations with domestic distributors and international buyers as well as management’s experience with similar productions in the past.

 

An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, less amortization expense of deferred productions costs, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher amortization expense of capitalized production costs. Our management evaluates unamortized production costs for impairment whenever there is an event that may signal that the fair value of the unamortized production costs are below their carrying value. One example that may trigger this type of analysis is the under-performance in the domestic box office of a feature film. For digital productions this analysis may occur if we are unable to secure sufficient advertising revenue for our web series. We typically perform an impairment analysis using a discounted cash flow method. Any write-down resulting from an impairment analysis is included in direct costs within our consolidated statements of operations. For the years ended December 31, 2016 and 2015, we impaired approximately $2.1 and $0.6 million, respectively of capitalized production costs.

 

Revenue Recognition

 

Revenue from web series and feature films is recognized in accordance with guidance of FASB ASC 926-60 “Revenue Recognition – Entertainment-Films”. Revenue is recorded when a contract with a buyer for the web series or feature film exists, the web series or feature film is complete in accordance with the terms of the contract, the customer can begin exhibiting or selling the web series or feature film, the fee is determinable and collection of the fee is reasonable. Revenues from licensing agreements for distribution in foreign territories typically includes a minimum guarantee with the possibility of sharing in additional revenues depending on the performance of the web series or feature film in that territory. Revenue for these types of arrangements are recorded when the web series or motion picture has been delivered and our obligations under the contract have been satisfied.

 

 On occasion, we may enter into agreements with third parties for the co-production or distribution of a web series. We may also enter into agreements for the sponsorship or integration of a product in a web series productions. Revenue from these agreements will be recognized when the web series is complete and ready to be exploited. In addition, the advertising revenue is recognized at the time advertisements are shown when a web series is aired. Cash received and amounts billed in advance of meeting the criteria for revenue recognition is classified as deferred revenue.

  

Revenue from public relations consists of fees from the performance of professional services and billings for direct costs reimbursed by clients. Fees are generally recognized on a straight-line or monthly basis which approximates the proportional performance on such contracts. Direct costs reimbursed by clients are billed as pass-through revenue with no mark-up.

 

Deferred revenue represents customer advances or amounts allowed to be billed under the contracts for work that has not yet been performed or expenses that have not yet been incurred.

 

 

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Warrant Liabilities and Related Fair Value Measurements

 

When we issue warrants, we evaluate the proper balance sheet classification of the warrant to determine whether the warrant should be classified as equity or as a derivative liability on the consolidated balance sheets. In accordance with ASC 815-40, Derivatives and Hedging-Contracts in the Entity’s Own Equity (ASC 815-40), we classify a warrant as equity so long as it is “indexed to the company’s equity” and several specific conditions for equity classification are met. A warrant is not considered indexed to the company’s equity, in general, when it contains certain types of exercise contingencies or contains certain provisions that may alter either the number of shares issuable under the warrant or the exercise price of the warrant, including, among other things, a provision that could require a reduction to the then current exercise price each time we subsequently issues equity or convertible instruments at a per share price that is less than the current conversion price (also known as a “full ratchet down round provision”). If a warrant is not indexed to the company’s equity, it is classified as a derivative liability which is carried on the consolidated balance sheets at fair value with any changes in its fair value recognized currently in the statements of operations.

 

We classified the G, H, I, J and K warrants issued during 2016 as derivative liabilities, because they contain full-ratchet down round provisions and report the warrants on our consolidated balance sheets at fair value under the caption “warrant liability” and report changes in the fair value of the warrant liability on the consolidated statements of operations under the caption “change in fair value of warrant liability”.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Observable inputs are based on market data obtained from sources independent of our company. Unobservable inputs reflect our own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, defined as follows:

 

Level 1   —	Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.
Level 2   —	Inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3   —	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. Unobservable inputs for the asset or liability that reflect management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.

 

We measured the Series G, H, I, J and K warrants we issued in 2016 at fair value in the consolidated financial statements as of and for the year ended December 31, 2016, using inputs classified as “level 3” of the fair value hierarchy. We develop unobservable “level 3” inputs using the best information available in the circumstances, which might include our own data, or when we believe inputs based on external data better reflect the data that market participants would use, we base our inputs on comparison with similar entities.

 

We select a valuation technique to measure “level 3” fair values that we believe is appropriate in the circumstances. In the case of measuring the fair value of the Series G, H, I, J and K warrants at December 31, 2016 and for the year then ended, d ue to the existence of the full ratchet down round provision, which creates a path-dependent nature of the exercise prices of the warrants, we decided a Monte Carlo Simulation model, which incorporates inputs classified as “level 3” was appropriate.

 

Key inputs used in the Monte Carlo Simulation model to determine the fair value of the Series G, H, I, J and K warrants at December 31, 2016 are as follows: 

 

 

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	As of December 31, 2016
Inputs	Series G	Series H	Series I	Series J	Series K
Volatility (1)	63.6 %	79.1 %	70.8 %	65.8 %	65.8 %
Expected term (years)	1.08	2.08	3.08	4	4
Risk free interest rate	.879 %	1.223 %	1.489 %	1.699 %	1.699 %
Common stock price	$  12.00	$  12.00	$  12.00	$  12.00	$  12.00
Exercise price	$  10.00	$  12.00	$  14.00	$  .03	$  .03

_____________

(1) “Level 3” input.

 

The “level 3” stock volatility assumption represents the range of the volatility curves used in the valuation analysis that we determined market participants would use based on comparison with similar entities. The risk-free interest rate is interpolated where appropriate, and is based on treasury yields. The valuation model also included a “level 3” assumption we developed as to dates of potential future financings by us that may cause a reset of the exercise price of the warrants.

 

Since derivative financial instruments, such as the Series G, H, I, J and K warrants, are initially and subsequently carried at fair values, our income or loss will reflect the volatility in changes to these estimates and assumptions. The fair value of the warrants is most sensitive to changes at each valuation date in our common stock price, the volatility rate assumption, and the exercise price, which could change if we were to do a dilutive future financing.

 

Income Taxes

 

Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using tax rates in effect for the years in which the differences are expected to reverse. The effects of changes in tax laws on deferred tax balances are recognized in the period the new legislation is enacted. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income. We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.

 

Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.

 

Recent Accounting Pronouncements

 

For a discussion of recent accounting pronouncements, see Note 3 to the consolidated financial statements included elsewhere in this prospectus.

 

 

 

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 BUSINESS

 

Overview

 

 

We are a leading independent entertainment marketing and premium content development company. Through our recent acquisition of 42West, we provide expert strategic marketing and publicity services to all of the major film studios, and many of the leading independent and digital content providers, as well as for hundreds of A-list celebrity talent, including actors, directors, producers, recording artists, athletes and authors. The strategic acquisition of 42West brings together premium marketing services with premium content production, creating significant opportunities to serve our respective constituents more strategically and to grow and diversify our business. Our content production business is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. We produce original feature films and digital programming primarily aimed at family and young adult markets.

 

We were first incorporated in the State of Nevada on March 7, 1995 and were domesticated in the State of Florida on December 4, 2014. On March 7, 2016, we acquired Dolphin Films, a content producer of motion pictures, from Dolphin Entertainment, Inc., an entity wholly owned by our President, Chairman and Chief Executive Officer, Mr. O’Dowd.

 

On March 30, 2017, we acquired 42West, an entertainment public relations agency offering talent publicity, strategic communications and entertainment content marketing. As consideration in the 42West acquisition, we paid approximately $18.7 million in shares of common stock based on our 30-trading-day average stock price prior to the closing date of $9.22 per share, as adjusted for the 1-to-2 reverse stock split (less certain working capital and closing adjustments, transaction expenses, and payments of indebtedness) plus the potential to earn up to an additional $9.3 million in shares of common stock. As a result, we (i) issued 615,140 shares of common stock on the closing date, 172,275 shares of common stock to certain 42West employees on April 13, 2017 and 59,320 shares of common stock as employee stock bonuses on August 21, 2017 and (ii) will issue 980,911 shares of common stock on January 2, 2018. In addition, we may issue up to 981,563 shares of common stock based on the achievement of specified financial performance targets over a three-year period as set forth in the membership interest purchase agreement.

 

The principal sellers have each entered into employment agreements with our company and will continue as employees of our company until March 2020. The non-executive employees of 42West have been retained as well. In connection with the 42West acquisition, we granted the sellers the right, but not the obligation, to cause us to purchase up to an aggregate of 1,187,094 of their shares of common stock received as consideration for a purchase price equal to $9.22 per share, as adjusted for the 1-to-2 reverse stock split, during certain specified exercise periods up until December 2020.

 

As a result of the 42West acquisition, we have determined that as of the second quarter of 2017, we operate in two reportable segments, the entertainment publicity division and the content production division. The entertainment publicity division is comprised of 42West and provides clients with diversified services, including public relations, entertainment content marketing and strategic marketing consulting.  The content production division is comprised of Dolphin Films and Dolphin Digital Studios and specializes in the production and distribution of digital content and feature films.

 

Effective May 10, 2016, we amended our Articles of Incorporation to effectuate a 1-to-20 reverse stock split. Effective July 6, 2017, we amended our Articles of Incorporation to (i) change our name to Dolphin Entertainment, Inc.; (ii) cancel previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock; (iii) reduce the number of Series C Convertible Preferred Stock (described below) outstanding in light of our 1-to-20 reverse stock split from 1,000,000 to 50,000 shares; and (iv) clarify the voting rights of the Series C Convertible Preferred Stock that, except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred. Effective September 14, 2017, we amended our Amended and Restated Articles of Incorporation to effectuate a 1-to-2 reverse stock split.

 

 

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Growth Opportunities

 

We are focused on driving growth through the following:

 

Expand and grow 42West to serve more clients with a broad array of interrelated services. As a result of its acquisition by Dolphin, 42West now has the ability to create promotional and marketing content for clients—a critical service for celebrities and marketers alike in today’s digital world. We believe that by adding content creation to 42West’s menu of capabilities, it will provide a great opportunity to capitalize on unique synergies to drive immediate organic growth, which will allow us to both attract new clients and broaden our offering of billable services to existing ones. We also believe that the skills and experience of our 42West business in entertainment PR are readily transferable to related business sectors—such as sports or fashion. The growing involvement in non-entertainment businesses by many of our existing entertainment clients has allowed 42West to establish a presence and develop expertise outside its traditional footprint with little risk or expense. Using this as a foundation, we are now working to expand our involvement in these new areas.

 

   Organically grow through future synergies between 42West and our digital and film productions . Adding content creation to 42West’s menu of capabilities provides a great opportunity for immediate growth, as it will allow us to both attract new clients and broaden our offering of billable services to existing ones. Furthermore, bringing marketing expertise in-house will allow us to review a prospective digital or film project’s marketing potential prior to making a production commitment, thus allowing our marketing strategy to be a driver of our creative content. In addition, for each project greenlit for production, we can potentially create a comprehensive marketing plan before the start of principal photography, allowing for relevant marketing assets to be created while filming. We can also create marketing campaigns for completed films, across all media channels, including television, print, radio, digital and social media.

 

Opportunistically grow through more complementary acquisitions. We plan to selectively pursue acquisitions in the future, to further enforce our competitive advantages, scale and grow our business and increase profitability. Our acquisition strategy is based on identifying and acquiring companies that complement our existing content production and entertainment publicity businesses. We believe that complementary businesses, such as data analytics and digital marketing, can create synergistic opportunities and bolster profits and cash flow.

 

Build a portfolio of premium film, television and digital content. We intend to grow and diversify our portfolio of film and digital content by capitalizing on demand for high quality digital media and film content throughout the world marketplace. We plan to balance our financial risks against the probability of commercial success for each project. We believe that our strategic focus on content and creation of innovative content distribution strategies will enhance our competitive position in the industry, ensure optimal use of our capital, build a diversified foundation for future growth and generate long-term value for our shareholders. Finally, we believe that marketing strategies that will be developed by 42West will drive our creative content, thus creating greater potential for profitability.

  

Entertainment Publicity

 

  42West

 

Through 42West, an entertainment public relations agency, we offer talent publicity, strategic communications and entertainment content marketing. In addition, we provide brand marketing and digital marketing services. Prior to its acquisition, 42West was the largest independently-owned public relations firm in the entertainment industry. Among other benefits, we believe that the 42West acquisition will strengthen and complement our current content production business, while expanding and diversifying our operations. We believe that having marketing expertise in-house will allow us to review a prospective project’s marketing potential prior to making a production commitment. Furthermore, for each project greenlit for production, we can potentially create a comprehensive marketing plan before the start of principal photography, allowing for relevant marketing assets to be created while filming. Therefore, we believe the marketing of our projects can begin much sooner than the delivery of a finished film or series.

 

Our public relations and marketing professionals at 42West develop and execute marketing and publicity strategies for hundreds of movies and television shows as well as for individual actors, filmmakers, recording artists, and authors. Through 42West, we provide services in the following areas:

 

 

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Talent

 

We focus on creating and implementing strategic communication campaigns for performers and entertainers, including television and film stars, recording artists, authors, models, athletes, and theater actors. Our talent roster includes Oscar- and Emmy-winning actors and Grammy-winning singers and musicians and New York Times best-selling authors. Our services in this area include ongoing strategic counsel, media relations, studio, network, charity, corporate liaison and event and tour support.

 

Entertainment & Targeted Marketing

 

We provide marketing direction, public relations counsel and media strategy for productions (including theatrical films, DVD and VOD releases, television programs, and online series) as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. Our capabilities include worldwide studio releases, independent films, television programming and web productions. We provide entertainment marketing services in connection with film festivals, awards campaigns, event publicity and red carpet management. In addition, we provide targeted marketing and publicity services that are tailored to reach diverse audiences. Our clients include major studios and independent producers for whom we create strategic multicultural marketing campaigns and provide strategic guidance aimed at reaching diverse audiences.

 

Strategic Communications

 

Our strategic communications team advises high-profile individuals and companies faced with sensitive situations or looking to raise, reposition, or rehabilitate their public profiles. We also help studios and filmmakers deal with controversial movies.

 

Much of the activities of our strategic communications team involve orchestrating high-stakes communications campaigns in response to sensitive, complex situations. We also help companies define objectives, develop messaging, create brand identities, and construct long-term strategies to achieve specific goals, as well as manage functions such as media relations or internal communications on a day-to-day basis. The strategic communications team focuses on strategic communications counsel, corporate positioning, brand enhancement, media relations, reputation and issues management, litigation support and crisis management and communications. Our clients include major studios and production companies, record labels, sports franchises, media conglomerates, technology companies, philanthropic organizations, talent guilds, and trade associations as well as a wide variety of high-profile individuals, ranging from major movie and pop stars to top executives and entrepreneurs.

 

Content Production

 

Dolphin Digital Studios

 

Through Dolphin Digital Studios, we create original content to premiere online, in the form of "web series". Dolphin Digital Studios is instrumental in producing and distributing our web series and sourcing financing for our digital media projects. Premium online and mobile video is the largest growth sector for online and mobile advertising, with market leaders such as YouTube, Facebook, Verizon and AT&T investing in major initiatives around original programming.

 

We target three distinct demographics for our “web series” activities:

 

●	Tweens (roughly 9-14 years old);
●	Teens and young adults (roughly 14-24 years old); and
●	General market (roughly 14-49 years old).

 

We expect to serve each of these demographics with different content, and we may have different distribution partners for each demographic.

 

 

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Dolphin Films

 

Dolphin Films is a content producer of motion pictures. In 2016, we released our motion picture, Max Steel . We also own the rights to several scripts that we intend to produce at a future date.

  

Production

 

Our in-house development team is continuously reviewing scripts for digital projects that are directed at one of our target demographics and that we believe we can produce within our normal planned budget range of $3.0 to $5.0 million. Our budget typically includes costs associated with purchase of the script, production of the project and marketing of the project. Occasionally, we also hire writers to develop a script for an idea that we have internally. From the selection provided by our development team, our management reviews the scripts and evaluates them based on expected appeal to advertisers, talent we think we can attract, available budget for the production and available financing. We normally purchase a variety of scripts which we hold for future use. Not all scripts purchased will be produced. Some scripts revert back to the writer if they are not produced during a contractually agreed upon timeframe.

 

Once we have a stable of scripts, we present a variety of projects, based on these scripts, to online platforms such as Hulu, AOL, and Yahoo!. The online platform will typically evaluate the project based on its estimation of potential demand, considering the genre or demographic to which they are looking to appeal. Once a project is selected by the online platform, we enter into a distribution agreement with the online platform that outlines, among other things, our revenue share percentages (typically between 30% and 45%) and the length of time that the show will air on that online platform. Based on agreements with the online platforms and advertisers, our management then makes the decision to “greenlight” or to approve, a project for production.

 

Our goal is also to produce young adult and family films and our in-house development team reviews scripts for motion pictures in this genre that can be produced within a budget range of $6.0 to $9.0 million. Our budget includes the cost of acquiring the script and producing the motion picture. We finance our motion pictures with funds from investors and the financing from international licensing agreements for the motion picture.

 

The production of digital projects and motion pictures is very similar. Once management greenlights a project, the pre-production phase, including the hiring of a director, talent, various crew and securing locations to film, begins. We may become signatories to certain guilds such as Screen Actors Guild, Directors Guild of America and Writers Guild of America in order to allow us to hire directors and talent for our productions. We typically hire crew members directly, engage a production service company to provide us with, among other things, the crew, equipment and a production office or use a combination of the two alternatives. Directors and talent are typically compensated a base amount for their work. In addition, directors and talent who are members of various guilds may receive remuneration from “residuals” that we pay to the various guilds based on the performance of our productions in ancillary markets. To better manage our upfront production costs, we sometimes structure our agreements with talent to allow them to participate in the proceeds of the digital project or motion picture in exchange for reduced upfront fixed payments, regardless of the project’s success.

 

The decision of where to produce the project is often based on incentive tax programs implemented by many states and foreign countries to attract film production in their jurisdictions as a means of economic development. These incentives normally take the form of sales tax refunds, transferable tax credits, refundable tax credits or cash rebates that are calculated based on a percentage spent in the jurisdiction offering the incentive. The pre-production phase may take several months and is critical to the success of the project.

 

The length of time needed to film varies by project but is typically between three and six weeks. Once the filming is completed, the project will enter the post-production phase, which includes film and sound editing, and development of special effects, as needed. Depending on the complexity of the work to be done, post-production may take from two to six months to complete.

 

 

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In the last five years, we produced and distributed Cybergeddon in partnership with Anthony Zuiker, creator of CSI, Hiding , and South Beach-Fever , and were hired to provide production services for Aim High produced by a related party in conjunction with Warner Brothers. These productions earned various awards including two Streamy Awards. Dolphin Films produced the motion picture, Max Steel , that was released in 2016.

 

In 2016, we entered into a co-production agreement for a new digital project showcasing favorite restaurants of NFL players throughout the country. Pursuant to the agreement, we were responsible for financing 50% of the project’s budget and are entitled to 50% of the profits. In addition, we were responsible for (a) producing; (b) negotiating and contracting the talent; (c) securing locations; (d) preparing the production and delivery schedules; (e) identifying and securing digital distribution; (f) soliciting and negotiating advertising and sponsorships; (g) legal and business affairs and (h) managing and maintaining the production account. The show was produced during 2016 throughout several cities in the U.S. The show was released on Destination America, a digital cable and satellite television channel, on September 9, 2017 and we do not expect to derive any revenues from this initial release.

 

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; and

●

Ask Me , a teen comedy in which a high-school student starts a business to help her classmates create elaborate Promposals.

 

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.

 

Distribution

 

Our digital productions for AVOD platforms have premiered on online platforms such as Hulu and Yahoo!. Distribution agreements with online platforms are for a limited period, typically six months. Once the contract expires, we have the ability to distribute our productions in ancillary markets such as through home entertainment, SVOD (e.g. Netflix), pay television, broadcast television, foreign and other markets. Our ability to distribute these productions in ancillary markets is typically based on the popularity of the project during its initial online distribution.

   

Similar to distribution of digital productions described above, the economic life of motion pictures is comprised of different phases. The motion picture is initially distributed in theaters. A successful motion picture may remain in theaters for several months, after which we have the ability to distribute the motion picture in ancillary markets such as home entertainment, PPV, VOD, EST, SVOD, AVOD, digital rentals, pay television, broadcast television, foreign and other markets. Concurrent with their release in the U.S., motion pictures are generally released in Canada and may also be released in one or more other foreign markets.

 

Theatrical distribution refers to the marketing and commercial or retail exploitation of motion pictures. Typically, we enter into an agreement with a distributor to place our films in theatres for a distribution fee. Pursuant to the agreement, the distribution fee varies depending on whether we provide our own P&A financing or whether the distributor finances the P&A.

 

In 2016, we obtained the P&A financing necessary for the distribution and marketing costs associated with our motion picture, Max Steel , and the film was released domestically on October 14, 2016. The motion picture did not perform as well as expected domestically, however, we secured approximately $8.2 million in international distribution agreements. As part of our domestic distribution arrangement, we still have the ability to derive revenues from the ancillary markets described above, although the amount of revenue derived from such channels is typically commensurate with the performance of the film in the domestic box office.

 

 

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Financing

 

We have financed our acquisition of the rights to certain digital projects and motion picture productions through a variety of financing structures including equity finance agreements, subscription agreements and loan and security agreements.

 

We financed our production of Max Steel using funds from investors and loans partially collateralized by licensing agreements for the exploitation of the motion picture in certain international territories. Our distribution and marketing costs were financed through financing obtained from a lender.

   

Online Kids Clubs

 

Through our online kids clubs we seek to partner with various organizations to provide an online destination for entertainment and information for kids. Through online kids club memberships, established “brands” in the children’s space seek to expand their existing online audience through the promotion of original content supplied and/or sourced by Dolphin Digital Studios.

 

We have partnered with Scholastic Books to provide to schools sponsored by a donor, a location in the school that is transformed into a reading room, which we refer to as a Reading Oasis. Donors may sponsor a school for $10,000 which entitles each child in the school to receive an annual online kids club membership and entitles the school to receive a Reading Oasis. The Reading Oasis provides the school with hundreds of books (K-3), colorful bean bag chairs, a reading themed carpet, book cases, a listening library, and a stereo listening center with four headphones.

 

In September 2016, we terminated, by mutual accord, our 2013 agreement with United Way Worldwide pursuant to which we created an online kids club to promote the organization’s philanthropic philosophy and encourage literacy in elementary school age children. We have retained the trademark to the online kids club and will continue to operate the site. In February 2017, we also terminated our 2012 agreement with US Youth Soccer Association, Inc. pursuant to which we created, designed and hosted the US Youth Soccer Clubhouse website.

 

We operate our online kids club activities through our wholly-owned subsidiary, Dolphin Kids Club LLC. Until December 2016, 25% of Dolphin Kids Club was owned by KCF Investments, LLC. Our agreement with KCF encompassed kids clubs created between January 1, 2012 and December 31, 2016. On December 29, 2016, we purchased KCF’s 25% membership interest in Dolphin Kids Club and Dolphin Kids Club became our wholly-owned subsidiary. During the six months ended June 30, 2017, management decided to discontinue the online kids clubs at the end of this year to dedicate a majority of our time and resources to the entertainment publicity business and the production of feature films and digital content.

 

Intellectual Property

 

We seek to protect our intellectual property through trademarks and copyrights. We currently hold two trademarks for each of Cybergeddon and 42West, two trademarks for our online kids clubs and two copyrights for each of Cybergeddon , Hiding , Max Steel and Jack of all Tastes and one for South Beach . We also own 25% of the partnership that owns the copyright to the film Believe .

  

Competition

 

The businesses in which we engage are highly competitive. Our entertainment publicity business operates in a highly competitive industry. Through 42West, we compete against other public relations and marketing communications companies as well as independent and niche agencies to win new clients and maintain existing client relationships. Our content production business faces competition from companies within the entertainment business and from alternative forms of leisure entertainment, such as travel, sporting events, video games and computer-related activities. We are subject to competition from other digital media and motion production companies as well as from large, well established companies within the entertainment industry that have significantly greater development, production, distribution and capital resources than us. We compete for the acquisition of literary properties and for the services of producers, directors, actors and other artists as well as creative and technical personnel and production financing, all of which are essential to the success of our business. In addition, our productions compete for audience acceptance and advertising dollars.

 

 

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We believe that we compete on the basis of:

 

●

42West’s long and loyal list of marquee clients—42West’s clients (upwards of 400 in 2016), including many of the world’s most famous and acclaimed screen and pop stars, its most honored directors and producers, every major movie studio, and virtually every digital platform and content distributor, along with a host of production companies and media firms as well as consumer product marketers, is a competitive advantage given the nature of the entertainment marketing and public relations industry;

●

a stable and experienced work force, led by an exceptional management team—our CEO, Mr. O’Dowd, has a 20-year history of producing and delivering high-quality family entertainment. In addition, 42West’s three co-CEOs, Leslee Dart, Amanda Lundberg, and Allan Mayer, are all longtime PR practitioners, with decades of experience, widely regarded as being among the top communications strategists in the entertainment industry. They lead a staff of PR professionals that is known for both its skill and its longevity. Staff turnover is far below industry norms, and every one of the firm’s six managing directors has been there for more than nine years; and

●

our ability to offer interrelated services—we believe that the ability to create content for our 42West clients and the ability to internally develop and execute marketing campaigns for our digital and film productions will allow us to expand and grow each of our business lines;

 

Employees

 

As of October 2, 2017, we have 88 full-time employees in our operations, including 83 employees from 42West. We believe our relationship with our employees is good. We also utilize consultants in the ordinary course of our business and hire additional employees on a project-by-project basis in connection with the production of digital media projects or motion pictures.

 

Regulatory Matters

 

Our online kids clubs programs which are aimed at elementary school age children are subject to laws and regulations relating to privacy and child protection. Through our online kids clubs we may monitor and collect certain information about the child users of these forums. A variety of laws and regulations have been adopted in recent years aimed at protecting children using the internet such as COPPA. COPPA sets forth, among other things, a number of restrictions on what website operators can present to children under the age of 13 and what information can be collected from them.

 

We are also subject to state and federal work and safety laws and disclosure obligations, under the jurisdiction of the U.S. Occupational Safety and Health Administration and similar state organizations.

 

Corporate Offices

 

Our corporate headquarters is located at 2151 Le Jeune Road, Suite 150-Mezzanine, Coral Gables, Florida 33134. Our telephone number is (305) 774-0407. 42West has offices located at 600 3rd Avenue, 23rd Floor, New York, New York, 10016 and 1840 Century Park East, Suite 700, Los Angeles, California 90067.

 

 

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PROPERTIES

 

As of the date of this prospectus, we do not own any real property. We lease 3,332 square feet of office space located at 2151 Le Jeune Road, Suite 150-Mezzanine, Coral Gables, Florida 33134, at a monthly rate of $7,404. In 2012, we opened an additional office located at 10866 Wilshire Boulevard, Suite 800, Los Angeles, California 90024 and currently lease 4,582 square feet of office space at a monthly rate of $13,746 with annual increases of 3% for years 1 to 3 and 3.5% for the remainder of the lease. On June 1, 2017, we entered into an agreement to sublease our office in Los Angeles. The sublease agreement is through July 31, 2019 at an initial monthly rate of $14,891.50.  Commencing on the thirteenth month of the sublease, the monthly lease rate will increase by 3%. Pursuant to the lease agreement, the subtenant will take ownership of the furniture in the premises.

 

42West leases 12,505 square feet of office space located at 600 Third Avenue, 23rd Floor, New York, NY 10016, at a monthly rate of $67,735 with increases every three years. In addition, 42West leases 12,139 square feet of office space at 1840 Century Park East, Suite 700, Los Angeles, CA 90067 at a base rate of $36,417 (commencing on 2/1/14), with annual increases of 3% per year. We believe our current facilities are adequate for our operations for the foreseeable future.

 

 LEGAL PROCEEDINGS

 

A putative class action was filed on May 5, 2017, in the United States District Court for the Southern District of Florida by Kenneth and Emily Reel on behalf of a purported nationwide class of individuals who attended the Fyre Music Festival, or the Fyre Festival, in the Bahamas on April 28-30, 2017. The complaint names several defendants, including 42West, along with the organizers of the Fyre Festival, Fyre Media Inc. and Fyre Festival LLC, individuals related to Fyre, and another entity called Matte Projects LLC. The complaint alleges that the Fyre Festival was promoted by Fyre as a luxurious experience through an extensive marketing campaign orchestrated by Fyre and executed with the assistance of outside marketing companies, 42West and Matte, but that the reality of the festival did not live up to the luxury experience that it was represented to be. The plaintiffs assert claims for fraud, negligent misrepresentation and for violation of several states’ consumer protection laws. The plaintiffs seek to certify a nationwide class action comprised of “All persons or entities that purchased a Fyre Festival 2017 ticket or package or that attended, or planned to attend, Fyre Festival 2017” and seek damages in excess of $5,000,000 on behalf of themselves and the class.  The plaintiffs sought to consolidate this action with five other class actions also arising out of the Fyre Festival (to which 42West is not a party) in a Multi District Litigation, or MDL, proceeding, which request was denied by the Judicial Panel on Multi District Litigation. On July 28, 2017, 42West filed a motion to dismiss the putative class action.  On September 19, 2017, one of the defendants filed a cross-claim against all other named defendants seeking indemnity and contribution.  On October 2, 2017, 42West filed a motion to dismiss the cross-claim . We believe the claims against 42West are without merit and that we have strong defenses to the claims.

 

 

 

In addition, we are involved in various legal proceedings relating to claims arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our business, financial condition, results of operations or liquidity.

 

 

 

 

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MANAGEMENT

 

Our directors and our executive officers and the positions held by each of them are as follows:

 

Directors and Director Nominees

 

NAME		AGE		PRINCIPAL OCCUPATION
William O’Dowd, IV		48		Chairman, President and Chief Executive Officer
Michael Espensen		67		Director
Nelson Famadas		44		Director
Allan Mayer		67		Director
Mirta A Negrini		53		Director, Chief Financial and Operating Officer
Justo Pozo		60		Director
Nicholas Stanham, Esq.		49		Director

 

Executive Officers

 

NAME		AGE		PRINCIPAL OCCUPATION
William O’Dowd, IV		48		Chief Executive Officer
Mirta A Negrini		53		Chief Financial and Operating Officer

 

William O’Dowd, IV . Mr. O’Dowd has served as our Chief Executive Officer and Chairman of our Board since June 2008. Mr. O’Dowd founded Dolphin Entertainment, LLC in 1996 and has served as its President since that date. In 2016, we acquired Dolphin Films, Inc., a content producer of motion pictures, from Dolphin Entertainment, LLC. Past television series credits for Mr. O’Dowd include serving as Executive Producer of Nickelodeon’s worldwide top-rated series Zoey101 (Primetime Emmy-Award nominated) and Ned’s Declassified School Survival Guide , as well as Nickelodeon’s first ever musical, Spectacular! In addition, Mr. O’Dowd produced the first season of Raising Expectations , a 26-episode family sitcom. Raising Expectations won the 2017 KidScreen Award for Best New Tween/Teen Series, the global children’s television industry’s highest honor.

 

Qualifications . The Board nominated Mr. O’Dowd to serve as a director because of his current and prior senior executive and management experience at our company and his significant industry experience, including having founded Dolphin Entertainment, LLC, a leading entertainment company specializing in children’s and young adult’s live-action programming.

 

Michael Espensen . Mr. Espensen has served on our Board since June 2008. From 2009 to 2014, Mr. Espensen served as Chief Executive Officer of Keraplast Technologies, LLC, a private multi-million dollar commercial-stage biotechnology company. From 2009 to present, Mr. Espensen has also served as Chairman of the Board of Keraplast. While serving as Chief Executive Officer, Mr. Espensen was responsible for overseeing and approving Keraplast’s annual budgets and financial statements. Mr. Espensen is also a producer and investor in family entertainment for television and feature films. Between 2006 and 2009, Mr. Espensen was Executive or Co-Executive Producer of twelve made-for-television movies targeting children and family audiences. As Executive Producer, he approved production budgets and then closely monitored actual spending to ensure that productions were not over budget. Mr. Espensen has also been a real estate developer and investor for over thirty years .

 

Qualifications . The Board nominated Mr. Espensen to serve as a director because of his business management and financial oversight experience both as the current Chairman and former Chief Executive Officer of a multi-million dollar company and as a former Executive Producer in the made-for-television movie industry, as well as his valuable knowledge of our industry.

 

 

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              Nelson Famadas . Mr. Famadas has served on our Board since December 2014. Since 2015, he has served as President of Cien, a marketing firm that serves the Hispanic market. Prior to Cien, Mr. Famadas served as Senior Vice President of National Latino Broadcasting from July 2011 to May 2015. NLB is an independent Hispanic media company that owns and operates two satellite radio channels on SiriusXM. From July 2010 to March 2012, Mr. Famadas served as our Chief Operating Officer, where he was responsible for daily operations including public filings and investor relations. Mr. Famadas began his career at MTV Networks, specifically MTV Latin America, ultimately serving as New Business Development Manager. From 1995 through 2001, he co-founded and managed Astracanada Productions, a television production company that catered mostly to the Hispanic audience, creating over 1,300 hours of programming. As Executive Producer, he received a Suncoast EMMY in 1997 for Entertainment Series for A Oscuras Pero Encendidos . Mr. Famadas has over 20 years of experience in television and radio production, programming, operations, sales and marketing.

 

Qualifications . The Board nominated Mr. Famadas to serve as a director because of his significant prior management experience as a co-founder and former manager of a television production company and senior vice president of a broadcasting firm, as well as his current management experience with a marketing firm.

 

Allan Mayer . Mr. Mayer has served on our Board since June 2017. He has served as a Co-Chief Executive Officer of our subsidiary, 42West, since March 2017. Previously, he served as Principal of 42West from October 2006 until its acquisition by our company in March 2017. Previously, from 1997 until October 2006, Mr. Mayer was managing director and head of the entertainment practice at the crisis communications firm Sitrick and Company. Mr. Mayer began his professional life as a journalist, working as a staff reporter for The Wall Street Journal ; a writer, foreign correspondent and senior editor for Newsweek , and the founding editor (and later publisher) of Buzz magazine. He also served as editorial director of Arbor House Publishing Co. and senior editor of Simon & Schuster. Mr. Mayer has authored two books Madam Prime Minister: Margaret Thatcher and Her Rise to Power (Newsweek Books, 1980) and Gaston's War (Presidio Press, 1987)—and is co-author, with Michael S. Sitrick, of Spin: How To Turn The Power of the Press to Your Advantage (Regnery, 1998). In addition, he has written for a wide variety of national publications, ranging from The New York Times Magazine to Vogue . Mr. Mayer is a recipient of numerous professional honors, including the National Magazine Award, the Overseas Press Club Citation of Excellence, and six William Allen White Awards. Mr. Mayer serves on the board of directors of Film Independent and has lectured on crisis management and communications at UCLA’s Anderson School of Business and USC's Annenberg School of Communication. From December 2007 to January 2016, Mr. Mayer served as a director and member of the compensation and nominating and governance committees of American Apparel Inc., a public company. In connection with the 42West acquisition, our Board agreed to nominate a director selected by the sellers of 42West. In addition, Mr. O’Dowd entered into an agreement with the sellers to vote his beneficially owned shares of common stock to elect such nominee. As of April 20, 2017, the record date of the annual meeting of shareholders, Mr. O'Dowd owned 17.3% of our outstanding common stock. The sellers selected Mr. Mayer as their candidate for election to our Board.

 

Qualifications . The Board believes Mr. Mayer is qualified to serve as a director based on his management experience as a founding principal of 42West as well as his significant experience in the entertainment marketing and public relations industry.

 

Mirta A Negrini . Ms. Negrini has served on our Board since December 2014 and as our Chief Financial and Operating Officer since October 2013. Ms. Negrini has over thirty years of experience in both private and public accounting. Immediately prior to joining us, she served since 1996 as a named partner in Gilman & Negrini, P.A., an accounting firm of which our company was a client. Ms. Negrini is a Certified Public Accountant licensed in the State of Florida.

 

Qualifications . The Board nominated Ms. Negrini to serve as a director because of her significant accounting experience gained as a named partner at an accounting firm.

 

 

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Justo Pozo . Mr. Pozo has served on our Board since June 2017. He is the Chairman of Pozo Capital Partners, LLC, a family-owned equity investment fund, focusing in the areas of entertainment, finance and real estate. Previously, until May 2012, Mr. Pozo was Co-Founder and President of Preferred Care Partners, Inc., one of the largest privately owned Healthcare Maintenance Organizations in Florida until it was acquired by United Healthcare Services, Inc. Under his leadership, Preferred became one of South Florida’s fastest growing private companies in 2003, being ranked 67 out of 500 privately held companies in South Florida by South Florida CEO magazine in 2007. Preferred was also the recipient of South Florida’s Good to Great Award given by the Greater Miami Chamber of Commerce. During his tenure at Preferred, he received numerous recognitions including the induction into Florida International University’s College of Business Entrepreneurial Hall of Fame and the Miami Dade College Hall of Fame. He was selected by the South Florida Business Journal as a Heavy Hitter in the Health Care industry and was a finalist for the same publications Excellence in Health Care Award. In 2008, he received the prestigious Torch Award for Distinguished Alumnus for the College of Business Administration of Florida International University. Mr. Pozo is a Certified Public Accountant licensed in the State of Florida. In March 2015, he was appointed by the Florida Board of Governors, as Trustee to the Florida International University Board of Trustees.

 

Qualifications . The Board nominated Mr. Pozo to serve as a director because of his leadership experience as a founder and President of an entity that experienced significant growth and because of his background in accounting.

  

Nicholas Stanham, Esq. Mr. Stanham has served on our Board since December 2014. Mr. Stanham is a founding partner of R&S International Law Group, LLP in Miami, Florida, which was founded in January 2008. His practice is focused primarily in real estate and corporate structuring. Mr. Stanham has over 20 years of experience in real estate purchases and sales of residential and commercial properties. Since 2004, Mr. Stanham has been a member of the Christopher Columbus High School board of directors. In addition, he serves as a director of ReachingU, a foundation that promotes initiatives and supports organizations that offer educational opportunities to Uruguayans living in poverty.

 

Qualifications . The Board nominated Mr. Stanham to serve as a director because of his experience as a founding partner at a law firm as well as his business management experience at that firm.

 

Significant Employees

 

NAME		AGE		PRINCIPAL OCCUPATION
Leslee Dart		63		Co-Chief Executive Officer of 42West
Amanda Lundberg		52		Co-Chief Executive Officer of 42West

 

Leslee Dart . Ms. Dart has served as a Co-Chief Executive Officer of 42West since March 2017. Ms. Dart co-heads 42West’s Talent Division and co-heads its Entertainment Marketing Division. Ms. Dart has directed the publicity campaigns for more than 300 motion pictures and television shows.   Ms. Dart and her team also represent numerous individual actors and entertainers. A recipient of the 2009 New York Women in Communications Matrix Award for excellence in Public Relations, Ms. Dart began her career at Rogers & Cowan, a marketing and public relations agency. In 1981, she joined PMK, a marketing and public relations agency, eventually becoming its President. In 2004, she founded The Dart Group, which later became 42West. Ms. Dart attended the University of Southern California and received a degree in public relations from the School of Journalism, with a minor in fine arts.

 

Amanda Lundberg . Ms. Lundberg has served as a Co-Chief Executive Officer of 42West since March 2017. Ms. Lundberg co-heads 42West’s Entertainment Marketing Division. Ms. Lundberg has been instrumental in developing and overseeing hundreds of film-release campaigns, awards campaigns, festival launches, and publicity initiatives for studios, financing and production companies as well as for individual filmmakers and talent. Ms. Lundberg also represents a diverse slate of actors, directors, writers, and producers. In addition, Ms. Lundberg has played a pioneering role in helping filmmakers and financiers self-distribute their films. Prior to joining 42West in 2005, Ms. Lundberg was Executive Vice President of Worldwide Public Relations at Miramax, a global film and television studio, developing and overseeing publicity campaigns for major motion pictures. From 1995 to 2001, Ms. Lundberg also served as Senior Vice President of Worldwide Publicity at Metro-Goldwyn-Mayer, a leading entertainment company, where she oversaw the studio’s international public relations efforts.

 

 

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There is no family relationship between any of our directors, executive officers and significant employees. None of our directors, officers or significant employees has been involved in any material legal proceedings in the past ten years.

 

Director Independence

 

We are not listed on a national securities exchange; however, we have elected to use the definition of independence under the NASDAQ listing requirements in determining the independence of our directors and nominees for director. In 2017, our Board undertook a review of director independence, which included a review of each director and director nominee’s responses to questionnaires inquiring about any relationships with us. This review was designed to identify and evaluate any transactions or relationships between a director, or director nominee or any member of his or her immediate family and us, or members of our senior management or other members of our Board, and all relevant facts and circumstances regarding any such transactions or relationships. Based on its review, our Board determined that Messrs. Espensen, Famadas, Pozo and Stanham are independent. Messrs. O’Dowd and Mayer and Ms. Negrini are not independent under NASDAQ’s independence standards, its compensation committee independence standards or its nominations committee independence standards.

 

In making a determination of independence with respect to director nominee, Mr. Pozo, our Board considered (i) Mr. Pozo’s various past investments in our digital productions, which we refer to as the Investments, and his receipt of interest income from such investments, as well as the fact that Mr. Pozo is in the business of making investments to other companies similar to ours, and has participated in such Investments on substantially similar terms as all other investors and has not received any preferential terms or payment arrangements and (ii) Mr. Pozo’s beneficial ownership of approximately 13% of our outstanding common stock as of April 17, 2017. Our Board determined that such Investments and beneficial ownership would not impair Mr. Pozo’s independence from our company.

 

 

 

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EXECUTIVE COMPENSATION

 

The following summary compensation table sets forth all compensation awarded to, earned by, or paid to our named executive officers during the fiscal years ended December 31, 2016 and 2015.

 

Summary Compensation Table

 

Name and Principal Position		Year	Salary ($)	Bonus ($)	All Other Compensation ($)	Total ($)
William O’Dowd, IV (1)		2016	250,000	—	377,403 (2)	627,403
Chairman and Chief Executive Officer		2015	250,000	—	574,947	824,947
Mirta A Negrini		2016	200,000	—	—	200,000
Chief Financial and Operating Officer		2015	150,000	50,000	—	200,000

____________________________

 

(1)

For 2016, we accrued the full amount of Mr. O’Dowd’s salary of $250,000 but did not make any payments on this amount.

 

(2)

This amount includes life insurance in the amount of $48,384, interest paid on accrued and unpaid compensation in the amount of $212,066 and interest paid on the revolving promissory note in the amount of $116,953 for the fiscal year ended December 31, 2016. In March 2016, Dolphin exchanged $3,073,410 aggregate amount of principal and interest outstanding under the revolving promissory note for shares of our common stock. For additional information on the revolving promissory note, please see “Certain Relationships and Related Transactions.”

 

Outstanding Equity Awards at Fiscal Year-End

 

None of the executive officers named in the table above had any outstanding equity awards as of December 31, 2016 and 2015.

Director Compensation

 

In 2016, we did not pay compensation to any of our directors in connection with their service on our Board.

 

Mirta A Negrini Employment Arrangement

 

On October 21, 2013, we appointed Ms. Negrini as our Chief Financial and Operating Officer, at an annual base salary of $150,000. In 2016, Ms. Negrini’s annual base salary was increased to $200,000. The terms of Ms. Negrini’s employment arrangement do not provide for any payments in connection with her resignation, retirement or other termination, or a change in control, or a change in her responsibilities following a change in control.

 

 

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 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The table below shows the beneficial ownership as of October 2, 2017, of our common stock and our Series C Convertible Preferred Stock held by each of our directors, named executive officers, all current directors and executive officers as a group and each person known to us to be the beneficial owner of more than 5% of our outstanding common stock and 5% of our Series C Convertible Preferred Stock. The percentages in the table below are based on 9,367,065 shares of common stock outstanding and 50,000 shares of Series C Convertible Preferred Stock outstanding as of October 2, 2017. Shares of common stock that will be issuable upon conversion of the Series C Convertible Preferred Stock are not included in such calculation as the Board has not determined that an optional conversion threshold (as defined below) has occurred. The Series C Convertible Preferred Stock is convertible in accordance with the terms set forth in our Amended and Restated Articles of Incorporation as amended, described in the section of this prospectus titled “Description of Securities.”

 

Beneficial ownership is determined in accordance with Rule 13d-3 promulgated under the Exchange Act. Except as indicated by footnote and subject to community property laws, where applicable, to our knowledge the persons named in the table below have sole voting and investment power with respect to all shares of common stock that are shown as beneficially owned by them. In computing the number of shares owned by a person and the percentage ownership of that person, any such shares subject to warrants or other convertible securities held by that person that were exercisable as of October 2, 2017 or that will become exercisable within 60 days thereafter are deemed outstanding for purposes of that person’s percentage ownership but not deemed outstanding for purposes of computing the percentage ownership of any other person. Except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred.

 

Common Stock

 

Name and Address of Owner (1)	# of Shares of Common Stock	% of Class (Common Stock)
Directors and Executive Officers
William O’Dowd, IV (2)	1,625,843	17.4 %
Michael Espensen	278	*
Nelson Famadas	1,993	*
Allan Mayer (3)	154,867	1.7  %
Mirta A Negrini	––	*
Justo Pozo (4)	1,215,332	13.0 %
Nicholas Stanham, Esq. (5)	14,334	*
All Directors and Executive Officers as a Group (7 persons)	3,012,646	32.2 %
5% Holders
Stephen L. Perrone (6)	2,050,000	21.5 %
T Squared Partners LP (7)	952,000	9.9 %
Alvaro and Lileana de Moya (8)	603,742	6.4 %

 

   Series C Convertible Preferred Stock

 

Name and Address of Owner (1)	# of Shares of Preferred Stock	% of Class (Preferred Stock)
William O’Dowd, IV (9)	50,000	100 %

 

* Less than 1% of outstanding shares.

 

 

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(1)	Unless otherwise indicated, the address of each shareholder is c/o Dolphin Entertainment, Inc., 2151 Le Jeune Road, Suite 150, Mezzanine, Coral Gables, Florida, 33134.

 

(2)

The amount shown includes (1) 621,052 shares of common stock held by Dolphin Digital Media Holdings LLC, which is wholly-owned by Mr. O’Dowd, (2) 527,841 shares of common stock held by Dolphin Entertainment, LLC, which is wholly-owned by Mr. O’Dowd and (3) 476,950 shares of common stock held by Mr. O’Dowd individually. Does not include shares of common stock that are issuable upon conversion of the Series C Convertible Preferred Stock upon the determination by the independent directors of the Board that an optional conversion threshold has occurred. In accordance with the terms of our Amended and Restated Articles of Incorporation, as amended, each share of Series C Convertible Preferred Stock will be convertible into one half of a share of common stock, subject to adjustment for each issuance of common stock (but not upon issuance of common stock equivalents) that occurred, or occurs, from the date of issuance of the Series C Convertible Preferred Stock (the “issue date”) until the fifth (5th) anniversary of the issue date (i) upon the conversion or exercise of any instrument issued on the issue date or thereafter issued (but not upon the conversion of the Series C Convertible Preferred Stock), (ii) upon the exchange of debt for shares of common stock, or (iii) in a private placement, such that the total number of shares of common stock held by an “Eligible Class C Preferred Stock Holder” (based on the number of shares of common stock held as of the date of issuance) will be preserved at the same percentage of shares of common stock outstanding held by such Eligible Class C Preferred Stock Holder on such date. An Eligible Class C Preferred Stock Holder means any of (i) Dolphin Entertainment, LLC for so long as Mr. O’Dowd continues to beneficially own at least 90% and serves on the board of directors or other governing entity, (ii) any other entity in which Mr. O’Dowd beneficially owns more than 90%, or a trust for the benefit of others, for which Mr. O’Dowd serves as trustee and (iii) Mr. O’Dowd individually. Series C Convertible Preferred Stock will only be convertible by the Eligible Class C Preferred Stock Holder upon our company satisfying one of the “optional conversion thresholds”. Specifically, a majority of the independent directors of the Board, in its sole discretion, must have determined that our company accomplished any of the following (i) EBITDA of more than $3.0 million in any calendar year, (ii) production of two feature films, (iii) production and distribution of at least three web series, (iv) theatrical distribution in the United States of one feature film, or (v) any combination thereof that is subsequently approved by a majority of the independent directors of the Board based on the strategic plan approved by the Board. While certain events may have occurred that could be deemed to have satisfied this criteria, the independent directors of the Board have not yet determined that an optional conversion threshold has occurred.

 

(3)	The amount shown is beneficially owned by Mr. Mayer and is held by the Mayer-Vogel Trust, for which Mr. Mayer serves as trustee.

 

(4)

The amount shown includes: (i) 508,869 shares held by Pozo Opportunity Fund I, LLC; (ii) 342,115 shares held by Pozo Opportunity Fund II, LLC; (iii) 336,945 shares held by Pozo Capital Partners, LLC; (iv) 938 shares held by the Zulita Pina Irrevocable Trust; (v) 875 shares held by Justo Pozo ACF Ricardo S. Pozo U/FI/UTMA; (vi) 625 shares held by the Carolina Pozo Roth IRA; and (vii) 24,966 shares held by Justo Luis and Sylvia E. Pozo. Mr. Pozo is the beneficial owner of all of the shares and has sole voting and dispositive power with respect to all of the shares except for (i) 24,966 shares with respect to which he shares voting and dispositive power with his spouse, (ii) 1,500 shares with respect to which he shares voting and dispositive power with his children; and (iii) 336,945 shares held by Pozo Capital Partners, LLC with respect to which Mr. Pozo shares voting and dispositive power with his spouse and children.

 

(5)	Mr. Stanham shares voting and dispositive power with respect to all of the shares of common stock with his spouse.

 

 

(6)

The amount shown includes: (i) 1,235,000 shares held by KCF Investments LLC; (ii) 385,000 shares held by BBCF 2011 LLC; (iii) 225,000 shares held by BBCD LLC; (iv) 5,000 shares held by Mr. Perrone as an individual; and (v) 25,000 shares held by Strocar Investments LLC. The amount shown also includes 175,000 shares issuable upon the exercise of a common stock purchase warrant that is exercisable within 60 days after October 2, 2017. Stephen L. Perrone (4450 US Highway #1, Vero Beach, FL 32967) is the beneficial owner of all of the shares and has sole voting and dispositive power with respect to all of the shares.

 

(7)

The amount shown is based upon: (i) 12,115 shares issuable upon the exercise of a Class E Warrant; (ii) 175,000 shares issuable upon the exercise of a Class F Warrant; (iii) 750,000 shares issuable upon the exercise of a Class G Warrant; (iv) 250,000 shares issuable upon the exercise of a Class H Warrant; (v) 250,000 shares issuable upon the exercise of a Class I Warrant; and (vi) 15,089 shares held by Mark Jensen and/or Thomas M. Suave and related entities owned by Mark Jensen and/or Thomas M. Suave. Each of the warrants is convertible/exercisable within 60 days after October 2, 2017, to the extent that after giving effect to such conversion/exercise, the holder (together with the holder’s affiliates) would not beneficially own in excess of 9.9% of the number of shares of common stock outstanding immediately after giving effect to such conversion/exercise. Mark Jensen and Thomas M. Suave are both principals of T Squared Partners LP (P.O. Box 606, Fishers, IN 46038) and are each deemed to have beneficial ownership of all the shares. Mr. Jensen and Mr. Suave have shared voting and dispositive power over all shares beneficially owned by T Squared Partners LP.

 

(8)

The amount shown includes: (i) 75,000 shares held by the Alvaro de Moya Revocable Trust; (ii) 75,000 shares held by the Lileana de Moya Revocable Trust; (iii) 100,000 shares held by the Lileana de Moya Lifetime Trust; (iv) 10,000 shares held by the Alvaro de Moya Grantor Retained Annuity Trust; and (v) 343,742 held by Alvaro and Lileana de Moya. Alvaro and Lileana de Moya serve as trustees for these entities and have shared voting and dispositive power over all the shares beneficially owned.

 

(9)	The Series C Convertible Preferred Stock are held by Dolphin Entertainment, LLC which is wholly-owned by Mr. O’Dowd.

 

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

William O’Dowd, IV

 

On December 31, 2011, we issued an unsecured revolving promissory note to Dolphin Entertainment, LLC, an entity wholly owned by our CEO, Mr. O’Dowd. The revolving promissory note accrued interest at a rate of 10% per annum. Dolphin Entertainment, LLC had the right at any time to demand that all outstanding principal and accrued interest be repaid with a ten day notice to us. During the years ended December 31, 2015 and 2014, Dolphin Entertainment, LLC advanced $2,797,000 and $166,000 and was repaid $3,267,000 and $2,096,856, respectively in principal. During the year ended December 31, 2016, Dolphin Entertainment, LLC advanced $270,000. On March 4, 2016, we entered into a subscription agreement with Dolphin Entertainment, LLC, pursuant to which we and Dolphin Entertainment, LLC agreed to convert $1,920,600 of principal balance and $1,152,809 of accrued interest outstanding under the revolving promissory note into 307,341 shares of common stock. The shares were converted at a price of $10.00 per share. During the years ended December 31, 2016, 2015 and 2014, $32,008, $340,050 and $368,709, respectively, were expensed in interest and we recorded accrued interest of $5,788, $1,126,590 and $786,007, related to the revolving promissory note, on our consolidated balance sheets as of December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, 2015 and 2014, the outstanding balances under the revolving promissory note were $0, $1,982,267 and $2,451,767 respectively. The largest aggregate balance that we owed to Dolphin Entertainment, LLC during 2016, 2015 and 2014 was $3,112,658, $5,313,757 and $4,839,620 respectively.

 

On April 1, 2013, we entered into an agreement with Dolphin Films, which at the time was indirectly, wholly owned by our CEO.  We were responsible for rendering management and production services to the related party.  The terms of the agreement were for a period between April 1, 2013 and December 31, 2014 for an annual fee of $2,000,000.  The agreement was not subsequently renewed.

 

Dolphin Entertainment, LLC has previously advanced funds for working capital to Dolphin Films, its former subsidiary which we acquired in March 2016. During the year ended December 31, 2015, Dolphin Films agreed to enter into second loan and security agreements with certain of Dolphin Entertainment, LLC’s debtholders, pursuant to which the debtholders exchanged their Dolphin Entertainment, LLC notes for notes issued by Dolphin Films totaling $8,774,327. The amount of debt assumed by Dolphin Films was applied against amounts owed to Dolphin Entertainment, LLC by Dolphin Films. On October 1, 2016, Dolphin Films entered into a promissory note with Dolphin Entertainment, LLC, in the principal amount of $1,009,624. The note is payable on demand and bears interest at a rate of 10% per annum. As of December 31, 2016 and 2015, Dolphin Films owed Dolphin Entertainment, LLC $434,326 and $1,612,357, respectively, of principal and $19,652 and $1,305,166, respectively, of accrued interest, that was recorded on the consolidated balance sheets. Dolphin Films recorded interest expense of $83,551 and $148,805, respectively, for the years ended December 31, 2016 and 2015. During the six months ended June 30, 2017, we agreed to include certain script costs and other payables totaling $594,315 that were owed to Dolphin Entertainment, LLC in the note. During the six months ended June 30, 2017, we received proceeds related to the note from Dolphin Entertainment, LLC in the amount of $1,297,000 and repaid Dolphin Entertainment, LLC $506,981. As of June 30, 2017, Dolphin Films owed Dolphin Entertainment, LLC $1,818,661 that was recorded on the consolidated balance sheets. Dolphin Films recorded interest expense of $67,418 for the six months ended June 30, 2017. The largest aggregate balance Dolphin Films owed Dolphin Entertainment, LLC during 2016 and 2015 was $2,734,094 and $8,697,877, respectively.

 

On September 7, 2012, we entered into an employment agreement with Mr. O’Dowd, which was subsequently renewed for a period of two years, effective January 1, 2015. The agreement provided for an annual salary of $250,000 and a one-time bonus of $1,000,000. Unpaid compensation accrues interest at a rate of 10% per annum. As of December 31, 2016, 2015 and 2014, we had a balance of $735,211, $523,145 and $336,633, respectively of accrued interest and $2,250,000, $2,000,000 and $1,750,000, respectively of accrued compensation related to this agreement. We recorded $212,066, $186,513 and $161,513 of interest expense for the years ended December 31, 2016, 2015 and 2014. The largest aggregate balance we owed Mr. O’Dowd during 2016 and 2015 was $2,250,000 and $2,000,000 respectively.

 

During 2015, we agreed to pay Dolphin Entertainment, LLC $250,000 for a script that it had developed for a web series that we produced during 2015.

 

 

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As previously mentioned, on March 7, 2016, we acquired Dolphin Films from Dolphin Entertainment, LLC. As consideration, we issued to Dolphin Entertainment, LLC 2,300,000 shares of Series B Convertible Preferred Stock, par value $0.10 per share and 50,000 shares of Series C Convertible Preferred Stock, par value $0.001 per share. On November 15, 2016, Dolphin Entertainment, LLC converted the Series B Convertible Preferred Stock into 1,092,500 shares of our common stock. As Mr. O’Dowd is the sole owner of Dolphin Entertainment, LLC, he is deemed the beneficial owner of such shares of common stock.

 

Michael Espensen

 

On December 31, 2011, we executed an unsecured promissory note in favor of our director, Mr. Espensen, in the amount of $104,612 bearing interest at 10% per annum and payable on demand.  On the same day, we issued a payment in the amount of $14,612 to reduce the principal.  We completed making payments of principal and interest in August 2014 and paid $104,612 in principal and $16,389 of interest over the life of the loan.

 

Allan Mayer

 

On September 20, 2017, we executed an unsecured promissory note in favor of our director, Mr. Mayer, in the amount of $150,000. The promissory note accrues interest at a rate of 10% per annum with a maturity date of September 20, 2018. As of October 2, 2017, no principal or interest has been paid on the note and the largest principal amount since the date of issuance of the note has been $150,000.

 

Justo Pozo

 

During 2016, we entered into three separate debt exchange agreements with entities under the control of our director, Justo Pozo, to exchange promissory notes with an aggregate principal and interest balance of $8,148,145 into 814,814 shares of our common stock at $10.00 per share. The promissory notes accrued interest at rates ranging from 11.25% to 12.5% per annum. Mr. Pozo was the holder of a convertible note that mandatorily and automatically converted into common stock, at the conversion price of $10.00 per share, upon the average market price per share of common stock being greater than or equal to the conversion price for twenty trading days. During 2016, such triggering event occurred and the convertible note was converted into 316,400 shares of our common stock.

 

Nicholas Stanham

 

In March 2016, we entered into a debt exchange agreement with our director, Mr. Stanham, pursuant to which we exchanged a promissory note in the amount of $50,000 for 5,564 shares of our common stock, as payment in full of the promissory note. The promissory note accrued interest at a rate of 10% per annum. The shares of common stock were converted at a price of $10.00 per share.

 

T Squared Partners LP

 

In connection with the merger whereby we acquired Dolphin Films, we entered into a preferred stock exchange agreement with T Squared Partners LP, pursuant to which, on March 7, 2016, we issued 1,000,000 shares of Series B Convertible Preferred Stock to T Squared in exchange for 1,042,753 shares of Series A Convertible Preferred Stock, previously issued to T Squared. On November 16, 2016, T Squared converted the Series B Convertible Preferred Stock into 475,000 shares of our common stock.

 

On November 4, 2016, we issued Class G, Class H and Class I Warrants to T Squared that entitle T Squared to purchase up to 1,250,000 shares of our common stock. The warrants have a maximum exercise provision that prohibit T Squared from exercising warrants that would cause it to exceed 9.99% of our outstanding shares of common stock, unless the restriction is waived or amended, by the mutual consent of us and T Squared.

 

 

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In September 2015, T Squared extended its Class E and Class F Warrants until December 31, 2018. On April 13, 2017, T Squared partially exercised Class E Warrants and acquired 162,885 shares of our common stock pursuant to the cashless exercise provision in the related warrant agreement. T Squared had previously paid down $1,675,000 for these shares.

 

Stephen L. Perrone

 

In December 2016, we and entities affiliated with Stephen L. Perrone entered into: (i) a debt exchange agreement to exchange promissory notes in the aggregate amount of $6,470,990 for shares of our common stock and (ii) a purchase agreement to acquire a 25% membership interest of Dolphin Kids Clubs owned by the affiliated entity. The promissory notes accrued interest at rates ranging from 11.25% to $13.25% per annum. Pursuant to the agreements, we issued a Class J Warrant that entitled Mr. Perrone to purchase up to 1,085,000 shares of our common stock at a price of $0.03 per share through December 29, 2020. In addition, we issued to an entity affiliated with Mr. Perrone a Class K Warrant as consideration to terminate an equity finance agreement in the amount of $564,000. The Class K Warrant entitled Mr. Perrone to purchase up to 85,000 shares of our common stock at a price of $0.03 per share prior to December 29, 2020. On March 31, 2017, Mr. Perrone’s affiliated entities exercised the Class J and Class K Warrants at an aggregate purchase price of $35,100 and acquired 1,170,000 shares of our common stock.

 

Alvaro and Lileana De Moya

 

During 2016, we entered into two separate debt exchange agreements with Alvaro and Lileana De Moya to convert two promissory notes entered into in 2013 and 2015, with an aggregate balance of $3,437,414 of principal and interest into 343,742 shares of our common stock at a price of $10.00 per share. The promissory notes accrued interest at rates ranging from 11.25% to 12.5% per annum. In addition, we entered into a subscription agreement with the De Moya’s in which they purchased 260,000 shares of our common stock at $10.00 per share.

 

              All related person transactions must be reviewed and approved by our audit committee. Current SEC rules define transactions with related persons to include any transaction, arrangement or relationship (i) in which we are a participant, (ii) in which the amount involved exceeds $120,000, and (iii) in which any executive officer, director, director nominee, beneficial owner of more than 5% of our common stock, or any immediate family member of such persons has or will have a direct or indirect material interest.

 

 

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 DESCRIPTION OF SECURITIES

 

The following is a brief description of our capital stock. This summary does not purport to be complete in all respects. This description is subject to and qualified entirely by the terms of our Amended and Restated Articles of Incorporation, as amended, which we refer to as our Articles of Incorporation, and our Bylaws, copies of which have been filed with the Commission and are also available upon request from us.

 

Our authorized capital stock currently consists of 200,000,000 shares of common stock, par value $0.015 per share and 10,000,000 shares of preferred stock, par value $0.001 per share, in one or more series. Of such preferred stock, 50,000 have been designated Series C Convertible Preferred Stock, par value $0.001 per share. As of October 2, 2017, we had outstanding 9,367,057 shares of our common stock and 50,000 shares of our Series C Convertible Preferred Stock. At that date, we had an aggregate of 1,612,115 shares of our common stock issuable upon the exercise of outstanding warrants to purchase common stock. Shares of our common stock are also issuable upon the conversion of 50,000 shares of Series C Convertible Preferred Stock outstanding. For a discussion of the conditions upon which the shares of Series C Convertible Preferred Stock become convertible, and the number of shares of common stock into which such preferred stock would be convertible upon satisfaction of such conditions, see “Series C Convertible Preferred Stock” below. In connection with our 42West acquisition (i) we will issue 980,911 shares of our common stock to the sellers on January 2, 2018 and (ii) we may issue up to 981,563 shares of our common stock to the sellers based on the achievement of specified financial performance targets over a three-year period as set forth in the membership interest purchase agreement. In addition, we granted the sellers the right, but not the obligation, to cause us to purchase up to an aggregate of 1,187,094 of their shares of common stock received as consideration, for a purchase price of $9.22 per share, as adjusted for the 1-to-2 reverse stock split, during certain specified exercise periods up until December 2020. As of the date of this prospectus, we have repurchased 116,591 shares of common stock from the sellers pursuant to the put options. In addition, 78,757 shares of our common stock are issuable upon the conversion of seven convertible promissory notes in the aggregate principal amount of $725,000 (calculated based on the 90-trading day average price per share as of October 2, 2017) . For a discussion of the terms of conversion of the promissory notes and the number of common stock into which such promissory notes would be convertible, see “Convertible Promissory Notes” below.

 

Effective May 10, 2016, we amended our Articles of Incorporation to effectuate a 1-to-20 reverse stock split. Effective July 6, 2017, we amended our Articles of Incorporation to (i) change our name to Dolphin Entertainment, Inc.; (ii) cancel previous designations of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock; (iii) reduce the number of Series C Convertible Preferred Stock (described below) outstanding in light of our 1-to-20 reverse stock split from 1,000,000 to 50,000 shares; and (iv) clarify the voting rights of the Series C Convertible Preferred Stock that, except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred. Effective September 14, 2017, we amended our Articles of Incorporation to effectuate a 1-to-2 reverse stock split.

 

Units

 

Each unit consists of one share of common stock, par value $0.015 per share, and one warrant to purchase          share of our common stock, each as described further below. The common stock and warrants will be immediately separable and will be issued separately.

 

Common Stock

 

The holders of our common stock are generally entitled to one vote for each share held on all matters submitted to a vote of the shareholders and do not have any cumulative voting rights. Unless otherwise required by Florida law, once a quorum is present, matters presented to shareholders, except for the election of directors, will be approved by a majority of the votes cast. The election of directors is determined by a plurality of the votes cast.

 

 

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Holders of our common stock are entitled to receive dividends if, as and when declared by the Board out of funds legally available for that purpose, subject to preferences that may apply to any preferred stock that we issue. In the event of our dissolution or liquidation, after satisfaction of all our debts and liabilities and distributions to the holders of any preferred stock that we issued, or may issue in the future, of amounts to which they are preferentially entitled, the holders of common stock will be entitled to share ratably in the distribution of assets to the shareholders.

 

There are no cumulative, subscription or preemptive rights to subscribe for any additional securities which we may issue, and there are no redemption provisions, conversion provisions or sinking fund provisions applicable to the common stock. The rights of holders of common stock are subject to the rights, privileges, preferences and priorities of any class or series of preferred stock.

 

Our Articles of Incorporation and Bylaws do not restrict the ability of a holder of our common stock to transfer his or her shares of our common stock.

 

All shares of our common stock will, when issued, be duly authorized, fully paid and nonassessable. The shares to be issued by us in this offering, and the shares to be issued by us upon exercise of the warrants to be issued in this offering in accordance with the terms of the warrants, will be when issued and paid for, validly issued, fully paid and nonassessable.

 

Preferred Stock

 

Our Board, without further approval of the shareholders, is authorized to fix the designations, powers, including voting powers, preferences and the relative, participating, optional or other special rights, if any, of the shares of each class or series and any qualifications, limitations and restrictions thereof, including dividend rights, conversion rights, voting rights, sinking-fund provisions, terms of redemption, liquidation preferences, preemption rights, and the number of shares constituting any series or the designation of such series. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could, among other things, adversely affect the voting power or other rights of the holders of our common stock and, under certain circumstances, make it more difficult for a third party to gain control of us, discourage bids for our common stock at a premium or otherwise adversely affect the market price of the common stock.

 

Series C Convertible Preferred Stock

 

On February 23, 2016, we amended our Articles of Incorporation to designate 1,000,000 preferred shares as Series C Convertible Preferred Stock with a $0.001 par value per share which may be issued only to an “Eligible Series C Preferred Stock Holder” as described below. As previously discussed, as part of the merger consideration in the Dolphin Films acquisition, on March 7, 2016, we issued 1,000,000 shares of Series C Convertible Preferred Stock to Dolphin Entertainment, LLC, an entity wholly owned by our President, Chairman and CEO, Mr. O’Dowd. Effective July 6, 2017, we amended our Articles of Incorporation to reduce the number of Series C Convertible Preferred Stock outstanding in light of our 1-to-20 reverse stock split from 1,000,000 to 50,000 shares and to clarify the voting rights of the Series C Convertible Preferred Stock as described below.

 

 

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Each share of Series C Convertible Preferred Stock will be convertible into one half of a share of common stock, subject to adjustment for each issuance of common stock (but not upon issuance of common stock equivalents) that occurred, or occurs, from the date of issuance of the Series C Convertible Preferred Stock (the “issue date”) or March 7, 2016, until the fifth (5th) anniversary of the issue date (i) upon the conversion or exercise of any instrument issued on the issue date or thereafter issued (but not upon the conversion of the Series C Convertible Preferred Stock), (ii) upon the exchange of debt for shares of common stock, or (iii) in a private placement, such that the total number of shares of common stock held by an “Eligible Class C Preferred Stock Holder” (based on the number of shares of common stock held as of the date of issuance) will be preserved at the same percentage of shares of common stock outstanding held by such Eligible Class C Preferred Stock Holder prior to such issuance. An Eligible Class C Preferred Stock Holder means any of (i) Dolphin Entertainment, LLC for so long as Mr. O’Dowd continues to beneficially own at least 90% and serves on the board of directors or other governing entity, (ii) any other entity in which Mr. O’Dowd beneficially owns more than 90%, or a trust for the benefit of others, for which Mr. O’Dowd serves as trustee and (iii) Mr. O’Dowd individually. Series C Convertible Preferred Stock will only be convertible by the Eligible Class C Preferred Stock Holder upon our company satisfying one of the “optional conversion thresholds”. Specifically, a majority of the independent directors of the Board, in its sole discretion, must have determined that we accomplished any of the following (i) EBITDA of more than $3.0 million in any calendar year, (ii) production of two feature films, (iii) production and distribution of at least three web series, (iv) theatrical distribution in the United States of one feature film, or (v) any combination thereof that is subsequently approved by a majority of the independent directors of the Board based on the strategic plan approved by the Board. While certain events may have occurred that could be deemed to have satisfied this criteria, (including the distribution of Max Steel) the independent directors of the Board have not yet determined that an optional conversion threshold has occurred. Except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold has occurred. Only upon such determination, will the Series C Convertible Preferred Stock be entitled or permitted to vote on all matters required or permitted to be voted on by the holders of common stock and will be entitled to that number of votes equal to three votes for the number of Conversion Shares (as defined in the Certificate of Designation) into which such Holder’s shares of the Series C Convertible Preferred Stock could then be converted.

 

The Series C Convertible Preferred Stock will automatically convert upon the occurrence of any of the following events: (i) each outstanding share of Series C Convertible Preferred Stock which is transferred to any holder other than an Eligible Class C Preferred Stock Holder will automatically convert into that number of fully paid and nonassessable Conversion Shares (as defined in the Certificate of Designation) equal to the Conversion Number (as defined in the Certificate of Designation) at the time in effect; (ii) if the aggregate number of shares of common stock plus Conversion Shares (issuable upon conversion of the Series B Convertible Preferred Stock and the Series C Convertible Preferred Stock) held by the Eligible Class C Preferred Stock Holders in the aggregate constitute 10% or less of the sum of (x) the outstanding shares of common stock plus (y) all Conversion Shares held by the Eligible Class C Preferred Stock Holders, then each outstanding Series C Convertible Preferred Stock then outstanding will automatically convert into that number of fully paid and nonassessable Conversion Shares equal to the Conversion Number at the time in effect; or (iii) at such time as a holder of Series C Convertible Preferred Stock ceases to be an Eligible Class C Preferred Stock Holder, each share of Series C Convertible Preferred Stock held by such person or entity will immediately convert into that number of fully paid and nonassessable Conversion Shares equal to the Conversion Number at the time in effect.

  

The Series C Convertible Preferred Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (a) senior to all classes of common stock, to the Series B Convertible Preferred Stock and to each other class of capital stock or series of preferred stock established thereafter by the Board the terms of which expressly provide that such class ranks junior to the Series C Convertible Preferred Stock, which we refer to as Junior Stock, (b) on a parity with each other class of capital stock or series of preferred stock established thereafter by the Board, which we refer to as Parity Stock, and (c) junior to any future class of preferred stock established thereafter by the Board, the terms of which expressly provide that such class ranks senior to the Series C Convertible Preferred Stock, which we refer to as Senior Stock.

  

 

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Upon any liquidation, dissolution or winding up after payment or provision for payment of our debts and other liabilities, the holders of Series C Convertible Preferred Stock are entitled to be paid out of our assets available for distribution to our shareholders (i) prior to the holders of any class or series of common stock and Junior Stock, (ii) pro rata with the holders of any Parity Stock and (iii) after the holders of any Senior Stock, an amount equal to $0.001 per share of Series C Convertible Preferred Stock.

 

The Series C Convertible Preferred Stock has dividend rights on parity with the common stock.

 

Warrants

 

We currently have outstanding warrants, exercisable into 1,612,115 shares of our common stock at exercise prices ranging from $6.20 to $10.00 per share.

 

As of October 2, 2017, we had outstanding six series of common stock warrants: (i) Series E Warrants, (ii) Series F Warrants, (iii) Series G Warrants, (iv) Series H Warrants, (v) Series I Warrants, and (vi) the Strocar warrants for the purchase of an aggregate of 1,612,115 shares of common stock. The Series E Warrants represent the right to purchase an aggregate of 12,115 shares of common stock at an exercise price of $6.20 per share and expire on December 31, 2018. The Series F Warrants represent the right to purchase an aggregate of 175,000 shares of common stock at an exercise price of $10.00 per share and expire on December 31, 2018. The Series G Warrants represent the right to purchase an aggregate of 750,000 shares of common stock at an exercise price of $9.22 per share and expire on January 31, 2018. The Series H Warrants represent the right to purchase an aggregate of 250,000 shares of common stock at an exercise price of $9.22 per share and expire on January 31, 2019. The Series I Warrants represent the right to purchase an aggregate of 250,000 shares of common stock at an exercise price of $9.22 and expire on January 31, 2020. The Strocar Warrants represent the right to purchase an aggregate of 175,000 shares of common stock at an exercise price of $10.00 per share and expire on December 31, 2018.

 

Cashless Exercise. The holders of each of the warrants may, upon exercise, elect to receive the net number of shares of common stock determined according to the formula set forth in the warrants in lieu of making the cash payment otherwise contemplated to be made to use upon such exercise.

 

Certain Adjustments and Anti-Dilution. The exercise price and the number of shares of common stock purchasable upon the exercise of the Warrants are subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, and combinations and reclassifications of our common stock. In addition, each of the Series E, G, H and I Warrants, in the event we sell, grant or issue any shares, options, warrants, or any instrument convertible into shares or equity in any form below the current exercise price per share of such warrant, provides that the current exercise price per share for the warrants be reduced to the lower price.

 

Rights as a Stockholder. The holder of a warrant does not have the rights or privileges of a holder of our common stock, including any voting rights, until the holder exercises the warrant.

 

Reduction of Exercise Price. The Holders of most of our warrants may, over the term of the warrant, make a payment to us for an equivalent amount of money to reduce the exercise price of such warrant until such time as the exercise price of this warrant is able to be exercised via the cashless exercise provision.

Underwriters’ Warrants

 

Please see “Underwriting” for a description of warrants to be issued to the underwriters.

 

 

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Warrants Issued in this Offering

 

The warrants will be issued in registered form under a warrant agreement between us and our warrant agent. The material provisions of the warrants are set forth herein but are only a summary and are qualified in their entirety by the provisions of the warrant agreement that has been filed as an exhibit to the registration statement of which this prospectus forms a part.

 

Each whole warrant entitles the purchaser to purchase share of our common stock at a price equal to $ per share at any time for up to years after the date of the closing of this offering.

 

The holder of a warrant will not be deemed a holder of our underlying common stock until the warrant is exercised. No fractional warrants will be issued. If an investor would otherwise be entitled to receive a fractional warrant, the number of warrants issued to the investor will be rounded up to the nearest whole warrant.

 

Subject to certain limitations as described below the warrants are immediately exercisable and expire on the anniversary of the date of issuance. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise.

 

The exercise price and the number of shares issuable upon exercise of the warrants is subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our common stock, and also upon any distributions of assets, including cash, stock or other property to our shareholders. The warrant holders must pay the exercise price in cash upon exercise of the warrants, unless such warrant holders are utilizing the cashless exercise provision of the warrants. After the close of business on the expiration date, unexercised warrants will become void.

 

In addition, in the event we consummate a merger or consolidation with or into another person or other reorganization event in which shares of our common stock are converted or exchange for securities, cash or other property, or we sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common stock, then following such event, the holders of the warrants will be entitled to receive upon exercise of the warrants the same kind and amount of securities, cash or property which the holders would have received had they exercised the warrants immediately prior to such fundamental transaction. Any successor to us or surviving entity shall assume the obligations under the warrants. In addition, as further described in the form of warrant filed as an exhibit to the registration statement of which this prospectus forms a part, in the event of any fundamental transaction completed for cash, or a going private transaction under Rule 13e-3 of the Exchange Act, or involving a person not trading on a national securities exchange, the holders of the warrants will have the right to require us to purchase the warrants for an amount in cash that is determined in accordance with a formula set forth in the warrants.

  

Upon the holder’s exercise of a warrant, we will issue the shares of common stock issuable upon exercise of the warrant within three business days following our receipt of notice of exercise.

 

Prior to the exercise of any warrants to purchase common stock, holders of the warrants will not have any of the rights of holders of the common stock purchasable upon exercise, including the right to vote or to receive any payments of dividends on the common stock purchasable upon exercise.

 

Warrant holders may exercise warrants only if the issuance of the shares of common stock upon exercise of the warrants is covered by an effective registration statement, or an exemption from registration is available under the Securities Act of 1933, as amended, or the Securities Act, and the securities laws of the state in which the holder resides. We intend to use commercially reasonable efforts to have the registration statement, of which this prospectus forms a part, effective when the warrants are exercised. The warrant holders must pay the exercise price in cash upon exercise of the warrants unless there is not an effective registration statement or, if required, there is not an effective state law registration or exemption covering the issuance of the shares underlying the warrants (in which case, the warrants may only be exercised via a “cashless” exercise provision).

 

 

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Convertible Promissory Notes

 

On each of July 18, July 26, August 1, August 4, 2017, August 31, September 6, 2017 and September 9, 2017, we entered into a subscription agreement pursuant to which we issued a convertible promissory note, each with substantially identical terms, for an aggregate principal amount of $725,000. Each of the convertible promissory notes matures one year from the date of issue and bears interest at a rate of 10% per annum. The principal and any accrued interest of each of the convertible promissory notes are convertible by the respective holder at a price equal to either (i) the 90-trading day average price per share of common stock as of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as similarly defined in each of the convertible promissory notes) of common stock is made, 95% of the Public Offering Share price (as similarly defined in each of the convertible promissory notes). The convertible promissory notes are convertible into 78,757 shares of our common stock (calculated based on the 90-trading day average price per share as of October 2, 2017).

 

Registration Rights

 

In connection with the 42West acquisition, on March 30, 2017, we entered into a registration rights agreement with the sellers. Pursuant to the registration rights agreement, the sellers are entitled to rights with respect to the registration under the Securities Act of shares received as consideration in the acquisition. These shares are referred to as registrable securities.

 

The registration of shares of our common stock pursuant to the exercise of the registration rights described below would enable the sellers to trade these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will pay the fees, costs and expenses of underwritten registrations under the registration rights agreement.

 

Generally, in an underwritten offering, the managing underwriter, if any, has the right to limit the number of shares the sellers may include in accordance with the terms of the registration rights agreement. The registrable securities will no longer be registrable securities when (i) a registration statement covering the registrable securities has been declared effective and such registrable securities have been disposed of pursuant to the effective registration statement, (ii) the registrable securities may be sold without manner of sale, volume or other restriction pursuant to Rule 144 under the Securities Act, or (iii) the registrable securities are no longer outstanding.

 

Demand Registration Rights

 

At any time after the one-year anniversary of the registration rights agreement, we will be required, upon the request of sellers holding at least a majority of the consideration received in the acquisition, to file a registration statement on Form S-1 and use our reasonable efforts to effect a registration covering up to 25% of the registrable securities. We are required to effect only one registration on Form S-1. The right to have the registrable securities registered on Form S-1 is subject to other specified conditions and limitations.

 

Form S-3 Registration Rights

 

If we become eligible to file a registration statement on Form S-3, upon the request of the sellers holding at least a majority of the consideration received by the sellers, we will be required to use our reasonable efforts to effect a registration of such shares on Form S-3 covering up to an additional 25% of the consideration received by the sellers. We are required to effect only one registration on Form S-3, if eligible. The right to have the registrable securities registered on Form S-3 is subject to other specified conditions and limitations.

 

 

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Perrone Piggyback Registration Rights

 

               Pursuant to a debt exchange agreement, a purchase agreement and a termination agreement, we granted Stephen Perrone, a greater than 5% shareholder of our company, piggyback registration rights with respect to 1,170,000 shares that he received upon exercise of Class J and Class K warrants.  For a discussion of the agreements, see “Certain Relationships and Related Transactions.”  Mr. Perrone waived his right to include his shares of common stock in this offering.

 

Anti-takeover Effects of our Articles of Incorporation

 

Our Articles of Incorporation provide that our Board may provide further issuances of preferred stock, in one or more series, to establish the number of shares to be included in each series, to fix the designation, rights, preferences, privileges and restrictions of the shares of each series and to increase or decrease the number of shares of any series of preferred stock, all without any further vote or action by our shareholders. The existence of authorized but unissued and unreserved preferred stock may enable our Board to issue shares to persons friendly to current management, which could render more difficult or discourage an attempt to obtain control of our company by means of a proxy contest, tender offer, merger or otherwise, and thereby protect the continuity of our management.

 

Indemnification

 

Both our Articles of Incorporation and Bylaws provide for indemnification of our directors and officers to the fullest extent permitted by the Florida Business Corporation Act.

 

Listing

 

Our shares of common stock are currently quoted on the OTC Pink Marketplace, operated by OTC Market Group. The symbol for our common stock is “DPDM”. There is currently no public market for our warrants. We have applied to have our common stock and warrants offered hereby listed on The NASDAQ Global Market under the symbol “DLPN” and “DLPNW,” respectively. On October 4, 2017, the last reported sale price of our common stock on the OTC Pink Marketplace was $8.00 per share.

Transfer Agent

 

The transfer agent and registrar for our common stock is Nevada Agency and Transfer Company.

 

Warrant Agent

 

The warrant agent for the warrant is             .

 

 

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UNDERWRITING

 

Maxim Group LLC and Ladenburg Thalmann & Co. Inc., or the underwriters, are acting as the joint book-running managers of this offering. We have entered into an underwriting agreement dated          , 2017 with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters and each underwriter has agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the following number of units:

 

Underwriters		Number of Units
Maxim Group LLC
Ladenburg Thalmann & Co.
Total

 

The underwriters are committed to purchase all the units offered by us other than those covered by the option to purchase additional units described below, if they purchase any units. The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.

 

We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.

 

The underwriters are offering the units, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

 

Underwriter Compensation

 

We have agreed to pay the underwriters a cash fee equal to 7% of the aggregate gross proceeds sold in the offering and issue to the underwriters warrants to purchase that number of shares of our common stock equal to 7% of the aggregate number of the shares of common stock underlying the units sold in the offering (or       shares, assuming the over-allotment option is fully exercised). Such underwriters’ warrants shall have an exercise price equal to 110% of the public offering price, terminate three years after the effective date of the offering, will provide for cashless exercise. Such underwriters’ warrants will be subject to FINRA Rule 5110(g)(1) in that, such warrants shall not be transferable for 180 days from the effective date of the offering except as permitted by FINRA Rule 5110(g)(2).

 

              The underwriters propose to offer the units offered by us to the public at the public offering price set forth on the cover of this prospectus supplement. In addition, the underwriters may offer some of the units to other securities dealers at such price less a concession of $       per unit. After the initial offering, the public offering price and concession to dealers may be changed.

 

Option to Purchase Additional Securities

 

We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of      additional units from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase          units covered by the option at the public offering price that appears on the cover page of this prospectus supplement, less the underwriting discount. If this option is exercised in full, the total price to the public will be approximately $    and the total proceeds to us will be $    .

 

 

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Discounts and Commissions

 

The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

 

		Total
	Per Unit	Without Over-Allotment	With Over-Allotment
Public offering price	$	$	$
Underwriting discount (7%)	$	$	$
Proceeds, before expenses, to us	$	$	$

 

We have agreed to reimburse the underwriters their actual, out-of-pocket expenses, including the reasonable fees and disbursements of the underwriters’ counsel related to the offering, up to an aggregate maximum amount of $150,000 but in any event in compliance with the provisions of FINRA Rule 5110(f)(2). In the event of a termination of the offering, the underwriters will be entitled to reimbursement of their actual out-of-pocket expenses, not to exceed $50,000. We estimate that the total expenses of the offering including all expenses to be reimbursed to the underwriters excluding the underwriters’ discount, will be approximately $   .

 

Right of First Refusal

 

Subject to the completion of the offering and the receipt in the offering of $5.0 million from investors contacted by Maxim Group LLC, other than any person who is or has been, within the prior twelve months a holder of our debt or equity securities, we have agreed to give Maxim Group LLC a right of first refusal for twelve months from the date of commencement of sales of this offering to act as no less than our co-lead manager, co-book runner and/or co-lead placement agent for any further capital raising transactions undertaken by us. In addition, if we terminate the engagement with Maxim Group LLC, and Maxim Group LLC was prepared to proceed with an offering, we have agreed to pay Maxim Group LLC a twelve-month tail fee equal to the compensation which would have been received in this offering if any investor who was introduced to us by Maxim Group LLC, other than any person who is or has been, within the prior twelve months a holder of our debt or equity securities, provides us with further capital during such twelve-month period following the termination.

 

Price Stabilization, Short Positions and Penalty Bids

 

The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchasers for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act:

 

●

Over-allotment involves sales by the underwriters of securities in excess of the number of securities the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of securities over-allotted by the underwriters is not greater than the number of securities that they may purchase in the over-allotment option. In a naked short position, the number of securities involved is greater than the number of securities in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option (which they anticipate will occur if our stock prices are greater than the price per security in this offering) and/or purchasing securities in the open market (which they anticipate will occur if our stock prices are less than the price per security in this offering).

 

●

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

 

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●

Syndicate covering transactions involve purchases of securities in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of securities to close out the short position, the underwriters will consider, among other things, the price of securities available for purchase in the open market as compared to the price at which they may purchase securities through the over-allotment option. If the underwriters sell more securities than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying securities in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the securities in the open market after pricing that could adversely affect investors who purchase in the offering.

 

●

Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the securities originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our securities, or preventing or retarding a decline in the market price of those securities. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on an exchange or in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

 

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the securities. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

 

In connection with this offering, the underwriters may also engage in passive market making transactions in our securities. Passive market making consists of displaying bids on a national securities exchange limited by the prices of independent market makers and effecting purchases limited by those prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of our securities at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.

 

Electronic Offer, Sale and Distribution of Shares

 

The underwriters may facilitate the marketing of this offering online directly or through one of the underwriters’ affiliates. In those cases, prospective investors may view offering terms and a prospectus online and place orders online or through their financial advisors. Such websites and the information contained on such websites, or connected to such sites, are not incorporated into and are not a part of this prospectus. In connection with this offering, the underwriters may distribute prospectuses electronically.

 

Other Relationships

 

The underwriters and their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters may in the future, engage in investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. The underwriters  may in the future, receive customary fees and commissions for these transactions.

 

In the ordinary course of their various business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

 

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LEGAL MATTERS

 

The validity of the securities offered by this prospectus will be passed upon by Greenberg Traurig, P.A., Fort Lauderdale, Florida. Certain legal matters will be passed upon for the underwriter by Ellenoff Grossman & Schole LLP, New York, New York.

 EXPERTS

 

The consolidated financial statements of Dolphin Entertainment, Inc. as of December 31, 2016 and 2015 and for each of the years then ended included in this prospectus and in the registration statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm, appearing elsewhere herein and in the registration statement, given on the authority of said firm as experts in auditing and accounting.

 

The financial statements of 42 West, LLC as of December 31, 2016 and 2015 and for each of the years then ended, included in this prospectus and in the registration statement have been so included in reliance on the report of BDO USA, LLP, independent auditors, appearing elsewhere herein and in the registration statement, given on the authority of said firm as experts in auditing and accounting.

 WHERE YOU CAN FIND MORE INFORMATION

 

Our corporate website is www.dolphinentertainment.com. We make available, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, on our website under “Investor Relations – SEC Filings,” as soon as reasonably practicable after we file electronically such material with, or furnish it to, the SEC.

 

You may also read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10:00 a.m. to 3:00 p.m., and you may obtain information on the operation of the Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov, that contains reports, proxy and information statements and other information that we file electronically with the SEC.