The following discussion of our financial condition and results of operations
should be read in conjunction with our audited historical consolidated financial
statements and the notes thereto, which are included elsewhere in this Annual
Report on Form 10-K for the year ended December 31, 2019 ( this"2019 Form
10-K"). The following discussion includes forward-looking statements that
involve certain risks and uncertainties, including, but not limited to, those
described in Item 1A. Risk Factors in this 2019 Form 10-K. Our actual results
may differ materially from those discussed below. See "Special Note Regarding
Forward-Looking Statements" and Item 1A. Risk Factors, in each case contained in
this 2019 Form 10-K.
OVERVIEW
We are a leading independent entertainment marketing and premium content
development company. We were first incorporated in the State of Nevada on March
7, 1995 and domesticated in the State of Florida on December 4, 2014. Our
common stock trades on The Nasdaq Capital Market under the symbol "DLPN".
Through our subsidiaries 42West, The Door and Shore Fire, we provide expert
strategic marketing and publicity services to many of the top brands, both
individual and corporate, in the entertainment and hospitality industries.
42West, The Door and Shore Fire are each recognized global leaders in PR
services for the respective industries they serve. Our acquisition of Viewpoint
has added full-service creative branding and production capabilities to our
marketing group. Dolphin's legacy content production business, founded by
Emmy-nominated Chief Executive Officer, Bill O'Dowd, has produced multiple
feature films and award-winning digital series, primarily aimed at family and
young adult markets.
On December 3, 2019, referred to as the Shore Fire Closing Date, we acquired all
of the issued and outstanding capital stock of Shore Fire, a New York
corporation. Shore Fire is a public relations and media management firm that
specializes in music, entertainment and popular culture.
We agreed to pay an aggregate purchase price of $3 million for Shore Fire,
before adjustments, comprising (i) $1,000,000 in cash paid to the seller on the
Shore Fire Closing Date (as adjusted for Shore Fire's indebtedness, working
capital and cash targets, and transaction expenses); (ii) $200,000 in shares of
our common stock based on a price, per share of $0.64, issued to the seller on
the Shore Fire Closing Date and (iii) $140,000 in cash paid on the Shore Fire
Closing Date to certain key employees, referred to as the Shore Fire Key
Employees; (iv) additional $250,000 in cash paid on each of the third, sixth,
twelve and twenty-four month anniversary of the Shore Fire Closing Date; (v)
$200,000 in shares of our common stock to the seller on each of the twelve and
twenty-four month anniversary of the Shore Fire Closing Date; (vi) $140,000 in
cash to the Shore Fire Key Employees on the twelve month anniversary of the
Shore Fire Closing Date and (vii) $120,000 in cash to the Shore Fire Key
Employees on the twenty-four month anniversary of the Shore Fire Closing Date.
In connection with the acquisition of Shore Fire, we acquired intangible assets
of approximately $1.1 million and goodwill of $1.9 million.
We have established an acquisition strategy based on identifying and acquiring
companies that complement our existing entertainment publicity and marketing
services and content production businesses. We believe that complementary
businesses, such as data analytics and digital marketing, can create synergistic
opportunities and bolster profits and cash flow. We have identified potential
acquisition targets and are in various stages of discussion with such targets.
We intend to complete at least one acquisition during 2020, but there is no
assurance that we will be successful in doing so, whether in 2020 or at all. We
currently intend to fund any acquisitions through loans or additional issuances
of our common stock, securities convertible into our common stock, debt
securities or a combination of such financing alternatives; however, there can
be no assurance that we will be successful in raising the capital necessary to
consummate any acquisitions, whether on favorable terms or at all.
We operate in two reportable segments: our entertainment publicity and
marketing segment and our content production segment. The entertainment
publicity and marketing segment comprises 42West, The Door, Shore Fire and
Viewpoint and provides clients with diversified services, including public
relations, entertainment content marketing, strategic marketing consulting,
creative branding and in-house production of content for marketing. The content
production segment comprises Dolphin Films and Dolphin Digital Studios and
specializes in the production and distribution of digital content and feature
films.
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Going Concern
In the audit opinion for our financial statements as of and for the year ended
December 31, 2019, our independent auditors included an explanatory paragraph
expressing substantial doubt about our ability to continue as a going concern
based upon our accumulated deficit as of December 31, 2019 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; however, there can be no assurance
that we will be successful in raising any necessary additional capital or
securing loans. Such issuances of additional securities would further dilute the
equity interests of our existing shareholders, perhaps substantially. With the
acquisitions of 42West, The Door, Viewpoint and now Shore Fire, we are currently
exploring opportunities to expand the services currently being offered by them
to the entertainment and hospitality community. In addition, we are exploring
ways to reduce expenses by identifying certain costs that can be combined, for
example, consolidating certain "back office" functions such as accounting and
human resources. There can be no assurance that we will be successful in
selling these services to clients or reducing expenses.
REVENUES
For the years ended December 31, 2019 and 2018, we derived substantially all of
our revenues from our entertainment publicity and marketing segment. The
entertainment publicity and marketing segment derives its revenues from
providing public relations services for celebrities and musicians, entertainment
and targeted content marketing for film and television series, strategic
communications services for corporations and public relations, marketing
services and brand strategies for hotels and restaurants. We additionally
derived revenues from the content production segment primarily from the
distribution of our feature films, Max Steel and Believe. The table below sets
forth the percentage of total revenue derived from our two segments for the
years ended December 31, 2019 and 2018:
For the years ended
December 31,
2019 2018
Revenues:
Entertainment publicity 99.7 % 97.2 %
Content production 0.3 % 2.8 %
Total revenue 100.0 % 100.0 %
Entertainment Publicity and Marketing
Our revenue is directly impacted by the retention and spending levels of
existing clients and by our ability to win new clients. We believe that we
currently have a stable client base, and we have continued to grow organically
through referrals and actively soliciting new business as well as through
acquisition of new businesses within the same industry. We earn revenues
primarily from the following sources: (i) celebrity talent services; (ii)
content marketing services under multiyear master service agreements in exchange
for fixed project-based fees; (iii) numerous individual engagements for
entertainment content marketing services for durations of generally between
three and six months; (iv) strategic communications services; (v) engagements
for marketing of special events such as food and wine festivals and (vi) content
productions of marketing materials on a project contract basis. For these
revenue streams, we collect fees through either fixed fee monthly retainer
agreements or project-based fees.
We earn entertainment publicity and marketing revenues primarily through the
following:
·
Talent - We earn fees from creating and implementing strategic communication
campaigns for performers and entertainers, including Oscar, Tony and Emmy
winning film, theater and television stars, directors, producers, celebrity
chefs and Grammy winning recording artists. Our services in this area include
ongoing strategic counsel, media relations, studio and/or network liaison work,
and event and tour support.
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·
Entertainment Marketing and Brand Strategy- We earn fees from providing
marketing direction, public relations counsel and media strategy for
entertainment content (including theatrical films, television programs, DVD and
VOD releases, and streaming services) from all the major studios, as well as
content producers ranging from individual filmmakers and creative artists to
production companies, streaming services, film financiers, DVD distributors, and
other entities. In addition, we provide entertainment marketing services in
connection with film and festivals, food and wine festivals, awards campaigns,
event publicity and red-carpet management. As part of our services we offer
marketing and publicity services tailored to reach diverse audiences. We also
provide marketing direction targeted to the ideal consumer through a creative
public relations and creative brand strategy for hotel and restaurant groups.
Our clients for this type of service include major studios, independent
producers for whom we create targeted multicultural marketing campaigns and
leading hotel and restaurant groups.
We expect that increased digital streaming marketing budgets at several large
key clients will drive growth of revenue and profit in 42West's Entertainment
Marketing division over the next several years.
·
Strategic Communications - We earn fees by advising companies looking to create,
raise or reposition their public profiles, primarily in the entertainment
industry. We believe that growth in 42West's Strategic Communications division
will be driven by increasing demand for these services by traditional and
non-traditional media clients who are expanding their activities in the content
production, branding, and consumer products PR sectors. We expect that this
growth trend will continue for the next three to five years. We also help
studios and filmmakers deal with controversial movies, as well as high-profile
individuals address sensitive situations.
·
Creative Branding and Production - We offer clients creative branding and
production services from concept creation to final delivery. Our services
include brand strategy, concept and creative development, design and art
direction, script and copyrighting, live action production and photography,
digital development, video editing and composite, animation, audio mixing and
engineering, project management and technical support. We expect that our
ability to offer these services to our existing clients in the entertainment and
hospitality industries will be accretive to our revenue.
Content Production
Dolphin Films
For the years ended December 31, 2019 and 2018, we derived revenues from Dolphin
Films primarily through the distribution of our motion pictures, Max Steel and
Believe, in the ancillary markets.
Our ability to receive additional revenues from Max Steel depends on our ability
to repay our loans under our production service agreement and prints and
advertising loan agreement from the profits of Max Steel. Max Steel did not
generate sufficient funds to repay either of these loans prior to the applicable
maturity dates. On August 23, 2019, we entered into a revenue participation
agreement with the lender of the prints and advertising loan. Under this
revenue participation agreement, we agreed to give the lender all of the future
domestic distribution proceeds of Max Steel up to $0.9 million in exchange for
the payment and satisfaction in full of the prints and advertising loan. As a
result, we recorded a gain on the extinguishment of debt of $0.7 million and
impaired the capitalized production costs of $0.6 million during the year ended
December 31, 2019. We have provided a $0.6 million backstop to the guarantor of
the prints and advertising loan and that amount is recorded in other current
liabilities.
If the lender of the production loan forecloses on the collateral securing the
loan, our subsidiary Max Steel VIE would lose any future international
distribution revenue of Max Steel, which we believe is minimal. We are not a
party to this loan and have not guaranteed to the lender any of the amounts
outstanding under this loan. For a discussion of the terms of such agreements
and the $620,000 backstop, see "Liquidity and Capital Resources" below.
Project Development and Related Services
We have a team that dedicates a portion of its time to sourcing scripts for
future development. The scripts can be for either digital or motion picture
productions. We have acquired the rights to certain scripts that we intend to
produce and release in the future, subject to obtaining financing. We have not
yet determined if these projects would be produced for digital or theatrical
distribution.
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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
·
Sisters Before Misters, a comedy about two estranged sisters finding their way
back to each other after a misunderstanding causes one of them to have to plan
the other's wedding.
We have completed development of each of these feature films, which means that
we have completed the script and can begin pre-production once financing is
obtained. We are planning to fund these projects through loans or additional
sales of our common stock, securities convertible into our common stock, debt
securities or a combination of such financing alternatives; however, there can
be no assurance that we will be successful in raising any necessary capital.
There is no assurance that we will be able to obtain the financing necessary to
produce these feature films.
EXPENSES
Our expenses consist primarily of: (1) direct costs; (2) selling, general and
administrative expenses; (3) depreciation and amortization; (4) legal and
professional fees; and (5) payroll. For the year ended December 31, 2018, we
also had non-cash charge of goodwill impairment of approximately $1.9 million.
Direct costs include certain cost of services, as well as certain production
costs, related to our entertainment publicity and marketing business. Direct
costs also include amortization of deferred production costs, impairment of
deferred production costs, residuals and other costs associated with our content
production business. 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 motion picture and
digital productions 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.
Selling, general and administrative expenses include all overhead costs except
for payroll, depreciation and amortization and legal and professional fees that
are reported as a separate expense item.
Depreciation and amortization include the depreciation of our property,
equipment and leasehold improvements and amortization of intangible assets,
including the favorable lease asset.
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
For the years ended December 31, 2019 and 2018, other income and expenses
consisted primarily of: (1) gain or loss on extinguishment of debt; (2)
acquisition costs; (3) changes in the fair value of put rights; (4) changes in
fair value of contingent consideration and (5) interest expense.
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RESULTS OF OPERATIONS
Year ended December 31, 2019 as compared to year ended December 31, 2018
Revenues
For the years ended December 31, 2019 and 2018, our revenues were as follows:
For the year ended
December 31,
2019 2018
Revenues:
Entertainment publicity and marketing $ 24,915,261 $ 21,916,727
Content production 86,606 634,612
Total revenue $ 25,001,867 $ 22,551,339
Revenues from entertainment publicity and marketing increased by approximately
$3.0 million, for the year ended December 31, 2019 as compared to the year ended
December 31, 2018. The increase was due to a full year of revenue of The Door
acquired on July 5, 2018 and Viewpoint acquired on October 31, 2018 and one
month of revenue of Shore Fire acquired December 3, 2019. The increase is
partially offset by the decrease in revenue of 42West due to departures of
senior publicists and their staff in 2018.
Revenues from content production decreased by $0.5 million for the year ended
December 31, 2019 as compared to the year ended December 31, 2018, primarily due
to the normal revenue cycle of our motion picture Max Steel. The majority of the
revenues of a motion picture are recognized in the first twelve months following
the release of the film. Max Steel was released on October 14, 2016, and we have
already recognized the revenues from the theatrical release, a majority of home
entertainment (i.e. DVD) and from international licensing arrangements. For the
year ended December 31, 2018, we also recorded $0.2 million of revenues from
domestic ancillary markets, related to our motion picture Believe that was
released in December of 2013.
On September 4, 2018, our domestic distributor, Open Road, filed for Chapter 11
bankruptcy protection. The assets of Open Road were sold on December 21, 2018 to
Raven Capital, with the final deal closing in February 2019. We expect that our
domestic distribution agreements for Max Steel and Believe, which were purchased
in the sale of the assets of Open Road, will continue on the same terms as
agreed upon with Open Road. On August 23, 2019, we entered into a revenue
participation agreement with the lender of the prints and advertising loan and
agreed to give them up $0.9 million of future domestic distribution revenue in
exchange for the payment and full satisfaction of the prints and advertising
loan in the amount of $0.7 million, including accrued interest, on the date of
the agreement. We do not expect to receive any significant future revenues from
the domestic distribution of Max Steel.
Expenses
For the years ended December 31, 2019 and 2018, our operating expenses were as
follows:
For the year ended
December 31,
2019 2018
Expenses:
Direct costs $ 5,043,903 $ 2,176,968
Selling, general and administrative 3,799,765 4,486,023
Depreciation and amortization
1,946,960 1,978,804
Legal and professional 1,560,483 2,119,107
Payroll 16,735,911 14,082,014
Goodwill impairment - 1,857,000
Total expenses $ 29,087,022 $ 26,699,916Overall expenses increased by approximately $2.4 million for the year ended
December 31, 2019, as compared to the year ended December 31, 2018. The increase
was due to a full year of expenses of The Door acquired on July 5, 2018 and
Viewpoint acquired on October 31, 2018 and one month of expenses of Shore Fire
acquired December 3, 2019.
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Direct costs increased by approximately $2.9 million for the year ended December
31, 2019, as compared to the year ended December 31, 2018. Direct costs related
to the entertainment publicity and marketing segment were approximately $4.3
million in 2019, as compared to $1.6 million in 2018. The increase was
primarily due to a full year of direct costs associated with the operations of
The Door and Viewpoint during 2019. The Door was acquired on July 5, 2018 and
Viewpoint was acquired on October 31, 2018 and as such, we only recorded direct
costs from their respective dates of acquisition.
Direct costs related to the content production segment were approximately $0.8
million for 2019, as compared to $0.6 million for 2018. During 2019, direct
costs for the content production segment consisted primarily of impairment of
capitalized production costs. Capitalized production costs for Max Steel were
impaired during the year ended December 31, 2019 as a result of the agreement to
direct all future domestic film revenues up to $0.9 million to the print and
advertising loan's creditor, in settlement of said loan. We evaluate
capitalized production costs to determine if the fair value of the capitalized
production costs is below the carrying value. Based on management's estimate of
ultimate revenues for Max Steel, the capitalized production costs in the amount
of $0.6 million were determined to be above fair value and were impaired during
the year ended December 31, 2019. During 2018, direct costs for the content
production segment consisted primarily of amortization of capitalized production
costs. Capitalized production costs are amortized based on revenues recorded
during the period over the estimated ultimate revenues of the film.
Selling, general and administrative expenses decreased by approximately $0.7
million for the year ended December 31, 2019, as compared to the year ended
December 31, 2018. The decrease is mainly due to bad debt expenses recorded for
the year ended December 31, 2018 of approximately $0.6 million. Of that amount,
$0.4 million was from the content production segment and consisted of
receivables from the international sales of Max Steel. The other $0.2 million
was related to the entertainment publicity and marketing segment.
Depreciation and amortization had an immaterial decrease of $0.03 million for
the year ended December 31, 2019, as compared to the year ended December 31,
2018. However, we should note that this decrease is in spite of a full year of
amortization for the intangible assets acquired in the acquisitions of The Door
and Viewpoint. This decrease is due to our adoption of the new lease accounting
(ASC 842) on January 1, 2019, that requires favorable leases be accounted for as
a right-of-use asset rather than be amortized as an intangible asset.
Legal and professional fees for the year ended December 31, 2019 decreased by
approximately $0.6 million as compared to the year ended December 31, 2019.
Legal and professional fees attributable to the entertainment publicity and
marketing segment decreased by approximately $0.2 million for the year ended
December 31, 2019, as compared to the year ended December 31, 2018, primarily
due to Bank United not requiring a stand-alone audit for 42West. Legal and
professional fees for the content production segment decreased by approximately
$0.4 million for the year ended December 31, 2019 as compared to December 31,
2018, primarily due to the elimination of services of consultants and legal
fees.
Payroll expenses increased by approximately $2.7 million for the year ended
December 31, 2019 as compared to the year ended December 31, 2018. Payroll
expenses attributable to our entertainment publicity and marketing business
increased by approximately $1.8 million for the year ended December 31, 2019 as
compared to the year ended December 31, 2018 due to including payroll expenses
for a full year of The Door and Viewpoint that were acquired on July 5, 2018 and
October 31, 2018, offset by a decrease in payroll of 42West related to the
departures of certain senior publicists in mid-2018. Payroll expenses related
to the content production segment increased by approximately $0.09 million for
the year ended December 31, 2019, as compared to the year ended December 31,
2018 due to salary increases of the CEO and CFO.
Goodwill impairment decreased by approximately $1.9 million for the year ended
December 31, 2019 as compared to the year ended December 31, 2018 as a result of
our 2018 test of goodwill that determined that the carrying value of our
goodwill was higher than the fair value of the goodwill for the reporting unit
42West within the entertainment publicity and marketing segment. We did not
have any goodwill impairment for the year ended December 31, 2019.
Other Income and Expenses
For the year ended
December 31,
2019 2018
Other Income and expenses:
Gain (loss) extinguishment of debt $ 711,718 $ (53,271 )
Acquisition costs (106,015 ) (438,552 )
Change in fair value of put rights 2,880,520 616,943
Change in fair value of contingent consideration 193,557 1,070,000
Interest expense (1,206,201 ) (1,050,478 )
Total $ 2,473,579 $ 144,642
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As previously discussed, during the year ended December 31, 2019, we agreed to
exchange up to $0.9 million of future domestic revenues of Max Steel for the
extinguishment of the prints and advertising loan and recorded $0.7 million of a
gain on the extinguishment of that debt. During the year ended December 31,
2018, a holder of a convertible promissory note exchanged the principal and
accrued interest on the promissory note into 85,299 shares of our common stock
pursuant to the terms of the promissory note, at an exercise price of $3.21 per
share. On the date of the conversion, the market price of our common stock was
$3.83 per share resulting in a loss on extinguishment of debt of $0.05 million.
Acquisition costs consisted primarily of legal, consulting and auditing costs
related to our acquisitions. Acquisition costs for the year ended December 31,
2019 were related to the acquisition of Shore Fire on December 3, 2019.
Acquisition costs for the year ended December 31, 2018 consisted primarily of
costs associated with our acquisition of The Door and Viewpoint on July 5, 2018
and October 31, 2018, respectively.
The fair value of put rights related to the 42West acquisition were recorded on
our balance sheet on the date of the acquisition. The fair value of the put
rights is measured at every balance sheet date and any changes are recorded on
our consolidated statements of operations. The change in fair value of the puts
was $2.8 million and $0.6 million, respectively, for the years ended December
31, 2019 and 2018.
The fair value of contingent consideration related to our acquisition of The
Door was recorded on our balance sheet on July 5, 2018. The fair value of the
related contingent consideration is measured at every balance sheet date and any
changes recorded on our consolidated statements of operations. For the years
ended December 31, 2019 and 2018, we recorded a gain of $0.2 million and $1.1
million related to the change in fair value of the contingent consideration for
The Door.
Interest expense increased by approximately $0.2 million for the year ended
December 31, 2019, as compared to the year ended December 31, 2018, primarily
due to additional convertible and non-convertible promissory notes signed during
2019. See Liquidity and Capital Resources for further discussion on these notes
payable.
Income Tax Benefit
We had an income tax benefit of $0.4 million for year ended December 31, 2019,
compared to a benefit of $1.1 million for year ended December 31, 2018. The
primary component of the income tax benefit in both years is due to a release of
the valuation allowance against the deferred tax liabilities of the companies
acquired.
As of December 31, 2019, we have approximately $43.7 million of net operating
loss carryforwards for U.S. federal income tax purposes that begin to expire in
2028. Federal net operating losses generated after December 31, 2017 have an
indefinite life and do not expire. Additionally, we have approximately $25.3
million of net operating loss carryforwards for Florida state income tax
purposes that begin to expire in 2029, approximately $13.1 million of California
net operating loss carryforwards that begin to expire in 2032, and approximately
$1.8 million of New York and New York City net operating loss carryforwards that
begin to expire in 2038. A portion of the carryforwards may expire before being
applied to reduce future income tax liabilities.
In assessing the ability to realize the deferred tax assets, we consider whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. We believe it is more
likely than not that the deferred tax asset will not be realized and we have
accordingly recorded a net valuation allowance of $16.2 million and $14.3
million as of December 31, 2019 and 2018, respectively.
Net Loss
Net loss was approximately $(1.2) million or $(0.07) per share based on
16,522,924 weighted average shares outstanding and approximately $(0.20) per
share based on 21,425,506 weighted average shares outstanding on a fully diluted
basis for the year ended December 31, 2019. Net loss was approximately $(2.9)
million or $(0.22) per share based on 13,773,395 weighted average shares
outstanding and approximately $(0.23) per share based on 16,159,486 weighted
average shares outstanding on a fully diluted basis for the year ended December
31, 2018. Net loss for the years ended December 31, 2019 and 2018, respectively,
were related to the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Year ended December 31, 2019 as compared to year ended December 31, 2018
Cash flows used by operating activities for the year ended December 31, 2019
were $2.9 million compared to cash flows used by operating activities of $0.6
million for the year ended December 31, 2018. The increase in cash used in
operating activities for the year ended December 31, 2019 as compared to the
year ended December 31, 2018 is primarily due to lower cash flows from
operations before changes in operating assets and liabilities of approximately
$2.0 million. In addition, we used approximately $0.1 million to purchase the
rights to scripts for our content production segment.
Cash flows used in investing activities for the year ended December 31, 2019
were $0.9 million primarily related to the purchase of Shore Fire, net of cash
acquired and the purchase of fixed assets. Cash flows used in investing
activities for the year ended December 31, 2018, were approximately $1.6 million
and were primarily related to the purchase of The Door and Viewpoint, net of
cash acquired and for the purchase of fixed assets.
Cash flows provided by financing activities for year ended December 31, 2019 was
approximately $0.4 million as compared to $3.2 million for the year ended
December 31, 2018. Cash flows used in financing activities for the year ended
December 31, 2019 consisted primarily of (i) $0.1 million of net repayment of
debt related to Max Steel; (ii) $2.3 million used to purchase our Common Stock
pursuant to Put Rights that were exercised; (iii) $0.3 million comprising the
second and third installments of the consideration paid for Viewpoint; (iv)
second installment of the consideration for The Door in the amount of $0.8
million; (v) final installment of the consideration paid to employees of 42West
to settle change of control provisions in their employment contracts in the
amount of $0.4 million; (vi) $1.9 million proceeds from the sale of common stock
through a public offering in October 2019; (vii) proceeds from convertible notes
payable of $2.1 million and (viii) proceeds from non-convertible note payable of
$0.3 million. By contrast, cash flows provided by financing activities for the
year ended December 31, 2018 consisted primarily of (i) $1.7 million in proceeds
from our loan agreement with Bank United; (ii) repayment of $0.8 million on a
line of credit with City National Bank; (iii) repayment of our debt under the
prints and advertising loan; (iv) $3.9 million used to buy back our common stock
pursuant to the put agreements with the sellers of 42West; (v) repayment of $0.6
million of a related party promissory note; (vi) $1.5 million in proceeds from a
note payable and (vii) $6.8 million in proceeds from the sale of common stock
including shares sold through a public offering and shares sold to an investor
in a registered direct offering.
As of December 31, 2019 and 2018, we had cash available for working capital of
approximately $2.2 million and $5.5 million, respectively, not including $0.7
million pledged as collateral for standby letter of credit for the New York
office, and a working capital deficit of approximately $15.6 million and $11.9
million, respectively.
These factors, along with an accumulated deficit of $96.0 million as of December
31, 2019, raise substantial doubt about our ability to continue as a going
concern. Our audited consolidated financial statements contained in this 2019
Form 10-K 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. There is no assurance that we will
be successful in raising additional capital. Such issuances of additional shares
of common stock or securities convertible into common stock would further dilute
the equity interests of our existing shareholders, perhaps substantially. We
currently have the rights to several scripts, that we intend to produce and
release subject to obtaining financing. We will potentially earn a producer and
overhead fee for this production. There can be no assurances that such
production will be released or fees will be realized in future periods.
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 December 31, 2019, our total
debt was approximately $14.8 million and our total stockholders' equity was
approximately $9.7 million. Approximately $3.0 million of the total debt as of
December 31, 2019 represents the fair value of put options in connection with
the 42West acquisition, which may or may not be exercised by the sellers.
Approximately $3.3 million (including $1.7 of accrued interest) of our
indebtedness as of December 31, 2019 was incurred by the variable interest
entity consolidated in our financial statements, Max Steel Productions LLC ("Max
Steel VIE"). Repayment of this loan was intended to be made from revenues
generated by Max Steel outside of the United States. Max Steel did not generate
sufficient funds to repay this loan prior to the maturity date. If the lender of
this loan forecloses on the collateral securing the loan, our subsidiary Max
Steel VIE would lose any future international distribution revenue of Max Steel,
which we believe is minimal.
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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 affect any of these remedies on satisfactory
terms or at all and our indebtedness may affect our ability to continue to
operate as a going concern.
Financing Arrangements
Prints and Advertising Loan
On August 12, 2016, Dolphin Max Steel Holdings 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 guaranteed by any
other Dolphin entity and the only asset held by Max Steel Holdings is the
copyright for the motion picture, which secures the loan. 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 year
ended December 31, 2017, we agreed to allow the lender to apply the $1,250,000
to the loan balance. The loan was partially secured by a $4,500,000 corporate
guaranty from an unaffiliated party associated with the motion picture, of which
we have agreed to backstop $620,000. As a condition precedent to closing the
loan, Max Steel Holdings delivered to the lender clear chain-of-title to the
rights of the motion picture Max Steel. The lender 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. During 2017, the third-party
guarantor paid $4.5 million pursuant to the guarantee of the loan, reducing the
outstanding balance by such amount and increasing our accrued expenses by the
$620,000 backstop related to the guarantee. Repayment of the loan was intended
to be made from revenues generated by Max Steel in the United States. Max Steel
did not generate sufficient funds to repay the loan prior to the maturity date.
On August 23, 2019, we entered into a revenue participation agreement with the
lender whereby they are entitled to the next $0.9 million of revenues from the
domestic distribution of Max Steel in exchange for payment and satisfaction in
full of the P&A Loan. During the year ended December 31, 2019, we recognized a
gain on extinguishment of debt of $0.7 million related to this revenue
participation agreement.
Production Service Agreement
During 2014, the Max Steel VIE, a variable interest entity (or VIE) created in
connection with the financing and production of Max Steel, entered into a loan
agreement 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 2015, which, 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. As a condition precedent to closing the loan, Max Steel Holdings
delivered to the lender clear chain-of-title to the rights of the motion picture
Max Steel. Due to delays in the release of the film, Max Steel VIE was unable to
make some of the scheduled payments and, pursuant to the terms of the agreement,
the Max Steel VIE has accrued $1.6 million of interest at the default rate. The
film was released in theaters in the United States on October 14, 2016 and
delivery to the international distributors began after the US release. As of
December 31, 2019 and 2018, we had outstanding balances of $3.3 million and $3.4
million, respectively, including accrued interest of $1.7 million and $1.6
million, respectively, related to this debt on our consolidated balance sheets.
Repayment of the loan was intended to be made from revenues generated by Max
Steel outside of the United States. Max Steel did not generate sufficient funds
to repay the loan prior to the maturity date. On February 20, 2020, we received
a letter from the lender stating that no sums, debts, liabilities, expenses,
opportunity costs, revenues and any other amounts were due from the Max Steel
VIE. We are currently evaluating the status of Max Steel Productions LLC as a
VIE and our primary beneficiary status of Max Steel VIE.
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42West Line of Credit
On March 15, 2018, 42West entered into a business loan agreement with
BankUnited, N.A., (the "Loan Agreement"), for a revolving line of credit
agreement under a revolving note. The revolving line of credit matures on March
15, 2020 and bears interest on the outstanding balance at the bank's prime rate
plus 0.25% per annum. The maximum amount that can be drawn on the revolving line
of credit is $2,300,000. Amounts outstanding under the note are secured by
42West's current and future inventory, chattel paper, accounts, equipment and
general intangibles. On March 28, 2018, we drew $1,690,000 from the line of
credit facility to purchase 183,296 shares of our common stock, per the put
agreements with the sellers. On June 29, 2018, we issued a standby letter of
credit, in the amount of $50,000, to secure the lease of 42West's Los Angeles
office. The borrowing capacity under the Loan Agreement was reduced by the same
amount. As of December 31, 2019 and 2018, the outstanding balance on the line of
credit was $1,700,390. Subsequently on February 20, 2020, in anticipation of
converting the line of credit into a term loan, we partially repaid the line of
credit in the amount of $500,000. On March 27, 2020 we received loan documents
from Bank United for a one year term loan in the amount of $1,200,390,
amortizable over 36 months, with a rate prime plus 0.75 percentage points. The
Door will be a co-borrower on the loan and it will be guaranteed by the Company.
Promissory Notes
Convertible Notes
2020 Lincoln Park Note
On January 3, 2020, we entered into a securities purchase agreement with Lincoln
Park Capital Fund LLC and issued a convertible promissory note with a principal
amount of $1.3 million at a purchase price of $1.2 million together with
warrants to purchase up to 207,588 shares of our common stock at an exercise
price of $0.78 per share. The securities purchase agreement provides for
issuance of warrants to purchase up to 207,588 shares of our common stock on
each of the second, fourth and sixth month anniversaries of the securities
purchase agreement if the principal balance has not been paid on such dates. As
such, on March 4, 2020 we issued warrants to purchase up to 207,588 shares of
our common stock. The convertible promissory note has an original issue
discount of $100,000 and does not bear interest unless there is an event of
default. The convertible promissory note may be converted at any time into
shares of our common stock at an initial conversion price equal to the lower of
(A) $2.00 per share and (B) the lower of (i) the lowest intraday sales price of
our common stock on the applicable conversion date and (ii) the average of the
three lowest closing sales prices of our common stock during the twelve
consecutive trading days including the trading day immediately preceding the
conversion date but under no circumstances lower than $0.78 per share. The
convertible promissory note matures on January 3, 2022. The proceeds of the
convertible promissory note were used to repay the 2018 Convertible Debt
described below.
On January 3, 2020, in connection with the securities purchase agreement with
Lincoln Park discussed above, we entered into a Registration Rights Agreement
with Lincoln Park pursuant to which we agreed to register any shares converted
into our Common Stock pursuant to the terms of the convertible promissory note
with Lincoln Park, if during the six-month period commencing on the date of the
Registration Rights Agreement, we determine to file a resale registration
statement with the Securities and Exchange Commission.
2020 Convertible Notes
On March 4, 2020, we issued a convertible promissory note to a third-party
investor and received $500,000. We also agreed to issue a warrant to purchase up
to 100,000 shares of our common stock at purchase price of $0.78 per share. The
convertible promissory note bears interest at a rate of 8% per annum and matures
on March 4, 2030. The balance of the convertible promissory note and any accrued
interest may be converted at the note holder's option at any time at a purchase
price $0.78 per share of our common stock.
On March 18, 2020, we issued two convertible promissory notes to two third-party
investors for principal amounts of $120,000 and $75,000. The notes earn interest
at 10% per annum and mature on March 18, 2022. The balance of each of the
convertible promissory notes and any accrued interest may be converted at the
noteholder's option at any time at a purchase price $0.78 per share of our
common stock.
On March 25, 2020, we issued a convertible promissory note to a third-party
investor for a principal amount of $560,000 and received $500,000, net of
transaction costs of $10,000 and original issue discount. The Company also
issued 50,000 shares of our common stock related to this convertible note
payable. The maturity date of the convertible promissory note is March 25, 2021
and the balance of the convertible promissory note and any accrued interest may
be converted at the noteholder's option at any time at a purchase price $0.78
per share of our common stock.
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2019 Lincoln Park Note
On May 20, 2019, we entered into a securities purchase agreement with Lincoln
Park Capital Fund LLC and issued a convertible promissory note with a principal
amount of $1.1 million at a purchase price of $1.0 million together with
warrants to purchase up to 137,500 shares of our common stock at an exercise
price of $2.00 per share. The securities purchase agreement provides for
issuance of warrants to purchase up to 137,500 shares of our common stock on
each of the second, fourth and sixth month anniversaries of the securities
purchase agreement if the principal balance has not been paid on such dates. As
such, on each of July 23, 2019, September 20, 2019 and November 20, 2019 we
issued warrants to purchase up to 137,500 shares of our common stock. The
convertible promissory note has an original issue discount of $100,000 and does
not bear interest unless there is an event of default. The convertible
promissory note may be converted at any time into shares of our common stock at
an initial conversion price equal to the lower of (A) $5.00 per share and (B)
the lower of (i) the lowest intraday sales price of our common stock on the
applicable conversion date and (ii) the average of the three lowest closing
sales prices of our common stock during the twelve consecutive trading days
including the trading day immediately preceding the conversion date. The
convertible promissory note matures on May 21, 2021. As of December 31, 2019, we
had a balance of $0.8 million, net of $0.1 million original issue discount and
$0.1 million of a beneficial conversion feature, on our consolidated balance
sheet.
The 2019 Lincoln Park Note contains a clause that re-prices the conversion price
if we sell equity securities within 180-days of the 2019 Lincoln Park Note. On
October 21, 2019, we issued 2,700,000 shares of common stock pursuant to a
public offering at a purchase price of $0.78 per share. As such, the conversion
price of the Lincoln Park Note was adjusted to $0.78. On each of February 3,
February 13 and February 27, 2020, Lincoln Park notified us that they were
converting $250,000 of the Lincoln Park Note into 319,366 shares of our common
stock.
2019 Convertible Debt
On October 11, 2019, we issued a convertible promissory note agreement to a
third-party investor and received $500,000. The convertible promissory note
bears interest at a rate of 10% per annum and matures on October 11, 2021. The
balance of the convertible promissory note and any accrued interest may be
converted at the note holder's option at any time at a purchase price based on
the 30-day average closing market price per share of our common stock.
On September 25, 2019, we issued a convertible promissory note agreement to a
third-party investor and received $250,000. The convertible promissory note
bears interest at a rate of 10% per annum and matures on September 25, 2021. The
balance of the convertible promissory note and any accrued interest may be
converted at the note holder's option at any time at a purchase price based on
the 30-day average closing market price per share of our common stock.
On August 12, 2019, in lieu of cash, we issued a $702,500 convertible promissory
note agreement in exchange for 76,194 shares of our common stock related to
76,194 exercised put rights of one of the 42West Sellers. The convertible
promissory note bears interest at a rate of 10% per annum and matures on August
12, 2020. The balance of the convertible promissory note and any accrued
interest may be converted at the note holder's option at any time at a purchase
price based on the 30-day average closing market price per share of our common
stock.
On July 9, 2019, we issued a convertible promissory note agreement to a
third-party investor and received $150,000. The convertible promissory note
bears interest at a rate of 10% per annum and matures on July 9, 2021. The
balance of the convertible promissory note and any accrued interest may be
converted at the note holder's option at any time at a purchase price based on
the 30-day average closing market price per share of our common stock. On
January 12, 2020, the convertible note holder notified us that they were
converting the principal balance of the convertible note into 254,326 shares of
our common stock using 30-day average closing market price (January 10, 2020) of
$0.59 per share of common stock.
On March 25, 2019, we issued a convertible promissory note agreement to an
unrelated investor and received $200,000. The convertible promissory note bears
interest at a rate of 10% per annum and matures on March 25, 2021. The balance
of the convertible promissory note and any accrued interest may be converted at
the note holders' option at any time at a purchase price based on the 30-day
trailing average market price of the Common Stock. On January 1, 2020, the
convertible note holder notified us that they were converting the principal
balance of the convertible note into 346,021 shares of our common stock using
30-day average closing market price (December 31, 2019) of $0.58 per share of
common stock.
As of December 31, 2019, we had a balance of $702,500 in current liabilities and
$1,100,000 in noncurrent liabilities related to these convertible notes payable.
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2018 Convertible Debt
On July 5, 2018, we issued an 8% secured convertible promissory note in the
principal amount of $1.5 million (the "Note"), to Pinnacle Family Office
Investments, L.P. ("Pinnacle"), pursuant to a Securities Purchase Agreement,
dated the same date. We used the proceeds of the convertible promissory note to
finance the Company's acquisition of The Door. Our obligations under the Note
are secured primarily by a lien on the assets of The Door and Viewpoint. We must
pay interest on the principal amount of the Note, at the rate of 8% per annum in
cash on a quarterly basis. The Note matures on January 5, 2020. The Note
contained a clause that re-prices the conversion price if we sell equity
securities at a price lower than the conversion price at any time that the Note
is outstanding. On October 21, 2019, we issued 2,700,000 shares of common stock
pursuant to a public offering at a purchase price of $0.78 per share. As such,
the conversion price of the Note was adjusted to $0.78. On December 4, 2019,
Pinnacle notified us that they were converting $297,936 of the Note into 380,603
shares of our common stock.
On the date of the Note, our common stock had a market value of $3.65. We
determined that the Note contained a beneficial conversion feature or debt
discount by calculating the number of shares using the conversion rate of the
Note of $3.25 per share, and then calculating the market value of the shares
that would be issued at conversion using the market value of our common stock on
the date of the Note. We recorded a debt discount on the Note of $184,614 that
is amortized and recorded as interest expense over the life of the Note. For the
year ended December 31, 2019, we recorded interest expense in our audited
consolidated statement of operations in the amount of $118,279 and paid $90,000
of interest. For the year ended December 31, 2018, we paid interest and recorded
interest expense in the amount of $58,333.
For the year ended December 31, 2019 and 2018, respectively, we recorded
interest expense of $123,076 and $61,538 from the amortization of the beneficial
conversion of the Note. As of December 31, 2019, we had a balance of $1,202,064
(after the conversion of $297,936 into shares of our common stock) recorded in
current liabilities on our balance sheet, related to this Note. As of December
31, 2018, we had $1,376,924, net of $123,076 of debt discount, recorded in
noncurrent liabilities on our audited consolidated balance sheet, related to
this Note.
On January 5, 2020, the Note maturity date, we paid Pinnacle $1,231,678,
including accrued interest of $29,614, in full satisfaction and repayment of the
Note.
2017 Convertible Debt
In 2017, we entered into subscription agreements pursuant to which we issued
unsecured convertible promissory notes, each with substantially similar terms,
for an aggregate principal amount of $875,000. The convertible promissory notes
mature during the third quarter of 2020 and each bears interest at a rate of 10%
per annum. The principal and any accrued and unpaid interest of the convertible
promissory notes are convertible by the respective holders into shares of our
common stock at a price of either (i) the 90 day average closing market price
per share of our common stock as of the date the holder submits a notice of
conversion or (ii) if an Eligible Offering (as defined in the convertible
promissory notes) of our common stock is made, 95% of the public offering price
per share of our common stock. As of December 31, 2019, we had a balance of
$550,000 in current liabilities related to these convertible promissory notes.
On June 25, 2018, one of the holders of a convertible promissory note notified
us that they would convert $250,000 of principal and $23,425 of accrued interest
into 85,299 shares of common stock at a price of $3.21 per share using the
90-day trading average price per share of common stock as of June 22, 2018. On
the date of the conversion (June 25, 2018), the market price of the Common Stock
was $3.83 per share and we recorded a loss on extinguishment of debt in the
amount of $53,271 on our consolidated statements of operation for the year ended
December 31, 2018.
On March 21, 2019, one of the holders of a convertible promissory note notified
us that they would convert $75,000 of principal into 53,191 shares of common
stock at a price of $1.41 per share using the 90-day trading average price per
share of common stock as of March 20, 2019. On the date of the conversion the
market price of the Common Stock was $1.81 per share and we recorded a loss on
extinguishment of debt in the amount of $21,287 on our consolidated statements
of operation for the year ended December 31, 2019.
As of December 31, 2019 and 2018, respectively, we have a balance of $550,000
and $625,000 in current liabilities related to the 2017 convertible promissory
notes.
Nonconvertible Notes Payable
On November 5, 2019, we issued a promissory note in the amount of $350,000 that
matures two years after issuance. We may prepay this promissory note with no
penalty after the initial six months. The promissory note bears interest at a
rate of 10% per annum.
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On July 5, 2012, we issued an unsecured promissory note in the amount of
$300,000 bearing interest at a rate of 10% per annum and payable on demand to
KCF Investments LLC ("KCF"), an entity controlled by Mr. Stephen L Perrone, an
affiliate of Dolphin. The proceeds from this note were used for working capital.
On December 10, 2018, we agreed to exchange this promissory note, including
accrued interest of $192,233, for a new unsecured promissory note in the amount
of $492,233 that matures on December 10, 2023. The promissory note bears
interest at a rate of 10% per annum and provides for monthly repayments of
principal and interest in the amount of $10,459 beginning January 15, 2019. The
promissory note may be repaid at any time prior to maturity without a penalty.
On November 30, 2017, we issued a promissory note in the amount of $200,000 that
matures on January 15, 2019. We may prepay this promissory note with no penalty
at any time. The promissory note bears interest at a rate of 10% per annum. We
agreed to extend the maturity date until January 15, 2021.
On June 14, 2017, we issued a promissory note in the amount of $400,000 that
matures two years after issuance. We may prepay this promissory note with no
penalty after the initial six months. The promissory note bears interest at a
rate of 10% per annum.
As of December 31, 2019, we have a balance of $288,237 in current liabilities, a
balance of $1,074,122 in noncurrent liabilities and accrued interest of $8,788
in other current liabilities related to these promissory notes on our balance
sheet. As of December 31, 2018, we have a balance of $479,874 in current
liabilities, a balance of $612,359 in noncurrent liabilities and accrued
interest of $6,315 in other current liabilities related to these promissory
notes payable.
2019 Public Offering
On October 21, 2019, in an underwritten registered public offering, we sold
2,700,000 shares of common stock at a public offering price of $0.78 per share.
The net proceeds of the 2019 Public Offering were approximately $1.9 million,
after deducting underwriting discounts and commissions and offering expenses
payable by us.
2018 Public Offering
On July 24, 2018, in an underwritten registered public offering, we sold
2,000,000 shares of common stock at a public offering price of $3.00 per share.
The net proceeds of the Offering were approximately $5.3 million, after
deducting underwriting discounts and commissions and offering expenses payable
by us. In August 2018, the underwriters exercised their over-allotment option
with respect to 265,000 shares of common stock and we received proceeds, net of
the underwriter discount and expenses, of $0.7 million.
2018 Registered Direct Offering
On September 19, 2018, we issued and sold to a single investor in a registered
direct offering an aggregate of 250,000 shares of our common stock at a price of
$3.00 per share. The offering was made pursuant to our effective shelf
registration statement on Form S-3 previously filed with the Securities and
Exchange Commission. We received proceeds of approximately $0.7 million from
this issuance and sale of our common stock after deducting related expenses.
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.
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Leases
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), which requires
all assets and liabilities arising from leases to be recognized in our
consolidated balance sheets. The Company adopted this new accounting guidance
effective January 1, 2019. In July 2018, the FASB added an optional transition
method which we elected upon adoption of the new standard. This allowed us to
recognize and measure leases existing at January 1, 2019 without restating
comparative information. In addition, we elected to apply the package of
practical expedients permitted under the transition guidance within the new
standard, which among other things, allows us to carry forward the historical
lease classification.
We determine if an arrangement is a lease at the lease commencement date. In
addition to our lease agreements, we review all material new vendor arrangements
for potential embedded lease obligations. The asset balance related to operating
leases is presented within "right-of-use (ROU) asset" on our consolidated
balance sheet. The current and noncurrent balances related to operating leases
are presented as "Lease liability", in their respective classifications, on our
consolidated balance sheet.
The lease liability is recognized based on the present value of the remaining
fixed lease payments discounted using our incremental borrowing rate as of
January 1, 2019. The ROU asset is calculated based on the lease liability
adjusted for any lease payments paid to the lessor at or before the commencement
date (i.e. prepaid rent) and initial direct costs incurred by us and excluding
any lease incentives received from the Lessor. For operating leases, the lease
expense is recognized on a straight-line basis over the lease term. The Company
accounts for its lease and non-lease components as a single component, and
therefore both are included in the calculation of lease liability recognized on
the consolidated balance sheets.
Revenue Recognition
On January 1, 2018, we adopted ASU No. 2014-09 - Revenue from Contracts with
Customers (Topic 606). Using this newly adopted guidance, we recognize revenue
when promised goods or services are transferred to our clients in an amount that
reflects the consideration to which we expect to be entitled to in exchange for
those goods or services. Revenue from public relations services 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, as the services are consumed by our clients, which approximates
the proportional performance on such contracts. Direct costs reimbursed by
clients are billed as pass-through revenue with no mark-up. Revenues from
content produced for digital marketing is recognized upon satisfactory delivery
to the client.
We have entered into agreements with foreign and a domestic distributor for our
motion picture Max Steel. These international distribution agreements contain
minimum guaranteed payments once the motion picture is delivered and other
specifications are met per the agreements. We entered into a domestic
distribution agreement with Open Road to distribute the film in the United
States using their existing relationships and output agreements with the movie
theaters, as well, as DVD, SVOD, pay TV, and free TV distributors. These
distribution agreements are for the licensing of function intellectual property
and, as such, we recognize revenue once the motion picture has been delivered
and the license period has begun.
ASC 606 provides guidance on determining whether revenues should be recognized
on a gross or net basis (Principal vs Agent). Based on the new guidance of ASC
606, we determined that for the domestic distribution of Max Steel we should
report revenues on a gross basis because we are primarily responsible for the
fulfillment of the completed motion picture and carry the "inventory risk" if
the motion picture does not meet the customers specifications. At other times,
we may enter into contracts with distributors, on significantly different terms,
and will need to evaluate these contracts at that time.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Assets and liabilities measured at fair
value are categorized based on whether the inputs are observable in the market
and the degree that the inputs are observable. Inputs refer broadly to the
assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk. Observable inputs are based on
market data obtained from sources independent of 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.
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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 carry certain derivative financial instruments using inputs classified as
"Level 3" in the fair value hierarchy on our balance sheets.
On July 1, 2018, we adopted ASU 2017-11 and as a result certain warrants with
down round provisions that were previously classified as liabilities with
changes in fair value on each balance sheet date recorded in the statement of
operations are now recorded in equity.
Put Rights
In connection with the 42West acquisition, we entered into put agreements with
each of the sellers of 42West granting them the right, but not the obligation,
to cause us to purchase up to an aggregate of 1,187,087 of their shares received
as consideration for their membership interest of 42West, including the put
rights on the shares earned from the earn out consideration. Based upon the
results of operations of 42West during 2017, the sellers earned this additional
consideration. In January of 2018, we also entered into put agreements with
certain 42West employees granting them the right, but not the obligation, to
cause us to purchase up to an aggregate of 140,697 of their shares received in
April 2017 and in July 2018 and those earned from the earn out consideration. We
have agreed to purchase the shares at $9.22 per share during certain specified
exercise periods as set forth in the put agreements, up until December 2020.
During the year ended December 31, 2019, we purchased 355,802 shares of common
stock and paid approximately $2.2 million cash, issued a convertible promissory
note in the amount of $702,500 and issued 385,514 shares of common stock at a
purchase price of $1.08 as payment for these put rights.
We use a Black-Scholes Option Pricing model, which incorporates significant
inputs that are not observable in the market, and thus represents a Level 3
measurement as defined in ASC820. The unobservable inputs utilized for measuring
the fair value of the put rights reflects management's own assumptions that
market participants would use in valuing the put rights. The put rights were
initially measured on the date of the put agreements and are subsequently
measured at each balance sheet date with changes in the fair value between
balance sheet dates, being recorded as a gain or loss in the statement of
operations.
Contingent Consideration
On July 5, 2018, in connection with our acquisition of The Door, we agreed to
issue to the sellers up to 1,538,462 shares of common stock based on a price of
$3.25 per share and up to $2.0 million in cash if certain adjusted net income
targets were met over a four-year period. If the adjusted net income targets are
achieved, the contingent consideration is first paid in shares of common stock
and the last $2.0 million of contingent consideration earned, if any, is paid in
cash.
To value the contingent consideration, we used a Monte Carlo Simulation Model,
which incorporates significant inputs that are not observable in the market, and
thus represents Level 3 measurement as defined in ASC820. The unobservable
inputs utilized for measuring the fair value of the contingent consideration
reflect management's own assumptions about the assumptions that market
participants would use in valuing the contingent consideration. The contingent
consideration for The Door was initially measured as of the date of the merger
(July 5, 2018) and is subsequently measured at each balance sheet date with
changes in the fair value between balance sheet dates, being recorded as a gain
or loss in the statement of operations.
Income Taxes
We reported an effective tax rate of 25.4% and 26.9% for the years ended
December 31, 2019 and 2018, respectively. We have deferred tax assets and
liabilities as a result of temporary differences between financial statement
carrying amounts and the tax basis of assets and liabilities. As of December 31,
2019, we had approximately $43,692,000 of net operating loss carryforwards for
U.S. federal income tax purposes. We believe it is more likely than not that the
deferred tax asset will not be realized and have recorded a net valuation
allowance of $16,227,300 and $14,259,043 as of December 31, 2019 and 2018,
respectively which resulted in a decrease in this deferred tax account.
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Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 3 to the audited
consolidated financial statements included elsewhere in this 2019 Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2019 and 2018, we did not have any off-balance sheet
arrangements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this 2019 Form 10-K contain "forward-looking statements"
and information within the meaning of Section 27A of the Securities Act of 1933,
as amended, or the "Securities Act", and Section 21E of the Securities Exchange
Act of 1934, as amended, or the "Exchange Act", which are subject to the "safe
harbor" created by those sections. 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," "will," "would" 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 2019 Form 10-K 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 beliefs regarding our competitive advantages;
·
our expectations regarding increased movie marketing budgets at several large
key clients and the impact of such increased budgets on revenue and profit in
our entertainment publicity and marketing segment over the next several years;
·
our intention to hire new individuals or teams whose existing books of business
and talent rosters can be accretive to revenues and profits of the business and
our expectations regarding the impact of such additional hires on the growth of
our revenues and profits;
·
our beliefs regarding the drivers of growth in the entertainment publicity and
marketing segment, the timing of such anticipated growth trend and its resulting
impact on the overall revenue;
·
our intention to expand into television production in the near future;
·
our belief regarding the transferability of 42West, The Door, Shore Fire and
Viewpoint'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, our belief that such acquisitions will
create synergistic opportunities and increased profits and cash flows, and our
expectation regarding the timing of such acquisitions;
·
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 release of future
feature films and digital projects, our intention to obtain financing for such
projects and our target demographics;
·
our intention to use our purchased scripts for future motion picture and digital
productions;
·
our expectations to raise funds through loans, additional sales of our common
stock, securities convertible into our common stock, debt securities or a
combination of financing alternatives;
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·
our belief that the only recourse to the lenders under the production service
agreement is to foreclose on the collateral securing the loans, which consists
of the copyright for Max Steel;
·
our beliefs regarding the outcome of litigation to which we are a party, that
arise in the ordinary course of business; 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 continue as a going concern;
· our history of net losses and our ability to generate a profit;
· our significant indebtedness and our ability to obtain additional financing or
service the existing indebtedness;
· the effect of the COVID-19 outbreak on our business and operations;
·
our ability to realize the anticipated benefits of the acquisitions we have
made, including synergies, expanded interrelated service offerings, growth and
increased revenues;
·
our ability to accurately predict our clients' acceptance of our differentiated
business model that offers interrelated services;
·
our ability to successfully identify and complete acquisitions in line with our
growth strategy and anticipated timeline, 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 comply with terms and covenants in our revolving credit line;
·
our ability to maintain compliance with Nasdaq listing requirements;
·
the ability of the lenders under the production service agreement to
successfully assert that we are liable to them for the payment of Max Steel
VIE's debt;
·
adverse events, trends and changes in the entertainment or entertainment
marketing industries that could negatively impact our operations and ability to
generate revenues;
·
loss of a significant number of entertainment publicity and marketing clients;
·
the ability of key 42West clients to increase their movie marketing budgets as
anticipated;
·
our ability to continue to successfully identify and hire new individuals or
teams who will provide growth opportunities;
·
uncertainty that our strategy of hiring of new individuals or teams will
positively impact our revenues and profits;
·
lack of demand for strategic communications services by traditional and
non-traditional media clients who are expanding their activities in the content
production, branding and consumer products PR sectors;
·
unpredictability of the commercial success of our 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;
·
economic factors that adversely impact the food and hospitality industries, such
as those economic factors from the global outbreak of COVID-19;
·
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, The Door and Shore Fire executives and employees and our CEO;
·
availability of financing from investors under favorable terms;
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·
our ability to adequately address material weaknesses in internal control over
financial reporting; and
·
uncertainties regarding the outcome of pending litigation.
The foregoing list of important factors does not include all such factors, nor
necessarily present them in order of importance. In addition, you should consult
other disclosures made by the Company (such as in our other filings with the SEC
or in Company press releases) for other factors that may cause actual results to
differ materially from those projected by the Company. Please refer to Part I,
Item 1A, Risk Factors of this 2019 Form 10-K for additional information
regarding factors that could affect the Company's results of operations,
financial condition and liquidity. Any forward-looking statements, which we make
in this 2019 Form 10-K, speak only as of the date of such statement, and we
undertake no obligation to update such statements, except as otherwise required
by applicable law. We can give no assurance that such forward-looking
statements will prove to be correct. An occurrence of, or any material adverse
change in, one or more of the risk factors or risks and uncertainties referred
to in this report or included in our other periodic reports filed with the SEC
could materially and adversely impact our operations and our future financial
results. Comparisons of results for current and any prior periods are not
intended to express any future trends or indications of future performance,
unless expressed as such, and should only be viewed as historical data.
Any public statements or disclosures made by us following this report that
modify or impact any of the forward-looking statements contained in or
accompanying this report will be deemed to modify or supersede such outlook or
other forward-looking statements in or accompanying this report.
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DOLPHIN ENTERTAINMENT, INC. 
