OVERVIEW
We are a leading independent entertainment marketing and premium content
production 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".
On January 8, 2021, we acquired all of the issued and outstanding shares of B/HI
Communications, Inc, a California corporation, referred to as B/HI, from Dean G
Bender and Janice L Bender as co-trustees of the Bender Family Trust dated May
6, 2013, the Seller. The acquisition was effective January 1, 2021. B/HI is an
entertainment public relations agency that specializes in corporate and product
communications programs for interactive gaming, esports, entertainment content
and consumer product organizations. As consideration for the acquisition of the
shares of B/HI, we agreed with the Seller to pay, $0.8 million of shares of our
common stock based on a 30-day trailing trading average closing price
immediately prior to, but not including, the applicable payment date adjusted
for working capital, cash targets and the B/HI indebtedness of approximately
$0.5 million, net of minimum operating cash as defined in the purchase
agreement. We may also pay up to an additional $1.2 million of which 50% will be
paid in cash and 50% will be paid in shares of our common stock upon B/HI
achieving certain specified financial performance targets during the years ended
December 31, 2021 and 2022.
Through our subsidiaries, 42West, The Door, Shore Fire, Viewpoint, Be Social and
B/HI, we provide expert strategic marketing and publicity services to many of
the top brands, both individual and corporate, in the entertainment, hospitality
and music industries. 42West, The Door and Shore Fire are each recognized global
leaders in the PR services for the industries they serve. Viewpoint adds
full-service creative branding and production capabilities to our marketing
group and Be Social provides influencer marketing capabilities through its
roster of highly engaged social media influencers. Dolphin's legacy content
production business, founded by our Emmy-nominated Chief Executive Officer, Bill
O'Dowd, has produced multiple feature films and award-winning digital series,
primarily aimed at family and young adult markets.
We have established an acquisition strategy based on identifying and acquiring
companies that complement our existing entertainment publicity and marketing
services and content production businesses. We believe that complementary
businesses, such as data analytics and digital marketing, can create synergistic
opportunities and bolster profits and cash flow. We have identified potential
acquisition targets and are in various stages of discussion with such targets.
We intend to complete one additional acquisition during 2021, but there is no
assurance that we will be successful in doing so, whether in 2021 or at all.
We operate in two reportable segments: our entertainment publicity and marketing
segment and our content production segment. The entertainment publicity and
marketing segment comprises 42West, The Door, Shore Fire, Viewpoint, Be Social
and B/HI and provides clients with diversified services, including public
relations, entertainment content marketing, strategic marketing consulting,
digital marketing capabilities, creative branding and in-house production of
content for marketing. The content production segment comprises Dolphin Films
and Dolphin Digital Studios and specializes in the production and distribution
of digital content and feature films.
On March 11, 2020, The World Health Organization categorized a novel coronavirus
(COVID-19) as a pandemic, and it continues to spread throughout the United
States. The outbreak of COVID-19 and public and private sector measures to
reduce its transmission, such as the imposition of social distancing and orders
to work-from-home, stay-at-home and shelter-in-place adversely affected our
business and demand for certain of our services. One of our subsidiaries
operates in the food and hospitality sector that was been negatively impacted by
the orders to either suspend or reduce operations of restaurants and hotels.
Another subsidiary represents talent, such as actors, directors and producers.
The revenues from these clients has been negatively impacted by the suspension
of content production. Conversely, the television and streaming consumption
around the globe has increased as well as the demand for consumer products.
Revenues from the marketing of these shows and products has somewhat offset the
decrease in revenue from the sectors discussed above. We have taken steps to
align our expenses with our changes in revenue. The steps being taken across the
Company include freezes on hiring, staff reductions, salary reductions and cuts
in non-essential spending. We continue to believe that our strategic strengths
discussed above will continue to assist us as we navigate a rapidly changing
marketplace. The effects of COVID-19 pandemic are negatively impacting our
results of operations, cash flows and financial position; however, the extent of
the impact will vary depending on the duration and severity of the economic and
operational impacts of COVID-19.
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Going Concern
In the audit opinion for our financial statements as of and for the year ended
December 31, 2020, our registered public accountants included an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern based upon our accumulated deficit as of December 31, 2020 and our
working capital deficit. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties. In addition, we
operate in industries that have been adversely affected by COVID-19 (e.g. food,
hospitality and talent PR). Management is planning to raise any necessary
additional funds through additional sales of our common stock, securities
convertible into our common stock, debt securities, as well as available bank
and non-bank financing, or a combination of such financing alternatives;
however, there can be no assurance that we will be successful in raising any
necessary additional capital or securing loans. Any such issuances of additional
shares of our common stock or securities convertible into our common stock would
dilute the equity interests of our existing shareholders, perhaps substantially.
If we are unable to raise additional funds from the sale of common stock,
securities convertible into our common stock, debt securities, bank and non-bank
financing or any combination of such financing securities, we may not be able to
continue as a going concern within one year from the issuance of these condensed
consolidated financial statements.
Revenues
For the three months ended March 31, 2021 and 2020, we derived all of our
revenues from our entertainment publicity and marketing segment. The
entertainment publicity and marketing segment generates its revenues from
providing public relations services for celebrities, musicians and brands,
entertainment and targeted content marketing for film and television series,
strategic communications services for corporations, public relations, marketing
services and brand strategies for hotels and restaurants and digital marketing
through its roster of social media influencers. Please refer to discussion under
Revenues in the Results of Operations section below for further discussion on
the revenues from the content production segment. The table below sets forth the
percentage of total revenue derived from our two segments for the three months
ended March 31, 2021 and 2020:
For the three months ended
March 31,
2021 2020
Revenues:
Entertainment publicity 100.0 % 100.0 %
Content production 0.0 % 0.0 %
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 have
a stable client base, and we have continued to grow organically through
referrals and actively soliciting new business, as well as through acquisition
of new businesses within the same industry. We earn revenues primarily from the
following sources: (i) celebrity talent services; (ii) content marketing
services under multiyear master service agreements in exchange for fixed
project-based fees; (iii) individual engagements for entertainment content
marketing services for durations of generally between three and six months; (iv)
strategic communications services; (v) engagements for marketing of special
events such as food and wine festivals; (vi) engagement for marketing of brands;
(vii) arranging strategic marketing agreements between brands and social media
influencers and (viii) content productions of marketing materials on a project
contract basis. For these revenue streams, we collect fees through either fixed
fee monthly retainer agreements, fees based on a percentage of contracts or
project-based fees.
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 online series) from all the major studios, as well as content
producers ranging from individual filmmakers and creative artists to production
companies, film financiers, DVD distributors, and other entities. In addition,
we provide entertainment marketing services in connection with film festivals,
food and wine festivals, awards campaigns, event publicity and red-carpet
management. As part of our services, we offer marketing and publicity services
tailored to reach diverse audiences. We also provide marketing direction
targeted to the ideal consumer through a creative public relations and creative
brand strategy for hotel and restaurant groups. Our clients for this type of
service include major studios, streaming services, independent producers and
leading hotel and restaurant groups. We expect that increased digital streaming
marketing budgets at several large key clients will drive growth of revenue and
profit in 42West's Entertainment Marketing division over the next several
years.
? Strategic Communications - We earn fees by advising companies looking to
create, raise or reposition their public profiles, primarily in the
entertainment industry. We believe that growth in Strategic Communications
division will be driven by increasing demand for these services by traditional
and non-traditional media clients who are expanding their activities in the
content production, branding, and consumer products PR sectors. We expect that
this growth trend will continue for the next three to five years. We also help
studios and filmmakers deal with controversial movies, as well as high-profile
individuals address sensitive situations.
? Creative Branding and Production - We offer clients creative branding and
production services from concept creation to final delivery. Our services
include brand strategy, concept and creative development, design and art
direction, script and copyrighting, live action production and photography,
digital development, video editing and composite, animation, audio mixing and
engineering, project management and technical support. We expect that our
ability to offer these services to our existing clients in the entertainment
and consumer products industries, will be accretive to our revenue.
? Digital Media Influencer Marketing Campaigns - We arrange strategic marketing
agreements between brands and social media influencers, for both organic and
paid campaigns. We also offer services for social media activations at events,
as well as editorial work on behalf of brand clients. Our services extend
beyond our own captive influencer network, and we manage custom campaigns
targeting specific demographics and locations, from ideation to delivery of
results reports. We expect that our relationship with social media influencers
will provide us the ability to offer these services to our existing clients in
the entertainment and consumer products industries and will be accretive to our
revenue.
Content Production
Project Development and Related Services
We have a team that dedicates a portion of its time to identifying scripts,
story treatments and novels for acquisition, development and production. The
scripts can be for either digital or motion picture productions. We have
acquired the rights to certain scripts that we intend to produce and release in
the future, subject to obtaining financing. We have not yet determined if these
projects would be produced for digital, television or theatrical distribution.
Our pipeline of feature films includes:
? Youngblood, an updated version of the 1986 hockey classic;
? 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 and.
? Out of their League, a romantic comedy pitting husband versus wife in the
cut-throat world of fantasy football;
We have completed development of each of these feature films, which means that
we have completed the script and can begin pre-production once financing is
obtained. We are planning to fund these projects through third-party financing
arrangements, domestic distribution advances, pre-sales, and location-based tax
credits, and if necessary, sales of our common stock, securities convertible
into our common stock, debt securities or a combination of such financing
alternatives; however, there is no assurance that we will be able to obtain the
financing necessary to produce any of these feature films.
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Expenses
Our expenses consist primarily of: (1) direct costs; (2) selling, general and
administrative expenses; (3) depreciation and amortization expense; (4) legal
and professional fees and (5) payroll expenses.
Direct costs include certain cost of services, as well as certain production
costs, related to our entertainment publicity and marketing business. Included
within direct costs are immaterial impairments for any of our content production
projects.
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 and
equipment and amortization of intangible assets and leasehold improvements.
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 three months ended March 31, 2021 and 2020, other income and expenses
consisted primarily of: (1) gain (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; (5) changes in fair value of warrants;
(6) changes in fair value of convertible notes and derivative liabilities and
(7) interest expense. For the three months ended March 31, 2020, we also had a
loss on the deconsolidation of our Max Steel variable interest entity.
RESULTS OF OPERATIONS
Three months ended March 31, 2021 as compared to three months ended March 31,
2020
Revenues
For the three months ended March 31, 2021 and 2020 revenues were as follows:
For the three months ended
March 31,
2021 2020
Revenues:
Entertainment publicity and marketing $ 7,177,117 $ 6,633,800
Content production - -
Total revenue $ 7,177,117 $ 6,633,800Revenues from entertainment publicity and marketing increased by approximately
$0.5 million for the three months ended March 31, 2021, as compared to the same
period in the prior year primarily due to the revenues of Be Social and B/HI.
These revenues were offset by decreases in revenues from our clients in the food
and hospitality industries and the talent division. Government imposed orders to
either reduce or completely shut down the in-restaurant service due to COVID-19
caused our clients to either reduce or suspend the services we offer. We did not
derive any revenues from the content production segment as we have not produced
and distributed any of the projects discussed above and the projects that were
produced and distributed in 2013 and 2016 have mostly completed their normal
revenue cycles.
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Expenses
For the three months ended March 31, 2021 and 2020, our expenses were as
follows:
For the three months ended
March 31,
2021 2020
Expenses:
Direct costs $ 829,151 $ 688,977
Selling, general and administrative 1,482,471 1,120,616
Depreciation and amortization 482,712 521,003
Legal and professional 344,607 284,440
Payroll 5,233,116 4,889,623
Total expenses $ 8,372,057 $ 7,504,659
Direct costs increased by approximately $0.1 million for the three months ended
March 31, 2021, as compared to the three months ended March 31, 2020. Direct
costs for Viewpoint are primarily costs attributable to the production costs of
each of their projects. The increase in direct costs is primarily related to an
increase in Viewpoint's revenue.
Selling, general and administrative expenses increased by approximately $0.4
million for the three months ended March 31, 2021 as compared to the three
months ended March 31, 2020. The increase is directly related to including the
selling, general and administrative costs of Be Social acquired on August 17,
2020 and B/HI acquired on January 1, 2021, for the three months ended March 31,
2021.
Legal and professional fees increased by approximately $0.06 million for the
three months ended March 31, 2021 as compared to the three months ended March
31, 2020 due primarily to including legal and professional fees for Be Social
acquired August 17, 2020 and B/HI acquired January 1, 2021 in the three months
ended March 31, 2021.
Payroll expenses increased by approximately $0.3 million for the three months
ended March 31, 2021, as compared to the three months ended March 31, 2020
primarily due to including payroll costs of Be Social acquired on August 17,
2020 and B/HI acquired on January 1, 2021, in the aggregate amount of
approximately $0.8 million for the three months ended March 31, 2021, offset by
general decreases in payroll costs in other subsidiaries of approximately $0.5
million from personnel changes made as a result of COVID-19.
Other Income and Expenses
For the three months ended
March 31,
2021 2020
Other Income and expenses:
(Loss) gain on extinguishment of debt $ (57,363 ) $ 3,259,865
Loss on deconsolidation of Max Steel VIE - (1,484,591 )
Change in fair value of convertible notes and derivative
liabilities
(871,449 ) 147,459
Change in fair value of warrants (2,562,877 ) 72,515
Change in fair value of put rights (71,106 ) 1,470,740
Change in fair value of contingent consideration (365,000 ) 103,000
Acquisition costs (22,907 ) -
Interest expense and debt amortization (165,194 ) (624,282 )
Total other (expense) income, net $ (4,115,896 ) $ 2,944,706During the three months ended March 31, 2021, we recorded a loss on
extinguishment of debt related to the exchange of certain put rights for shares
of our common stock. During the three months ended March 31, 2020, we recorded a
gain on extinguishment of debt of $3.3 million primarily related to the Max
Steel VIE. On February 20, 2020, the lender of the production service agreement
confirmed that the Max Steel VIE did not owe them any debt. We reassessed our
status as the primary beneficiary of the Max Steel VIE and concluded that we
were no longer the primary beneficiary of the Max Steel VIE. As a result, we
deconsolidated the Max Steel VIE and recorded a loss on deconsolidation of
approximately $1.5 million during the nine months ended September 30, 2020.
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We elected the fair value option for certain convertible notes issued in 2020.
The embedded conversion feature of a convertible note issued in 2019 met the
criteria for a derivative. The fair value of these convertible notes and
embedded conversion feature are remeasured at every balance sheet date and any
changes are recorded on our condensed consolidated statements of operations. For
the three months ended March 31, 2021, we recorded a change in the fair value of
the convertible notes issued in 2020 in the amount of $(871,449). None of the
decrease in the value of the convertible notes was attributable to instrument
specific credit risk and as such all of the gain in the change in fair value was
recorded within net income.
For the three months ended March 31, 2020, we recorded a change in the fair
value of the embedded derivative of the 2019 note in the amount of $147,459.
None of the decrease in the value of the convertible notes was attributable to
instrument specific credit risk and as such all of the gain in the change in
fair value was recorded within net income.
Warrants issued with two convertible notes payable issued on January 3 and March
4, 2020, were initially measured at fair value at the time of issuance and
subsequently remeasured at estimated fair value on a recurring basis at each
reporting period date, with changes in estimated fair value of each respective
warrant liability recognized as other income or expense. On March 24, 2021, one
of the warrant holders exercised 146,027 warrants via a cashless exercise
formula. The price of our common stock on the exercise date was $19.16 per share
and we recorded a change in fair value of the exercised warrants of $2.4 million
on our condensed consolidated statement of operations. The fair value of the
2020 warrants that were not exercised increased by approximately $0.2 million
and we recorded a change in the fair value of the warrants for that amount on
our condensed consolidated statement of operations.
The fair value of put rights related to the 42West acquisition were recorded on
our condensed consolidated balance sheet on the date of the acquisition. The
fair value of the put rights are measured at every balance sheet date and any
changes are recorded on our condensed consolidated statements of operations. The
fair value of the put rights increased by approximately $0.1 million for the
three months ended March 31, 2021 and decreased by approximately $1.5 million
for the three months ended March 31, 2020.
Contingent consideration related to our acquisitions of The Door and Be Social
was recorded at fair value on our condensed consolidated balance sheet as of the
respective acquisition dates. The fair value of the related contingent
consideration is measured at every balance sheet date and any changes recorded
on our condensed consolidated statements of operations. The fair value of the
contingent consideration increased by approximately $0.4 million for the three
months ended March 31, 2021 and decreased by approximately $0.1 million for the
three months ended March 31, 2020.
Interest expense and debt amortization expense decreased by approximately $0.5
million for the three months ended March 31, 2021 as compared to the same period
in prior year primarily due to convertible notes that converted during the three
months ended March 31, 2021 and $0.3 million of debt amortization recorded
during the three months ended March 31, 2020, related to beneficial conversion
features on certain convertible notes payable converted during that period.
Net Loss
Net loss was approximately $(5.3) million or $(0.73) per share based on
7,267,297 weighted average shares outstanding for basic and fully diluted loss
per share for the three months ended March 31, 2021. Net income was
approximately $2.1 million or $0.40 per share based on 4,099,713 weighted
average shares outstanding for basic earnings per share and $0.3 million or
$0.05 per share based on 5,676,996 weighted average shares on a fully diluted
basis for the three months ended March 31, 2020. The increase in net loss for
the three months ended March 31, 2021 as compared to the three months ended
March 31, 2020, is related to the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Three months ended March 31, 2021 as compared to three months ended March 31,
2020
Cash flows used in operating activities for three months ended March 31, 2021
was $0.1 million. Our net loss of approximately $5.3 million contained non-cash
items such as loss on extinguishment of debt and changes in the fair value of
liabilities in the aggregate net amount of approximately $4.5 million resulting
in $0.8 million of cash flows used in operations. This was offset by changes in
operating assets and liabilities of approximately $0.7 million, primarily from
the increase of accounts receivable, contract liabilities and accrued interest
from a related party offset by a decrease in accounts payable. Cash flows used
in operating activities for the three months ended March 31, 2020, were $0.4
million. Our net income of approximately $2.1 million was primarily due to
non-cash items such as gain on extinguishment of debt and changes in the fair
value of liabilities in the aggregate net amount of $2.5 million, resulting in
$0.5 million of cash flows used in operations. This was offset by changes in
operating assets and liabilities of approximately $0.1 million, primarily from
the decrease of other current liabilities.
Cash flows used in investing activities for the three months ended March 31,
2021 were $0.5 million entirely related to the acquisition of B/HI, net of cash
acquired. Cash flows used in investing activities for the three months ended
March 31, 2020, were $0.3 million primarily due to the acquisition of Shore
Fire.
Cash flows used for financing activities for the three months ended March 31,
2021 were approximately $0.2 million as compared to $0.3 million provided by
financing activities for the three months ended March 31, 2020. Cash flows used
in financing activities during the three months ended March 31, 2021 consisted
primarily (i) $0.1 million used for repayment of the Bank United term loan and
(ii) $0.3 million used to purchase our common stock pursuant to Put Rights
exercised offset by $0.2 million received in exchange for a convertible note
payable. Cash flows provided by financing activities for the three months ended
March 31, 2020 consisted primarily of (i) $0.5 million repayment of line of
credit with Bank United; (ii) $2.4 million provided by the sale of convertible
promissory notes; (iii) $1.2 repayment of a convertible promissory note upon its
maturity and (iv) $0.4 million used to buy back our Common Stock pursuant to Put
Rights that were exercised.
As of March 31, 2021 and 2020, we had cash available for working capital of
approximately $7.1 million, not including $0.7 million pledged as collateral for
the standby letter of credit for the New York office and security deposit in the
Newton MA office, and $1.9 million, not including $0.7 million pledged as
collateral for the standby letter of credit for the New York and Newton, MA
offices, respectively, and a working capital deficit of approximately $4.0
million and $10.7 million, respectively.
These factors, along with an accumulated deficit of $103.2 million as of March
31, 2021, raise substantial doubt about our ability to continue as a going
concern. The condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q 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 additional issuances of our
common stock, securities convertible into our common stock, debt securities, as
well as available bank and non-bank financing, or a combination of such
financing alternatives. There is no assurance that we will be successful in
raising additional capital. Such issuances of additional shares of our common
stock or securities convertible into our common stock would further dilute the
equity interests of our existing shareholders, perhaps substantially.
Our subsidiaries operate in industries that were adversely affected by the
government mandated shelter-in-place, stay-at-home and work-from-home orders as
a result of the novel coronavirus COVID-19. Between April 19, 2020 and April 23,
2020, we entered into five separate loan agreements and received an aggregate
amount of approximately $2.8 million under the Paycheck Protection Program which
was established under the Coronavirus Aid, Relief and Economic Security Act
(CARES Act). Be Social, which the Company acquired on August 17, 2020, received
a PPP Loan in the amount of $304,169 prior to the acquisition. The loans are
unsecured and all or a portion of the loans may be forgiven upon application to
the lender for certain expenditure amounts made, including payroll costs, in
accordance with the requirements under the Paycheck Protection Program. There is
no assurance that our obligation under these loans will be forgiven.
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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 March 31, 2021, our total
debt was approximately $5.6 million, not including the funds received from the
Paycheck Protection Program that we expect will be forgiven, and our total
stockholders' equity was approximately $20.5 million.
If we are not able to generate sufficient cash to service our current or future
indebtedness, we will be forced to take actions such as reducing or delaying
digital or film productions, selling assets, restructuring or refinancing our
indebtedness or seeking additional debt or equity capital or bankruptcy
protection. We may not be able to execute any of these remedies on satisfactory
terms or at all and our indebtedness may affect our ability to continue to
operate as a going concern.
Put Rights
In connection with the 42West acquisition, pursuant to put agreements, we
granted the sellers and certain 42West employees put rights to require us to
purchase up to an aggregate of 265,397 shares of our common stock that they
received as consideration (including shares from the earn out consideration
which was achieved for the year ended December 31, 2017) for a purchase price of
$46.10 per share during certain specified exercise periods up until March 2021.
During the three months ended March 31, 2021, put right holders exercised put
rights for 22,867 shares of our common stock in accordance with the put
agreements.
During the three months ended March 31, 2021, we made payments in the amount of
$260,900 and exchanged 6,507 put rights for 77,519 shares of our common stock,
related to put rights that had been exercised in 2020. As of March 31, 2021, we
owed $1,054,235 related to the exercise of these put rights. As of March 31,
2021, all put rights available to the holders have been exercised.
Financing Arrangements
Production Service Agreement
On February 20, 2020, we received notification from the lender of the Production
Service Agreement that the Max Steel VIE did not owe any debt to the lender. As
a result, we recorded a gain on extinguishment of debt in the amount of
approximately $3.3 million during the three months ended March 31, 2020.
Term Loan
On March 31, 2020, 42West and The Door, as co-borrowers, entered into a business
loan agreement with Bank United, N.A. to convert the balance of a 42West line of
credit of $1,200,390 into a three-year term loan (the "Term Loan"). The Term
Loan bears interest at a rate of 0.75% points over the Lender's Prime Rate and
matures on March 15, 2023. As of March 31, 2021, the outstanding balance on the
Term Loan was $800,260.
The Term Loan contains customary affirmative covenants, including covenants
regarding maintenance of a maximum debt to total net worth ratio of at least
4.0:1.0 and a minimum fixed charge coverage of 1.06x based on fiscal year-end
audit to be calculated as provided in the Term Loan. Further, the Term Loan
contains customary negative covenants, including those that, subject to certain
exceptions, restrict the ability of 42West and The Door to incur additional
indebtedness, grant liens, make loans, investments or certain acquisitions, or
enter into certain types of agreements. Upon the occurrence of an event of
default, the bank may accelerate the maturity of the loan and declare the unpaid
principal balance and accrued but unpaid interest immediately due and payable.
In the event of 42West and The Door's insolvency, such outstanding amounts will
automatically become due and payable. 42West and The Door may prepay any amounts
outstanding under the Term Loan without penalty. The bank tests for compliance
with debt covenants on an annual basis based on the financial statements of
42West and The Door as of and for the year ended December 31. Based on current
economic factors and uncertainties due to COVID-19, we believe we are out of
compliance with certain debt covenants as of and for the three months ended
March 31, 2021. As such, we have classified the entire balance of $800,260 of
the Term Loan in current liabilities on our condensed consolidated balance
sheet.
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Promissory Notes
Convertible Notes Payable
On March 30, 2021, December 1, 2020, October 26, 2020, September 11, 2020 and
March 18, 2020, we issued convertible promissory notes in the aggregate amount
of $1,445,000. The convertible promissory notes bear interest at a rate of 10%
per annum and have maturity dates on second anniversary of their respective
issuances. The balance of each convertible promissory note and any accrued
interest can be converted at the noteholder's option at any time at a purchase
price based on either a 30-day or 90-day average closing market price per share
of our common stock. During the three months ended March 31, 2021, the holders
of five of the convertible notes converted the notes into 381,601 shares of our
common stock at conversion prices ranging between $3.69 and $3.96 per share.
During the three months ended March 31, 2021 and 2020, we recorded interest
expense of $27,538 and $704, respectively related to these convertible notes
payable. As of March 31, 2021 and December 31, 2020, the principal balance of
the convertible promissory notes of $150,000 and $1,445,000, respectively was
recorded in noncurrent liabilities under the caption convertible promissory
notes on our condensed consolidated balance sheets.
Convertible Notes Payable at fair value
On January 3, 2020, March 4, 2020 and March 25, 2020, we entered into three
separate securities purchase agreements and issued three convertible promissory
notes with aggregate principal amounts of $2,360,000 at a purchase price of
$2,200,000, (the "January 3rd Note", the "March 4, Note" and the "March
25thNote", respectively). The January 3rd Note matures on January 3, 2022, the
March 4th Note 4 matures on March 4, 2030 and the March 25th Note matures on
March 25, 2021. The January 3rd Note and March 4th Note were issued with
warrants ('Warrants E, F, G, H and I") to purchase up to 186,072 shares of our
common stock at a purchase price of $3.91 per share. The January 3rd Note may be
converted at any time into shares of our common stock at a conversion price
equal to the lower of (A) $5.25 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 $3.91 per
share. The March 4th Note is convertible at fixed conversion prices of $3.91 and
the March 25th Note is convertible at a fixed conversion price of $3.90 per
share. The March 4th Notewith a principal amount of $500,000 bears interest at a
rate of 8% per annum, payable monthly. We elected the fair value option to
account for these convertible promissory notes. As such, we initially recorded
the fair value of each of the notes on their respective issue dates. On each
balance sheet date, we record the fair value of the convertible promissory notes
with any changes in the fair value recorded in the condensed consolidated
statement of operation.
On July 14, 2020, August 17, 2020, January 13 2021 and January 27, 2021, the
January 3rd Note and March 25th Note with an aggregate principal balance of
$1,860,000 were converted into 453,735 shares of our common stock at purchase
prices ranging between $3.90 and $4.45 per share. As of March 31, 2021, we had a
balance of $1,298,740 in noncurrent liabilities recorded on our condensed
consolidated balance sheets related to these convertible promissory notes at
fair value. For the three months ended March 31, 2021 and 2020, we recorded a
loss from the change in fair value of $(871,449) and a gain from the change in
fair value of $147,459, respectively, on our condensed consolidated statements
of operations.
Nonconvertible Promissory Notes
On November 5, 2019, November 30, 2017 and June 14 2017, we issued unsecured
promissory notes in the aggregate amount of $950,000. The promissory notes bear
interest at a rate of 10% per annum and had initial maturity dates ranging
between one and two years of the initial issuance date. The maturity dates have
been extended and the promissory notes now have maturity dates ranging between
November 5, 2021 and November 30, 2022.
On December 10, 2018, we agreed to exchange a promissory note in the amount of
$300,000, including accrued interest of $192,233 for a new unsecured promissory
note in the amount of $492,233 that matures on December 10, 2023. This
promissory note bears interest of 10% per annum and can be prepaid without a
penalty at any time prior to its maturity. The note requires monthly repayments
of principal and interest in the amount of $10,459 throughout the life of the
note.
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As of March 31, 2021 and December 30, 2020, we had a balance of $1,049,935 and
$846,749, respectively, recorded as current liabilities and $200,721 and
$426,645, respectively in noncurrent liabilities on our condensed consolidated
balance sheets related to these nonconvertible promissory notes. We recorded
interest expense of $31,659 and $33,759 for the three months ended March 31,
2021 and 2020 related to these nonconvertible promissory notes. We made interest
payments of $67,948 during the three months ended March 31, 2021 related to the
convertible and nonconvertible promissory notes.
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with U.S. Generally Accepted Accounting Principles, or "GAAP". The
preparation of these consolidated financial statements requires us to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates. Please refer to
our critical accounting policies as disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2020 and Note 3 Summary of Significant
Accounting Policies, to our Consolidated Financial Statements for a complete
description of our significant accounting policies.
Income Taxes
We recorded an income tax benefit of $38,851 for the three months ending March
31, 2021. There was no income tax expense or benefit for the three ending March
31, 2020. The income tax benefit of $38,851 is due to a reduction of the
valuation allowance against the deferred tax liability recorded as a result of
the B/HI acquisition.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 (General) to
the unaudited condensed consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of March 31, 2021 and 2020, we did not have any material off-balance sheet
arrangements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may include, but are not limited to, statements
relating to our objectives, plans and strategies, as well as statements, other
than historical facts, that address activities, events or developments that we
intend, expect, project, believe or anticipate will or may occur in the future.
These statements are often characterized by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "could," 'intends," "target,"
"projects," "contemplates," "believes," "estimates," "predicts," "potential,"
"goal" or "continue" or the negative of these terms or other similar
expressions.
Forward-looking statements are based on assumptions and assessments made in
light of our experience and perception of historical trends, current conditions,
expected and future developments and other factors believed to be appropriate.
Forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties, many of which are outside of our control.
You should not place undue reliance on these forward-looking statements, which
reflect our views only as of the date of this Quarterly Report on Form 10-Q, and
we undertake no obligation to update these forward-looking statements in the
future, except as required by applicable law.
Risks that could cause actual results to differ materially from those indicated
by the forward-looking statements include those described as "Risk Factors" in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as
updated by our subsequently filed Quarterly Reports on Forms 10-Q and Current
Reports on Forms 8-K.
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