UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM
For the quarterly period ended
OR
For the transition period from __________ to __________
Commission file number:
(Exact name of registrant as specified in its charter)
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| incorporation or organization) | Identification No.) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
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and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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The number of shares of common stock outstanding was as of November 10, 2023.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable: | ||||||||
| Trade, net of allowance of $ | ||||||||
| Other receivables | ||||||||
| Notes receivable | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Capitalized production costs, net | ||||||||
| Employee receivable | ||||||||
| Right-of-use asset | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Property, equipment and leasehold improvements, net | ||||||||
| Other long-term assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| LIABILITIES | ||||||||
| Current | ||||||||
| Accounts payable | $ | $ | ||||||
| Term loan, current portion | ||||||||
| Notes payable, current portion | ||||||||
| Contingent consideration | ||||||||
| Accrued interest – related party | ||||||||
| Accrued compensation – related party | ||||||||
| Lease liability, current portion | ||||||||
| Deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Term loan, noncurrent portion | ||||||||
| Notes payable | ||||||||
| Convertible notes payable | ||||||||
| Convertible note payable at fair value | ||||||||
| Loan from related party | ||||||||
| Contingent consideration | ||||||||
| Lease liability | ||||||||
| Deferred tax liability | ||||||||
| Warrant liability | ||||||||
| Other noncurrent liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 18) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred Stock, Series C, $ par value, shares authorized, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Common stock, $par value, shares authorized, and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Expenses: | ||||||||||||||||
| Direct costs | ||||||||||||||||
| Payroll and benefits | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Acquisition costs | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Impairment of goodwill | ||||||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | ||||||||||||
| Legal and professional | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expenses) income: | ||||||||||||||||
| Change in fair value of convertible note | ( | ) | ||||||||||||||
| Change in fair value of warrants | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (expenses) income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes and equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss before equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Share-based compensation | ||||||||
| Equity in losses of unconsolidated affiliates | ||||||||
| Impairment of equity method investment | ||||||||
| Commitment shares issued to Lincoln Park Capital Fund, LLC | ||||||||
| Bonus payment issued in shares | ||||||||
| Impairment of goodwill | ||||||||
| Impairment of intangible assets | ||||||||
| Impairment of right-of-use asset | ||||||||
| Impairment of capitalized production costs | ||||||||
| Write-off of debt origination costs | ||||||||
| Change in allowance for credit losses | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Change in fair value of warrants | ( | ) | ( | ) | ||||
| Change in fair value of convertible notes | ( | ) | ||||||
| Deferred income tax expense, net | ||||||||
| Debt origination costs amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, trade and other | ||||||||
| Other current assets | ( | ) | ||||||
| Capitalized production costs | ( | ) | ( | ) | ||||
| Other long-term assets and employee receivable | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued interest – related party | ||||||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Lease liability | ( | ) | ||||||
| Other noncurrent liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Issuance of notes receivable | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from equity line of credit agreement | ||||||||
| Cash settlement of contingent consideration for Be Social (2023) and B/HI (2022) | ( | ) | ( | ) | ||||
| Proceeds from convertible notes payable | ||||||||
| Proceeds from term loan | ||||||||
| Repayment of term loan | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Payment of interest to related party | ( | ) | ||||||
| Early payment penalty on debt refinancing | ( | ) | ||||||
| Debt origination costs | ( | ) | ||||||
| Principal payments on finance leases | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | ( | ) | ||||||
| Cash and cash equivalents and restricted cash, beginning of period | ||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(unaudited)
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of commitment shares to Lincoln Park Capital Fund, LLC | $ | $ | ||||||
| Receipt of Crafthouse equity in connection with marketing agreement | $ | $ | ||||||
| Settlement of contingent consideration for B/HI (2022), The Door (2022) and Be Social (2023) in shares of common stock | $ | $ | ||||||
| Employee compensation paid in shares of common stock | $ | $ | ||||||
| Issuance of shares of common stock for the conversion of convertible notes payable | $ | $ | ||||||
| Employee bonus paid in stock | $ | $ | ||||||
| Lease liabilities arising from obtaining right-of-use assets. | $ | $ | ||||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statements of cash flows that sum to the total of the same such amounts shown in the statements of cash flows:
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
| For the three and nine months ended September 30, 2023 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital Fund, LLC | — | |||||||||||||||||||||||||||
| Issuance of shares related to employment agreements | — | |||||||||||||||||||||||||||
| Balance March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended June 30, 2023 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital Fund LLC | — | |||||||||||||||||||||||||||
| Conversion of convertible note payable | — | |||||||||||||||||||||||||||
| Issuance of shares related to the Be Social acquisition | — | |||||||||||||||||||||||||||
| Issuance of shares related to employment agreements | — | |||||||||||||||||||||||||||
| Balance June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended September 30, 2023 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital Fund, LLC | — | |||||||||||||||||||||||||||
| Issuance of shares related to employment agreements | — | |||||||||||||||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
| For the three and nine months ended September 30, 2022 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital Fund, LLC | — | |||||||||||||||||||||||||||
| Shares issuable for contingent consideration | — | — | ||||||||||||||||||||||||||
| Issuance of restricted shares, net of shares withheld for taxes | — | ( | ) | |||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income for the three months ended June 30, 2022 | — | — | ||||||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital Fund, LLC | — | |||||||||||||||||||||||||||
| Issuance of restricted shares, net of shares withheld for taxes | — | ( | ) | |||||||||||||||||||||||||
| Issuance of shares to sellers of The Door Marketing Group LLC for earnout consideration | — | ( | ) | |||||||||||||||||||||||||
| Issuance of shares to seller of B/HI Communication Inc. for earnout consideration | — | |||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Balance June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended September 30, 2022 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares related to conversion of note payable | — | |||||||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital Fund, LLC | — | |||||||||||||||||||||||||||
| Issuance of common stock on vesting of restricted stock units, net of shares withheld for taxes | — | ( | ) | |||||||||||||||||||||||||
| Issuance of shares related to employment agreement | — | |||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
Dolphin Entertainment, Inc., a Florida corporation (the “Company,” “Dolphin,” “we,” “us” or “our”), is a leading independent entertainment marketing and premium content development company. Through its acquisitions of 42West LLC (“42West”), The Door Marketing Group, LLC (“The Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation Incorporated (“Viewpoint”), Be Social Public Relations, LLC (“Be Social”), B/HI Communications, Inc. (“B/HI”) and Socialyte, LLC (“Socialyte”), the Company provides expert strategic marketing and publicity services throughout the United States of America (“U.S.”) to all of the major film studios and many of the leading independent and digital content providers, A-list celebrity talent, including actors, directors, producers, celebrity chefs, social media influencers and recording artists. The Company also provides strategic marketing publicity services and creative brand strategies for prime hotel and restaurant groups and consumer brands throughout the U.S. The strategic acquisitions of 42West, The Door, Shore Fire, Viewpoint, Be Social, B/HI and Socialyte bring together premium marketing services, including digital and social media marketing capabilities, with premium content production, creating significant opportunities to serve respective constituents more strategically and to grow and diversify the Company’s business. Dolphin’s content production business is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. Dolphin produces original feature films and digital programming primarily aimed at family and young adult markets.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films, Inc. (“Dolphin Films”), Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC, Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte. The Company applies the equity method of accounting for its investments in entities for which it does not have a controlling financial interest, but over which it has the ability to exert significant influence.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2023, and its results of operations and cash flows for the three and nine months ended September 30, 2023 and 2022. All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2023. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to the estimates in the fair value of acquisitions, estimates in assumptions used to calculate the fair value of certain liabilities and impairment assessments for investment in capitalized production costs, goodwill and long-lived assets. Actual results could differ materially from such estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications had no impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows.
Recent Accounting Pronouncements
Accounting Guidance Adopted
In June 2016, the FASB issued new guidance on measurement of credit losses (ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”) with subsequent amendments issued in November 2018 (ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the accounting for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. The Company adopted this guidance effective January 1, 2023 and the adoption of this accounting standard did not have a material impact on the Company’s condensed consolidated financial statements.
| 8 |
NOTE 2 – REVENUE
Disaggregation of Revenue
The Company’s principal geographic markets are within the U.S. The following is a description of the principal activities, by reportable segment, from which we generate revenue. For more detailed information about reportable segments, see Note 15.
Entertainment Publicity and Marketing
The Entertainment Publicity and Marketing (“EPM”) segment generates revenue from diversified marketing services, including public relations, entertainment and hospitality content marketing, strategic marketing consulting and content production of marketing materials. Within the EPM segment, we typically identify one performance obligation, the delivery of professional publicity services, in which we typically act as the principal. 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.
We also enter into management agreements with a roster of social media influencers and are paid a percentage of the revenue earned by the social media influencer. Due to the short-term nature of these contracts, in which we typically act as the agent, the performance obligation is typically completed and revenue is recognized net at a point in time, typically the date of publication.
Content Production
The Content Production (“CPD”) segment generates revenue from the production of original motion pictures and other digital content production. In the CPD segment, we typically identify performance obligations depending on the type of service, for which we generally act as the principal. Revenue from motion pictures is recognized upon transfer of control of the licensing rights of the motion picture or web series to the customer. For minimum guarantee licensing arrangements, the amount related to each performance obligation is recognized when the content is delivered, and the window for exploitation right in that territory has begun, which is the point in time at which the customer is able to begin to use and benefit from the content. For sales or usage-based royalty income, revenue is recognized starting at the exhibition date and is based on the Company’s participation in the box office receipts of the theatrical exhibitor and the performance of the motion picture.
The revenues recorded by the EPM and CPD segments is detailed below:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Entertainment publicity and marketing | $ | $ | $ | $ | ||||||||||||
| Content production | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
Contract Balances
The opening and closing balances of our contract liability balances from contracts with customers as of September 30, 2023 and December 31, 2022 were as follows:
| Contract Liabilities |
|||||
| Balance as of December 31, 2022 | $ | ||||
| Balance as of September 30, 2023 | |||||
| Change | $ | ||||
Contract liabilities are recorded when the Company receives advance payments from customers for public relations projects or as deposits for promotional or brand-support video projects. Once the work is performed or the projects are delivered to the customer, the contract liabilities are deemed earned and recorded as revenue. Advance payments received are generally for short duration and are recognized once the performance obligation of the contract is met. Contract liabilities are presented within deferred revenue in the condensed consolidated balance sheets. The change in the contract liability balance relates to the advanced consideration received from customers under the terms of our contracts, primarily related to fees, which are generally recognized shortly after billing.
Revenues for the three and nine months ended September 30, 2023 and 2022 include the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amounts included in the beginning of year contract liability balance | $ | $ | $ | $ | ||||||||||||
The Company’s unsatisfied performance obligations are for contracts that have an original expected duration of one year or less and, as such, the Company is not required to disclose the remaining performance obligation.
| 9 |
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of September 30, 2023, the
Company had a balance of $
The Company evaluates goodwill in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) significant decline in market capitalization or (4) an adverse action or assessment by a regulator. During the second quarter of the 2023 year, the Company’s stock price remained constant and did not respond as positively as expected to new information on the Company’s future projects and forecasts; this, in combination with recurring net losses, resulted in the Company’s market capitalization to be less than the Company’s book value. The Company considered this to be a triggering event, and therefore performed a quantitative analysis of the fair value of goodwill during the second quarter of 2023.
As a result of this quantitative
analysis, during the second quarter of 2023, the Company recorded an impairment of Goodwill amounting to $
Intangible Assets
Finite-lived intangible assets consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Trademarks and trade names | ||||||||||||||||||||||||||||
| Non-compete agreements | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Amortization expense associated
with the Company’s intangible assets was $
During the three and nine months
ended September 30, 2023, the Company recognized an impairment of the trademarks and trade names of Socialyte and Be Social in connection
with the rebranding of both subsidiaries as the new “The Digital Dept.” of the Company. The impairment amount was determined
to be the carrying value of both the trademark and trade name intangible assets as of September 30, 2023, which amounted to $
Amortization expense related to intangible assets for the remainder of 2023 and thereafter is as follows:
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| $ |
The following table presents the changes in goodwill and intangible assets:
| Goodwill | Intangible Assets | |||||||
| Balance December 31, 2022 | $ | $ | ||||||
| Amortization expense | ( |
) | ||||||
| Balance March 31, 2023 | ||||||||
| Amortization expense | ( |
) | ||||||
| Impairment of goodwill | ( |
) | ||||||
| Balance June 30, 2023 | $ | $ | ||||||
| Amortization expense | ( |
) | ||||||
| Impairment of intangible assets | ( |
) | ||||||
| Balance September 30, 2023 | $ | $ | ||||||
| 10 |
NOTE 4 —ACQUISITIONS
Socialyte, LLC
On November 14, 2022 (“Closing Date”), the Company, through its wholly owned subsidiary, Social MidCo LLC, (“MidCo”), acquired all of the issued and outstanding membership interests of Socialyte, a Delaware limited liability company (the “Socialyte Purchase”), pursuant to a membership interest purchase agreement dated the Closing Date (the “Socialyte Purchase Agreement”) between the Company and NSL Ventures, LLC (the “Socialyte Seller”). Socialyte is a New York and Los Angeles-based creative agency specializing in social media influencer marketing campaigns for brands.
The total consideration paid
to the Socialyte Seller in respect to the Socialyte Purchase was $
The condensed consolidated statement
of operations includes revenues and net loss from Socialyte amounting to $
The following table summarizes the fair value of the consideration transferred:
| Closing common stock (Consideration) | $ | |||
| Common stock issued at Closing Date as working capital adjustment | ||||
| Cash consideration paid at closing | ||||
| Cash consideration paid subsequent to closing (Unsecured Promissory Note issued to Seller) | ||||
| Fair value of the consideration transferred | $ | |||
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed by the Socialyte Purchase on the Closing Date. Amounts in the table are estimates that may change, as described below. There were no measurement period adjustments during the three and nine months ended September 30, 2023. The measurement period of the Socialyte Purchase concludes on November 14, 2023.
| November 14, 2022 | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Accrued revenue | ||||
| Property, equipment and leasehold improvements | ||||
| Prepaid expenses | ||||
| Intangibles | ||||
| Total identifiable assets acquired | $ | |||
| Accounts payable | ( | ) | ||
| Accrued expenses and other current liabilities | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Total liabilities assumed | $ | ( | ) | |
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Fair value of the consideration transferred | $ | |||
| 11 |
NOTE 5 — NOTES RECEIVABLE
The notes receivable held by the Company are unsecured convertible note receivables from JDDC Elemental LLC (“Midnight Theatre”) (the “Notes Receivable”). The Notes Receivable are recorded at their principal face amount plus accrued interest. Due to their short-term maturity and conversion terms, these have been recorded at the face value of the note and an allowance for credit losses has not been established.
As of September 30, 2023, the
Notes Receivable amounted to $
NOTE 6 — EQUITY METHOD INVESTMENTS
The Company’s equity method investment consisted of: (i) Class A and Class B units of Midnight Theatre and (ii) Series 2 common interest of Stanton South LLC, which operates Crafthouse Cocktails (“Crafthouse Cocktails”).
The Company evaluated these investments under the Variable Interest Entity guidance and determined the Company is not the primary beneficiary of either Midnight Theatre or Crafthouse Cocktails, however, it does exercise significant influence over Midnight Theatre and Crafthouse Cocktails; as a result, it accounts for these investments under the equity method of accounting. Equity method investments are included within other long-term assets in the condensed consolidated balance sheets.
Midnight Theatre
As of September 30, 2023 and December
31, 2022, the investment in Midnight Theatre amounted to $
Crafthouse Cocktails
As part of the Company’s
ongoing monitoring of its equity method investments, during the three months ended September 30, 2023, the Company determined their investment
in Crafthouse Cocktails was impaired and therefore recorded an impairment for the entire balance of its investment as of September 30,
2023. This determination was made after Crafthouse was unable to secure their latest round of funding and the Company concluded the resulting
decline in the carrying value of this investment was determined to be other than temporary in nature. The impairment amounted to $
During the nine months ended September
30, 2023, prior to the impairment recognition, the Company recorded losses in connection with its equity method investment in Crafthouse
Cocktails amounting to $
As of December 31, 2022, the
investment in Crafthouse Cocktails amounted to $
NOTE 7 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued funding under Max Steel production agreement | $ | $ | ||||||
| Accrued audit, legal and other professional fees | ||||||||
| Accrued commissions | ||||||||
| Accrued bonuses | ||||||||
| Talent liability | ||||||||
| Accumulated customer deposits | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
| 12 |
NOTE 8 — DEBT
Total debt of the Company was as follows as of September 30, 2023 and December 31, 2022:
| Debt Type | September 30, 2023 | December 31, 2022 | ||||||
| Convertible notes payable | $ | $ | ||||||
| Convertible note payable - fair value option | ||||||||
| Non-convertible promissory notes | ||||||||
| Non-convertible promissory notes – Socialyte | ||||||||
| Loans from related party (see Note 9) | ||||||||
| Term loan, net of debt issuance costs (see Note 12) | ||||||||
| Total debt | $ | $ | ||||||
| Less current portion of debt | ( | ) | ( | ) | ||||
| Noncurrent portion of debt | $ | $ | ||||||
The table below details the maturity dates of the principal amounts for the Company’s debt as of September 30, 2023:
| Debt Type | Maturity Date | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||
| Convertible notes payable | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Non-convertible promissory notes | ||||||||||||||||||||||||||
| Non-convertible promissory notes - Socialyte | ||||||||||||||||||||||||||
| Term loan | ||||||||||||||||||||||||||
| Loans from related party | ||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Convertible Notes Payable
On January 9, 2023, January 13,
2023 and June 15, 2023, the Company issued three convertible notes payable in the aggregate amount of $
The Company recorded interest expense
related to these convertible notes payable of $
On June 8, 2023, the holder of
two convertible notes converted the aggregate principal balance of $
Convertible Note Payable at Fair Value
The Company had one convertible
promissory note outstanding with aggregate principal amount of $
The Company had a balance of $
There was
The Company recorded interest expense
related to these convertible notes payable at fair value of $
| 13 |
Nonconvertible Promissory Notes
On February 22, 2023, the Company
issued an unsecured nonconvertible promissory note in the amount of $
As of September 30, 2023 and December
31, 2022, the Company had a balance of $
During the nine months ended September
30, 2023, one unsecured nonconvertible promissory note amounting to $
The Company recorded interest
expense related to these nonconvertible promissory notes of $
Nonconvertible promissory note - Socialyte Promissory Note
As discussed in Note 4, as part
of the Socialyte Purchase, the Company entered into the Socialyte Promissory Note amounting to $
The Socialyte Purchase Agreement allows the Company to offset a working capital deficit against the Socialyte Promissory Note. As such, on June 30, 2023, the Company deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the Socialyte Seller.
The Company recorded interest
expense related to the Socialyte Promissory Note of $
Credit and Security Agreement
In connection with the
Socialyte Purchase discussed in Note 4, Socialyte, with MidCo entered into a Credit and Security Agreement with BankProv
(“Credit Agreement”), which included a $
The Credit Agreement contained
financial covenants that require Socialyte to maintain: (1) a quarterly minimum debt service ratio of 1.25:1.00; (2) a quarterly
senior funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 3.00:1.00 and (3) quarterly total funded debt to EBITDA
(as defined in the Credit Agreement) not to exceed 5.00:1.00, as well as the Company to maintain a minimum liquidity of $
Term Loan
The Term Loan had a term of five years, with a maturity date of November 14, 2027. The Company was required to repay the Term Loan through 60 consecutive monthly payments of principal, based upon a straight-line amortization period of 84 months, based on the principal amount outstanding, plus interest at an annual rate of 7.37%, commencing on December 14, 2022, and continuing on the corresponding day of each month thereafter until it was paid in full. Any remaining unpaid principal balance, including accrued and unpaid interest and fees, if any was to be due and payable in full on November 14, 2027, its maturity date.
Interest on the Term Loan was
to be payable on a monthly basis. Interest was computed on the basis of a three hundred sixty (360) day year, for the actual number of
days elapsed. Default interest was to be charged in accordance with the terms of the Term Loan. During the nine months ended September
30, 2023, the Company made payments of $
| 14 |
Revolver
During both the three and nine
months ended September 30, 2023, the Company drew $400,000 from the Revolver, which was repaid on September 29, 2023 as part of the Refinancing
Transaction discussed below, therefore, as of September 30, 2023, there were no amounts outstanding under the Revolver. When drawn, the
outstanding principal balance of the Revolver accrued interest from the date of the draw of the greater of (i)
Refinancing Transaction
On September 29, 2023, the Company
entered into a loan agreement with BankUnited (“BankUnited Loan Agreement”) in which the existing Credit Agreement with BankProv
was repaid (the “Refinancing Transaction”). The BankUnited Loan Agreement includes: (i) $
Interest on the BKU Term Loan accrues at 8.10% fixed rate per annum. Principal and interest on the BKU Term Loan shall be payable on a monthly basis based on a 5-year amortization. Interest on the BKU Line of credit is payable on a monthly basis, with all principal due at maturity. The BKU Commercial Card payment is due in full at the end of each bi-weekly billing cycle.
The BankUnited Credit Facility
contains financial covenants tested semi-annually on a trailing twelve-month basis that require the Company to maintain a minimum debt
service coverage ratio of 1.25:1.00 and a maximum funded debt/EBITDA ratio of 3.00:1.00. In addition, the BankUnited Credit Facility contains
a liquidity covenant that requires the Company to hold a cash balance at BankUnited with a daily minimum deposit balance of $
The Refinancing Transaction was
accounted for as an extinguishment of debt. In connection with this extinguishment, the Company incurred a prepayment penalty of $
NOTE 9 — LOANS FROM RELATED PARTY
The Company issued Dolphin Entertainment, LLC (“DE LLC”), an entity wholly owned by the Company’s Chief Executive Officer, William O’Dowd (the “CEO”), a promissory note (the “DE LLC Note”) which matures on December 31, 2026.
As of both September 30, 2023
and December 31, 2022, the Company had a principal balance of $
The Company recorded interest expense
of $
NOTE 10 — FAIR VALUE MEASUREMENTS
The Company’s non-financial assets measured at fair value on a nonrecurring basis include goodwill and intangible assets. The determination of our intangible fair values includes several assumptions and inputs (Level 3) that are subject to various risks and uncertainties. Management believes it has made reasonable estimates and judgments concerning these risks and uncertainties. All other financial assets and liabilities are carried at amortized cost.
The Company’s cash balances are representative of their fair values, as these balances are comprised of deposits available on demand. The carrying amounts of accounts receivable, notes receivable, prepaid and other current assets, accounts payable and other non-current liabilities approximate their fair values because of the short turnover of these instruments.
Financial Disclosures about Fair Value of Financial Instruments
The tables below set forth information related to the Company’s consolidated financial instruments:
| Level in | September 30, 2023 | December 31, 2022 | |||||||||||||||||
| Fair Value | Carrying | Fair | Carrying | Fair | |||||||||||||||
| Hierarchy | Amount | Value | Amount | Value | |||||||||||||||
| Assets: | |||||||||||||||||||
| Cash and cash equivalents | 1 | $ | $ | $ | $ | ||||||||||||||
| Restricted cash | 1 | ||||||||||||||||||
| Liabilities: | |||||||||||||||||||
| Convertible notes payable | 3 | $ | $ | $ | $ | ||||||||||||||
| Convertible note payable at fair value | 3 | ||||||||||||||||||
| Warrant liability | 3 | ||||||||||||||||||
| Contingent consideration | 3 | ||||||||||||||||||
| 15 |
Convertible notes payable
As of September 30, 2023, the
Company has ten outstanding convertible notes payable with aggregate principal amount of $
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||
| Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
| 10% convertible notes due in October 2024 | 3 | $ | $ | $ | $ | ||||||||||||||
| 10% convertible notes due in November 2024 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in December 2024 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in January 2025 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in November 2026 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in December 2026 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in June 2027 | 3 | ||||||||||||||||||
| 10% convertible notes due in August 2027 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in September 2027 | 3 | $ | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||
The estimated fair value of the convertible notes was computed using a Monte Carlo Simulation, using the following assumptions:
| Fair Value Assumption – Convertible Debt | September 30, 2023 | December 31, 2022 | ||||
| Stock Price | $ | $ | ||||
| Minimum Conversion Price | $ | $ | ||||
| Annual Asset Volatility Estimate | % | % | ||||
| Risk Free Discount Rate (based on U.S. government treasury obligation with a term similar to that of the convertible note) | % - | % | % - | % |
Fair Value Option (“FVO”) Election – Convertible note payable and freestanding warrants
Convertible note payable, at fair value
As of September 30, 2023, the
Company has one outstanding convertible note payable with a face value of $
The March 4th Note is measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2022 to September 30, 2023:
| March 4th Note | ||||
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2022 | $ | |||
| (Gain) Loss on the change in fair value reported in the condensed consolidated statements of operations | ||||
| Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2023 | $ | |||
The estimated fair value of the March 4th Note as of September 30, 2023 and December 31, 2022, was computed using a Black-Scholes simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:
| September 30, 2023 | December 31, 2022 | |||||||
| Face value principal payable | $ | $ | ||||||
| Original conversion price | $ | $ | ||||||
| Value of common stock | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk free rate | % | % | ||||||
| 16 |
Warrants
In connection with the March 4th Note, the Company issued the Series I Warrants. The Series I Warrants are measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2022 to September 30, 2023:
| Fair Value: | Series I | |||
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2022 | $ | |||
| (Gain) Loss on the change in fair value reported in the condensed consolidated statements of operations | ( |
|||
| Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2023 | $ | |||
The estimated fair value of the Series “I” Warrants was computed using a Black-Scholes valuation model, using the following assumptions:
| Fair Value Assumption - Series “I” Warrants | September 30, 2023 | December 31, 2022 | ||||||
| Exercise Price per share | $ | $ | ||||||
| Value of common stock | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
| Risk free rate | % | % | ||||||
Contingent consideration
The Company records the fair value of the contingent consideration liability in the consolidated balance sheets under the caption “Contingent consideration” and records changes to the liability against earnings or loss under the caption “Change in fair value of contingent consideration” in the consolidated statements of operations. As of September 30, 2023, the Company had paid off all contingent consideration related to the acquisition of Be Social.
For the contingent consideration, which is measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2022 to September 30, 2023:
| Be Social | ||||
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2022 | $ | |||
| Loss on change of fair value reported in the condensed consolidated statements of operations | ||||
| Settlement of contingent consideration(1) | ( |
) | ||
| Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2023 | $ | |||
| (1) |
NOTE 11 — STOCKHOLDERS’ EQUITY
2021 Lincoln Park Transaction
On December 29, 2021, the Company entered into a purchase agreement (the “LP 2021 Purchase Agreement”) and a registration rights agreement (the “LP 2021 Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park agreed to purchase from the Company up to $ of the Company’s common stock (subject to certain limitations) from time to time during the term of the LP 2021 Purchase Agreement. Pursuant to the terms of the LP 2021 Purchase Agreement, at the time the Company signed the LP 2021 Purchase Agreement and the LP 2021 Registration Rights Agreement, the Company issued shares of the Company’s common stock to Lincoln Park as consideration for its commitment (“2021 LP commitment shares”) to purchase shares of the Company’s common stock under the LP 2021 Purchase Agreement. Pursuant to the LP 2021 Purchase Agreement, the Company issued an additional LP commitment shares on March 7, 2022.
During the nine months ended September
30, 2022, excluding the additional commitment shares disclosed above, the Company sold shares of common stock, respectively,
at prices ranging between $ and $ pursuant to the LP 2021 Purchase Agreement and received proceeds of $
The LP 2021 Purchase Agreement was terminated effective August 12, 2022 and the Company did not sell any shares pursuant to this agreement during the three months ended September 30, 2022.
| 17 |
2022 Lincoln Park Transaction
On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park, pursuant to which the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $ in value of its shares of the Company’s common stock from time to time over a 36-month period.
Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, the Company issued shares of its common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of its common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period expense and included within selling, general and administrative expenses in the consolidated statements of operations.
During the three and nine months
ended September 30, 2023, the Company sold and shares of its common stock, respectively, at prices ranging
between $ and $ pursuant to the LP 2022 Purchase Agreement and received proceeds of $
During both the three and nine
months ended September 30, 2022, excluding the additional commitment shares disclosed above, the Company sold shares of common
stock at prices ranging between $ and $ pursuant to the LP 2022 Purchase Agreement and received proceeds of $
The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of its common stock in the future (“put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it has insignificant value as of September 30, 2023.
Shares issued related to employment agreements
Pursuant to the employment agreement
between the Company and Mr. Anthony Francisco, he is entitled to receive share awards amounting to $ at each of certain dates
in 2023 and 2024, in the aggregate amounting to $
During the three and nine months ended September 30, 2023, the Company paid the salary of certain employees at one if its subsidiaries in fully vested shares of the Company’s common stock. During the three and nine months ended September 30, 2023, the Company issued an aggregate of and shares, respectively, amounting to $ and $, respectively, in the aggregate on different dates though the nine months ended September 30, 2023, following the normal payroll cycle.
The following table sets forth the computation of basic and diluted loss per share:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net income attributable to participating securities | ||||||||||||||||
| Net loss attributable to Dolphin Entertainment common stock shareholders and numerator for basic loss per share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of convertible notes payable | ( | ) | ( | ) | ||||||||||||
| Change in fair value of warrants | ( | ) | ( | ) | ||||||||||||
| Interest expense | ||||||||||||||||
| Numerator for diluted loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Denominator for basic EPS - weighted-average shares | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Warrants | ||||||||||||||||
| Convertible notes payable | ||||||||||||||||
| Denominator for diluted EPS - adjusted weighted-average shares | ||||||||||||||||
| Basic loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 18 |
Basic (loss) earnings per share is computed by dividing income or loss attributable to the shareholders of common stock (the numerator) by the weighted-average number of shares of common stock outstanding (the denominator) for the period. Diluted (loss) earnings per share assume that any dilutive equity instruments, such as convertible notes payable and warrants were exercised and outstanding common stock adjusted accordingly, if their effect is dilutive.
One of the Company’s convertible notes payable, the warrants and the Series C Preferred Stock have clauses that entitle the holder to participate if dividends are declared to the common stockholders as if the instruments had been converted into shares of common stock. As such, the Company uses the two-class method to compute earnings per share and attributes a portion of the Company’s net income to these participating securities. These securities do not contractually participate in losses. For the three months ended September 30, 2023 and 2022, and the nine months ended September 30, 2023 and 2022, the Company had a net loss and as such the two-class method is not presented.
For the three and nine months ended September 30, 2023 potentially dilutive instruments including shares and shares, respectively, of common stock issuable upon conversion of convertible notes payable were not included in the diluted loss per share as inclusion was considered to be antidilutive. For the three and nine months ended September 30, 2023, the warrants were t included in diluted loss per share because the warrants were not “in the money”.
For the three and nine months ended September 30, 2022, the convertible promissory note carried at fair value and the outstanding warrants were included in the calculation of fully diluted loss per share. The other convertible notes carried at their principal loan amount, convertible into an aggregate of and weighted average shares for the three and nine months ended September 30, 2022 respectively, were not included in the calculation of diluted loss per share as their effect would be antidilutive.
NOTE 14 — RELATED PARTY TRANSACTIONS
As part of the employment agreement
with its CEO, the Company provided a $
As of September 30, 2023 and December
31, 2022, the Company had accrued $
The Company entered into the DE LLC Note with an entity wholly owned by our CEO. See Note 9 for further discussion.
NOTE 15 — SEGMENT INFORMATION
The Company operates in two reportable segments, Entertainment Publicity and Marketing Segment (“EPM”) and Content Production Segment (“CPD”).
| · | The Entertainment Publicity and Marketing segment is composed of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte. This segment primarily provides clients with diversified marketing services, including public relations, entertainment and hospitality content marketing, strategic marketing consulting and content production of marketing materials. |
| · | The Content Production segment is composed of Dolphin Entertainment and Dolphin Films. This segment engages in the production and distribution of digital content and feature films. The activities of our Content Production segment also include all corporate overhead activities. |
The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating segment performance is operating income (loss) which is the same as (Loss) income from operations on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022. Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. Legal and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees. All segments follow the same accounting policies as those described in the Annual Report on Form 10-K for the year ended December 31, 2022.
| 19 |
In connection with the acquisitions
of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte, the Company assigned $
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| EPM | $ | $ | $ | $ | ||||||||||||
| CPD | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Segment Operating Income (Loss): | ||||||||||||||||
| EPM | $ | $ | $ | ( | ) | $ | ||||||||||
| CPD | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses), net | ||||||||||||||||
| Loss before income taxes and equity in losses of unconsolidated affiliates | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| As of September 30, 2023 | As of December 31, 2022 | |||||||
| Total assets: | ||||||||
| EPM | $ | $ | ||||||
| CPD | ||||||||
| Total | $ | $ | ||||||
NOTE 16 — LEASES
The Company and its subsidiaries are party to various office leases with terms expiring at different dates through November 2027. The amortizable life of the right-of-use asset is limited by the expected lease term. Although certain leases include options to extend the Company did not include these in the right-of-use asset or lease liability calculations because it is not reasonably certain that the options will be executed.
| Operating Leases | As
of September 30, 2023 | As
of December 31, 2022 | ||||||
| Assets | ||||||||
| Right-of-use asset | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Lease liability | $ | $ | ||||||
| Noncurrent | ||||||||
| Lease liability | $ | $ | ||||||
| Total operating lease liability | $ | $ | ||||||
| Finance Lease | As
of September 30, 2023 | As
of December 31, 2022 | ||||||
| Assets | ||||||||
| Right-of-use asset | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Lease liability | $ | $ | ||||||
| Noncurrent | ||||||||
| Lease liability | $ | $ | ||||||
| Total finance lease liability | $ | $ | ||||||
| 20 |
The tables below show the lease income and expenses recorded in the condensed consolidated statements of operations incurred during the three and nine months ended September 30, 2023 and 2022 for operating and financing leases, respectively.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| Lease costs | Classification | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease costs | Selling, general and administrative expenses | $ | $ | $ | $ | |||||||||||||
| Sublease income | Selling, general and administrative expenses | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||
| Net operating lease costs | $ | $ | $ | $ | ||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| Lease costs | Classification | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amortization of right-of-use assets | Selling, general and administrative expenses | $ | $ | $ | $ | |||||||||||||
| Interest on lease liability | Selling, general and administrative expenses | |||||||||||||||||
| Total finance lease costs | $ | $ | $ | $ | ||||||||||||||
During the nine months ended September
30, 2022, the Company recorded an impairment of its ROU asset amounting to $
Lease Payments
For the nine months ended September
30, 2023 and 2022, the Company made payments in cash related to its operating leases in the amounts of $
Future minimum lease payments for leases for the remainder of 2023 and thereafter, were as follows:
| Year | Operating Leases | Finance Leases | |||||
| 2023 | $ | $ | |
||||
| 2024 | |||||||
| 2025 | |||||||
| 2026 | |||||||
| 2027 | |||||||
| Total lease payments | $ | $ | |||||
| Less: Imputed interest | ( |
) | ( |
) | |||
| Present value of lease liabilities | $ | $ | |||||
As of September 30, 2023, the
Company’s weighted average remaining lease term on its operating and finance leases is
NOTE 17 — COLLABORATIVE ARRANGEMENT
IMAX Co-Production Agreement
On June 24, 2022, the Company
entered into an agreement with IMAX Corporation (“IMAX”) to co-produce and co-finance a documentary motion picture on the
flight demonstration squadron of the United States Navy, called The Blue Angels (“Blue Angels Agreement”). IMAX and Dolphin
have each agreed to fund 50% of the production budget. As of December 31, 2022, the Company had paid $
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As production of the documentary motion picture is not complete, no income or expense has been recorded in connection with the Blue Angels Agreement during the three and nine months ended September 30, 2023.
We have evaluated the Blue Angels Agreement and have determined that it is a collaborative arrangement under FASB ASC Topic 808 “Collaborative Arrangements”. We will reevaluate whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards, dependent upon the ultimate commercial success of documentary motion picture.
On April 25, 2023, IMAX entered
into an acquisition agreement with Amazon Content Services, LLC for the distribution rights of Blue Angels. The Company estimates that
it will derive approximately $
NOTE 18 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. The Company is not aware of any pending litigation as of the date of this report and, therefore, in the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows.
IMAX Co-Production Agreement
As discussed in Note 17, on June
24, 2022, the Company entered into the Blue Angels Agreement with IMAX. Under the terms of this agreement, on April 26, 2023, the Company
funded the remaining $
NOTE 19 — SUBSEQUENT EVENTS
On October 2, 2023, (the “Special Projects Closing Date”), the Company acquired all of the issued and outstanding membership interest of Special Projects Media LLC, a New York limited liability company (“Special Projects”), pursuant to a membership interest purchase agreement (the “Special Projects Purchase Agreement”) between the Company and Andrea Oliveri, Nicole Vecchiarelli, Foxglove Corp and Alexandra Alonso (“Sellers”). Special Projects is a talent booking and events agency that elevates media, fashion, and lifestyle brands. Special Projects has headquarters in New York and Los Angeles.
The consideration paid by the
Company in connection with the acquisition of Special Projects is approximately $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading independent entertainment marketing and premium content production company. Through our subsidiaries, 42West, The Door, Shore Fire and Viewpoint, 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 (film and television), The Door (culinary, hospitality and consumer products), and Shore Fire (music) are each recognized global leaders in the PR services for the industries they serve. The Digital Department was formed from the combination of two of our subsidiaries, Be Social and Socialyte, and provides best-in-class influencer marketing capabilities. Special Projects is one of the entertainment industry’s leading talent booking and celebrity live event company. Viewpoint adds full-service creative branding and production capabilities to our marketing group. Dolphin’s legacy content production business, founded by our Emmy-nominated Chief Executive Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital series, primarily aimed at family and young adult markets. Our common stock trades on The Nasdaq Capital Market under the symbol “DLPN.”
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 can create synergistic opportunities and bolster profits and cash flow.
We have also established an investment strategy, “Dolphin Ventures,” (formerly known as Dolphin 2.0), based upon identifying opportunities to develop internally owned assets, or acquire ownership stakes in others’ assets, in the categories of entertainment content, live events and consumer products. We believe these categories represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various stages of internal development and outside conversations on a wide range of opportunities within Dolphin Ventures. We intend to enter into additional investments during 2024, but there is no assurance that we will be successful in doing so, whether in 2024 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 is composed of 42West, The Door, Shore Fire, The Digital Department, Special Projects and Viewpoint and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, social media marketing, talent booking, live event production, creative branding, and the production of promotional video content. The content production segment is composed of Dolphin Films, Inc. (“Dolphin Films”) and Dolphin Digital Studios, which produce and distribute feature films and digital content. The activities of our Content Production segment also include all corporate overhead activities.
Dolphin Ventures
We believe our ability to engage a broad consumer base through our best-in-class pop culture marketing assets provides us an opportunity to make investments in products or companies which would benefit from our collective marketing power. We call these investments “Dolphin Ventures”. Simply put, we seek to own an interest in some of the assets we are marketing. Specifically, we want to own an interest in assets where our experience, industry relationships and marketing power will most influence the likelihood of success. This leads us to seek investments in the following categories of assets: 1) Content; 2) Live Events; and 3) Consumer Products.
Our most significant Dolphin Ventures investment was made in October, 2021, when we acquired an ownership interest in Midnight Theatre, a state-of-the-art contemporary variety theater and restaurant in the heart of Manhattan. An anchor of Brookfield Properties’ recently opened $4.5 billion Manhattan West development, the Midnight Theatre opened on September 21, 2022. The restaurant, Hidden Leaf, opened on July 6, 2022.
We have also made our first content investment under Dolphin Ventures. See Note 17 above for details regarding our Collaborative Arrangement with IMAX for production and distribution of the documentary feature “The Blue Angels.”
Revenues
For the three and nine months ended September 30, 2023 and 2022, we derived 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, as well as for 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 and digital marketing through its roster of social media influencers. We expect to generate income in our content production segment over the next eighteen months with the release of “The Blue Angels” documentary motion picture, discussed in the “Project Development and Related Services.”
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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 by actively soliciting new business. 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 production 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. We believe that the proliferation of content, both traditional and on social media, will lead to an increasing number of individuals seeking such services, which will drive growth and revenue in our Talent departments for several years to come. |
| ● | 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 virtually all the major studios and streaming services, 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. 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 also help studios and filmmakers deal with controversial movies, as well as high-profile individuals address sensitive situations. We believe that growth in the Strategic Communications division will be driven by increasing demand for these varied services by traditional and non-traditional media clients who are expanding their activities in the content production, branding, and consumer products PR sectors. |
| ● | 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. 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 digital, television 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.
We have completed development of several 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.
In June 2022, we entered into an agreement with IMAX Corporation (“IMAX”) to co-produce and co-finance a documentary motion picture on the flight demonstration squadron of the United States Navy called the Blue Angels. IMAX and Dolphin each funded 50% of the production budget, which is estimated at approximately $4.5 million. In April of 2023, IMAX entered into an agreement with Amazon Content Services LLC for the distribution rights of the Blue Angels. We estimate that we will derive approximately $3.5 million from the acquisition agreement and expect that the documentary motion picture will be released in early 2024.
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Expenses
Our expenses consist primarily of:
| (1) | Direct costs – includes certain costs of services, as well as certain production costs, related to our entertainment publicity and marketing business. Included within direct costs are immaterial impairments for any of our content production projects. |
| (2) | Payroll and benefits expenses – includes wages, stock-based compensation, payroll taxes and employee benefits. |
| (3) | Selling, general and administrative expenses – includes all overhead costs except for payroll, depreciation and amortization and legal and professional fees that are reported as a separate expense item. |
| (4) | Depreciation and amortization – includes the depreciation of our property and equipment and amortization of intangible assets and leasehold improvements. |
| (5) | Impairment of goodwill – includes an impairment charge as a result of triggering events identified during the second quarter of 2023. |
| (6) | Impairment of intangible assets – includes an impairment charge as a result of a rebranding of two of our subsidiaries during the third quarter of 2023. |
| (7) | Change in fair value of contingent consideration – includes changes in the fair value of the contingent earn-out payment obligations for the Company’s acquisitions. 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. |
| (8) | Legal and professional fees – includes fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants. |
Other Income and Expenses
For the three and nine months ended September 30, 2023 and 2022, other income and expenses consisted primarily of: (1) changes in fair value of convertible notes; (2) changes in fair value of warrants; (3) interest income; and (4) interest expense.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2023 as compared to three and nine months ended September 30, 2022
Revenues
For the three and nine months ended September 30, 2023 and 2022 revenues were as follows:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Entertainment publicity and marketing | $ | 10,184,511 | $ | 9,899,013 | $ | 31,100,867 | $ | 29,366,748 | ||||||||
| Content production | — | — | — | — | ||||||||||||
| Total revenue | $ | 10,184,511 | $ | 9,899,013 | $ | 31,100,867 | $ | 29,366,748 | ||||||||
Revenues from entertainment publicity and marketing increased by approximately $0.3 million and $1.7 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year. The increase is primarily driven by inclusion of Socialyte revenues for 2023, which were not present in 2022, partially offset by a decrease in revenues from other subsidiaries.
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. We expect to begin generating income in our content production segment in early 2024 with the release of the Blue Angels documentary film.
Expenses
For the three and nine months ended September 30, 2023 and 2022, our expenses were as follows:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Expenses: | ||||||||||||||||
| Direct costs | $ | 185,308 | $ | 837,429 | $ | 621,449 | $ | 2,941,044 | ||||||||
| Payroll and benefits | 8,382,659 | 7,030,814 | 26,114,881 | 20,947,531 | ||||||||||||
| Selling, general and administrative | 2,150,889 | 1,663,288 | 6,023,954 | 4,644,264 | ||||||||||||
| Acquisition costs | 4,666 | 315,800 | 8,823 | 315,800 | ||||||||||||
| Depreciation and amortization | 535,740 | 415,836 | 1,612,776 | 1,248,621 | ||||||||||||
| Impairment of goodwill | — | — | 6,517,400 | — | ||||||||||||
| Impairment of intangible assets | 341,417 | — | 341,417 | — | ||||||||||||
| Change in fair value of contingent consideration | — | (5,000 | ) | 33,226 | (81,106 | ) | ||||||||||
| Legal and professional | 695,188 | 774,613 | 1,955,037 | 2,317,800 | ||||||||||||
| Total expenses | $ | 12,295,867 | $ | 11,032,780 | $ | 43,228,963 | $ | 32,333,954 | ||||||||
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Direct costs decreased by approximately $0.7 million for the three months ended September 30, 2023 and $2.3 million for the nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022. The decrease in direct costs is partially driven by $0.2 million and $0.9 million of NFT production and marketing costs for the three and nine months ended September 30, 2022, respectively, that were not present in the same period in 2023. The decrease in direct costs is also partially attributable to the decrease in certain subsidiaries’ revenues as compared with the same periods in the prior year.
Payroll and benefits expenses increased by approximately $1.4 million and $5.2 million, respectively, for the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022, primarily due to the following:
| · | Inclusion of $1.1 million and $3.5 million for the three and nine months ended September 30, 2023, respectively, of Socialyte payroll expenses; |
| · | The remaining increases are related to salary increases throughout the Company and the hiring of a Chief Marketing Officer. |
Depreciation and amortization increased by $0.1 million and $0.4 million for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022, related primarily to the amortization of Socialyte intangible assets in 2023.
Selling, general and administrative expenses increased by approximately $0.5 million and $1.4 million for the three and nine months ended September 30, 2023, respectively, as compared to the three and nine months ended September 30, 2022, mainly due to costs incurred by our Los Angeles office that was opened in July of 2022 of $0.1 million and $0.7 million for the three and nine months ended September 30, 2023, respectively, an increase of bad debt of $0.3 for both the three and nine months ended September 30, 2023, and the inclusion of $0.1 million and $0.4 million of Socialyte selling, general and administrative expenses for the three and nine months ended September 30, 2023, respectively.
Impairment of goodwill was $6.5 million for the nine months ended September 30, 2023. As discussed in Note 3 – Goodwill and Intangibles Assets in the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, in the second quarter of 2023, we performed a quantitative assessment driven by triggering events related to declines in our market capitalization combined with the lack of positive response from the market to positive information related to future projects. The quantitative assessment resulted in the impairment of goodwill in the amount of $6.5 million of one of our reporting units. No such charges were recorded in the three and nine months ended September 30, 2022.
Impairment of intangible assets was $0.3 million for the three and nine months ended September 30, 2023. As discussed in Note 3 – Goodwill and Intangibles Assets in the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, during the three and nine months ended September 30, 2023, the Company recognized an impairment of the trademarks and trade names of Socialyte and Be Social in connection with the rebranding of both subsidiaries as the new “The Digital Dept.” of the Company.
Change in fair value of the contingent consideration was a loss of $33.2 thousand for the nine months ended September 30, 2023, compared to the change in fair value of the contingent consideration of gains $5.0 thousand and $(81.1) thousand for the three and nine months ended September 30, 2022. As all contingent consideration was settled by June 2023, there were no changes in fair value of contingent consideration for the three months ended September 30, 2023. The main components of the change in fair value of contingent consideration were the following:
| · | B/HI: this contingent consideration was settled in June 2022; therefore, no changes were recorded in the three and nine months ended September 30, 2023, nor in the three months ended September 30, 2022. The Company recorded a gain $76.1 thousand for the nine months ended September 30, 2022, up through the date of settlement. | |
| · | Be Social: losses of $17.7 thousand and $33.2 thousand for the three and nine months ended September 30, 2023, respectively, compared to a gain of $5.0 thousand for both the three and nine months ended September 30, 2022. The Company settled this contingent consideration on April 25, 2023 through a combination of $500,000 in cash and 148,687 shares of the Company’s stock, with a value of $272,047. |
Legal and professional fees decreased by approximately $0.1 million and $0.4 million for the three and nine months ended September 30, 2023, respectively, as compared to the three and nine months ended September 30, 2022 due to legal, consulting and audit fees incurred during the first quarter of 2022 related to our restatement of the financial statements as of, and for the three nine months ended September 30, 2021 included in Form 10-Q for that period, and revisions of the financial statements as of and for the three months ended March 31, 2021 and as of and for the three and six months ended June 30, 2021, respectively, which were included in our Forms 10-Q for March 31, 2021 and June 30, 2021 included our Form 10-K filed on May 26, 2022.
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Other Income and Expenses
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Other Income and expenses: | ||||||||||||||||
| Change in fair value of convertible notes | $ | — | $ | 45,642 | $ | (6,444 | ) | $ | 577,522 | |||||||
| Change in fair value of warrants | — | 10,000 | 5,000 | 105,000 | ||||||||||||
| Interest income | 104,303 | 91,722 | 309,424 | 204,943 | ||||||||||||
| Interest expense | (604,669 | ) | (217,869 | ) | (1,413,177 | ) | (605,827 | ) | ||||||||
| Total other (expenses) income, net | $ | (500,366 | ) | $ | (70,505 | ) | $ | (1,105,197 | ) | $ | 281,638 | |||||
Change in fair value of Convertible Notes at Fair Value – We elected the fair value option for one convertible note issued in 2020. The fair value of this convertible note is remeasured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. For the three months ended September 30, 2023, there was no change in fair value. For the three months ended September 30, 2022, we recorded a $45.6 thousand gain in the fair value of the convertible notes issued in 2020. For the nine months ended September 30, 2023 and 2022, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a $6.0 thousand loss and a $0.6 million gain, respectively. None of the decrease in the value of the convertible notes was attributable to instrument specific credit risk and as such, all of the gain in the change in fair value was recorded within net loss.
Change in fair value of warrants – Warrants issued with convertible notes payable issued in 2020 were initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant liability recognized as other income or expense. The fair value of the 2020 warrants that were not exercised did not have a change in fair value for the three months ended September 30, 2023 and decreased by approximately $5.0 thousand during the nine months ended September 30, 2023; therefore, we recorded a change in the fair value of the warrants for the nine months ended September 30, 2023 for that amount on our condensed consolidated statement of operations. For the three and nine months ended September 30, 2022, the fair value of the 2020 warrants that were not exercised decreased by approximately $10.0 thousand and $0.1 million; therefore, we recorded a gain in the change in fair value of the warrants for the three and nine months ended September 30, 2022 for those amounts, respectively, on our condensed consolidated statement of operations.
Interest income – Interest income increased by $12.6 thousand and $0.1 million for the three and nine months ended September 30, 2023 as compared to the same periods in the prior year, primarily due to increased notes receivable outstanding during 2023 as compared to the same periods in the prior year.
Interest expense – Interest expense increased by $0.4 million and $0.8 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year. The increases were primarily due to increased convertible and nonconvertible notes, the BankProv term loan in connection with the Socialyte Purchase, as well as the Socialyte Promissory Note, which were all outstanding during 2023 for a longer period as compared to the prior year. In addition, interest expense for both the three and nine months ended September 30, 2023 includes the $79,286 prepayment penalty and $91,859 write-off of unamortized debt issue costs in connection with the Refinancing Transaction.
Income Taxes
We recorded an income tax expense of approximately $31.1 thousand and $91.2 thousand for the three and nine months ended September 30, 2023, respectively, and approximately $7.2 thousand and $21.7 thousand for the three and nine months ended September 30, 2022, respectively, which reflects the accrual of a valuation allowance in connection with the limitations of our indefinite lived tax assets to offset our indefinite lived tax liabilities. To the extent the tax assets are unable to offset the tax liabilities, we have recorded a deferred expense for the tax liability (a “naked credit”).
Equity in losses of unconsolidated affiliates
Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investments.
For the three and nine months ended September 30, 2023, we recorded losses of $51.0 thousand and $0.2 million, respectively, from our equity investment in Midnight Theatre. Midnight Theatre commenced operations at the end of the second quarter of 2022; we recorded a loss of $60.8 thousand for both the three and nine months ended September 30, 2022. No equity gains or losses have been recorded prior to the third quarter of 2022.
For the nine months ended September 30, 2023, we recorded losses of $88.0 thousand from our equity investment in Crafthouse Cocktails, compared to losses of $39.4 thousand and $82.8 thousand for the three and nine months ended September 30, 2022, respectively.
During the three months ended September 30, 2023, the Company determined their investment in Crafthouse Cocktails was deemed to be impaired and therefore recorded an impairment for the entire balance of its investment as of September 30, 2023. As a result, no equity gain or loss was recorded during the three months ended September 30, 2023. This determination was made after Crafthouse Cocktails was unable to secure their latest round of funding. The Company concluded the resulting decline in the carrying value of this investment was not temporary in nature. The impairment amounted to $1,169,587 and is recorded within equity in losses of unconsolidated affiliates in the condensed consolidated statements of operations.
Net (Loss) Income
Net loss was approximately $3.9 million or $0.27 per share based on 14,121,275 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the three months ended September 30, 2023. Net loss was approximately $1.3 million or $0.14 per share based on 9,664,681 weighted average shares outstanding for basic loss per share and $0.14 per share based on 9,793,715 weighted average shares on a fully diluted basis earnings per share for the three months ended September 30, 2022. The change in net loss for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, is related to the factors discussed above.
Net loss was approximately $14.8 million or $1.11 per share based on 13,328,128 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the nine months ended September 30, 2023. Net loss was approximately $2.9 million or $0.31 per share based on 9,307,830 weighted average shares outstanding for basic loss per share and $0.37 per share based on 9,437,807 weighted average shares on a fully diluted basis earnings per share for the nine months ended September 30, 2022. The change in net income for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, is related to the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Statement of Cash Flows Data: | ||||||||
| Net cash used in operating activities | $ | (4,492,645 | ) | $ | (3,634,388 | ) | ||
| Net cash used in investing activities | (21,893 | ) | (3,172,544 | ) | ||||
| Net cash provided by financing activities | 7,447,203 | 4,169,351 | ||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | 2,932,665 | (2,637,581 | ) | |||||
| Cash and cash equivalents and restricted cash, beginning of period | 7,197,849 | 8,230,626 | ||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 10,130,514 | $ | 5,593,045 | ||||
Operating Activities
Cash used in operating activities was $4.5 million for the nine months ended September 30, 2023, a change of $0.9 million from cash used in operating activities of $3.6 million for the nine months ended September 30, 2022. The increase in net cash used in operations was primarily as a result of $11.9 million of increased net loss for the period, offset by a $9.5 million increase in non-cash items such as depreciation and amortization, bad debt expense, share-based compensation, impairment of capitalized production costs, impairment of goodwill and intangible asset and other non-cash losses and a $1.5 million net change in working capital.
Investing Activities
There were no significant cash flows used in investing activities for the nine months ended September 30, 2023. Net cash flows used in investing activities for the nine months ended September 30, 2022 were $3.2 million related primarily to the issuance of notes receivable.
Financing Activities
Cash flows provided by financing activities for the nine months ended September 30, 2023 were $7.4 million, which mainly related to:
Inflows:
| · | $5.8 million of proceeds from new term loan. | |
| · | $2.6 million of proceeds from notes payable. | |
| · | $2.2 million of proceeds from the Lincoln Park equity line of credit. | |
| · | $1.0 million of proceeds from convertible notes payable. |
Outflows:
| · | $3.0 million of repayment of existing term loan. | |
| · | $0.5 million of settlement of cash portion of contingent consideration for Be Social. | |
| · | $0.4 million of payment of interest to related party. | |
| · | $0.1 million of repayment of notes payable. | |
| · | $0.1 million of payment of debt origination costs. | |
| · | $0.1 million of payment early payment penalty of term loan | |
Cash flows provided by financing activities for the nine months ended September 30, 2022 were $4.2 million, which mainly related to:
Inflows:
| · | $5.1 million of proceeds from the Lincoln Park equity line of credit described below. |
Outflows:
| · | $0.6 million of settlement of cash portion of contingent consideration for B/HI. | |
| · | $0.3 million of repayment of notes payable. |
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Debt and Financing Arrangements
Total debt amounted to $19.2 million as of September 30, 2023 compared to $13.7 million as of December 31, 2022, an increase of $5.5 million.
Our debt obligations in the next twelve months from September 30, 2023 increased by $63.7 thousand from December 31, 2022. We expect our current cash position, cash expected to be generated from our operations and other availability of funds, as detailed below, to be sufficient to meet our debt requirements.
2022 Lincoln Park Transaction
On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park, pursuant to which the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of the Company’s common stock from time to time over a 36-month period.
The Company may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of its common stock on any business day (a “Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances up to 75,000 shares if the closing price is not below $7.50 and up to 100,000 shares if the closing price is not below $10.00, provided that Lincoln Park’s committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the event we purchase the full amount allowed for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as accelerated and additional accelerated purchases. The purchase price of shares of the Company’s common stock related to the future funding will be based on the then prevailing market prices of such shares at the time of sales as described in the LP 2022 Purchase Agreement.
Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, the Company issued 57,313 shares of its common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of its common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period expense and included within selling, general and administrative expenses in the consolidated statements of operations.
During the three and nine months ended September 30, 2023, the Company sold 300,000 and 1,150,000 shares of its common stock, respectively, at prices ranging between $1.65 and $2.27 pursuant to the LP 2022 Purchase Agreement and received proceeds of $550,850 and $2,162,150, respectively.
The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of its common stock in the future (“put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it has insignificant value as of September 30, 2023.
Convertible Notes Payable
During the nine months ended September 30, 2023, the Company issued three convertible notes payable in the aggregate amount of $1,000,000. As of September 30, 2023, the Company had ten convertible notes payable outstanding. The convertible notes payable bear interest at a rate of 10% per annum, with initial maturity dates ranging between the second anniversary and the sixth anniversary of their respective issuances. The balance of each convertible note payable and any accrued interest may be converted at the noteholder’s option at any time at a purchase price based on a 90-day average closing market price per share of the common stock. Five of the convertible notes payable may not be converted at a price less than $2.50 per share and five of the convertible notes payable may not be converted at a price less than $2.00 per share.
The Company recorded interest expense related to these convertible notes payable of $128,750 and $80,278 during the three months ended September 30, 2023 and 2022, respectively, and $414,880 and $215,278 during the nine months ended September 30, 2023 and 2022, respectively. In addition, the Company made cash interest payments amounting to $413,764 and $199,445 during the nine months ended September 30, 2023 and 2022, respectively, related to the convertible notes payable.
On June 8, 2023, the holder of two convertible notes converted the aggregate principal balance of $900,000 into 450,000 shares of common stock at a conversion price of $2.00 per share. At the moment of conversion, accrued interest related to these convertible notes payable amounted to $9,500 and was paid in cash.
As of September 30, 2023, the principal balance of the convertible promissory notes of $5,150,000 was recorded in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance sheets.
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Convertible Note Payable at Fair Value
The Company had one convertible promissory note outstanding with aggregate principal amount of $500,000 as of September 30, 2023 for which it elected the fair value option. As such, the estimated fair value of the note was recorded on its issue date. At each balance sheet date, the Company records the fair value of the convertible promissory note with any changes in the fair value recorded in the condensed consolidated statements of operations.
The Company had a balance of $350,000 and $343,556 in noncurrent liabilities as of September 30, 2023 and December 31, 2022, respectively, on its condensed consolidated balance sheets related to the convertible note payable measured at fair value.
There was no change in the fair value for the three months ended September 30, 2023. The Company recorded a gain in fair value of $45,642 for the three months ended September 30, 2022, and a loss in fair value of $6,444 and a gain in fair value of $577,522 for the nine months ended September 30, 2023 and 2022, respectively, on its condensed consolidated statements of operations related to this convertible promissory note at fair value.
The Company recorded interest expense related to these convertible notes payable at fair value of $9,863 for both the three months ended September 30, 2023 and 2022, and $29,589 for both the nine months ended September 30, 2023 and 2022, respectively. In addition, the Company made cash interest payments amounting to $29,589 for both the nine months ended September 30, 2023 and 2022, related to the convertible promissory notes at fair value.
Nonconvertible Promissory Notes
On February 22, 2023, the Company issued an unsecured nonconvertible promissory note in the amount of $2,215,000 and received proceeds of $2,215,000. On August 1, 2023, the Company issued an unsecured nonconvertible promissory note in the amount of $415,000 and received proceeds of $415,000. As of September 30, 2023, the Company has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $3,910,859, which bear interest at a rate of 10% per annum and mature between November 2023 and March 2029.
As of September 30, 2023 and December 31, 2022, the Company had a balance of $380,859 and $868,960, respectively, net of debt discounts recorded as current liabilities and $3,530,000 and $500,000 respectively, in noncurrent liabilities on its condensed consolidated balance sheets related to these unsecured nonconvertible promissory notes.
During the nine months ended September 30, 2023, one unsecured nonconvertible promissory note amounting to $400,000 matured and was extended for an additional period of two years, now maturing on June 14, 2025.
The Company recorded interest expense related to these nonconvertible promissory notes of $93,142 and $22,719 for the three months ended September 30, 2023 and 2022, respectively, and $238,195 and $70,996 for the nine months ended September 30, 2023 and 2022, respectively. The Company made interest payments of $215,111 and $73,217 during the nine months ended September 30, 2023 and 2022, respectively, related to the nonconvertible promissory notes.
Nonconvertible promissory note - Socialyte Promissory Note
As discussed in Note 4, as part of the Socialyte Purchase, the Company entered into the Socialyte Promissory Note amounting to $3,000,000. The Socialyte Promissory Note matured on September 30, 2023 and was payable in two payments: $1,500,000 on June 30, 2023 and $1,500,000 on September 30, 2023. The Socialyte Promissory Note carries an interest of 4% per annum, which accrues monthly, and all accrued interest was to be due and payable on September 30, 2023.
The Socialyte Purchase Agreement allows the Company to offset a working capital deficit against the Socialyte Promissory Note. As such, on June 30, 2023, the Company deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the Socialyte Seller.
The Company recorded interest expense related to the Socialyte Promissory Note of $30,000 for the three months ended September 30, 2023, and $95,000 for the nine months ended September 30, 2023.
Credit and Security Agreement
In connection with the Socialyte Purchase discussed in Note 4, Socialyte, with MidCo entered into a Credit and Security Agreement with BankProv (“Credit Agreement”), which included a $3,000,000 secured term note (“Term Loan”) and $500,000 of a secured revolving line of credit (“Revolver”). The Credit Agreement carried an annual facility fee of $5,000 payable on the first anniversary of the Credit Agreement’s Closing Date and of $875 on each one-year anniversary thereafter.
The Credit Agreement contained financial covenants that require Socialyte to maintain: (1) a quarterly minimum debt service ratio of 1.25:1.00; (2) a quarterly senior funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 3.00:1.00 and (3) quarterly total funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 5.00:1.00, as well as the Company to maintain a minimum liquidity of $1,500,000. The Credit Agreement also contained covenants that limited Socialyte’s and MidCo’s ability to, among other things, grant liens, incur additional indebtedness, make acquisitions or investments, dispose of certain assets, change the nature of their businesses, enter into certain transactions with affiliates or amend the terms of material indebtedness.
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Term Loan
The Term Loan had a term of five years, with a maturity date of November 14, 2027. The Company was to repay the Term Loan through 60 consecutive monthly payments of principal, based upon a straight-line amortization period of 84 months, based on the principal amount outstanding, plus interest at an annual rate of 7.37%, commencing on December 14, 2022, and continuing on the corresponding day of each month thereafter until it was paid in full. Any remaining unpaid principal balance, including accrued and unpaid interest and fees, if any was to be due and payable in full on November 14, 2027, its maturity date.
Interest on the Term Loan was to be payable on a monthly basis. Interest was computed on the basis of a three hundred sixty (360) day year, for the actual number of days elapsed. Default interest was to be charged in accordance with the terms of the Term Loan. During the nine months ended September 30, 2023, the Company made a payment of $479,745, inclusive of $158,316 of interest. The Term Loan was repaid on September 29, 2023 as part of the Refinancing Transaction discussed below, therefore as of September 30, 2023, there were no amounts outstanding under the Term Loan.
Revolver
During both the three and nine months ended September 30, 2023, the Company drew $400,000 from the Revolver, which was repaid on September 29, 2023 as part of the Refinancing Transaction discussed below, therefore, as of September 30, 2023, there were no amounts outstanding under the Revolver. When drawn, the outstanding principal balance of the revolver accrued interest from the date of the draw of the greater of (i) 5.50% per annum, or (ii) the Prime Rate (as defined in the Revolver) plus 0.75% per annum.
Refinancing Transaction
On September 29, 2023, the Company entered into a loan agreement with BankUnited (“BankUnited Loan Agreement”) in which the existing Credit Agreement with BankProv was repaid (the “Refinancing Transaction”). The BankUnited Loan Agreement includes: (i) $5,800,000 secured term loan (“BKU Term Loan”), (ii) and $750,000 of a secured revolving line of credit (“BKU Line of Credit”) and (iii) $400,000 Commercial Card (“BKU Commercial Card”). The BKU Term Loan carries a 1.0% origination fee and matures in September 2028, the BKU Line of Credit carries an initial origination fee of 0.5% and an 0.25% fee on each annual anniversary and matures in September 2026; the BKU Commercial Card does not have any initial or annual fee and matures in September 2026. The BKU Term Loan has a declining prepayment penalty equal to 5% in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five of the outstanding balance. The BKU Line of Credit and BKU Commercial Card can be repaid without any prepayment penalty.
Interest on the BKU Term Loan accrues at 8.10% fixed rate per annum. Principal and interest on the BKU Term Loan shall be payable on a monthly basis based on a 5-year amortization. Interest on the BKU Line of credit is payable on a monthly basis, with all principal due at maturity. The BKU Commercial Card payment is due in full at the end of each bi-weekly billing cycle.
The BankUnited Credit Facility contains financial covenants tested semi-annually on a trailing twelve-month basis that require the Company to maintain a minimum debt service coverage ratio of 1.25:1.00 and a maximum funded debt/EBITDA ratio of 3.00:1.00. In addition, the BankUnited Credit Facility contains a liquidity covenant that requires the Company to hold a cash balance at BankUnited with a daily minimum deposit balance of $1,500,000.
The Refinancing Transaction was accounted for as an extinguishment of debt. In connection with this extinguishment, the Company incurred a prepayment penalty of $79,286 and wrote-off of unamortized debt origination costs of $91,859 related to the Term Loan, which were both recognized as interest expense in the condensed consolidated statement of operations in this third quarter of 2023.
IMAX Agreement
As discussed in Note 17, on June 24, 2022, we entered into the Blue Angels Agreement with IMAX. Under the terms of this agreement, as of December 31, 2022, we had paid $1,500,000 pursuant to the Blue Angels Agreement, which was recorded as capitalized production costs. On April 26, 2023, we paid the remaining $500,000 pursuant to the Blue Angels Agreement. On November 7, 2023, the Company agreed to pay 50% of additional production costs to complete the documentary in the amount of $250,000.
On April 25, 2023, IMAX entered into an acquisition agreement with Amazon Content Services, LLC for the distribution rights of Blue Angels. We estimate that we will derive approximately $3.5 million from the acquisition agreement and we expect that the documentary motion picture will be released in early 2024.
Convertible Notes Receivable
As of September 30, 2023, we hold convertible notes receivable from JDDC Elemental LLC, which operates Midnight Theatre. These convertible notes receivable are recorded at their principal face amount plus accrued interest. Due to their short-term maturity and conversion terms (described below), these have been recorded at the face value of the note and an allowance for credit losses has not been established.
As of September 30, 2023, the Midnight Theatre notes amount to $4.6 million, inclusive accrued interest receivable of $0.5 million, and are convertible at the option of the Company into Class A and B Units of Midnight Theatre. During both the three and nine months ended September 30, 2023, Midnight Theatre made an interest payment of $125,000 related to the Notes Receivable. Subsequent to September 30, 2023, Midnight Theatre made interest payments of $12,500 related to the Notes Receivable.
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Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are discussed in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022.
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 consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, as well as statements, other than historical facts, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. These statements are often characterized by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “goal” or “continue” or the negative of these terms or other similar expressions.
Forward-looking statements are based on assumptions and assessments made in light of our experience and perception of historical trends, current conditions, expected and future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of our control. You should not place undue reliance on these forward-looking statements, which reflect our views only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update these forward-looking statements in the future, except as required by applicable law.
Risks that could cause actual results to differ materially from those indicated by the forward-looking statements include those described as “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as updated by our subsequently filed Quarterly Reports on Forms 10-Q and Current Reports on Forms 8-K.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on the Effectiveness of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023, which have not been remediated as of the date of the filing of this report.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
We have begun the process of designing and implementing effective internal controls measures to improve our internal control over financial reporting and remediate the material weaknesses. Our internal control remediation efforts include the following:
| · | Developing formal policies and procedures over the Company’s fraud risk assessment and risk management function; |
| · | Developing policies and procedures to enhance the precision of management review of financial statement information and control impact of changes in the external environment; |
| · | We have entered into an agreement with a third-party consultant that assists us in analyzing complex transactions and the appropriate accounting treatment; |
| · | We are enhancing our policies, procedures and documentation of period end closing procedures; |
| · | Implementing policies and procedures to enhance independent review and documentation of journal entries, including segregation of duties; and |
| · | Reevaluating our monitoring activities for relevant controls. |
Management is beginning the process of implementing and monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Management believes our planned remedial efforts will effectively remediate the identified material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address control deficiencies or determine it necessary to modify the remediation plan described above.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting for the fiscal quarter covered by this report.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. In the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows. The Company is not aware of any pending litigation as of the date of this report.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 31.1* | Certification of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1# | Certification of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2# | Certification of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. | |
| ** | Previously filed. | |
| # | Furnished herewith. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized November 14, 2023.
| Dolphin Entertainment, Inc. | ||
| By: | /s/ William O’Dowd IV | |
| Name: William O’Dowd IV | ||
| Chief Executive Officer | ||
| By: | /s/ Mirta A Negrini | |
| Name: Mirta A Negrini | ||
| Chief Financial Officer |
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