DLPN 10-Q
Dolphin Entertainment, Inc. (DLPN)
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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| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant's telephone number)
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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 |
| The |
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 Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), 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 was required to submit such files).
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. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of common stock outstanding was as of November 9, 2022.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| 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, 2022 | December 31, 2021 | |||||||
| LIABILITIES | ||||||||
| Current | ||||||||
| Accounts payable | $ | $ | ||||||
| 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 | ||||||||
| 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, 2022 and December 31, 2021 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at September 30, 2022 and December 31, 2021, 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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Expenses: | ||||||||||||||||
| Direct costs | ||||||||||||||||
| Payroll and benefits | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Acquisition costs | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | ||||||||||||
| Legal and professional | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expenses) income: | ||||||||||||||||
| Gain on extinguishment of debt, net | ||||||||||||||||
| Loss on disposal of fixed assets | ( | ) | ||||||||||||||
| Change in fair value of convertible note | ( | ) | ( | ) | ||||||||||||
| Change in fair value of warrants | ( | ) | ( | ) | ||||||||||||
| Change in fair value of put rights | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (expenses) income, net | ( | ) | ( | ) | ||||||||||||
| (Loss) income before income taxes and equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax (expense) benefit | ( | ) | ( | ) | ||||||||||||
| Net (loss) income before equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ( | ) | ||||||||||
| Equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| (Loss) earnings 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, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Share-based compensation | ||||||||
| Equity in losses of unconsolidated affiliates | ||||||||
| Commitment shares issued to Lincoln Park Capital LLC | ||||||||
| Bonus payment issued in shares | ||||||||
| Gain on extinguishment of debt | ( | ) | ||||||
| Loss on disposal of fixed assets | ||||||||
| Impairment of right-of-use asset | ||||||||
| Impairment of capitalized production costs | ||||||||
| Bad debt expense | ||||||||
| Change in fair value of put rights | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Change in fair value of warrants | ( | ) | ||||||
| Change in fair value of convertible note | ( | ) | ||||||
| Change in deferred tax | ( | ) | ||||||
| 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) provided by operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of fixed assets | ( | ) | ||||||
| Acquisition of B/HI Communications, Inc., net of cash acquired | ( | ) | ||||||
| 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 B/HI | ( | ) | ||||||
| Proceeds from convertible notes payable | ||||||||
| Repayment of term loan | ( | ) | ||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Exercise of put rights | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase 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, | ||||||||
| 2022 | 2021 | |||||||
| 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 LLC | $ | $ | ||||||
| Receipt of Crafthouse equity in connection with marketing agreement | $ | $ | ||||||
| Settlement of contingent consideration for B/HI and The Door in shares of common stock | $ | $ | ||||||
| Principal balance of convertible notes converted into shares of common stock | $ | $ | ||||||
| Issuance of shares of common stock related to the acquisitions | $ | $ | ||||||
| Put rights exchanged for shares of common stock | $ | $ | ||||||
| Interest on notes paid in stock | $ | $ | ||||||
| Employee bonus paid in stock | $ | $ | ||||||
Reconciliation of cash, cash equivalents and restricted cash. 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, | ||||||||
| 2022 | 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| For the three and nine months ended September 30, 2022 | ||||||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | 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 LLC | — | |||||||||||||||||||||||||||
| Issuance of common stock on vesting of restricted stock units, 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 LLC | — | |||||||||||||||||||||||||||
| Issuance of common stock on vesting of restricted stock units, 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 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.
| 6 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| For the three and nine months ended September 30, 2021 | ||||||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income for the three months ended March 31, 2021 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares related to conversion of note payable | — | |||||||||||||||||||||||||||
| Issuance of shares related to cashless exercise of warrants | — | |||||||||||||||||||||||||||
| Issuance of shares issued to seller of Be Social | — | |||||||||||||||||||||||||||
| Consideration for acquisition of B/HI Communications, Inc | — | |||||||||||||||||||||||||||
| Issuance of shares related to exchange of Put Rights for stock | — | |||||||||||||||||||||||||||
| Shares retired from exercise of puts | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended June 30, 2021 | — | — | ||||||||||||||||||||||||||
| Issuance of shares related to acquisition of The Door | — | ( | ) | |||||||||||||||||||||||||
| Issuance of shares related to exchange of Put Rights for stock | — | |||||||||||||||||||||||||||
| Shares retired from exercise of puts | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Balance June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income for the three months ended September 30, 2021 | — | — | ||||||||||||||||||||||||||
| Issuance of shares for employee bonus | — | |||||||||||||||||||||||||||
| Shares retired from exercise of puts | — | |||||||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
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”) and B/HI Communications, Inc. (“B/HI”), the Company provides expert strategic marketing and publicity services throughout the United States of America (“U.S.”) to virtually all of the major film studios and many of the leading streaming services, as well as to independent and digital content providers, and 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 a wide variety of consumer brands, including prime hotel and restaurant groups, throughout the U.S. 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.
Impact of COVID-19
The continued spread of new COVID-19 variants did not have a significant impact on our business during the quarter ended September 30, 2022. The future course of the pandemic could have adverse effects in the U.S and global economies and thus negatively impact our business and financial results.
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 and B/HI. 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, 2022, and its results of operations and cash flows for the three and nine months ended September 30, 2022 and 2021. 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, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022. The condensed consolidated balance sheet as of December 31, 2021 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, 2021.
| 8 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
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 as of 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, realizability of notes receivable and impairment assessments for investment in capitalized production costs, goodwill and long-lived assets. Management bases its estimates on historical experience and on other various assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from such estimates under different assumptions and conditions.
Due to COVID-19 and the uncertainty of the extent of the impacts related thereto, certain estimates and assumptions may require increased judgment. As events continue to evolve and additional information becomes available, these estimates may change in future periods. It is difficult to predict what the ongoing impact of the pandemic will be on future periods.
Update to Significant Accounting Policies
The Company’s significant accounting policies are detailed in "Note 2: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021. As a result of entering into a collaborative arrangement in June 2022, the Company updated its revenue recognition accounting policy to include the information as detailed below. There were no other significant changes to the Company’s accounting policies during the three and nine months ended September 30, 2022.
Revenue Recognition
The Company analyzes our collaboration agreements to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, the Company considers whether the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaboration guidance and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of the revenue with contracts with customer guidance. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.
For collaboration arrangements that are in the scope of the collaboration guidance, we may analogize to the revenue from contracts with customers’ guidance for some aspects of these arrangements. Revenue from transactions with collaboration participants is presented apart from revenue with contracts with customers in our condensed consolidated statements of operations. To date, there has been no revenue generated from collaboration arrangements.
Recent Accounting Pronouncements
Accounting Guidance Not Yet Adopted
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The guidance will be effective for the Company on January 1, 2023. The Company is currently evaluating the impact that the adoption of this standard will have on its condensed consolidated financial statements in connection with any future business combinations.
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. It is applicable to trade accounts receivable. The guidance will be effective for the Company on January 1, 2023 with a cumulative-effect adjustment, if any, to retained earnings as of the beginning of the year of adoption. The Company is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s condensed consolidated financial statements and disclosures.
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.
| 9 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Entertainment publicity and marketing | $ | $ | $ | $ | ||||||||||||
| Content production | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
Contract Balances
The opening and closing balances of our contract asset and liability balances from contracts with customers as of September 30, 2022 and December 31, 2021 were as follows:
| Contract Assets | Contract Liabilities | |||||
| Balance as of December 31, 2021 | $ | $ | ||||
| Balance as of September 30, 2022 | ||||||
| Change | $ | ( | ) | $ | ||
Contract assets are comprised of services provided for which consideration has not been received and for which payments are not unconditional. The change in the contract asset balance relates to the transfer to accounts receivable when the right to payment becomes unconditional. Contract assets are presented within other current assets in the condensed consolidated balance sheets.
| 10 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
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, 2022 and 2021 include the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Amounts included in the beginning of year contract liability balance | $ | $ | $ | $ | ||||||||||||
Remaining performance obligations
As of September 30, 2022, we
had approximately $
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of September 30, 2022, the
Company has 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. There were no triggering events noted during the three and nine month period ended September 30, 2022, that would require the Company to reassess goodwill for impairment outside of its regular annual impairment test.
Intangible Assets
Finite-lived intangible assets consisted of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | 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 $
| 11 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
Amortization expense related to intangible assets for the remainder of 2022 and thereafter is as follows:
| 2022 | $ | ||
| 2023 | |||
| 2024 | |||
| 2025 | |||
| 2026 | |||
| Thereafter | |||
| Total | $ |
NOTE 4 —ACQUISITIONS
B/HI Communications, Inc.
Effective January 1, 2021, the Company acquired all of the issued and outstanding shares of B/HI, a California corporation (the “B/HI Purchase”) pursuant to a share purchase agreement (the “B/HI Share Purchase Agreement”) between the Company and Dean G. Bender and Janice L. Bender, as co-trustees of the Bender Family Trust dated May 6, 2013 (collectively, the “B/HI Sellers). B/HI is an entertainment public relations agency that specializes in corporate and product communications programs for interactive gaming, e-sports, entertainment content and consumer product organizations.
The total consideration paid
to the B/HI Seller in respect to the B/HI Purchase is $ million of shares of common stock based on a 30-day trailing trading average
closing price immediately prior to, but not including, the applicable payment date adjusted for working capital, cash targets and the
B/HI indebtedness as defined in the B/HI Share Purchase Agreement. During 2021, subsequent to the initial measurement, the B/HI Seller
achieved certain financial performance targets pursuant to the B/HI Share Purchase Agreement and earned an additional $ million, which
was paid by $ million in cash and the remainder in common stock, which was settled by the issuance of shares of common stock
during the second quarter of 2022 pursuant to the B/HI Share Purchase Agreement. The common stock issued as part of the consideration
has not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Acquisition related costs for
the B/HI purchase amounted to $
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.
Midnight Theatre
As of September 30, 2022, the
Midnight Theatre notes amount to $
Crafthouse Cocktails
On November 30, 2021, Crafthouse
Cocktails issued a $
| 12 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
NOTE 6 — EQUITY METHOD INVESTMENTS
Equity method investments are
included within other long-term assets in the condensed consolidated balance sheets. As of September 30, 2022, the investment in Midnight
Theatre and Crafthouse Cocktails amounted to $
Midnight Theatre
Hidden Leaf, the restaurant at
Midnight Theatre, commenced operations in early July 2022. During both the three and nine months ended September 30, 2022, the Company
recorded a loss of $
Crafthouse Cocktails
During the nine months ended
September 30, 2022, the Crafthouse Note discussed in Note 5 was converted and Dolphin was issued common memberships interests of Crafthouse
Cocktails. During the nine months ended September 30, 2022, the Company received an additional $
NOTE 7 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued funding under Max Steel production agreement | $ | $ | ||||||
| Accrued audit, legal and other professional fees | ||||||||
| Accrued commissions | ||||||||
| Accrued bonuses | ||||||||
| Due to seller of Be Social | ||||||||
| Talent liability | ||||||||
| Accumulated customer deposits | ||||||||
| Other | ||||||||
| Other current liabilities | $ | $ | ||||||
NOTE 8 — DEBT
Total debt of the Company was as follows as of September 30, 2022 and December 31, 2021:
| Debt Type | September 30, 2022 | December 31, 2021 | ||||||
| Convertible notes payable | $ | $ | ||||||
| Convertible note payable - fair value option | ||||||||
| Non-convertible promissory notes | ||||||||
| Loans from related party (see Note 9) | ||||||||
| Total debt | $ | $ | ||||||
| Less current portion of debt | ( | ) | ( | ) | ||||
| Noncurrent portion of debt | $ | $ | ||||||
| 13 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
The table below details the maturity dates of the principal amounts for the Company’s debt as of September 30:
| Debt Type | Maturity Date | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||
| Convertible notes payable | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Convertible note payable - fair value option | ||||||||||||||||||||||||||
| Nonconvertible promissory notes | ||||||||||||||||||||||||||
| Loans from related party | ||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (1) |
Convertible Notes Payable
As of September 30, 2022, the
Company has two outstanding convertible promissory notes in the aggregate principal amount of $
The Company recorded interest
expense related to convertible notes payable of $
As of September 30, 2022 and
December 31, 2021, the principal balance of the convertible promissory notes of $
During the three and nine months
ended September 30, 2022, on August 8, 2022, the holder of one convertible note issued during 2021 converted
the principal balance of $
Subsequent to September 30, 2022,
on October 4, 2022, October 18, 2022 and November 3, 2022, the Company issued three convertible promissory notes in the aggregate amount
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
$
The Company recorded a gain in
fair value of $
The Company recorded interest
expense related to the convertible note payable at fair value of $
| 14 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
Nonconvertible Promissory Notes
As of September 30, 2022, the Company
has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $
As of September 30, 2022 and December
31, 2021, the Company had a balance of $
The Company recorded interest expense
related to these nonconvertible promissory notes 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 July 31, 2024.
As of both September 30, 2022 and
December 31, 2021, 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 are representative of 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, 2022 | December 31, 2021 | ||||||||||||||||||
| 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 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
Convertible notes payable
As of September 30, 2022, the Company has two outstanding convertible notes payable with aggregate principal amount of $2,400,000. See Note 8 for further information on the terms of these convertible notes.
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||
| Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||
| 10% convertible notes due in August 2024 | 3 | $ | $ | $ | $ | |||||||||||||||
| 10% convertible notes due in September 2024 | 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, 2022 | December 31, 2021 | ||||||
| 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, 2022, 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, 2021 to September 30, 2022:
| March 4th Note | ||||
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | $ | |||
| (Gain) on change of fair value reported in the condensed consolidated statements of operations | ( | ) | ||
| Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2022 | $ | |||
The estimated fair value of the March 4th Note as of September 30, 2022 and December 31, 2021, 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, 2022 | December 31, 2021 | |||||||
| Face value principal payable | $ | $ | ||||||
| Original conversion price | $ | $ | ||||||
| Value of Common Stock | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk free rate | % | % | ||||||
| 16 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
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, 2021 to September 30, 2022:
| Fair Value: | Series I | |||
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | $ | |||
| (Gain) on change of fair value reported in the condensed consolidated statements of operations | ( | ) | ||
| Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2022 | $ | |||
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, 2022 | December 31, 2021 | ||||||
| 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 condensed 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 condensed consolidated statements of operations.
As discussed in Note 4, during
the year ended December 31, 2021, the B/HI seller met the conditions for payment of contingent consideration. As a result, the contingent
consideration has been recorded as the actual amount of the payout to the B/HI seller, $
For the contingent consideration related to Be Social, the Company utilized a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the contingent consideration as of the acquisition date. The Company determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:
| Be Social | ||||||||
| Inputs | As of September 30, 2022 | As of December 31, 2021 | ||||||
| Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the contingent consideration) | % | % | ||||||
| Annual Asset Volatility Estimate | % | % | ||||||
| 17 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
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, 2021 to September 30, 2022:
| The Door(1) | Be Social(2) | B/HI(3) | ||||||||||
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | $ | $ | $ | |||||||||
| (Gain) on change of fair value reported in the condensed consolidated statements of operations | ( | ) | ( | ) | ( | ) | ||||||
| Settlement of contingent consideration | ( | ) | ( | ) | ||||||||
| Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2022 | $ | $ | $ | |||||||||
| (1) | |
| (2) | |
| (3) |
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 the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $ in value of its shares of common stock from time to time over a 36-month period.
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 common stock to Lincoln Park as consideration for its commitment (“commitment shares”) to purchase shares of our common stock under the LP 2021 Purchase Agreement. In addition, the Company issued an additional 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 $
| 18 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
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 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 common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of our 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 condensed consolidated statements of operations.
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 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 no value as of September 30, 2022.
On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). There are shares available to grant under the 2017 Plan. During the nine months ended September 30, 2022, the Company granted Restricted Stock Units (“RSUs”) to certain employees under the 2017 Plan, as detailed in the table below. During the nine months ended September 30, 2021, the Company did not issue any awards under the 2017 Plan.
The RSUs granted under the 2017 Plan to the Company’s employees vest in four equal installments on the following dates: March 15, 2022, June 15, 2022, September 15, 2022 and December 15, 2022. The Company recognized compensation expense for RSUs of $ and $ for the three and nine months ended September 30, 2022, respectively, which is included in payroll and benefits in the condensed consolidated statements of operations. There was share-based compensation recognized for the three and nine months ended September 30, 2021. As of September 30, 2022, unrecognized compensation expense related to RSUs of $ is expected to be recognized over a weighted-average period of years.
The following table sets forth the activity for the RSUs:
| Number of Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding (nonvested), December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( | ) | ||||||
| Vested | ( | ) | ||||||
| Outstanding (nonvested), September 30, 2022 | $ | |||||||
Shares issued related to an employment agreement
Pursuant to the employment agreement between the Company and Mr. Anthony Francisco, on July 27, 2022, the Company issued to Mr. Francisco shares of Common Stock at a price of $ per share, the closing sale price for the Common Stock on the date the shares were issued. Mr. Francisco’s employment agreement also entitles him to receive share awards amounting to $ at each of certain dates in 2023 and 2024, in the aggregate amounting to $.
| 19 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
The following table sets forth the computation of basic and diluted (loss) earnings per share:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Net income attributable to participating securities | ||||||||||||||||
| Net (loss) income attributable to Dolphin Entertainment common stock shareholders and numerator for basic (loss) earnings per share | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of convertible notes payable | ( | ) | ( | ) | ||||||||||||
| Change in fair value of warrants | ( | ) | ( | ) | ||||||||||||
| Interest expense | ||||||||||||||||
| Numerator for diluted (loss) earnings 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) earnings per share | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted (loss) earnings per share | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
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 attribute 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, 2021, the Company attributed $
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. For the three months ended September 30, 2021, convertible promissory notes in the aggregate of weighted average shares were not included in the calculation of diluted earnings per share and for the nine months ended September 30, 2021, convertible promissory notes and warrants in the aggregate of weighted average shares were not included in the calculation of diluted loss per share because inclusion was considered to be anti-dilutive.
| 20 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
NOTE 14 — RELATED PARTY TRANSACTIONS
As part of the employment agreement
with its CEO, the Company provided a $
As of September 30, 2022 and
December 31, 2021, 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, and B/HI. 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. |
| 21 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
The profitability measure employed by our chief operating decision maker, our President and Chief Executive Officer, for allocating resources to operating segments and assessing operating segment performance is operating income (loss). Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. General and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees, as well as legal and professional expenses which 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. All segments follow the same accounting policies as those described in the Annual Report on Form 10-K for the year ended December 31, 2021.
In connection with the acquisitions
of 42West, The Door, Viewpoint, Shore Fire, Be Social, and B/HI, the Company assigned $
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| EPM | $ | $ | $ | $ | ||||||||||||
| CPD | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Segment Operating Income (Loss): | ||||||||||||||||
| EPM | $ | $ | $ | $ | ||||||||||||
| CPD | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses), net | ( | ) | ||||||||||||||
| (Loss) income before income taxes and equity in losses of unconsolidated affiliates | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| As of September 30, 2022 | As of December 31, 2021 | |||||||
| 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 December 2027. The amortizable life of the right-of-use (“ROU”) asset is limited by the expected lease term. Although certain leases include options to extend, the Company did not include these in the ROU asset or lease liability calculations because it is not reasonably certain that the options will be executed.
On July 18, 2022, the Company entered into an agreement to sublet 17,554 rentable square feet in Los Angeles, California at a base rent of $3.61 per rentable square foot. The term of the sublease commenced on July 27, 2022 and expires on November 29, 2027 and allows for annual increases of 3% per annum throughout the term of the lease.
The table below shows the lease income and expenses recorded in the condensed consolidated statements of operations incurred during the three and nine months ended September 30, 2022 and 2021.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| Lease costs | Classification | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease costs | Selling, general and administrative expenses | $ | $ | $ | $ | |||||||||||||
| Operating lease costs | Direct costs | |||||||||||||||||
| Sublease income | Selling, general and administrative expenses | ( | ) | ( | ) | |||||||||||||
| Net lease costs | $ | $ | $ | $ | ||||||||||||||
During the nine months ended September
30, 2022, the Company recorded an impairment of its ROU asset amounting to $
| 22 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
Lease Payments
For the nine months ended September
30, 2022 and 2021, the Company made payments in cash related to its operating leases in the amounts of $
Future maturities lease payments for operating leases for the remainder of 2022 and thereafter, were as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: Imputed interest | ( |
) | ||
| Present value of lease liabilities | $ |
As of September 30, 2022, the Company’s
weighted average remaining lease term on its operating 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. During the three and nine months ended September 30, 2022, the Company paid $
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.
As production of the documentary motion picture is still in the early stages, no income or expense has been recorded in connection with the Blue Angels Agreement during the three and nine months ended September 30, 2022.
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, the Company has funded $
NOTE 19 — SUBSEQUENT EVENTS
On
October 2, 2022, the Company minted and offered for sale a collection of
On November 14, 2022, (the “Closing Date”), the Company, through its wholly owned subsidiary, MidCo LLC, (“MidCo”), acquired all of the issued and outstanding membership interest of Socialyte, LLC, a Delaware limited liability company, (“Socialyte”), pursuant to a membership purchase agreement between the Company and NSL Ventures, LLC (“Seller”). Socialyte is a New York and Los Angeles based creative agency specializing in social media influencer marketing campaigns for brands.
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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, Viewpoint and Be Social, we provide expert strategic marketing and publicity services to many of the top brands, both individual and corporate, in the entertainment, hospitality and music industries. 42West, The Door and Shore Fire are each recognized global leaders in the PR services for the industries they serve. Viewpoint adds full-service creative branding and production capabilities and Be Social provides influencer-marketing capabilities through its roster of highly engaged social media influencers. Dolphin’s legacy content production business, founded by our Emmy-nominated Chief Executive Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital series, primarily aimed at family and young adult markets. 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, such as live event production, can create synergistic opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion with such targets.
We have also established an investment strategy, “Dolphin 2.0,” based upon identifying opportunities to develop internally owned assets, or to acquire ownership interest 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 2.0. We intend to enter into additional investments during 2022 and 2023, but there is no assurance that we will be successful in doing so, whether in 2022, 2023 or at all.
We operate in two reportable segments: our entertainment publicity and marketing segment and our content production segment. The entertainment publicity and marketing segment comprises 42West, The Door, Shore Fire, Viewpoint and Be Social and provides clients with diversified services, including public relations, entertainment content marketing, strategic marketing consulting, digital marketing capabilities, creative branding and in-house production of content for marketing. The content production segment comprises Dolphin Films and Dolphin Entertainment and specializes in the production and distribution of digital content and feature films. The activities of our Content Production segment also include all corporate overhead activities.
Dolphin 2.0
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 2.0” (with “Dolphin 1.0” being the underlying businesses of each of our subsidiaries mentioned above). 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.
The first of our Dolphin 2.0 investments has been in the new world of Non-Fungible Tokens (“NFTs”). We see a large opportunity in this sector. Even without broad consumer adoption, the NFT market grew from an estimated $250 million in 2020 to over $40 billion in 2021, according to Bloomberg. We believe the NFT market will continue to grow for years to come, driven by the combination of 1) the ability of consumers to purchase using a credit card (and not just with cryptocurrencies); 2) consumer-friendly pricing options (previously not readily available due to large “gas fees” charged by both sellers and buyers of NFTs to offset the energy consumption required to “mint” the NFT for sale); and 3) popular entertainment and pop culture collectibles being offered.
On October 2, 2022, we minted (offered for sale) our first collection, “Creature Chronicles: Exiled Aliens”, a generative art collection of 7,777 unique avatars designed by Anthony Francisco, former Marvel Studio artist. The collection generated approximately 13,175 SOL, equaling approximately $435,000.
Our second Dolphin 2.0 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.
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Our third Dolphin 2.0 investment was made in December, 2021, when we acquired an ownership interest in Crafthouse Cocktails, a pioneering brand of ready-to-drink, all-natural classic cocktails. During the third quarter of 2022, Crafthouse Cocktails began its first international operations, with distribution in London, United Kingdom.
We have also made our first content investment under Dolphin 2.0. See Note 17 above for details regarding our Collaborative Arrangement with IMAX for production and distribution of the documentary feature “The Blue Angels.”
COVID Update
The continued spread of new COVID-19 variants did not have a significant impact on our business during the quarter ended September 30, 2022. The future course of the pandemic could have adverse effects in the U.S and global economies and thus negatively impact our business and financial results.
Revenues
For the three and nine months ended September 30, 2022 and 2021, we derived all of our revenues from our entertainment publicity and marketing segment. The entertainment publicity and marketing segment generates its revenues from providing public relations services for celebrities, musicians and brands, entertainment and targeted content marketing for film and television series, strategic communications services for corporations, public relations, marketing services and brand strategies for hotels and restaurants and digital marketing through its roster of social media influencers. Refer to discussion under Revenues in the Results of Operations section below for further discussion on the revenues from the content production segment.
Entertainment Publicity and Marketing
Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and we have continued to grow organically through referrals and actively soliciting new business. We earn revenues primarily from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers and (viii) content productions of marketing materials on a project contract basis. For these revenue streams, we collect fees through either fixed fee monthly retainer agreements, fees based on a percentage of contracts or project-based fees.
We earn entertainment publicity and marketing revenues primarily through the following:
| ● | Talent – We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs and Grammy winning recording artists. Our services in this area include ongoing strategic counsel, media relations, studio and/or network liaison work, and event and tour support. 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, as well as editorial work on behalf of brand clients. Our services extend beyond our own captive influencer network, and we manage custom campaigns targeting specific demographics and locations, from ideation to delivery of results reports. We expect that our relationship with social media influencers will provide us the ability to offer these services to our existing clients in the entertainment and consumer products industries and will be accretive to our revenue. |
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Content Production
Project Development and Related Services
We have a team that dedicates a portion of its time to identifying scripts, story treatments and novels for acquisition, development and production. The scripts can be for either digital, 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 have each agreed to fund 50% of the production budget. On June 29, 2022 and September 30, 2022, respectively, we made payments in the amount of $500,000 and $1,000,000 pursuant to this agreement. We anticipate a final $500,000 payment to be made in Q1 2023.
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) | Acquisition costs include professional fees incurred as part of the acquisition of our subsidiaries. | |
| (5) | Depreciation and amortization – includes the depreciation of our property and equipment and amortization of intangible assets and leasehold improvements. |
| (6) | Change in fair value of contingent consideration – includes changes in the fair value of the contingent earn-out payment obligations for the Company’ acquisitions. The fair value of the related contingent consideration is measured at every balance sheet date and any changes recorded on our condensed consolidated statements of operations. |
| (7) | 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, 2022, other income and expenses consisted primarily of: (1) changes in fair value of convertible notes; (2) changes in fair value of warrants; and (3) interest expense. For the three and nine months ended September 30, 2021, other income and expenses consisted primarily of: (1) gain on extinguishment of debt; (2) change in fair value of convertible notes; (3) change in fair value of warrants and (4) interest expense. For the nine months ended September 30, 2021, other income and expenses also included a change in the fair value of put rights.
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RESULTS OF OPERATIONS
Three and nine months ended September 30, 2022 as compared to three and nine months ended September 30, 2021
Revenues
For the three and nine months ended September 30, 2022 and 2021 revenues were as follows:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Entertainment publicity and marketing | $ | 9,899,013 | $ | 9,399,432 | $ | 29,366,748 | $ | 25,219,793 | ||||||||
| Total revenue | $ | 9,899,013 | $ | 9,399,432 | $ | 29,366,748 | $ | 25,219,793 | ||||||||
Revenues from entertainment publicity and marketing increased by approximately $0.5 million and $4.1 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year. The increase is primarily driven by increased revenues across most of our subsidiaries, as cross-selling across our subsidiaries has provided additional customers and increased demand for the service our subsidiaries provide.
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 the second half of 2023 with the release of the Blue Angels documentary film.
Expenses
For the three and nine months ended September 30, 2022 and 2021, our expenses were as follows:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Expenses: | ||||||||||||||||
| Direct costs | $ | 837,429 | $ | 991,708 | $ | 2,941,044 | $ | 2,578,295 | ||||||||
| Payroll and benefits | 7,030,814 | 5,875,755 | 20,947,531 | 16,770,091 | ||||||||||||
| Selling, general and administrative | 1,663,288 | 1,519,812 | 4,644,264 | 4,234,309 | ||||||||||||
| Acquisition costs | 315,800 | — | 315,800 | 22,907 | ||||||||||||
| Depreciation and amortization | 415,836 | 475,207 | 1,248,621 | 1,436,189 | ||||||||||||
| Change in fair value of contingent consideration | (5,000 | ) | 1,110,000 | (1,439,778 | ) | 1,310,000 | ||||||||||
| Legal and professional | 774,613 | 498,661 | 2,317,800 | 1,301,267 | ||||||||||||
| Total expenses | $ | 11,032,780 | $ | 10,471,143 | $ | 30,975,282 | $ | 27,653,058 | ||||||||
Direct costs decreased by approximately $0.2 million and increased by approximately $0.4 million for the three and nine months ended September 30, 2022, respectively, as compared to the three and nine months ended September 30, 2021. The increase in direct costs is mainly driven by $0.9 million of NFT production and marketing costs for the nine months ended September 30, 2022, respectively, that were not present in the same period in 2021, offset by approximately $0.5 million decrease in direct costs primarily attributable to a decrease in Viewpoint’s revenue as compared to the nine months ended September 30, 2021. The decrease in direct costs of approximately $0.2 million for the three months ended September 30, 2022 is primarily attributable to the decrease in Viewpoint’s revenue, in comparison with the same period in the prior year, as Viewpoint incurs third party costs related to the production of marketing materials, which are included in direct costs.
Payroll and benefits expenses increased by approximately $1.2 million and $4.2 million for the three and nine months ended September 30, 2022, respectively, as compared to the three and nine months ended September 30, 2021, primarily due to additional headcount in 2022 to support the growth of our business and stock compensation issued to our employees under the 2017 Plan.
Selling, general and administrative expenses increased by approximately $0.1 million and $0.4 million for the three and nine months ended September 30, 2022, respectively, as compared to the three and nine months ended September 30, 2021, mainly due to the fair value of the commitment shares issued as consideration for the Lincoln Park agreement and a $98.9 thousand impairment of an ROU asset.
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Acquisition costs for the three and nine months ended September 30, 2022 were $0.3 million, related to our acquisition of the membership interest of Socialyte LLC on November 14, 2022. Acquisition costs for the three and nine months ended September 30, 2021 were not significant, as the Company did not have any significant acquisition activity during 2021.
Depreciation and amortization remained consistent for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021.
Change in fair value of the contingent consideration was a $5.0 thousand gain and $1.4 million gain for the three and nine months ended September 30, 2022, respectively, compared to the change in fair value of the contingent consideration of $1.1 million loss and a $1.3 million loss for the three and nine months ended September 30, 2021, respectively. The main components of the change in fair value of contingent consideration were the following:
| · | The Door: this contingent consideration was settled in June 2022, therefore no changes were recorded in the three months ended September 30, 2022. The Company recorded a $0.3 million gain for the three months ended September 30, 2021, and a $1.4 million gain and $0.1 million gain for the nine months ended September 30, 2022 and 2021, respectively. |
| · | B/HI: this contingent consideration was settled in June 2022, therefore no changes were recorded in the three months ended September 30, 2022. The Company recorded a $1.1 million loss for the three months ended September 30, 2021, and a $76.1 thousand gain and $1.1 million loss for the nine months ended September 30, 2022 and 2021, respectively. |
| · | Be Social: $5.0 thousand gain and $0.3 million loss for the three months ended September 30, 2022 and 2021, respectively, and $5.0 thousand gain and $0.3 million loss for the nine months ended September 30, 2022 and 2021, respectively. |
Legal and professional fees increased by approximately $0.3 million and $1.0 million for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021 due primarily to: (1) entering into the 2022 Lincoln Park agreement and related filing of the Registration Statement on Form S-1 during the third quarter of 2022 and (2) legal, consulting and audit fees related to our restatement of the September 30, 2021 Form 10-Q, revisions of the Forms 10-Q for March 31, 2021 and June 30, 2021 included in our Form 10-K filed on May 26, 2022 and fees associated with our change of auditors.
Other Income and Expenses
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Other Income and expenses: | ||||||||||||||||
| Gain on extinguishment of debt, net | $ | — | $ | 1,733,400 | $ | — | $ | 2,689,010 | ||||||||
| Loss on disposal of fixed assets | — | — | — | (48,461 | ) | |||||||||||
| Change in fair value of convertible note | 45,642 | (223,923 | ) | 577,522 | (826,398 | ) | ||||||||||
| Change in fair value of warrants | 10,000 | (55,000 | ) | 105,000 | (2,552,877 | ) | ||||||||||
| Change in fair value of put rights | — | — | — | (71,106 | ) | |||||||||||
| Interest expense | (126,147 | ) | (241,115 | ) | (400,884 | ) | (576,146 | ) | ||||||||
| Total other (expenses) income, net | $ | (70,505 | ) | $ | 1,213,362 | $ | 281,638 | $ | (1,385,978 | ) | ||||||
We did not record any gain or loss on extinguishment of debt for the three and nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, we recorded a gain on extinguishment of debt of approximately $1.8 million and $2.7 million, respectively, in connection with forgiveness of the PPP Loans of 42West, Dolphin, Viewpoint, Shore Fire and The Door. Both periods were offset by a loss on extinguishment of debt of $57,400 related to the exchange of certain put rights for shares of our common stock.
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, 2022 and 2021, we recorded a change in the fair value of the convertible note issued in 2020 in the amount of a $45,642, gain and $0.2 million loss, respectively. For the nine months ended September 30, 2022 and 2021, we recorded a change in the fair value of the convertible note issued in 2020 in the amount of a gain of $0.6 million and a loss of $0.8 million, respectively. None of the decrease in the value of the convertible note 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) income.
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Warrants issued with the convertible note 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. In March 2021, one of the warrant holders exercised 146,027 warrants via a cashless exercise formula. The price of our common stock on the exercise date was $19.16 per share and we recorded a change in fair value of the exercised warrants of $2.5 million on our condensed consolidated statements of operations. 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 change in the fair value of the warrants for the three and nine months ended September 30, 2022 for those amounts, respectively, on our condensed consolidated statements of operations.
The fair value of put rights related to the 42West acquisition were recorded on our condensed consolidated balance sheet on the date of the acquisition. The fair value of the put rights are measured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. The fair value of the put rights decreased by approximately $71,000 for the nine months ended September 30, 2021. The final put rights were settled in March of 2021; therefore we did not have a liability related to the put rights as of September 30, 2022 and no changes in fair value occurred in 2022.
Interest expense decreased by $0.1 million and $0.2 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year, primarily due to lower convertibles and nonconvertible notes outstanding during 2022, as compared to the same periods in the prior year.
Equity in losses of unconsolidated affiliates
Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investees.
For the three and nine months ended September 30, 2022, we recorded losses of $39,437 and $82,837, respectively, from our equity investment in Crafthouse Cocktails. The Crafthouse Cocktails investment was not present in the three and nine months ended September 30, 2021.
Midnight Theatre commenced operations at the end of the second quarter of 2022; we recorded a loss of $60,786 thousand for the three months ended September 30, 2022. No equity gains or losses have been recorded prior to the third quarter of 2022.
Income Taxes
We recorded an income tax expense of $7,224 and $21,672 for the three and nine months ending September 30, 2022, 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”).
We recorded an income tax benefit of $38,851 for the nine months ended September 30, 2021, due to a reduction of the valuation allowance, as the net deferred tax asset was reduced as a result of the deferred tax liability recorded in the B/HI acquisition. There was no income tax expense or benefit for the three months ended September 30, 2021.
Net (Loss) Income
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. Net income was approximately $0.1 million or $0.02 per share based on 7,740,085 weighted average shares outstanding for both basic and diluted earnings per share for the three months ended September 30, 2021. The change in net income for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, is related to the factors discussed above.
Net loss was approximately $1.5 million or $0.16 per share based on 9,307,830 weighted average shares outstanding for basic loss per share and $0.23 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. Net loss was approximately $3.8 million or $0.50 per share based on 7,551,974 weighted average shares outstanding for both basic and diluted loss per share for the nine months ended September 30, 2021. The change in net loss for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, is related to the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Statement of Cash Flows Data: | ||||||||
| Net cash (used in) provided by operating activities | $ | (3,634,388 | ) | $ | 519,960 | |||
| Net cash used in investing activities | (3,172,544 | ) | (525,856 | ) | ||||
| Net cash provided by financing activities | 4,169,351 | 4,563,305 | ||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (2,637,581 | ) | 4,557,409 | |||||
| Cash and cash equivalents and restricted cash, beginning of period | 8,230,626 | 8,637,376 | ||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 5,593,045 | $ | 13,194,785 | ||||
Operating Activities
Cash used in operating activities was $3.6 million for nine months ended September 30, 2022, a change of $4.1 million from cash provided by operating activities of $0.5 million for nine months ended September 30, 2021. The change in cash flows from operations was primarily as a result of:
| · | $4.1 million decrease in non-cash changes in the fair value of liabilities, such as warrants, convertible notes and put rights; | |
| · | $2.7 million decrease in non-cash changes in the fair value of contingent consideration, primarily driven by changes in the price of the Company’s stock; | |
| · | $1.5 million payment related to IMAX agreement previously discussed; and | |
| · | $1.2 million in changes in other operating assets and liabilities. |
The above changes were offset by:
| · | $2.3 million of additional cash generated from our operating results, driven by the further growth of the business; | |
| · | $2.7 million of a gain on extinguishment of debt in the nine months ended September 30, 2021 primarily related to the forgiveness of PPP Loans, which was not present in 2022; and | |
| · | $3.0 million of non-cash items such as depreciation and amortization, bad debt expense, share-based compensation, impairment of ROU asset, impairment of capitalized production costs and other non-cash losses. |
Investing Activities
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. Cash flows used in investing activities for the nine months ended September 30, 2021 were $0.5 million entirely related to the acquisition of B/HI, net of cash acquired.
Financing Activities
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 from the cash portion of the contingent consideration payment to B/HI seller; and | |
| · | $0.3 of repayment of notes payable. |
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Cash flows provided by financing activities for the nine months ended September 30, 2021 were $4.6 million, which mainly related to:
Inflows:
| · | $5.9 million of proceeds from convertible notes payable. |
Outflows:
| · | $1.0 million from the exercise of put rights; | |
| · | $0.3 million of repayment of the term loan; and | |
| · | $71.5 thousand of repayment of notes payable. |
Debt and Financing Arrangements
As described below in further detail, we have taken measures to position the Company with a stronger balance sheet position, extending current loans to longer term maturities and reducing our overall debt position. Total debt amounted to $4.8 million as of September 30, 2022 compared to $6.2 million as of December 31, 2021, a reduction of $1.4 million or 22.0%.
Our debt obligations in the next twelve months from September 30, 2022 increased slightly from the obligations as of December 31, 2021. The current portion of the long-term debt increased to $0.5 million from $0.3 million. We expect our current cash position, cash expected to be generated from our operations and other availability of funds, as detailed below, are sufficient to meet our debt requirements.
2021 Lincoln Park Transaction
On December 29, 2021, we 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 we could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of our shares of common stock from time to time over a 36-month period.
Pursuant to the terms of the LP 2021 Purchase Agreement, at the time we signed the LP 2021 Purchase Agreement and the LP 2021 Registration Rights Agreement, we issued 51,827 shares of common stock to Lincoln Park as consideration for its commitment (“commitment shares”) to purchase shares of our common stock under the LP 2021 Purchase Agreement. In addition, we issued an additional 37,019 commitment shares on March 7, 2022.
During the nine months ended September 30, 2022, excluding the additional commitment shares disclosed above, we sold 1,035,000 shares of common stock, respectively, at prices ranging between $3.47 and $5.15 pursuant to the LP 2021 Purchase Agreement and received proceeds of $4,367,640, respectively.
In connection with entering into the 2022 LP Purchase Agreement, the prior LP 2021 Purchase Agreement, dated as of December 29, 2021 by and between us and Lincoln Park was terminated effective as of August 10, 2022 and no shares were sold during the three months ended September 30, 2022 pursuant to the LP 2021 Purchase Agreement.
2022 Lincoln Park Transaction
On August 10, 2022, we 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 we 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 common stock from time to time over a 36-month period.
We may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of 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 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 we signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, we issued 57,313 shares of common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of our 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 condensed consolidated statements of operations.
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During both the three and nine months ended September 30, 2022, excluding the additional commitment shares disclosed above, we sold 245,000 shares of common stock at prices ranging between $2.42 and $3.72 pursuant to the LP 2022 Purchase Agreement and received proceeds of $681,460. Between October 1, 2022 and November 14, 2022, we sold 215,000 shares of common stock at prices ranging between $2.31 and $2.65 pursuant to the LP 2022 Purchase Agreement and received proceeds of $547,375.
We evaluated the contract that includes the right to require Lincoln Park to purchase shares of 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. We have analyzed the terms of the freestanding put right and have concluded that it has no value as of September 30, 2022.
Convertible Notes Payable
As of September 30, 2022, we had two outstanding convertible promissory notes in the aggregate principal amount of $2.4 million. The convertible promissory notes bear interest at a rate of 10% per annum and mature on the third anniversary of their respective issuances. The balance of each convertible promissory note 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 our common stock but not at a price less than $2.50 per share.
As of September 30, 2022, the principal balance of the convertible promissory notes of $2.4 million was recorded in current liabilities under the caption, “Convertible Notes Payable” on our condensed consolidated balance sheets.
We recorded interest expense of $80,278 and $215,278 in the three and nine months ended September 30, 2022, respectively, and made cash interest payments amounting to $199,445 during the nine months ended September 30, 2022, related to the convertible notes payable.
During the three and nine months ended September 30, 2022, the holder of one convertible note issued during 2021 converted the principal balance of $500,000 into 125,604 shares of common stock at a conversion price of $3.98 per share. At the moment of conversion, accrued interest related to this note amounted to $5,278 and was paid in cash.
On October 4, 2022, October 18, 2022 and November 3, 2022, we issued three convertible promissory notes in the aggregate amount of $1,300,000. The convertible promissory notes bear interest at 10% per annum, mature on the second anniversary of their issuance and can be converted into shares of common stock, at the noteholder’s option at any time. Two of the convertible notes may not be converted at a price less than $2.50 per share and one of the convertible notes may not be converted at a price less than $2.00 per share.
It is our experience that convertible notes, including their accrued interest, are converted into shares of the Company’s common stock and not settled through payment of cash. Although we are unable to predict the noteholder’s intentions, we do not expect any change from our past experience.
Convertible Notes Payable at Fair Value
We had one convertible promissory note outstanding with aggregate principal amount of $0.5 million as of September 30, 2022 for which we 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, we record the fair value of the convertible promissory notes with any changes in the fair value recorded in the condensed consolidated statements of operations. As of September 30, 2022, we had a balance of $0.4 million in noncurrent liabilities related to this convertible promissory note measured at fair value.
We recorded interest expense of $9,863 and $29,589 in the three and nine months ended September 30, 2022, respectively, and made cash interest payments amounting to $29,589 during the nine months ended September 30, 2022, related to the convertible note payable at fair value.
Similar to the Convertible Notes discussed above, our historical experience has been that these convertible notes are converted into shares of the Company’s common stock prior to their maturity date and not settled through payment of cash.
Nonconvertible Promissory Notes
As of September 30, 2022, we have outstanding unsecured nonconvertible promissory notes in the aggregate amount of $0.9 million, which bear interest at a rate of 10% per annum and mature between June and December 2023. For these nonconvertible promissory notes, we had a balance of $0.5 million and $0.4 million recorded as current and noncurrent liabilities, respectively, as of September 30, 2022. On January 15, 2022, its maturity date, a non-convertible promissory note amounting to $0.2 million was repaid in cash.
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We recorded interest expense of $22,719 and $70,996 in the three and nine months ended September 30, 2022, respectively, and made cash interest payments amounting to $73,127 during the nine months ended September 30, 2022, related to the nonconvertible promissory notes.
IMAX Agreement
As discussed in Note 17 to our condensed consolidated financial statements, on June 24, 2022, the Company entered into the Blue Angels Agreement with IMAX. Under the terms of this agreement, the Company has funded $1,500,000 and has committed to fund up to an additional $500,000 of the production budget, which is expected to be disbursed in the first quarter of 2023.
Convertible Notes Receivable
As of September 30, 2022, 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, 2022, the Midnight Theatre notes amount to $4,323,153, including accrued interest receivable of $215,073, and are convertible at the option of the Company into Class A and B Units of Midnight Theatre. During the three months ended September 30, 2022, Midnight Theatre issued the Company nine notes amounting to $869,280 in the aggregate on the same terms as the previous notes.
In addition, during the nine months ended September 30, 2022, we held a convertible note receivable from Stanton South LLC, which operates Crafthouse Cocktails. This note amounted to $500,000 and was mandatorily redeemable by February 1, 2022; on that date the Crafthouse Cocktails note was converted and we were issued Series 2 membership interests of Stanton South LLC. As of September 30, 2022, the Company does not have an outstanding note receivable from Stanton South LLC.
Socialyte Acquisition
As discussed in Note 19 to our condensed consolidated financial statements, on November 14, 2022, (the “Closing Date”), we acquired all of the issued and outstanding membership interest of Socialyte. The total consideration amounted to $13.0 million plus the potential to earn up to an additional $5.0 million upon meeting certain financial targets in 2022. On the Closing Date, we paid $5.0 million cash, issued the Seller 1,346,257 shares of our Common Stock and issued the Seller a $3.0 million unsecured promissory note, which is to be repaid in two equal installments on June 30, 2023 and September 30, 2023. In addition, we issued the Seller 685,234 shares of our Common Stock in satisfaction of the Closing Date working capital adjustment.
We partially financed the cash portion of the consideration with a secured loan from Bank Prov with MidCo and Socialyte as co-borrowers, which we guaranteed. This loan amounted to $3.0 million, carries a fixed rate of 7.37% and has a five year term.
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Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. As a result of entering into a collaborative arrangement in September 2022, we have updated our revenue recognition accounting policy to include the information as detailed below. There were no other significant changes to our critical accounting policies during the three and nine months ended September 30, 2022, as compared to the critical accounting policies and estimates disclosed in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
Revenue Recognition
We analyze our collaboration agreements to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, we consider whether the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaboration guidance and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of the revenue with contracts with customer guidance. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.
For elements of collaboration arrangements that are not accounted for pursuant to the revenue from contracts with customer guidance, an appropriate recognition method is determined and applied consistently, generally by analogy to the revenue from contracts with customers guidance. Revenue from transactions with collaboration participants is presented apart from revenue with contracts with customers in our condensed consolidated statements of operations.
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, 2021, 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 improve 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, 2022. 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, 2021, filed with the SEC on May 26, 2022, 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. |
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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, 2021 filed with the SEC on May 26, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Company Purchases of Equity Securities
The following table presents information related to our repurchases of our shares of Common Stock during the quarter ended September 30, 2022:
| Period | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
| 7/1/2022 – 7/31/2022 | — | $ | — | — | — | ||||||||||||
| 8/1/2022 – 8/31/2022 | — | — | — | — | |||||||||||||
| 9/1/2022 – 9/30/2022 | 17 | 3.85 | — | — | |||||||||||||
| Total | 17 | $ | 3.85 | — | — | ||||||||||||
——————
| (1) | The Company purchased shares of common stock issued to employees pursuant to the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan to settle employee tax obligations on the value of the shares issued when the restricted stock units vested on September 15, 2022. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
| Item 1.01 | Entry into a Material Definitive Agreement. |
On November 14, 2022 (the “Closing Date”), Dolphin Entertainment, Inc., a Florida corporation (the “Company”), through its wholly-owned subsidiary Social MidCo, LLC (“MidCo”), acquired all of the issued and outstanding membership interests of Socialyte, LLC, a Delaware limited liability company (“Socialyte”), pursuant to a membership interest purchase agreement dated the Closing Date (the “Purchase Agreement”), between the Company and NSL Ventures, LLC (“Seller”). Socialyte is a NY and Los Angeles-based creative agency specializing in social media influencer marketing campaigns for brands.
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The consideration paid by the Company in connection with the acquisition of Socialyte is $13,000,000 plus the potential to earn up to an additional $5,000,000 upon completion of an earn-out more fully described in the Purchase Agreement. On the Closing Date, the Company paid the Seller $5,000,000 cash, issued the Seller 1,346,257 shares of its Common Stock and issued the Seller a $3,000,000 unsecured promissory note, which is be repaid in two equal installments on June 30, 2023 and September 30, 2023. In addition, the Company issued the Seller 685,234 shares of its Common Stock in satisfaction of the Closing Date working capital adjustment. The Company partially financed the cash portion of the consideration with a $3,000,000 five-year secured loan (the “Term Loan”) from Bank Prov with MidCo and Socialyte as co-borrowers. The Company also entered into a guaranty of the Term Loan.
The foregoing description of the Purchase Agreement is only a summary and is qualified in its entirety by reference to the full text of the Purchase Agreement, which is filed as Exhibit 2.1 to this Quarterly Report on Form 10-Q and incorporated by reference into this Item 1.01.
The Purchase Agreement is filed with this Quarterly Report on Form 10-Q to provide security holders with information regarding its terms. It is not intended to provide any other factual information about the Company, Socialyte or any other party to the Purchase Agreement. The representations, warranties and covenants contained in the Purchase Agreement were made solely for purposes of such agreement and as of specific dates, are solely for the benefit of the parties to the Purchase Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purpose of allocating contractual risk between the parties to the Purchase Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to security holders. Security holders should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company, Socialyte or any other party thereto. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Purchase Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures, except to the extent required by law.
| Item 2.01 | Completion of Acquisition or Disposition of Assets. |
The disclosures set forth in Item 1.01 of this above are incorporated by reference into this Item 2.01. The Company intends to file the required financial statements of Socialyte and pro forma financial information in a Current Report on Form 8-K within 71 days of this report.
| Item 3.02 | Unregistered Sales of Equity Securities. |
The information set forth in Item 1.01 of this Quarterly Report on Form 10-Q is incorporated by reference in this Item 3.02. The shares of Common Stock issued or to be issued by the Company to Seller pursuant to the Purchase Agreement have been or will be, as applicable, issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Rule 506 of Regulation D promulgated thereunder. The Seller represented to the Company that it is an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act.
| Item 7.01 | Regulation FD Disclosure. |
On November 14, 2022, the Company issued a press release announcing the acquisition of Socialyte. The information contained in this Item 7.01 shall not be deemed “filed” with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the Company under the Securities Act of 1933, as amended.
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ITEM 6. EXHIBITS
| * | 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, 2022.
| 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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