UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.DC 20549
———————
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to
Commission file number 000-50621
DOLPHIN ENTERTAINMENT, INC.
(Exact name of registrant as specified in its'its charter)
———————
Florida | 86-0787790 | |
(State or other jurisdiction of | (I.R.S. | |
incorporation or organization) | Identification No.) |
150 Alhambra Circle, Suite 150 – Mezzanine, 1200, Coral Gables, Florida33134
(Address of principal executive offices, including zip code)
(305)774-0407
(Registrant’sRegistrant's telephone number)
———————
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.015 par value per share | DLPN | The Nasdaq Capital Market |
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. Yes ☑☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check markcheckmark 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 a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.Act). Yes ☐No ☑
The number of shares of common stock outstanding was 9,367,057 as of November 16, 2017.
TABLE OF CONTENTS
ASSETS | As of September 30, 2017 | As of December 31, 2016 |
Current | ||
Cash and cash equivalents | $1,957,235 | $662,546 |
Restricted cash | - | 1,250,000 |
Accounts receivable, net of $164,000 of allowance for doubtful accounts | 3,978,865 | 3,668,646 |
Other current assets | 450,648 | 2,665,781 |
Total current assets | 6,386,748 | 8,246,973 |
Capitalized production costs | 2,437,163 | 4,654,013 |
Intangible assets, net of $498,666 of amortization | 8,611,334 | - |
Goodwill | 14,351,368 | - |
Property, equipment and leasehold improvements | 1,111,899 | 35,188 |
Investments | 220,000 | - |
Deposits | 643,708 | 1,261,067 |
Total Assets | $33,762,220 | $14,197,241 |
LIABILITIES | ||
Current | ||
Accounts payable | $1,423,213 | $677,249 |
Other current liabilities | 5,659,214 | 2,958,523 |
Line of credit | 750,000 | - |
Put rights | 947,515 | - |
Warrant liability | - | 14,011,254 |
Accrued compensation | 2,437,500 | 2,250,000 |
Debt | 5,063,846 | 18,743,069 |
Loan from related party | 1,734,867 | 684,326 |
Deferred revenue | 20,303 | 46,681 |
Note payable | 1,800,000 | 300,000 |
Total current liabilities | 19,836,458 | 39,671,102 |
Noncurrent | ||
Warrant liability | 2,774,583 | 6,393,936 |
Put rights | 2,752,485 | - |
Contingent consideration | 3,973,000 | - |
Note payable | 475,000 | - |
Other noncurrent liabilities | 1,217,000 | - |
Total noncurrent liabilities | 11,192,068 | 6,393,936 |
Total Liabilities | 31,028,526 | 46,065,038 |
STOCKHOLDERS' EQUITY (DEFICIT) | ||
Common stock, $0.015 par value, 200,000,000 shares authorized, 9,367,057 and 7,197,761 shares, respectively, issued and outstanding at September 30, 2017 and December 31, 2016. | 140,506 | 215,933 |
Preferred Stock, Series C, $0.001 par value, 50,000 shares authorized, 50,000 shares issued and outstanding at each of September 30, 2017 and December 31, 2016 | 1,000 | 1,000 |
Additional paid in capital | 92,829,088 | 67,727,474 |
Accumulated deficit | (90,236,900) | (99,812,204) |
Total Stockholders' Equity (Deficit) | $2,733,694 | $(31,867,797) |
Total Liabilities and Stockholders' Equity (Deficit) | $33,762,220 | $14,197,241 |
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 | $ | 4,452,562 | $ | 7,688,743 | ||||
Restricted cash | 1,140,483 | 541,883 | ||||||
Accounts receivable: | ||||||||
Trade, net of allowance of $627,553 and $471,535, respectively | 4,757,499 | 4,513,179 | ||||||
Other receivables | 2,061,845 | 3,583,357 | ||||||
Notes receivable | 4,323,153 | 1,510,137 | ||||||
Other current assets | 890,645 | 450,060 | ||||||
Total current assets | 17,626,187 | 18,287,359 | ||||||
Capitalized production costs, net | 1,598,412 | 137,235 | ||||||
Employee receivable | 572,085 | 366,085 | ||||||
Right-of-use asset | 7,894,850 | 6,129,411 | ||||||
Goodwill | 20,021,357 | 20,021,357 | ||||||
Intangible assets, net | 5,116,568 | 6,142,067 | ||||||
Property, equipment and leasehold improvements, net | 315,004 | 473,662 | ||||||
Other long-term assets | 2,581,005 | 1,234,275 | ||||||
Total Assets | $ | 55,725,468 | $ | 52,791,451 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1 |
For the three months ended | For the nine months ended | |||
September 30, | September 30, | |||
2017 | 2016 | 2017 | 2016 | |
Revenues: | ||||
Entertainment publicity | 5,409,175 | - | 10,546,716 | - |
Production and distribution | $1,398,839 | $1,140,000 | $4,625,801 | $1,144,157 |
Membership | - | 6,225 | - | 27,253 |
Total revenues | 6,808,014 | 1,146,225 | 15,172,517 | 1,171,410 |
Expenses: | ||||
Direct costs | 427,926 | 1,375,734 | 2,927,817 | 1,378,173 |
Distribution and marketing | 320,439 | 9,237,873 | 950,812 | 9,237,873 |
Selling, general and administrative | 628,564 | 370,984 | 1,871,258 | 1,019,641 |
Legal and professional | 208,637 | 689,523 | 1,098,728 | 1,576,963 |
Payroll | 3,482,246 | 350,264 | 7,284,734 | 1,101,465 |
Total expenses | 5,067,812 | 12,024,378 | 14,133,349 | 14,314,115 |
Income (Loss) before other expenses | 1,740,202 | (10,878,153) | 1,039,168 | (13,142,705) |
Other Income (Expenses): | ||||
Other income | - | - | - | 9,660 |
Amortization and Depreciation | (321,538) | (47,369) | (648,848) | (47,369) |
Extinguishment of debt | 3,881,444 | - | 3,877,277 | (5,843,811) |
Acquisition costs | - | - | (745,272) | - |
Bad debt | (69,437) | - | (85,437) | - |
Loss on disposal of furniture, office equipment and leasehold improvements | - | - | (28,025) | - |
Change in fair value of warrant liability | 1,396,094 | - | 7,685,607 | - |
Change in fair value of put rights and contingent consideration | (30,000) | - | (246,000) | - |
Interest expense | (424,187) | (613,651) | (1,273,166) | (3,768,727) |
Net Income (Loss) | 6,172,578 | (11,539,173) | 9,575,304 | (22,792,952) |
Net income attributable to noncontrolling interest | $- | $1,556 | $- | $6,813 |
Net income (loss) attributable to Dolphin Entertainment, Inc. | 6,172,578 | (11,540,729) | 9,575,304 | (22,799,765) |
Net Income (Loss) | $6,172,578 | $(11,539,173) | $9,575,304 | $(22,792,952) |
Income (Loss) per Share: | ||||
Basic | $0.66 | $(2.16) | $1.11 | $(7.37) |
Diluted | $0.44 | $(2.16) | $0.20 | $(7.37) |
Weighted average number of shares used in per share calculation | ||||
Basic | 9,336,826 | 5,337,108 | 8,640,543 | 3,801,626 |
Diluted | 10,382,818 | 5,337,108 | 9,479,840 | 3,801,626 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
September 30, 2022 | December 31, 2021 | |||||||
LIABILITIES | ||||||||
Current | ||||||||
Accounts payable | $ | 1,572,855 | $ | 942,085 | ||||
Notes payable, current portion | 516,036 | 307,685 | ||||||
Contingent consideration | 500,000 | 600,000 | ||||||
Accrued interest – related party | 1,650,635 | 1,621,437 | ||||||
Accrued compensation – related party | 2,625,000 | 2,625,000 | ||||||
Lease liability, current portion | 2,033,780 | 1,600,107 | ||||||
Deferred revenue | 911,970 | 406,373 | ||||||
Other current liabilities | 5,692,600 | 6,850,584 | ||||||
Total current liabilities | 15,502,876 | 14,953,271 | ||||||
Notes payable | 380,859 | 868,959 | ||||||
Convertible notes payable | 2,400,000 | 2,900,000 | ||||||
Convertible note payable at fair value | 420,613 | 998,135 | ||||||
Loan from related party | 1,107,873 | 1,107,873 | ||||||
Contingent consideration | 205,000 | 3,684,221 | ||||||
Lease liability | 6,581,512 | 5,132,895 | ||||||
Deferred tax liability | 97,879 | 76,207 | ||||||
Warrant liability | 30,000 | 135,000 | ||||||
Other noncurrent liabilities | 18,915 | — | ||||||
Total Liabilities | 26,745,527 | 29,856,561 | ||||||
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, 20211,000 | 1,000 | ||||||
Common stock, $ | par value, shares authorized, and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively149,986 | 120,306 | ||||||
Additional paid-in capital | 134,755,491 | 127,247,928 | ||||||
Accumulated deficit | (105,926,536 | ) | (104,434,344 | ) | ||||
Total Stockholders’ Equity | 28,979,941 | 22,934,890 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 55,725,468 | $ | 52,791,451 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2 |
For the nine months ended September 30, | ||
2017 | 2016 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net income (loss) | $9,575,304 | $(22,792,952) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||
Depreciation and amortization | 648,848 | 15,996 |
Amortization of capitalized production costs | 2,256,711 | 1,108,668 |
Bad debt | 85,437 | - |
Loss on extinguishment of debt | 4,167 | 5,843,811 |
Loss on disposal of fixed assets | 28,025 | - |
Change in fair value of warrant liability | (7,685,607) | - |
Change in fair value of put rights and contingent consideration | 246,000 | - |
Gain on extinguishment of debt | (4,500,000) | - |
Compensation paid with shares of common stock | 103,740 | - |
Changes in operating assets and liabilities: | ||
Accounts receivable | 1,310,988 | (1,142,727) |
Other current assets | 2,215,132 | - |
Prepaid expenses | - | 69,766 |
Related party receivable | - | (67,690) |
Capitalized production costs | (39,861) | (256,714) |
Deposits | 662,922 | (1,200,000) |
Deferred revenue | (26,378) | (74,736) |
Accrued compensation | 187,500 | 122,500 |
Accounts payable | 706,284 | (1,323,714) |
Other current liabilities | 434,920 | 4,121,106 |
Other noncurrent liabilities | 456,814 | - |
Net Cash Provided by (Used in) Operating Activities | 6,670,946 | (15,576,686) |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||
Restricted cash | 1,250,000 | - |
Payment of working capital adjustment (42West) | (185,031) | - |
Purchase of fixed assets | (166,956) | - |
Acquisition of 42West, net of cash acquired | 13,626 | - |
Net Cash Provided by Investing Activities | 911,639 | - |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Proceeds from loan and security agreements | - | 10,569,744 |
Repayment of loan and security agreements | - | (410,000) |
Sale of common stock | 500,000 | 6,225,000 |
Restricted cash | - | (1,250,000) |
Proceeds from line of credit | 750,000 | - |
Proceeds from note payable | 1,975,000 | - |
Repayment of debt | (9,179,223) | - |
Proceeds from the exercise of warrants | 35,100 | - |
Exercise of put rights | (1,075,000) | - |
Advances from related party | 1,388,000 | 320,000 |
Repayment to related party | (681,773) | (1,288,383) |
Net Cash Provided by (Used in) Financing Activities | (6,287,896) | 14,166,361 |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,294,689 | (1,410,325) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 662,546 | 2,392,685 |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $1,957,235 | $982,360 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: | ||
Interest paid | $26,459 | $749,249 |
SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW INFORMATION: | ||
Conversion of related party debt and interest to shares of common stock | $- | $3,073,410 |
Conversion of debt into shares of common stock | $- | $3,164,000 |
Conversion of loan and security agreements, including interest, into shares of common stock | $- | $20,434,858 |
Loan commitment fee and interest reserve | $- | $1,531,871 |
Liability for contingent consideration for the 42West Acquisition (see note 4) | $3,973,000 | $- |
Liability for put rights to the Sellers of 42West (see note 4) | $3,700,000 | $- |
Liabilities assumed in the 42West Acquisition (see note 4) | $1,011,000 | $- |
Payment of certain accounts payable with shares of common stock | $58,885 | $- |
Issuance of shares of Common Stock pursuant to 2017 Plan | $486,424 | $- |
Issuance of shares of Common Stock related to the 42West Acquisition (see note 4) | $15,030,767 | $- |
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 | $ | 9,899,013 | $ | 9,399,432 | $ | 29,366,748 | $ | 25,219,793 | ||||||||
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 | ||||||||||||
Loss from operations | (1,133,767 | ) | (1,071,711 | ) | (1,608,534 | ) | (2,433,265 | ) | ||||||||
Other (expenses) income: | ||||||||||||||||
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 | ) | ||||||||||
(Loss) income before income taxes and equity in losses of unconsolidated affiliates | (1,204,272 | ) | 141,651 | (1,326,896 | ) | (3,819,243 | ) | |||||||||
Income tax (expense) benefit | (7,224 | ) | — | (21,672 | ) | 38,851 | ||||||||||
Net (loss) income before equity in losses of unconsolidated affiliates | (1,211,496 | ) | 141,651 | (1,348,568 | ) | (3,780,392 | ) | |||||||||
Equity in losses of unconsolidated affiliates | (100,223 | ) | — | (143,623 | ) | — | ||||||||||
Net (loss) income | $ | (1,311,719 | ) | $ | 141,651 | $ | (1,492,191 | ) | $ | (3,780,392 | ) | |||||
(Loss) earnings per share: | ||||||||||||||||
Basic | $ | (0.14 | ) | $ | 0.02 | $ | (0.16 | ) | $ | (0.50 | ) | |||||
Diluted | $ | (0.14 | ) | $ | 0.02 | $ | (0.23 | ) | $ | (0.50 | ) | |||||
Weighted average number of shares outstanding: | ||||||||||||||||
Basic | 9,664,681 | 7,740,085 | 9,307,830 | 7,551,974 | ||||||||||||
Diluted | 9,793,715 | 7,740,085 | 9,437,807 | 7,551,974 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
Additional | Total | ||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders | |||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | |
Balance December 31, 2016 | 50,000 | $1,000 | 7,197,761 | $215,933 | $67,727,474 | $(99,812,204) | $(31,867,797) |
Net income for the nine months ended September 30, 2017 | - | - | - | - | - | 9,575,304 | 9,575,304 |
Sale of common stock during the nine months ended September 30, 2017 | - | - | 50,000 | 750 | 499,250 | - | 500,000 |
Issuance of shares from partial exercise of Warrant E and exercise of Warrants J and K | - | - | 1,332,885 | 19,993 | 9,960,107 | - | 9,980,100 |
Issuance of shares for payment of services | 6,140 | 92 | 61,487 | 61,579 | |||
Issuance of shares related to acquisition of 42West | - | - | 837,415 | 12,562 | 15,443,206 | - | 15,455,768 |
Shares issued per equity compensation plan | - | - | 59,320 | 890 | 102,850 | - | 103,740 |
Shares retired from exercise of puts | - | - | (116,591) | (1,749) | (1,073,251) | - | (1,075,000) |
Effect of reverse stock split on cumulative amount of par value | - | - | 127 | (107,965) | 107,965 | - | - |
Balance September 30, 2017 | 50,000 | $1,000 | 9,367,057 | $140,506 | $92,829,088 | $(90,236,900) | $2,733,694 |
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 | $ | (1,492,191 | ) | $ | (3,780,392 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,248,621 | 1,436,189 | ||||||
Share-based compensation | 166,582 | — | ||||||
Equity in losses of unconsolidated affiliates | 143,623 | — | ||||||
Commitment shares issued to Lincoln Park Capital LLC | 232,118 | — | ||||||
Bonus payment issued in shares | 50,000 | 17,858 | ||||||
Gain on extinguishment of debt | — | (2,689,010 | ) | |||||
Loss on disposal of fixed assets | — | 48,461 | ||||||
Impairment of right-of-use asset | 98,857 | — | ||||||
Impairment of capitalized production costs | 87,323 | 115,881 | ||||||
Bad debt expense | 276,579 | 232,100 | ||||||
Change in fair value of put rights | — | 71,106 | ||||||
Change in fair value of contingent consideration | (1,439,778 | ) | 1,310,000 | |||||
Change in fair value of warrants | (105,000 | ) | 2,552,877 | |||||
Change in fair value of convertible note | (577,522 | ) | 826,398 | |||||
Change in deferred tax | 21,672 | (38,851 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, trade and other | 209,600 | (1,278,000 | ) | |||||
Other current assets | 145,492 | (206,762 | ) | |||||
Capitalized production costs | (1,548,500 | ) | (95,829 | ) | ||||
Other long-term assets and employee receivable | (196,353 | ) | (9,744 | ) | ||||
Deferred revenue | (494,403 | ) | 2,354,336 | |||||
Accounts payable | 630,770 | (484,741 | ) | |||||
Accrued interest – related party | 29,198 | 29,194 | ||||||
Other current liabilities | (1,157,985 | ) | 117,134 | |||||
Lease liability | 17,994 | (8,245 | ) | |||||
Other noncurrent liabilities | 18,915 | — | ||||||
Net cash (used in) provided by operating activities | (3,634,388 | ) | 519,960 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of fixed assets | (64,464 | ) | — | |||||
Acquisition of B/HI Communications, Inc., net of cash acquired | — | (525,856 | ) | |||||
Issuance of notes receivable | (3,108,080 | ) | — | |||||
Net cash used in investing activities | (3,172,544 | ) | (525,856 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from equity line of credit agreement | 5,049,100 | — | ||||||
Cash settlement of contingent consideration for B/HI | (600,000 | ) | — | |||||
Proceeds from convertible notes payable | — | 5,950,000 | ||||||
Repayment of term loan | — | (300,097 | ) | |||||
Repayment of notes payable | (279,749 | ) | (71,463 | ) | ||||
Exercise of put rights | — | (1,015,135 | ) | |||||
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 |
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 | $ | 554,897 | $ | 495,722 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Issuance of commitment shares to Lincoln Park Capital LLC | $ | 232,118 | $ | — | ||||
Receipt of Crafthouse equity in connection with marketing agreement | $ | 1,000,000 | $ | — | ||||
Settlement of contingent consideration for B/HI and The Door in shares of common stock | $ | 1,539,444 | $ | — | ||||
Principal balance of convertible notes converted into shares of common stock | $ | 500,000 | $ | 3,745,000 | ||||
Issuance of shares of common stock related to the acquisitions | $ | — | $ | 350,000 | ||||
Put rights exchanged for shares of common stock | $ | — | $ | 600,000 | ||||
Interest on notes paid in stock | $ | — | $ | 8,611 | ||||
Employee bonus paid in stock | $ | 50,000 | $ | 17,858 |
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 | $ | 4,452,562 | $ | 12,652,902 | ||||
Restricted cash | 1,140,483 | 541,883 | ||||||
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 5,593,045 | $ | 13,194,785 |
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 | 50,000 | $ | 1,000 | 8,020,381 | $ | 120,306 | $ | 127,247,928 | $ | (104,434,344 | ) | $ | 22,934,890 | |||||||||||||||
Net loss for the three months ended March 31, 2022 | — | — | — | — | — | (792,481 | ) | (792,481 | ) | |||||||||||||||||||
Issuance of shares to Lincoln Park Capital LLC | — | — | 622,019 | 9,330 | 2,506,020 | — | 2,515,350 | |||||||||||||||||||||
Issuance of common stock on vesting of restricted stock units, net of shares withheld for taxes | — | — | 8,645 | 130 | (130 | ) | — | — | ||||||||||||||||||||
Share-based compensation | — | — | — | — | 59,305 | — | 59,305 | |||||||||||||||||||||
Balance March 31, 2022 | 50,000 | $ | 1,000 | 8,651,045 | $ | 129,766 | $ | 129,813,123 | $ | (105,226,825 | ) | $ | 24,717,064 | |||||||||||||||
Net income for the three months ended June 30, 2022 | — | — | — | — | — | 612,008 | 612,008 | |||||||||||||||||||||
Issuance of shares to Lincoln Park Capital LLC | — | — | 450,000 | 6,750 | 1,845,540 | — | 1,852,290 | |||||||||||||||||||||
Issuance of common stock on vesting of restricted stock units, net of shares withheld for taxes | — | — | 7,982 | 120 | (120 | ) | — | — | ||||||||||||||||||||
Issuance of shares to sellers of The Door Marketing Group LLC for earnout consideration | — | — | 279,562 | 4,193 | 1,019,004 | — | 1,023,197 | |||||||||||||||||||||
Issuance of shares to seller of B/HI Communication Inc for earnout consideration | — | — | 163,369 | 2,451 | 513,796 | — | 516,247 | |||||||||||||||||||||
Share-based compensation | — | — | — | — | 54,757 | — | 54,757 | |||||||||||||||||||||
Balance June 30, 2022 | 50,000 | $ | 1,000 | 9,551,958 | $ | 143,280 | $ | 133,246,100 | $ | (104,614,817 | ) | $ | 28,775,563 | |||||||||||||||
Net loss for the three months ended September 30, 2022 | — | — | — | — | — | (1,311,719 | ) | (1,311,719 | ) | |||||||||||||||||||
Issuance of shares related to conversion of note payable | — | — | 125,604 | 1,884 | 498,116 | — | 500,000 | |||||||||||||||||||||
Issuance of shares to Lincoln Park Capital LLC | — | — | 302,313 | 4,534 | 909,043 | — | 913,577 | |||||||||||||||||||||
Issuance of common stock on vesting of restricted stock units, net of shares withheld for taxes | — | — | 7,656 | 115 | (115 | ) | — | — | ||||||||||||||||||||
Issuance of shares related to employment agreement | — | — | 11,521 | 173 | 49,827 | — | 50,000 | |||||||||||||||||||||
Share-based compensation | — | — | — | — | 52,520 | — | 52,520 | |||||||||||||||||||||
Balance September 30, 2022 | 50,000 | $ | 1,000 | 9,999,052 | $ | 149,986 | $ | 134,755,491 | $ | (105,926,536 | ) | $ | 28,979,941 |
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 | 50,000 | $ | 1,000 | 6,618,785 | $ | 99,281 | $ | 117,540,557 | $ | (97,972,041 | ) | $ | 19,668,797 | |||||||||||||||
Net income for the three months ended March 31, 2021 | — | — | — | — | — | (5,271,985 | ) | (5,271,985 | ) | |||||||||||||||||||
Issuance of shares related to conversion of note payable | — | — | 663,155 | 9,948 | 2,543,664 | — | 2,553,612 | |||||||||||||||||||||
Issuance of shares related to cashless exercise of warrants | — | — | 146,027 | 2,190 | 2,795,687 | — | 2,797,877 | |||||||||||||||||||||
Issuance of shares issued to seller of Be Social | — | — | 103,245 | 1,549 | 348,451 | — | 350,000 | |||||||||||||||||||||
Consideration for acquisition of B/HI Communications, Inc | — | — | 31,158 | — | 31,158 | |||||||||||||||||||||||
Issuance of shares related to exchange of Put Rights for stock | — | — | 77,519 | 1,163 | 356,199 | — | 357,362 | |||||||||||||||||||||
Shares retired from exercise of puts | — | — | (3,254 | ) | (51 | ) | 51 | — | — | |||||||||||||||||||
Balance March 31, 2021 | 50,000 | $ | 1,000 | 7,605,477 | $ | 114,080 | $ | 123,615,767 | $ | (103,244,026 | ) | $ | 20,486,821 | |||||||||||||||
Net loss for the three months ended June 30, 2021 | — | — | — | — | — | 1,349,942 | 1,349,942 | |||||||||||||||||||||
Issuance of shares related to acquisition of The Door | — | — | 10,238 | 154 | (154 | ) | — | — | ||||||||||||||||||||
Issuance of shares related to exchange of Put Rights for stock | — | — | 37,847 | 568 | 348,759 | — | 349,327 | |||||||||||||||||||||
Shares retired from exercise of puts | — | — | (15,093 | ) | (227 | ) | (13,203 | ) | — | (13,430 | ) | |||||||||||||||||
Balance June 30, 2021 | 50,000 | $ | 1,000 | 7,638,469 | $ | 114,575 | $ | 123,951,169 | $ | (101,894,084 | ) | $ | 22,172,660 | |||||||||||||||
Net income for the three months ended September 30, 2021 | — | — | — | — | — | 141,651 | 141,651 | |||||||||||||||||||||
Issuance of shares for employee bonus | — | — | 1,935 | 29 | 17,829 | — | 17,858 | |||||||||||||||||||||
Shares retired from exercise of puts | — | — | 128,280 | 1,924 | 1,198,076 | — | 1,200,000 | |||||||||||||||||||||
Balance September 30, 2021 | 50,000 | $ | 1,000 | 7,768,684 | $ | 116,528 | $ | 125,167,074 | $ | (101,752,433 | ) | $ | 23,532,169 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATEDConsolidated FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
Dolphin Entertainment, Inc., a Florida corporation (the “Company,” “Dolphin,” “we,” “us” or “our”), formerly Dolphin Digital Media, Inc., is a leading independent entertainment marketing and premium content development company. Through its recent acquisitionacquisitions of 42 West,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, as well as for hundreds of A-listand A-list celebrity talent, including actors, directors, producers, celebrity chefs, social media influencers and recording artists, athletesartists. The Company also provides strategic marketing publicity services and authors. The strategic acquisitioncreative brand strategies for a wide variety of 42West brings together premium marketing services with premium content production, creating significant opportunities to serve respective constituents more strategicallyconsumer brands, including prime hotel and to grow and diversifyrestaurant groups, throughout the Company’s business.U.S. Dolphin’s content production business is a long established, leading independent producer, committed to distributing premium, best-in-classbest-in-class film and digital entertainment. Dolphin produces original feature films and digital programming primarily aimed at family and young adult markets. Dolphin also currently operates online kids clubs; however it intends to discontinue
Impact of COVID-19
The continued spread of new COVID-19 variants did not have a significant impact on our business during the online kids clubs atquarter ended September 30, 2022. The future course of the end of 2017 to dedicate its timepandemic could have adverse effects in the U.S and resources to the entertainment publicityglobal economies and thus negatively impact our business and the production of feature films and digital content.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Dolphin, and all of its wholly-owned and majority-owned and controlledwholly owned subsidiaries, includingcomprising Dolphin Films, Inc., (“Dolphin Kids Clubs, LLC, Cybergeddon Productions, LLC,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 42West.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to quarterly report on Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as amended, 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, (consistingconsisting only of normal recurring adjustments) consideredadjustments, necessary for a fair presentationstatement 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 reflected in these unauditedeliminated from the condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 20172022 are not necessarily indicative of the results that may be expected for the fiscalfull year ending December 31, 2017.2022. The condensed consolidated balance sheet atas of December 31, 20162021 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, 2016.2021.
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 atas 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 ultimate revenue and costs for investmentthe estimates in digital and feature film projects;the fair value of acquisitions, estimates in assumptions used to calculate the fair value of sales returns and other allowances and provisions for doubtful accountscertain liabilities, realizability of notes receivable and impairment assessments for investment in digitalcapitalized production costs, goodwill and feature film projects.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.
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 May 2014,October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 —Revenue2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 606) (“ASU 2014-09”)”, which provides guidance for revenue recognition. This ASU will supersede the revenue recognition requirements in ASC Topic 605, and most industry specific guidance, and replace it with a new Accounting Standards Codification (“ASC”) Topic 606. The FASB has also issued several subsequent ASUs which amend ASU 2014-09. The amendments do not change the core principle of the guidance in ASC 606.
In June 2016, the FASB issued new guidance. While there mayguidance 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 additional areas impacted by the new standard,effective for the Company has identified certain areas that may be impactedon January 1, 2023 with a cumulative-effect adjustment, if any, to retained earnings as follows:
Reclassifications
Certain prior year amounts generally described as restricted cash and restricted cash equivalents should be includedhave been reclassified to conform with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company does not currently expect the adoption of this new standard to have a material impact on its consolidated financial statements.
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 FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). This update mandates that entities will apply the modification accounting guidance if the value, vesting conditions or classification ofU.S. The following is a stock-based award changes. Entities will have to make alldescription of the disclosuresprincipal activities, by reportable segment, from which we generate revenue. For more detailed information about modifications that are required today, in addition to disclosing that compensation expense has not changed. Additionally, the new guidance also clarifies that a modification to an award could be significant and therefore requires disclosure, even if the modification accounting is not required. The guidance will be applied prospectively to awards modified on or after the adoption date and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact of the provisions of this new standard on its consolidated financial statements.
Entertainment Publicity and Marketing
The Entertainment Publicity and Marketing (“EPM”) segment generates revenue consistsfrom diversified marketing services, including public relations, entertainment and hospitality content marketing, strategic marketing consulting and content production of fees frommarketing materials. Within the EPM segment, we typically identify one performance obligation, the delivery of professional publicity services, and billings for direct costs reimbursed by clients.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. Direct costs reimbursed
We also enter into management agreements with a roster of social media influencers and are paid a percentage of the revenue earned by clients are billedthe social media influencer. Due to the short-term nature of these contracts, in which we typically act as pass-throughthe agent, the performance obligation is typically completed and revenue with no mark-up.
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 and web series areis recognized in accordance with guidanceupon transfer of FASB Accounting Standard Codification (“ASC”) 926-60 “Revenue Recognition – Entertainment-Films”. Revenue is recorded when a distribution contract, domestic or international, exists,control of the movielicensing rights of the motion picture or web series to the customer. For minimum guarantee licensing arrangements, the amount related to each performance obligation is completerecognized when the content is delivered, and the window for exploitation right in accordancethat 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:
Schedule of Revenue by Segment | ||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Entertainment publicity and marketing | $ | 9,899,013 | $ | 9,399,432 | $ | 29,366,748 | $ | 25,219,793 | ||||||||
Content production | — | — | — | — | ||||||||||||
Total Revenues | $ | 9,899,013 | $ | 9,399,432 | $ | 29,366,748 | $ | 25,219,793 |
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:
Schedule of contract asset and liability | ||||||
Contract Assets | Contract Liabilities | |||||
Balance as of December 31, 2021 | $ | 62,500 | $406,373 | |||
Balance as of September 30, 2022 | — | 911,970 | ||||
Change | $ | (62,500 | ) | $505,597 |
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 the contract, the customer can begin exhibiting or selling the movie or web series, the fee is determinable and collection of the fee is reasonable. On occasion, the Company may enter into agreements with third parties for the co-production or distribution of a movie or web series. Revenue from these agreements will beour contracts, primarily related to fees, which are generally recognized when the movie is complete and ready to be exploited. Cash received and amounts billed in advance of meeting the criteria for revenue recognition is classified as deferred revenue.
Revenues for the three and nine months ended September 30, 20172022 and $4,6812021 include the following:
Schedule of Revenues | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Amounts included in the beginning of year contract liability balance | $ | — | $ | 10,000 | $ | 329,937 | $ | 347,221 |
Remaining performance obligations
As of September 30, 2022, we had approximately $911,970 of unsatisfied performance obligations, of which $849,469 are expected to be recognized in the next twelve months, with the remainder recognized between twelve and $15,996, respectively, forfourteen months from September 30, 2022.
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of September 30, 2022, the Company has a balance of $20,021,357 of goodwill on its condensed consolidated balance sheet arising from the prior acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social and B/HI. All of the Company’s goodwill is related to the entertainment, publicity and marketing segment. There were no changes in the carrying value of goodwill during the three and nine months ended September 30, 2016. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. The range of estimated useful lives to be used to calculate depreciation and amortization for principal items of property and equipment are as follow:
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 (3)(4) an adverse action or assessment by a regulator.
Intangible Assets
Finite-lived intangible assets consisted of the reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair valuefollowing as of the reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying value (including goodwill). The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit, and the Company must perform step two of the impairment test (measurement).
Schedule of Intangible Assets | ||||||||||||||||||||||||
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 | $ | 8,290,000 | $ | 5,531,265 | $ | 2,758,735 | $ | 8,290,000 | $ | 4,880,016 | $ | 3,409,984 | ||||||||||||
Trademarks and trade names | 4,490,000 | 2,157,167 | 2,332,833 | 4,490,000 | 1,797,917 | 2,692,083 | ||||||||||||||||||
Non-compete agreements | 690,000 | 665,000 | 25,000 | 690,000 | 650,000 | 40,000 | ||||||||||||||||||
$ | 13,470,000 | $ | 8,353,432 | $ | 5,116,568 | $ | 13,470,000 | $ | 7,327,933 | $ | 6,142,067 |
Amortization expense associated with the Company’s intangible assets was $341,833 and $394,998 for as derivative liabilities, because they contain full-ratchet down round provisions (see notes 11 and 17). The Company also has equity classified warrants outstanding atthe three months ended September 30, 20172022 and December 31, 2016 (see note 17).2021, respectively, and $1,025,499 and $1,184,994 for the nine months ended September 30, 2022 and 2021, respectively.
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 defined as follows:
Schedule of amortization expense related to intangible assets for the next five years | |||
2022 | $ | 341,833 | |
2023 | 1,227,824 | ||
2024 | 991,715 | ||
2025 | 961,373 | ||
2026 | 934,001 | ||
Thereafter | 659,822 | ||
Total | $ | 5,116,568 |
NOTE 4 —ACQUISITIONS
B/HI Communications, Inc.
Effective January 1, 2021, the priceCompany 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 would be received to sell an asset orspecializes in corporate and product communications programs for interactive gaming, e-sports, entertainment content and consumer product organizations.
The total consideration paid to transfer a liabilitythe B/HI Seller in an orderly transaction between market participants atrespect to the measurement date. Assets and liabilities measured at fair value are categorizedB/HI Purchase is $ million of shares of common stock based on whethera 30-day trailing trading average closing price immediately prior to, but not including, the inputs are observableapplicable payment date adjusted for working capital, cash targets and the B/HI indebtedness as defined in the marketB/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 degree thatremainder in common stock, which was settled by the inputs are observable. Inputs refer broadlyissuance of shares of common stock during the second quarter of 2022 pursuant to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Observable inputs are based on market data obtained from sources independentB/HI Share Purchase Agreement. The common stock issued as part of the Company. Unobservable inputs reflectconsideration has not been registered under the Company’s own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, definedSecurities Act of 1933, as follows:
NOTE 5 — NOTES RECEIVABLE
The notes receivable held by the Company had no assets or liabilities measuredare unsecured convertible note receivables from JDDC Elemental LLC (“Midnight Theatre”) (the “Notes Receivable”). The Notes Receivable are recorded at fairtheir principal face amount plus accrued interest. Due to their short-term maturity and conversion terms, these have been recorded at the face value onof 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 $4,323,153, inclusive of $215,073 of interest receivable, and are convertible at the option of the Company into Class A and B Units of Midnight Theatre. During the three and nine months ended September 30, 2022, Midnight Theatre issued nine and sixteen unsecured convertible promissory notes, respectively, to the Company (the “Midnight Theatre Notes”) with an aggregate principal of $869,280 and $3,108,080 respectively, each with a recurring or nonrecurring basis.
Crafthouse Cocktails
On November 30, 2021, Crafthouse Cocktails issued a $500,000 unsecured convertible promissory note (the “Crafthouse Note”) to the Company created online kids clubs and derives revenue from annual membership fees.
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 Company’s operating segmentsinvestment in Midnight Theatre and Crafthouse Cocktails amounted to $939,214 and $1,417,163, respectively.
Midnight Theatre
Hidden Leaf, the provisions of ASC 280, Segment Reporting (ASC 280), the Company believes it meets the criteria for aggregating these operating segments into a single reporting segment because they have similar economic characteristics, similar nature of product sold, (content), similar production process (the Company uses the same labor force, and content) and similar type of customer (children, teens, tweens and family).
Crafthouse Cocktails
During the three and nine months ended September 30, 2017, respectively. These costs are included2022, the Crafthouse Note discussed in the condensed consolidated statementsNote 5 was converted and Dolphin was issued common memberships interests of operations inCrafthouse Cocktails. During the line item entitled “acquisition costs.”
For the three months ended September 30, 2017 | For the nine months ended September 30, 2017 | |
Revenue | $5,409,166 | $15,236,278 |
Net income | $247,247 | $1,612,589 |
Three months ended September 30, | Nine months ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
Revenues | $6,808,014 | $5,588,495 | $19,862,073 | $15,064,851 |
Net income (loss) | 5,923,245 | (11,617,330) | 10,297,757 | (22,205,725) |
March 31, 2017 (As initially reported) | Measurement Period Adjustments | September 30, 2017(As adjusted) | |
Cash | $273,625 | $— | $273,625 |
Accounts receivable | 1,706,644 | — | 1,706,644 |
Property, equipment and leasehold improvements | 1,087,962 | — | 1,087,962 |
Other assets | 265,563 | — | 265,563 |
Indemnification asset | — | 300,000 | 300,000 |
Intangible assets | 9,110,000 | — | 9,110,000 |
Total identifiable assets acquired | 12,443,794 | 300,000 | 12,743,794 |
Accounts payable and accrued expenses | (731,475) | — | (731,475) |
Line of credit and note payable | (1,025,000) | — | (1,025,000) |
Settlement liability | (300,000) | — | (300,000) |
Other liabilities | (902,889) | — | (902,889) |
Tax liabilities | (22,000) | — | (22,000) |
Total liabilities assumed | (2,981,364) | — | (2,981,364) |
Net identifiable assets acquired | 9,462,430 | — | 9,762,430 |
Goodwill | 13,996,337 | 355,031 | 14,351,368 |
Net assets acquired | $23,458,767 | $655,031 | $24,113,798 |
NOTE 7 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
Schedule of Other liabilities | ||||||||
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Accrued funding under Max Steel production agreement | $ | 620,000 | $ | 620,000 | ||||
Accrued audit, legal and other professional fees | 698,304 | 429,299 | ||||||
Accrued commissions | 496,276 | 457,269 | ||||||
Accrued bonuses | 220,000 | 360,817 | ||||||
Due to seller of Be Social | — | 304,169 | ||||||
Talent liability | 2,343,906 | 2,908,357 | ||||||
Accumulated customer deposits | 801,247 | 1,206,864 | ||||||
Other | 512,867 | 563,809 | ||||||
Other current liabilities | $ | 5,692,600 | $ | 6,850,584 |
NOTE 8 — DEBT
Total debt of the Company was as follows as of September 30, 2022 and December 31, 2021:
Schedule of debt | ||||||||
Debt Type | September 30, 2022 | December 31, 2021 | ||||||
Convertible notes payable | $ | 2,400,000 | $ | 2,900,000 | ||||
Convertible note payable - fair value option | 420,613 | 998,135 | ||||||
Non-convertible promissory notes | 896,895 | 1,176,644 | ||||||
Loans from related party (see Note 9) | 1,107,873 | 1,107,873 | ||||||
Total debt | $ | 4,825,381 | $ | 6,182,652 | ||||
Less current portion of debt | (516,036 | ) | (307,685 | ) | ||||
Noncurrent portion of debt | $ | 4,309,345 | $ | 5,874,967 |
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:
Schedule of Future Annual Contractual Principal Payment Commitments of Debt | ||||||||||||||||||||||||||
Debt Type | Maturity Date | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||
Convertible notes payable | Ranging from August to September 2024 | $ | — | $ | — | $ | 2,400,000 | $ | — | $ | — | $ | — | |||||||||||||
Convertible note payable - fair value option | March 2030 | — | — | — | — | — | 500,000 | |||||||||||||||||||
Nonconvertible promissory notes | Ranging between June 2023 and December 2023(1) | 27,935 | 868,960 | — | — | — | — | |||||||||||||||||||
Loans from related party | July 2024 | — | — | 1,107,873 | — | — | — | |||||||||||||||||||
$ | 27,935 | $ | 868,960 | $ | 3,507,873 | $ | — | $ | — | $ | 500,000 |
(1) | Pursuant to the terms of one of the nonconvertible promissory notes, the Company makes monthly payments of principal and interest. This note matures on December 2023; however, the amounts in the 2022 column represent principal payments to be made during the remainder of 2022. |
Convertible Notes Payable
As of September 30, 2022, the Company has two outstanding convertible promissory notes in the aggregate principal amount of $2,400,000. The convertible promissory notes bear interest at a rate of 10% per annum, with initial maturity dates on the second anniversary of their respective issuances. The maturity date of each convertible promissory note has been extended by one year. 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 the common stock but not at a price less than $ per share.
The Company recorded interest expense related to convertible notes payable of $80,278 and $88,000 during the three months ended September 30, 2022 and 2021, respectively, and $215,278 and $130,482 during the nine months ended September 30, 2022 and 2021, respectively. In addition, the Company made cash interest payments amounting to $199,445 and $109,176 during the nine months ended September 30, 2022 and 2021, respectively, related to the convertible promissory notes.
As of September 30, 2022 and December 31, 2021, the principal balance of the convertible promissory notes of $2,400,000 and $2,900,000, respectively, was recorded in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance sheets.
During the three and nine months ended September 30, 2016,2022, on August 8, 2022, the holder of one convertible note issued during 2021 converted the principal balance of $500,000 into shares of common stock at a conversion price of $3.98 per share. At the moment of conversion, accrued interest related to Max Steel. All capitalized production costs for Believe were either amortized or impairedthis note amounted to $5,278 and was paid in prior years. cash.
Subsequent to the release of Max Steel,September 30, 2022, on October 4, 2022, October 18, 2022 and November 3, 2022, the Company usedissued 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, at a discounted cash flow modelpurchase price based on a 90-day average closing market price per share of the common stock. Two of the convertible notes may not be converted at a price less than $2.50 per share and determined thatone of the convertible notes may not be converted at a price less than $2.00 per share.
Convertible Note Payable at Fair Value
The Company had one convertible promissory note outstanding with aggregate principal amount of $500,000 as of September 30, 2022 for which it elected the fair value option. As such, the estimated fair value of the note was recorded on its issue date. At each balance sheet date, the Company records the fair value of the capitalized production costs should be impaired by $2,000,000 due to a lower than expected domestic box office performance. Asconvertible promissory notes with any changes in the fair value recorded in the condensed consolidated statements of September 30, 2017, and December 31, 2016, theoperations.
The Company had a balance of $1,933,219,$420,613 and $4,189,930, respectively recorded as capitalized production costs related to Max Steel.
The Company entered intorecorded a co-production agreementgain in fair value of $45,642 and was responsiblea loss in fair value of $223,923 for financing 50% of the project’s budget. Per the terms of the agreement, the Company is entitled to 50% of the profits of the project, net of any distribution fees. The show was produced throughout several cities in the U.S. The show was released on Destination America, a digital cable and satellite television channel, on September 9, 2017 and the Company does not expect to derive any revenues from this initial release.
September 30, 2017 | December 31, 2016 | |
Furniture and fixtures | $539,715 | $65,311 |
Computers and equipment | 408,058 | 41,656 |
Leasehold improvements | 356,946 | 7,649 |
1,304,719 | 114,616 | |
Less: accumulated depreciation | (192,820) | (79,428) |
$1,111,899 | $35,188 |
The Company entered into various loan and security agreements with individual noteholders (the “First Loan and Security Noteholders”) for notes with an aggregate principal amount of $11,945,219 to finance future motion picture projects (the “First Loan and Security Agreements”). During the year ended December 31, 2015, one of the First Loan and Security Noteholders increased its funding under its respective First Loan and Security Agreement for an additional $500,000 note and the Company used the proceeds to repay $405,219 to another First Loan and Security Noteholder. Pursuantrecorded interest expense related to the termsconvertible note payable at fair value of $9,863 for both the First Loanthree months ended September 30, 2022 and Security Agreements, the notes accrued interest at rates ranging from 11.25% to 12% per annum, payable monthly through June 30, 2015. During 2015, the Company exercised its option under the First Loan2021, and Security Agreements, to extend the maturity date of these notes until December 31, 2016. In consideration$29,589 for the Company’s exercise of the option to extend the maturity date, the Company was required to pay a higher interest rate, increasing by 1.25% resulting in rates ranging from 12.50% to 13.25%. The First Loan and Security Noteholders, as a group, were to receive the Company’s entire share of the proceeds from the motion picture productions funded under the First Loan and Security Agreements, on a prorata basis, until the principal investment was repaid. Thereafter, the First Loan and Security Noteholders, as a group, would have the right to participate in 15% of the Company’s future profits from these projects (defined as the Company’s gross revenues of such projects less the aggregate amount of principal and interest paid for the financing of such projects) on a prorata basis based on each First Loan and Security Noteholder’s loan commitment as a percentage of the total loan commitments received to fund specific motion picture productions.
14 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
Nonconvertible Promissory Notes
As of September 30, 2017 and December 31, 2016 related to the Web Series Loan and Security Agreements on its condensed consolidated balance sheets.
As of September 20, 2018. The promissory note bears interest at 10% per annum30, 2022 and may be repaid at any time without a penalty. The promissory note is held by an entity of which Allan Mayer, a director, shareholder and employee ofDecember 31, 2021, the Company is the trustee.
The Company recorded interest expense related to these nonconvertible promissory notes of $22,719 and $30,317for the three months ended September 30, 2022 and 2021, respectively, and $70,996 and $92,765 for the nine months ended September 30, 20172022 and 2021, respectively. The Company made interest payments of $41,989$73,127 and $68,088, respectively, and $7,562 and $22,521 for$93,186 during the three and nine months ended September 30, 2016,2022 and 2021, respectively, related to thesethe nonconvertible promissory notes. As of September 30, 2017 and December 31, 2016, the Company had a balance of $1,800,000 and $300,000, respectively, on its consolidated balance sheets in current liabilities and $475,000 and $0, respectively, in noncurrent liabilities relating to these notes payable.
NOTE 109 — LOANS FROM RELATED PARTY
The Company issued an unsecured revolving promissory note (the “DE Note”) to Dolphin Entertainment, LLC (“DE LLC,LLC”), an entity wholly owned by the Company’s CEO. The DE Note accrued interest atChief Executive Officer, William O’Dowd (the “CEO”), a ratepromissory note (the “DE LLC Note”) which matures on July 31, 2024.
As of 10% per annum. DE LLCboth September 30, 2022 and December 31, 2021, the Company had the right at any time to demand that all outstandinga principal balance of $1,107,873, and accrued interest be repaid with a ten-day noticeamounted to the Company. On March 4, 2016, the Company entered into a subscription agreement (the “Subscription Agreement”) with DE LLC. Pursuant to the terms$138,712 and $55,849 as of the Subscription Agreement, the CompanySeptember 30, 2022 and DE LLC agreed to convert the $3,073,410 aggregate amount of principal and interest outstanding under the DE Note into 307,341 shares of Common Stock. The shares were converted at a price of $10.00 per share. On the date of the conversion that market price of the shares was $12.00 and as a result the Company recorded a loss on the extinguishment of the debt of $614,682 on the condensed consolidated statement of operations forDecember 31, 2021, respectively. For the nine months ended September 30, 2016. During2022 and 2021, the Company did not repay any principal balance on the DE LLC Note.
The Company recorded interest expense of $27,924 for both the three months ended September 30, 2022 and 2021, and $82,863 for both the nine months ended September 30, 2016, the2022 and 2021, related to this loan from related party. The Company recorded interest expense in the amount of $32,008 on its condensed consolidated statement of operations.
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 Company received proceedsshort turnover of these instruments.
Financial Disclosures about Fair Value of Financial Instruments
The tables below set forth information related to the New DE Note from DE LLC in the amount of $1,388,000 and repaid DE LLC $681,773. Company’s consolidated financial instruments:
Schedule of 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 | $ | 4,452,562 | $ | 4,452,562 | $ | 7,688,743 | $ | 7,688,743 | |||||||||||
Restricted cash | 1 | 1,140,483 | 1,140,483 | 541,883 | 541,883 | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Convertible notes payable | 3 | $ | 2,400,000 | $ | 2,168,000 | $ | 2,900,000 | $ | 2,900,000 | |||||||||||
Convertible note payable at fair value | 3 | 420,613 | 420,613 | 998,135 | 998,135 | |||||||||||||||
Warrant liability | 3 | 30,000 | 30,000 | 135,000 | 135,000 | |||||||||||||||
Contingent consideration | 3 | 705,000 | 705,000 | 4,284,221 | 4,284,221 |
15 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
Convertible notes payable
As of September 30, 2017, and December 31, 2016, Dolphin Films owed DE LLC $1,734,867 and $684,326, respectively, that was recorded2022, 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.
Schedule of convertible notes payable | ||||||||||||||||||||
September 30, 2022 | December 31, 2021 | |||||||||||||||||||
Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||
10% convertible notes due in August 2024 | 3 | $ | 2,000,000 | $ | 1,811,000 | $ | 2,000,000 | $ | 1,998,000 | |||||||||||
10% convertible notes due in September 2024 | 3 | 400,000 | 357,000 | 900,000 | 902,000 | |||||||||||||||
$ | 2,400,000 | $ | 2,168,000 | $ | 2,900,000 | $ | 2,900,000 |
The estimated fair value of the convertible notes was computed using a Monte Carlo Simulation, using the following assumptions:
Schedule of estimated fair value | ||||||||
Fair Value Assumption – Convertible Debt | September 30, 2022 | December 31, 2021 | ||||||
Stock Price | $ | $ | ||||||
Minimum Conversion Price | $ | 2.50 | $ | 2.50 | ||||
Annual Asset Volatility Estimate | 80 | % | 100 | % | ||||
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 $500,000 (the “March 4th Note”), which is accounted for under the Accounting Standards Codification (“ASC”) 825-10-15-4 FVO election. Under the FVO election, the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The estimated fair value adjustment is presented as a single line item within other (expenses) income in the accompanying condensed consolidated balance sheets. Dolphin Films recorded interest expensestatements of $45,055 and $112,473 foroperations under the three and nine months ended September 30, 2017.
The March 4th Note 9, the Company signed a promissory note and received $150,000 from an entity, of which Allan Mayer, director, shareholder and employee of the Company, is the trustee.
Schedule of fair value categorized within Level 3 | ||||
March 4th Note | ||||
Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | $ | 998,135 | ||
(Gain) on change of fair value reported in the condensed consolidated statements of operations | (577,522 | ) | ||
Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2022 | $ | 420,613 |
The estimated fair value of the nextMarch 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:
Schedule of estimated fair value | ||||||||
September 30, 2022 | December 31, 2021 | |||||||
Face value principal payable | $ | 500,000 | $ | 500,000 | ||||
Original conversion price | $ | 3.91 | $ | 3.91 | ||||
Value of Common Stock | $ | 2.65 | $ | 8.52 | ||||
Expected term (years) | ||||||||
Volatility | 100 | % | 100 | % | ||||
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 reported as income or expense ina reconciliation of the consolidated statementsfair values from December 31, 2021 to September 30, 2022:
Schedule of fair value categorized within Level 3 | ||||
Fair Value: | Series I | |||
Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | $ | 135,000 | ||
(Gain) on change of fair value reported in the condensed consolidated statements of operations | (105,000 | ) | ||
Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2022 | $ | 30,000 |
The estimated fair value of operations. On March 31, 2017,the Series “I” Warrants J and K were exercised.
Schedule of estimated fair value | ||||||||
Fair Value Assumption - Series “I” Warrants | September 30, 2022 | December 31, 2021 | ||||||
Exercise Price per share | $ | 3.91 | $ | 3.91 | ||||
Value of Common Stock | $ | 2.65 | $ | 8.52 | ||||
Expected term (years) | 2.92 | 3.67 | ||||||
Volatility | 100 | % | 100 | % | ||||
Dividend yield | 0 | % | 0 | % | ||||
Risk free rate | 4.25 | % | 1.07 | % |
Contingent consideration
The Company records the fair value of the contingent consideration liability in the condensed consolidated balance sheets under the caption “Warrant liability”“Contingent consideration” and records changes to the liability against earnings or loss under the caption “Changes“Change in fair value of warrant liability” in the condensed consolidated statements of operations. The carrying amount at fair value of the aggregate liability for the Warrants recorded on the condensed consolidated balance sheet at September 30, 2017 and December 31, 2016 is $2,774,583 and $20,405,190. Due to the change in the fair value of the Warrant Liability for the period in which the Warrants were outstanding during the three and nine months ended September 30, 2017, the Company recorded a gain on the change in fair value of the warrant liability of $1,396,094 and $7,685,607, respectively, for the three and nine months ended September 30, 2017, in the condensed consolidated statement of operations.
Issuance Date | Number of Common Shares | Per Share Exercise Price | Remaining Term (Months) | Expiration Date | ||
Series G Warrants | November 4, 2016 | 750,000 | $9.22 | 4 | January 31, 2018 | |
Series H Warrants | November 4, 2016 | 250,000 | $9.22 | 16 | January 31, 2019 | |
Series I Warrants | November 4, 2016 | 250,000 | $9.22 | 28 | January 31, 2020 |
As of September 30, 2017 | |||
Inputs | Series G | Series H | Series I |
Volatility (1) | 71.2% | 67.0% | 76.3% |
Expected term (years) | 0.33 | 1.33 | 2.33 |
Risk free interest rate | 1.107% | 1.363% | 1.520% |
Common stock price | $8.40 | $8.40 | $8.44 |
Exercise price | $9.22 | $9.22 | $9.22 |
Warrants “G”, “H” and “I” | Warrants “J” and “K” | Total | |
Beginning fair value balance reported in the consolidated balance sheet at December 31, 2016 | $6,393,936 | $14,011,254 | $20,405,190 |
Change in fair value (gain) reported in the statements of operations | (3,619,353) | (4,066,254) | (7,685,607) |
Exercise of “J” and “K�� Warrants | — | (9,945,000) | (9,945,000) |
Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2017 | $2,774,583 | $— | $2,774,583 |
As discussed in the fair value of the Put Rights for the period in which the Put Rights were outstandingNote 4, during the three and nine monthsyear ended September 30, 2017,December 31, 2021, the Company recordedB/HI seller met the conditions for payment of contingent consideration. As a gain on the put rights of $200,000 and $100,000, respectively, in the condensed consolidated statement of operations. The Company measured the fair value of the Put Rights as of the date of the acquisition.
Inputs | On the date of Acquisition (March 30, 2017) | As of September 30, 2017 |
Equity Volatility estimate | 75% | 82.5% |
Discount rate based on US Treasury obligations | 0.12%-1.70% | 1.04%-1.62% |
For the acquisition.
Schedule of contingent consideration | ||||||||
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) | 3.33 | % | 0.73 | % | ||||
Annual Asset Volatility Estimate | 60.00 | % | 85.00 | % |
17 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
Inputs | On the date of Acquisition (March 30, 2017) | As of September 30, 2017 |
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration) | 1.03%-1.55% | 1.31% -1.62% |
Annual Asset Volatility Estimate | 72.5% | 80% |
Estimated EBITDA | $3,600,000- $3,900,000 | $3,600,000- $3,900,000 |
For the Contingent Consideration,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 the date of acquisition (March 30, 2017)December 31, 2021 to September 30, 2017:
Schedule of reconciliation of the fair values | ||||||||||||
The Door(1) | Be Social(2) | B/HI(3) | ||||||||||
Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | $ | 2,381,869 | $ | 710,000 | $ | 1,192,352 | ||||||
(Gain) on change of fair value reported in the condensed consolidated statements of operations | (1,358,672 | ) | (5,000 | ) | (76,106 | ) | ||||||
Settlement of contingent consideration | (1,023,197 | ) | — | (1,116,246 | ) | |||||||
Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2022 | $ | — | $ | 705,000 | $ | — |
During the year ended December 31, 2021, The Door achieved the conditions for the earnout consideration, which were settled on June 7, 2022 by payment of 279,562 shares of common stock. For the | ||
(2) | For the three and nine months ended September 30, | |
(3) |
NOTE 1211 — LICENSING AGREEMENT - RELATED PARTY
2021 Lincoln Park Transaction
On December 29, 2021, the Company entered into a ten-year licensingpurchase agreement (the “LP 2021 Purchase Agreement”) and a registration rights agreement (the “LP 2021 Registration Rights Agreement”) with DELincoln Park Capital Fund, LLC a related party. Under the license,(“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.
The Company 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”), provided that on such day the last closing sale price per-share of our common stock is authorizednot less than $1.00 as reported by the Nasdaq Capital Market. The amount of a Regular Purchase may be increased under certain circumstances up to use DE LLC’s brand properties75,000 shares if the closing price is not below $10.00, and up to 100,000 shares if the closing price is not below $12.50, 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 connection with the creation, promotion and operationLP 2021 Purchase Agreement.
Pursuant to the terms of subscription based Internet social networking websites for children and young adults. The license requires thatthe LP 2021 Purchase Agreement, at the time the Company payssigned the LP 2021 Purchase Agreement and the LP 2021 Registration Rights Agreement, the Company issued shares of common stock to DE LLC royaltiesLincoln 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 rateLP 2021 Purchase Agreement and received proceeds of fifteen percent of net sales from performance of$4,367,640, respectively. The LP 2021 Purchase Agreement was terminated effective August 12, 2022 and the licensed activities. The Company did not usesell any of the brand properties relatedshares pursuant to this agreement during the three months ended September 30, 2022.
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.The Company 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 there was no royaltyshares at the time of sales as described in the LP 2022 Purchase Agreement.
Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, the Company issued forand included within selling, general and administrative expenses in the condensed consolidated statements of operations.
During both the three and nine months ended September 30, 2017 and 2016.
The Company evaluated the obligation to absorb the expected losses orcontract that includes the right to receiverequire Lincoln Park to purchase shares of common stock in the residual returnsfuture (“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 entity. The most common type of VIE is a special-purpose entity (“SPE”). SPEs are commonly used in securitization transactions in order to isolate certain assets,freestanding put right and distribute the cash flows from those assets to investors. The legal documents that govern the transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and other parties that have rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPE’s, assets by creditors of other entities, including the creditors of the seller of the assets.
Max Steel Productions LLC | JB Believe LLC | |||||||||
(in USD) | As of and for the nine months ended September 30, 2017 | As of and for the three months ended September 30, 2017 | As of December 31,2016 | As of and for the nine months ended September 30, 2016 | As of and for the three months ended September 30, 2016 | As of and for the nine months ended September 30, 2017 | As of and for the three months ended September 30, 2017 | As of December 31,2016 | As of and for the nine months ended September 30, 2016 | As of and for the three months ended September 30, 2016 |
Assets | 9,597,807 | 9,597,807 | 12,327,887 | n/a | n/a | — | — | 240,269 | n/a | n/a |
Liabilities | (12,578,388) | (12,578,411) | (15,922,552) | n/a | n/a | (6,752,271) | (6,752,271) | (7,014,098) | n/a | n/a |
Revenues | 4,572,665 | 1,398,839 | n/a | 1,140,000 | 1,140,000 | 53,136 | — | n/a | 3,786 | — |
Expenses | (3,958,581) | (575,366) | n/a | (2,253,056) | (1,711,325) | (31,578) | (27,786) | n/a | (392,416) | (131,825) |
On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). There are that replacedas detailed in the 2012 Plan. On August 7, 2017,table below. During the nine months ended September 30, 2021, the Company filed a registration statement on Form S-8 to register 1,000,000 shares of Common Stock issuabledid 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 $2017, 59,320 shares2022, unrecognized compensation expense related to RSUs of restricted stock were issued under the 2017 Plan. The shares of restricted stock were issued on August 21, 2017 and have$ is expected to be recognized over a vestingweighted-average period of six months (February 21, 2018). Employees that received years.
The following table sets forth the awards must remain employed byactivity for the RSUs:
Schedule of RSUs | ||||||||
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding (nonvested), December 31, 2021 | — | $ | — | |||||
Granted | 36,336 | 6.86 | ||||||
Forfeited | (4,404 | ) | 6.86 | |||||
Vested | (24,357 | ) | 6.86 | |||||
Outstanding (nonvested), September 30, 2022 | 7,575 | $ | 6.86 |
Shares issued related to an employment agreement
Pursuant to the employment agreement between the Company until the vesting date or they risk the forfeiture of the award.
19 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
The following table sets forth the computation of basic and diluted income (loss) earnings per share:
Three months ended September 30, | Nine months ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
Numerator: | ||||
Net income (loss) | $6,172,578 | $(11,540,729) | $9,575,304 | $(22,799,765) |
Preferred stock deemed dividend | — | — | — | (5,227,247) |
Numerator for basic income (loss) per share | 6,172,578 | (11,540,729) | 9,575,304 | (28,027,012) |
Change in fair value of Warrants “J” and “K” (note 11) | (1,396,094) | — | (7,685,607) | — |
Change in fair value of Put rights | (200,000) | — | — | — |
Numerator for diluted income (loss) per share | $4,576,484 | $(11,540,729) | $1,889,697 | $(28,027,012) |
Denominator: | ||||
Denominator for basic EPS — weighted–average shares | 9,336,826 | 5,337,108 | 8,640,543 | 3,801,626 |
Effect of dilutive securities: | ||||
Warrants | 3,704 | — | 501,918 | — |
Employee nonvested stock awards | 25,556 | — | 8,612 | — |
Shares issuable in January 2018 in connection with the 42West acquisition (Note 4) | 980,911 | — | 328,767 | — |
Put rights in connection with the 42West acquisition (Note 4) | 35,821 | — | — | — |
Denominator for diluted EPS — adjusted weighted-average shares assuming exercise of warrants | 10,382,818 | 5,337,108 | 9,479,840 | 3,801,626 |
Basic income (loss) per share | $0.66 | $(2.16) | $1.11 | $(7.37) |
Diluted Income (loss) per share | $0.44 | $(2.16) | $0.20 | $(7.37) |
Schedule of Basic and Diluted Income (Loss) Per Share | ||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Numerator | ||||||||||||||||
Net (loss) income | $ | (1,311,719 | ) | $ | 141,651 | $ | (1,492,191 | ) | $ | (3,780,392 | ) | |||||
Net income attributable to participating securities | — | 5,833 | — | — | ||||||||||||
Net (loss) income attributable to Dolphin Entertainment common stock shareholders and numerator for basic (loss) earnings per share | (1,311,719 | ) | 135,818 | (1,492,191 | ) | (3,780,392 | ) | |||||||||
Change in fair value of convertible notes payable | (45,642 | ) | — | (577,522 | ) | — | ||||||||||
Change in fair value of warrants | (10,000 | ) | — | (105,000 | ) | — | ||||||||||
Interest expense | 9,863 | — | 29,589 | — | ||||||||||||
Numerator for diluted (loss) earnings per share | $ | (1,357,498 | ) | $ | 135,818 | $ | (2,145,124 | ) | $ | (3,780,392 | ) | |||||
Denominator | ||||||||||||||||
Denominator for basic EPS - weighted-average shares | 9,664,681 | 7,740,085 | 9,307,830 | 7,551,974 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Warrants | 1,157 | — | 2,100 | — | ||||||||||||
Convertible notes payable | 127,877 | — | 127,877 | — | ||||||||||||
Denominator for diluted EPS - adjusted weighted-average shares | 9,793,715 | 7,740,085 | 9,437,807 | 7,551,974 | ||||||||||||
Basic (loss) earnings per share | $ | (0.14 | ) | $ | 0.02 | $ | (0.16 | ) | $ | (0.50 | ) | |||||
Diluted (loss) earnings per share | $ | (0.14 | ) | $ | 0.02 | $ | (0.23 | ) | $ | (0.50 | ) |
Basic income (loss) earnings per share is computed by dividing income or loss attributable to the shareholders of Common Stockcommon stock (the numerator) by the weighted-average number of shares of Common Stockcommon stock outstanding (the denominator) for the period. The denominator for diluted incomeDiluted (loss) earnings per share assumesassume that any dilutive equity instruments, convertible into Common Stock such as warrants, convertible securities,notes payable and any other Common Stock equivalents, if dilutive,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 $5,833 of the Company’s net income to these participating securities and reduced the net income available to common shareholders by that amount when calculating basic earnings per share. For the three months ended September 30, 2022 and the nine months ended September 30, 2022 and 2021, the Company had a net loss and as such the two-class method is not presented.
For the three and nine months ended September 30, 2022, the convertible promissory note carried at fair value and the outstanding warrants were included outstanding shares duringin the period. In periodscalculation of losses,fully diluted loss per share is computed on the same basis as basic loss per share, as the inclusionshare. The other convertible notes carried at their principal loan amount, convertible into an aggregate of any other potential and weighted average shares outstanding would be anti-dilutive.
20 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited) |
NOTE 1714 — WARRANTS
Warrants: | Shares | Weighted Avg. Exercise Price |
Balance at December 31, 2016 | 2,945,000 | $5.98 |
Issued | — | — |
Exercised | 1,332,885 | 1.28 |
Expired | — | — |
Balance at September 30, 2017 | 1,612,115 | $9.28 |
Warrants: | Number of Shares | Exercise price at September 30, 2017 | Original Exercise Price | Fair Value as of September 30, 2017 | Fair Value as of December 31, 2016 | Expiration Date |
Warrant “G” | 750,000 | $9.22 | $10.00 | $1,043,761 | $3,300,671 | January 31, 2018 |
Warrant “H” | 250,000 | $9.22 | $12.00 | 715,215 | 1,524,805 | January 31, 2019 |
Warrant “I” | 250,000 | $9.22 | $14.00 | 1,015,607 | 1,568,460 | January 31, 2020 |
1,250,000 | $2,774,583 | $6,393,936 |
As part of histhe employment agreement he receivedwith its CEO, the Company provided a $1,000,000$1,000,000 signing bonus in 2012, thatwhich has not been paid and is recorded in accrued compensation on the condensed consolidated balance sheets.sheets, along with unpaid base salary of $1,625,000 in aggregate attributable for the period from 2012 through 2018. Any unpaid and accrued compensation due to the CEO under thishis employment agreement will accrue interest on the principal amount at a rate of 10%10% per annum from the date of thishis employment agreement until it is paid. TheEven though the employment agreement included provisions for disability, termination for causeexpired and without cause byhas not been renewed, the Company voluntary termination by executivehas an obligation under the agreement to continue to accrue interest on the unpaid balance.
As of September 30, 2022 and a non-compete clause. TheDecember 31, 2021, the Company had accrued $2,437,500 and $2,250,000$2,625,000 of compensation as accrued compensation and $909,834has balances of $1,511,929 and $735,211 of$1,565,588, respectively, in accrued interest in other current liabilities on its condensed consolidated balance sheets, as of September 30, 2017 and December 31, 2016, respectively, in relationrelated to Mr. O’Dowd’s employment.the CEO’s employment agreement. Amounts owed under this arrangement are payable on demand. The Company recorded interest expense related to the accrued compensation of $60,388 and $174,623, respectively, for the three and nine months ended September 30, 2017 and $54,081 and $156,404, respectively, for the three and nine months ended September 30, 2016, onin the condensed consolidated statements of operations.
The Company issued 2,300,000 shares of Series B Convertible Preferred Stock (“Series B”), par value $0.10 per share, and 50,000 shares of Series C Convertible Preferred Stock, par value $0.001 per share to DE LLC.
NOTE 15 — SEGMENT INFORMATION
The Company has granted each of the Sellers the right to cause the Company to purchase up to an aggregate of 1,187,094 of their shares of Common Stock received as Consideration for a purchase price equal to $9.22 per share during certain specified exercise periods up until December 2020. Pursuant to the terms of one such Put Agreement between Mr. Allan Mayer, a member of the board of directors of the Company, and the Company, Mr. Mayer exercised Put Rights and caused the Company to purchase 32,537 shares of Common Stock at a purchase price of $9.22 for an aggregate amount of $300,000, during the period between March 30, 2017 (42West Acquisition date) and September 30, 2017.
· | 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 divisionssegments and assessing operating divisionsegment performance is operating income (loss). All segments follow the same accounting policies as those described in Note 3.
Three months ended September 30, | Nine months ended September 30, | |
2017 | ||
Revenue: | ||
EPD | $5,409,175 | $10,546,716 |
CPD | 1,398,839 | 4,625,801 |
Total | $6,808,014 | $15,172,517 |
Segment operating income (loss): | ||
EPD | $1,432,148 | $2,200,996 |
CPD | 308,054 | (1,161,828) |
Total | 1,740,202 | 1,039,168 |
Interest expense | (424,187) | (1,273,166) |
Other income, net | 4,856,563 | 9,809,302 |
Income before income taxes | $6,172,578 | $9,575,304 |
In connection with the acquisitions of 42West, The Company responded with a letter stating reasonable cause for the noncomplianceDoor, Viewpoint, Shore Fire, Be Social, and requested that penalties be abated. During 2012,B/HI, the Company received a notice stating that the reasonable cause had been denied. The Company decided to pay the penaltiesassigned $5,116,568 of intangible assets, net of accumulated amortization of $8,353,432, and not appeal the decision for the 2009 Internal Revenue Service notification. There is no associated interest expensegoodwill of $20,021,357 as the tax filings are for information purposes only and would not result in further income taxes to be paid by the Company. The Company made payments in the amount of $40,000 during the year ended December 31, 2012 related to these penalties. At each of September 30, 20172022 to the EPM segment. Equity method investments are included within the EPM segment.
Schedule of Revenue and Assets by Segment | ||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenues: | ||||||||||||||||
EPM | $ | 9,899,013 | $ | 9,399,432 | $ | 29,366,748 | $ | 25,219,793 | ||||||||
CPD | — | — | — | — | ||||||||||||
Total | $ | 9,899,013 | $ | 9,399,432 | $ | 29,366,748 | $ | 25,219,793 | ||||||||
Segment Operating Income (Loss): | ||||||||||||||||
EPM | $ | 604,837 | $ | 507,658 | $ | 3,336,688 | $ | 488,077 | ||||||||
CPD | (1,738,604 | ) | (1,579,369 | ) | (4,945,222 | ) | (2,921,342 | ) | ||||||||
Total operating (loss) income | (1,133,767 | ) | (1,071,711 | ) | (1,608,534 | ) | (2,433,265 | ) | ||||||||
Interest expense | (126,147 | ) | (241,115 | ) | (400,884 | ) | (576,146 | ) | ||||||||
Other income (expenses), net | 55,642 | 1,454,477 | 682,522 | (809,832 | ) | |||||||||||
(Loss) income before income taxes and equity in losses of unconsolidated affiliates | $ | (1,204,272 | ) | $ | 141,651 | $ | (1,326,896 | ) | $ | (3,819,243 | ) |
As of September 30, 2022 | As of December 31, 2021 | |||||||
Total assets: | ||||||||
EPM | $ | 48,366,935 | $ | 48,691,939 | ||||
CPD | 7,358,533 | 4,099,512 | ||||||
Total | $ | 55,725,468 | $ | 52,791,451 |
NOTE 16 — LEASES
The Company and its subsidiaries are party to various office leases with terms expiring at different dates through December 31, 2016,2027. 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 had a remainder of $40,000did not include these in accruals related to these late filing penalties whichthe ROU asset or lease liability calculations because it is presented as a component of other current liabilities.
On July 18, 2022, the Company notified US Youth Soccer Association, Inc., with whom it had entered into an agreement to create, design and host the US Youth Soccer Clubhouse website, that it would not renew the agreement.sublet 17,554 rentable square feet in Los Angeles, California at a base rent of $3.61 per rentable square foot. The Company did not record any revenues or expenses related to this website for the three and nine months ended September 30, 2017 and 2016.
The table below shows the lease income and managingexpenses recorded in the sponsorship package, and hiringcondensed consolidated statements of certain employees to administer the program. Each school sponsorship package was $10,000 with the Company earning $1,250. The remaining funds were used for program materials and the costs of other partners. During the nine months ended September 30, 2017, management decided to discontinue the online kids clubs at the end of 2017.
Schedule of Lease Income and Expenses | ||||||||||||||||||
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 | $ | 709,542 | $ | 620,121 | $ | 1,876,153 | $ | 2,029,524 | |||||||||
Operating lease costs | Direct costs | — | — | — | 60,861 | |||||||||||||
Sublease income | Selling, general and administrative expenses | (106,247 | ) | — | (228,230 | ) | — | |||||||||||
Net lease costs | $ | 603,295 | $ | 620,121 | $ | 1,647,923 | $ | 2,090,385 |
During the nine months ended September 30, 2022, the Company recorded an impairment of its ROU asset amounting to $98,857, related to the sublease of one of the Company’s subsidiaries’ offices, which was included in selling, general and administrative expenses in the condensed consolidated statements of operations.
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 $1,567,453 and $2,067,546, respectively.
Future maturities lease payments for operating leases for the remainder of 2022 and thereafter, were as follows:
Schedule of Future Minimum Payments Under Operating Lease Agreements | ||||
2022 | $ | 695,949 | ||
2023 | 2,659,521 | |||
2024 | 2,550,664 | |||
2025 | 1,979,589 | |||
2026 | 1,782,057 | |||
Thereafter | 719,797 | |||
Total lease payments | $ | 10,387,577 | ||
Less: Imputed interest | (1,772,284 | ) | ||
Present value of lease liabilities | $ | 8,615,293 |
As of September 30, 2022, the Company’s weighted average remaining lease term on its operating leases is 3.60 years and the Company’s weighted average discount rate is 8.63% related to its operating leases.
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 $1,000,000 and $1,500,000, respectively, pursuant to the Blue Angels Agreement, which were recorded as capitalized production costs.
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 revenues generated byincome or expense has been recorded in connection with the online kids clubsBlue Angels Agreement during the three and nine months ended September 30, 2017.
NOTE 18 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be subject to legal proceedings, claims, and liabilities that arise in the shareholdersordinary course of business. The Company is not aware of any pending litigation as of the Company approveddate of this report and, therefore, in the 2017 Plan which replacedopinion of management and based upon the 2012 Plan. The 2017 Plan was adopted asadvice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a flexible incentive compensation plan that would allow us to use different forms of compensation awards to attract new employees, executives and directors, to further the goal of retaining and motivating existing personnel and directors and to further align such individuals’ interests with those ofmaterial effect in the Company’s shareholders. Under the 2017 Plan, the total numberfinancial position, results of shares of Common Stock reservedoperations and available for delivery under the 2017 Plan (the “Awards”), at any time during the term of the 2017 Plan, will be 1,000,000 shares of Common Stock. The 2017 Plan imposes individual limitationscash flows.
IMAX Co-Production Agreement
As discussed in Note 17, on the amount of certain Awards, in part with the intention to comply with Section 162(m) of the Code. Under these limitations, in any fiscal year of the Company during any part of which the 2017 Plan is in effect, no participant may be granted (i) stock options or stock appreciation rights with respect to more than 300,000 Shares, or (ii) performance shares (including shares of restricted stock, restricted stock units, and other stock based-awards that are subject to satisfaction of performance goals) that the Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to more than 300,000 Shares, in each case, subject to adjustment in certain circumstances. The maximum amount that may be paid out to any one participant as performance units that the Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to any 12-month performance period is $1,000,000 (pro-rated for any performance period that is less than 12 months), and with respect to any performance period that is more than 12 months, $2,000,000. Through August 21, 2017, the Company issued 59,320 Shares as Awards to certain employees. There is a vesting period of six months. Through September 30, 2017, the Company recorded compensation expense of $103,760 on its condensed consolidated statement of operations.
NOTE 19 — SUBSEQUENT EVENTS
On October 2, 2022, the Company minted and offered for sale a collection of 7,777 non-fungible tokens (“NFT”s), titled Creature Chronicles: Exiled Aliens. The collection generated approximately 13,175 Solana (“SOL”) equivalent to approximately $435,000 on the date of the sale.
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 base salary with a guaranteed increase of at least 7.5% of the base salary after 18 months of employment and periodic reviews throughout the term of the employment agreement. The employmentmembership purchase agreement contains provisions for termination as a result of death or disability and entitles the employee to bonuses, commission, vacations and to participate in all employee benefit plans offered by the Company.
The Employment Agreements also contain provisions for termination and as a result of death or disability. During the term of the Employment Agreement, the Principal Sellers shall be entitled to participate in all employee benefit plans, practices and programs maintainedconsideration paid by the Company as well as are entitled to paid vacation in accordance with the Company’s policy. Each of the Employment Agreements contains lock-up provisions pursuant to which each Principal Seller has agreed not to transfer any shares of Common Stock in the first year, no more than 1/3 of the Initial Consideration and Post-Closing Consideration received by such Seller in the second year and no more than an additional 1/3 of the Initial Consideration and Post-Closing Consideration received by such Seller in the third year, following the closing date of the 42West Acquisition.
Period ended September 30, 2017 | |
October 1, 2017 – December 31, 2017 | $345,403 |
2018 | 1306,473 |
2019 | 1,329,613 |
2020 | 1,433,403 |
2021 | 1,449,019 |
Thereafter | 4,675,844 |
$10,539,756 |
23 |
ITEM 2.
OVERVIEW
We are a leading independent entertainment marketing and premium content developmentproduction company. Through our recent acquisition ofsubsidiaries, 42West, The Door, Shore Fire, Viewpoint and Be Social, we provide expert strategic marketing and publicity services to all of the major film studios, and many of the leading independenttop brands, both individual and digital content providers, as well ascorporate, in the entertainment, hospitality and music industries. 42West, The Door and Shore Fire are each recognized global leaders in the PR services for hundredsthe industries they serve. Viewpoint adds full-service creative branding and production capabilities and Be Social provides influencer-marketing capabilities through its roster of A-list celebrity talent, including actors, directors, producers, recording artists, athletes and authors. The strategic acquisition of 42West brings together premium marketing services with premium content production, creating significant opportunities to serve our respective constituents more strategically and to grow and diversify our business. Ourhighly engaged social media influencers. Dolphin’s legacy content production business, is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. We produce originalfounded by our Emmy-nominated Chief Executive Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital programmingseries, primarily aimed at family and young adult markets.
We have recorded amortization in the amount of approximately $0.5 million during the nine months ended September 30, 2017.
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 complete at least one acquisition over the next year, althoughenter into additional investments during 2022 and 2023, but there is no assurance that we will be successful in doing so.
We operate in two reportable segments, thesegments: our entertainment publicity division and themarketing segment and our content production division.segment. The entertainment publicity division is comprised ofand marketing segment comprises 42West, The Door, Shore Fire, Viewpoint and Be Social and provides clients with diversified services, including public relations, entertainment content marketing, and strategic marketing consulting.consulting, digital marketing capabilities, creative branding and in-house production of content for marketing. The content production division is comprised ofsegment comprises Dolphin Films and Dolphin Digital StudiosEntertainment and specializes in the production and distribution of digital content and feature films.
Dolphin 2.0
We believe our ability to continue asengage a going concern based uponbroad consumer base through our net loss forbest-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 year ended December 31, 2016, our accumulated deficit asunderlying businesses of December 31, 2016 and our level of working capital. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is planning to raise any necessary additional funds through loans and additional saleseach of our common stock, securities convertible intosubsidiaries 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 common stock, debt securities orexperience, 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 such financing alternatives; however, there can be no assurance that1) 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 will be successfulminted (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 raising any necessary additional loans or capital. Such issuancesOctober, 2021, when we acquired an ownership interest in Midnight Theatre, a state-of-the-art contemporary variety theater and restaurant in the heart of additional securities would further diluteManhattan. An anchor of Brookfield Properties’ recently opened $4.5 billion Manhattan West development, the equity interestsMidnight Theatre opened on September 21, 2022. The restaurant, Hidden Leaf, opened on July 6, 2022.
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 existing shareholders, perhaps substantially. Withfirst content investment under Dolphin 2.0. See Note 17 above for details regarding our Collaborative Arrangement with IMAX for production and distribution of the acquisitiondocumentary feature “The Blue Angels.”
COVID Update
The continued spread of 42West, we are currently exploring opportunities to expandnew COVID-19 variants did not have a significant impact on our business during the services currently being offered by 42West toquarter ended September 30, 2022. The future course of the entertainment communitypandemic could have adverse effects in the U.S and reducing expenses by identifying certain costs that can be combined. There can be no assurance that we will be successful in selling these services to clients or reducing expenses.
Revenues
For the three and nine months ended September 30, 2016,2022 and 2021, we derived revenues from a portion of fees obtained from the sale of memberships to online kids clubs and international distribution rights of our motion pictures, Believe and Max Steel. During the three and nine months ended September 30, 2017, we derived the majorityall of our revenues from our recently acquired subsidiary 42West. 42West derivesentertainment publicity and marketing segment. The entertainment publicity and marketing segment generates its revenues from providing talent,public relations services for celebrities, musicians and brands, entertainment and targeted content marketing for film and television series, strategic communications services. Duringservices 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 three and nine months ended September 30, 2017,Results of Operations section below for further discussion on the revenues from the content production and distribution were derived from the release of our motion picture, Max Steel. The table below sets forth the components of revenue for the three and nine months ended September 30, 2017 and 2016:
For the three months ended September 30, | For the nine months ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
Revenues: | ||||
Entertainment publicity | 79.5% | 0.0% | 69.5% | 0.0% |
Production and distribution | 20.5% | 99.5% | 30.5% | 97.7% |
Membership | 0.0% | 0.5% | 0.0% | 2.3% |
Total revenue | 100.0% | 100.0% | 100.0% | 100.0% |
Entertainment Publicity
Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and continuewe have continued to grow organically through referrals and actively soliciting new business. We earn revenues primarily from three sources. We providethe following sources: (i) celebrity talent services in exchange for monthly fees of approximately $5,000 per client. We provide entertainmentservices; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees ranging from $25,000 to $300,000 per project. We have numerous projects per year per clientfees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months. We providemonths; (iv) strategic communications services in exchangeservices; (v) engagements for monthly fees ranging from $10,000 to $30,000 per client.
We earn revenues from the distribution of online content on advertiser supported video-on-demand, or AVOD, platforms. Distribution agreements contain revenue sharing provisions which permit the producer to retain a percentage of all domesticentertainment publicity and international advertising revenue generated from the online distribution of a particular web series. Typically, these rates range from 30% to 45% of such revenue. We have previously distributed our productions on various online platforms including Yahoo!, Facebook, Hulu and AOL. No revenues from this source have been derived during the three and nine months ended September 30, 2017 and 2016.
● | 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. |
25 |
Content Production
Project Development and Related Services
We have a development team that dedicates a portion of its time to identifying scripts, story treatments and resources to sourcing scriptsnovels for future developments.acquisition, development and production. The scripts can be for either digital, television or motion picture productions. During 2015 and 2016, weWe have acquired the rights to certain scripts one that we intend to produce and release in the second quarter of 2018. During the nine months ended September 30, 2017, we acquired the rightsfuture, subject to a book from which we intend to develop a script and produce in 2018. We intend to release the projects starting in early 2019.obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical distribution.
We have retained the trademark to the online kids club and will continue to operate the site. Pursuant to the termscompleted development of our agreement with US Youth Soccer, we notified themseveral feature films, which means that we did not intend to renew our agreement that terminated on February 1, 2017.have completed the script and can begin pre-production once financing is obtained. We operate our online kids club activities through our subsidiary, Dolphin Kids Clubs, LLC. On December 29, 2016, we entered into a purchase agreement to acquire the remaining 25% membership interest in Dolphin Kids Clubs and as a result, Dolphin Kids Clubs became our wholly owned subsidiary. As consideration for the purchase of the 25% membership interest, we issued Warrant J which was exercised to acquire 1,085,000 shares of our common stock at a purchase price of $0.03 per share.
For the three months ended September 30, | For the nine months ended September 30, | |||
Revenues: | 2017 | 2016 | 2017 | 2016 |
Entertainment publicity | $5,409,175 | $n/a | $10,546,716 | $n/a |
Production and distribution | 1,398,839 | 1,140,000 | 4,625,801 | 1,144,157 |
Membership | - | 6,225 | - | 27,253 |
Total revenues (in USD) | $6,808,014 | $1,146,225 | $15,172,517 | $1,171,410 |
For the three months ended September 30, | For the nine months ended September 30, | |||
Expenses: | 2017 | 2016 | 2017 | 2016 |
Direct costs | $427,926 | $1,375,734 | $2,927,817 | $1,378,173 |
Distribution and marketing | 320,439 | 9,237,873 | 950,812 | 9,237,873 |
Selling, general and administrative | 628,564 | 370,984 | 1,871,258 | 1,019,641 |
Legal and professional | 208,637 | 689,523 | 1,098,728 | 1,576,963 |
Payroll | 3,482,246 | 350,264 | 7,284,734 | 1,101,465 |
Total expenses | $5,067,812 | $12,024,378 | $14,133,349 | $14,314,115 |
For the three months ended September 30, | For the nine months ended September 30, | |||
Other (Income) Expense: | 2017 | 2016 | 2017 | 2016 |
Amortization and depreciation | $321,538 | $47,369 | $648,848 | $47,369 |
Extinguishment of debt | (3,881,444) | - | (3,877,277) | 5,843,811 |
Acquisition costs | - | - | 745,272 | - |
Bad debt | 69,437 | - | 85,437 | - |
Loss on disposal of furniture, office equipment and leasehold improvements | - | - | 28,025 | - |
Change in fair value of warrant liability | (1,396,094) | - | (7,685,607) | - |
Change in fair value of put and contingent consideration | 30,000 | - | 246,000 | - |
Interest expense | 424,187 | 613,651 | 1,273,166 | 3,768,727 |
Other Income/expense | $(4,432,376) | $661,020 | $(8,536,136) | $9,659,907 |
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 future periods. We expect to begin to generate cash flows from our other sources of revenue, including the distribution of at least one web series that, as discussed earlier has completed production. With the acquisition of 42West, we are currently exploring opportunities to expand the services currently being offered by 42West to the entertainment community. There can be no assurance that we will be successful in selling these services to clients.
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 our available cash flow may not be adequate to maintain our current operations if we are unable to repay, extend or refinance such indebtedness. As ofExpenses
For the three and nine months ended September 30, 2017, our total debt was $13.5 million2022, other income and our total stockholders’ equity was approximately $2.7 million. Approximately $3.7 million of the total debt as of September 30, 2017 represents theexpenses consisted primarily of: (1) changes in fair value of put optionsconvertible notes; (2) changes in connection with the 42West acquisition, which may or may not be exercised by the sellers
26 |
RESULTS OF OPERATIONS
Three and interest. Amounts borrowed under the credit facility accrue interest at either (i) a fluctuating per annum rate equal to the 5.5% plus a base rate or (ii) a per annum rate equal to 6.5% plus the LIBOR determined for the applicable interest period. As of September 30, 2017 and December 31, 2016, we recorded $2,366,689 and $12,500,000, respectively, including the reserve, related to this agreement on our condensed consolidated balance sheets. On our condensed consolidated statement of operations for the three months ended September 30, 2017, we recorded interest expense of $177,225 and for the nine months ended September 30, 2017, we recorded (i) interest expense of $602,6972022 as compared to three and (ii) $500,000 in direct costsnine 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 loan proceeds that were not usedentertainment publicity and marketing increased by the distributor for the marketing of the filmapproximately $0.5 million and returned to the lender. In September 2017, the third party guarantor paid $4.5 million pursuant to the guarantee of the loan, reducing the outstanding balance by such amount and increasing our accounts payable by the $620,000 backstop related to the guarantee. We have recorded a gain on the extinguishment of debt on our consolidated statement of operations of approximately $3.9$4.1 million for the three and nine months ended September 30, 2017. Repayment of2022, respectively, as compared to the loan was intended to be made from revenues generated by Max Steelsame periods in the U.S. Max Steelprior 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 generate sufficient funds to repay the loan prior to the maturity date. As a result, if the lender forecloses on the collateral securing the loan, our subsidiary will lose the copyright for Max Steel and, consequently, will no longer receivederive any revenues from the domestic distributioncontent production segment as we have not produced and distributed any of Max Steel. In addition, we would impair the entire capitalizedprojects 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 Max Steelapproximately $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 assetROU asset.
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.
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 whichon 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, 20172022 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 $1.9 million.
Midnight Theatre commenced operations at the end of the second quarter of 2022; we recorded a variable interest entity (or VIE) createdloss 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.
29 |
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. |
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 productionFinancing 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 Max SteelSeptember 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 financing dealpurchase 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 the amountvalue of $10.4 millionour shares of common stock from time to produce Max Steel. The loan is partially secured by international distribution agreements made prior to the commencement of principal photography and tax incentives. The agreement contains repayment milestones to be made during the year ended December 31, 2015, that if not met, accrue interest attime over a default rate of 8.5% per annum above the published base rate of HSBC Private Bank (UK) Limited until the maturity on January 31, 2016 or the release of the movie. As a condition precedent to closing the loan, Dolphin Max Steel Holdings LLC delivered to the lender clear chain-of-title to the rights of the motion picture Max Steel. Due to delays in the release of the film, Max Steel VIE was unable to make some of the scheduled payments and, pursuant36-month period.
Pursuant to the terms of the agreement, the Max Steel VIE has accrued $1.4 million of interestLP 2021 Purchase Agreement, at the default rate. The film was released October 14, 2016time we signed the LP 2021 Purchase Agreement and deliverythe 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 international distributors has begun. As of December 31, 2016 and September 30, 2017, we had outstanding balances of $6.2 million and $2.7 million, respectively, related to this debt on our condensed consolidated balance sheets. Repayment of the loan was intended to be made from revenues generated by Max Steel outside of the U.S. Max Steel did not generate sufficient funds to repay the loan prior to the maturity date. As a result, if the lender forecloses on the collateral securing the loan, Max Steel VIE will lose the copyright for Max Steel and, consequently, our consolidated financial statements will no longer reflect any revenues from the distribution of Max Steel in foreign territories.LP 2021 Purchase Agreement. In addition, we would impairissued an additional 37,019 commitment shares on March 7, 2022.
During the accounts receivablenine 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 foreign distribution agreementsfuture 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 aswithin 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, 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 asset on our balance sheet, whichEntity’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, 2017 was $1.4 million.
Convertible Notes Payable
As a result, the balance as of September 30, 2017 was $750,000. As of the date of this filing, City National Bank has not called the2022, we had two outstanding principal of the revolving note; however, we have sufficient liquidity to satisfy all our outstanding obligations under the revolving note in such event. Under the revolving note, an event of default will occur if we fail to pay any principal when due after five days’ notice and an opportunity to cure.
As of September 30, 2017 and December 31, 2016, we did not have any debt outstanding or accrued interest related to such loan and security agreements2022, 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 yearsthree and nine months ended December 31, 2014 and 2015, we entered into various loan and security agreements with individual noteholders for an aggregate principal amount of notes of $4.0 million which we used to finance production of our 2015 web series, South Beach–Fever. Under the loan and security agreements, we issued promissory notes that accrued interest at rates ranging from 10% to 12% per annum payable monthly through August 31, 2015, with the exception of one note that accrued interest through February 29, 2016. During 2015, we exercised our option under the loan and security agreements to extend the maturity date of these notes until August 31, 2016. In consideration for our exercise of the option to extend the maturity date, we were required to pay a higher interest rate, increasing 1.25% to a range between 11.25% and 13.25%. Pursuant to the terms of the loan and security agreements, the noteholders, as a group, had the right to participate in 15% of our future profits generated by the series (defined as our gross revenues of such series less the aggregate amount of principal and interest paid for the financing of such series) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund the series.
During the three and distributionnine months ended September 30, 2022, the holder of the motion picture, Believe. The remaining $0.5 million wasone convertible note issued as a note in exchange for cash. Pursuant to the loan and security agreements, we issued notes that accrued interest at rates ranging from 11.25% to 12% per annum, payable monthly through December 31, 2016. We had the option to extend the maturity date of these notes until July 31, 2018. If we chose to exercise our option to extend the maturity date, we would have been required to pay a higher interest rate, increasing 1.25% to a range between 11.25% and 13.25%. The noteholders, as a group, would have received our entire share of the proceeds from these projects, on a prorata basis, untilduring 2021 converted the principal investment was repaid. Thereafter, the noteholders, as a group, had the right to participate in 15%balance of our future profits from such projects (defined as our gross revenues of such projects less the aggregate amount of principal and interest paid for the financing of such projects) on a prorata basis based on each noteholder’s loan commitment as a percentage of the total loan commitments received to fund specific motion picture productions.
On October 4, 2022, October 18, 2022 and November 3, 2022, we issued three convertible promissory notes in the private placement. On March 31, 2016, we received $1,500,000, in advance for oneaggregate amount of these agreements.$1,300,000. The amount was recorded as noncurrent debtconvertible promissory notes bear interest at 10% per annum, mature on our condensed consolidated balance sheet. Under the termssecond anniversary of the April 2016 subscription agreements, each investor had the option to purchase additionaltheir issuance and can be converted into shares of common stock, at the purchase price, not to exceed the number of such investor’s initial number of subscribed shares, during eachnoteholder’s option at any time. Two of the second, thirdconvertible notes may not be converted at a price less than $2.50 per share and fourth quarters of 2016. One investor delivered notices of its election to purchase shares on each of June 28, 2016 and October 13, 2016 and we issued (i) 50,000 shares for an aggregate purchase price of $0.5 million and (ii) 60,000 shares for an aggregate purchase price of $0.6 million, respectively.
It is our experience that convertible notes, including their accrued interest, are converted into shares of ourthe 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 a purchase price of $10.00 per share.
We had one convertible promissory notes, eachnote outstanding with substantially similar terms, for an aggregate principal amount of $875,000. Each$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 bearswith 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 matures one year from themature 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.
We recorded interest expense of issue, with the exception of one note$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 $75,000 which matures two years from the datenote and an allowance for credit losses has not been established.
As of issue. The principal and anySeptember 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 eachCompany 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 convertible promissory notes are convertible by the respective holder at a price of either (i) the 90 trading day average price per share of common stock as of the date the holder submits a notice of conversion or (ii) if an Eligible Offering (as defined in each of the convertible promissory notes) of common stock is made, 95% of the Public Offering Share price (as defined in each of the convertible promissory notes).
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.
33
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or “GAAP”.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.
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 fair value hierarchy. We develop unobservable “level 3” inputs usingcollaboration are considered to be distinct and deemed to be within the best information availablescope 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 circumstances, which might include our own data, or when we believe inputs based on external data better reflect the data that market participants would use, we base our inputs on comparison with similar entities.
For elements of measuring the fair value of the Series G, H, and I warrants at September 30, 2017 and for the nine months then ended, due to the existence of the full ratchet down round provision, which creates a path-dependent nature of the exercise prices of the warrants, we decided a Monte Carlo Simulation model, which incorporates inputs classified as “level 3” was appropriate.
As of September 30, 2017 | |||
Inputs | Series G | Series H | Series I |
Volatility(1) | 71.2% | 67.0% | 76.3% |
Expected term (years) | 0.33 | 1.33 | 2.33 |
Risk free interest rate | 1.107% | 1.363% | 1.520% |
Common stock price | $8.40 | $8.40 | $8.44 |
Exercise price | $9.22 | $9.22 | $9.22 |
Inputs | On the date of Acquisition (March 30, 2017) | As of September 30, 2017 |
Equity Volatility estimate | 75% | 82.5% |
Discount rate based on US Treasury obligations | 0.12% - 1.70% | 1.04% - 1.65% |
Inputs | On the date of Acquisition (March 30, 2017) | As of September 30, 2017 |
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the Contingent Consideration) | 1.03% -1.55% | 1.31%- 1.62% |
Annual Asset Volatility Estimate | 72.5% | 80% |
Estimated EBITDA | $3,600,000 - $3,900,000 | $3,600,000 - $3,900,000 |
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 31 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
34 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q constitute “forward-looking”contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements for purposes of federal and state securities laws. Thesemay include, but are not limited to, statements concern expectations, beliefs, projections,relating to our objectives, plans and strategies, anticipatedas 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 similar expressions concerning matters thatfuture developments and other factors believed to be appropriate. Forward-looking statements are not historical facts. Such forward-looking statements include:
Risks that could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or impliedindicated by thosethe forward-looking statements include but are not limited to,those described as “Risk Factors” in our Annual Report on Form 10-K for the following:
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 ensureimprove 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, 2017.2022. 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 reportAnnual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the Securities and Exchange Commission (the “SEC”)SEC on April 17, 2017,May 26, 2022, which have not been fully 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 remediate the other material weaknesses inimprove our internal control over financial reporting we areand remediate the material weaknesses. Our internal control remediation efforts include the following:
· | Developing formal policies and procedures over the Company’s fraud risk assessment and risk management function; |
· | Developing policies and procedures to enhance the precision of management review of financial statement information and control impact of changes in the external environment; |
· | We have entered into an agreement with a third-party consultant that assists us in analyzing complex transactions and the appropriate accounting treatment; |
· | We are enhancing our policies, procedures and documentation of period end closing procedures; |
· | Implementing policies and procedures to enhance independent review and documentation of journal entries, including segregation of duties; and |
· | Reevaluating our monitoring activities for relevant controls. |
Management is beginning the process of finalizing aimplementing 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 under the direction of our Board of Directors, and intend to implement improvements during fiscal year 2017 as follows:
Changes in Internal Control over Financial Reporting
During our lastthe most recently completed fiscal quarter, there werehave been no changes in our internal controlscontrol over financial reporting that havehas materially affected, or areis reasonably likely to materially affect, suchour internal controlscontrol over financial reporting.reporting for the fiscal quarter covered by this report.
36 |
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may be subject to legal proceedings, claims, and liabilities that arise in the United States District Court forordinary course of business. In the Southern Districtopinion of Florida by Kennethmanagement and Emily Reel on behalfbased upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a purported nationwide class of individuals who attended the Fyre Music Festival, or the Fyre Festival,material effect in the Bahamas on April 28-30, 2017.Company’s financial position, results of operations and cash flows. The complaint names several defendants, including 42West, along with the organizersCompany is not aware of any pending litigation as of the Fyre Festival, Fyre Media Inc. and Fyre Festival LLC, individuals related to Fyre, and another entity called Matte Projects LLC. The complaint alleges that the Fyre Festival was promoted by Fyre as a luxurious experience through an extensive marketing campaign orchestrated by Fyre and executed with the assistancedate of outside marketing companies, 42West and Matte, but that the reality of the festival did not live up to the luxury experience that it was represented to be. The plaintiffs assert claims for fraud, negligent misrepresentation and for violation of several states’ consumer protection laws. The plaintiffs seek to certify a nationwide class action comprised of “All persons or entities that purchased a Fyre Festival 2017 ticket or package or that attended, or planned to attend, Fyre Festival 2017” and seek damages in excess of $5,000,000 on behalf of themselves and the class. The plaintiffs sought to consolidate this action with five other class actions also arising out of the Fyre Festival (to which 42West is not a party) in a Multi District Litigation proceeding, or MDL, which request was denied by the Judicial Panel on Multi District Litigation. On September 10, 2017, one of the defendants filed a cross-claim against all other named defendants seeking indemnity and contribution. On October 2, 2017, 42West filed a motion to dismiss the cross-claim. We believe the claims against 42West are without merit and that we have strong defenses to the claims.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors associated with our business is containeddisclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162021 filed with the SEC on April 17, 2017 (the “Form 10-K”) and below:
As of December 31, 2016 | As of September 30, 2017 | |
Related party debt | $684,326 | $1,734,867 |
Max Steel debt | $18,743,069 | $5,063,846 |
Total Debt (including related party debt) | $19,727,395 | $13,523,713 |
Total Stockholders’ Equity (Deficit) | $(31,867,797) | $2,733,694 |
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 stockCommon Stock during the quarter ended September 30, 2017:2022:
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.
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 |
| ||||
7/1/2017 – 7/31/2017 | 8,134 | $9.22 | — | — |
8/1/2017 – 8/31/2017 | — | — | — | — |
9/1/2017 – 9/30/2017 | 32,538 | $9.22 | — | — |
Total | 40,672 | $9.22 | — | — |
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 termsfull 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 conditionscontracting 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 filethe Put Agreements, the Sellers exercised their Put Rightsrequired financial statements of Socialyte and caused the Company to purchase 40,672pro 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 for an aggregate amount of $375,000. See Note 4 — Acquisition of 42West for further discussionissued 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 Put Agreements.
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.
ITEM 6. EXHIBITS
Exhibit No. | Description | |
3.1** | Amended and Restated Articles of Incorporation of Dolphin Entertainment, Inc. | |
10.1* | Membership Interest Purchase Agreement dated as of November 14, 2022, by and between Dolphin Entertainment, Inc. and NSL Ventures, LLC. | |
31.1* | Certification of Chief Executive Officer of the Company pursuant to Section 302 of the | |
31.2* | ||
Certification of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1# | ||
Certification of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of | ||
32.2# | ||
Certification of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of | ||
2002 | ||
101.INS | Inline XBRL Instance Document | |
(the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | ||
101.SCH | Inline XBRL Taxonomy | |
Document | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
Document | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
Document | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
Document | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Previously filed. |
# | Furnished herewith. |
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 17, 2017.
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 |