UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-38331
DOLPHIN ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction of
incorporation or organization)
150 Alhambra Circle, Suite 1200, Coral Gables, FL
(Address of principal executive offices)
86-0787790
(I.R.S. Employer
Identification No.)
33134
(Zip Code)
Registrant’s telephone number (305) 774-0407
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.015 par value per share
Trading Symbol(s)
DLPN
Name of each exchange on which registered
The Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by a check mark if 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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by a 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,” and "emerging growth company" in Rule 12b-2 of the Exchange
Act:
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting from that prepared or issued its audit report: ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) ☐ Yes ☒ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, as of the last business day of the registrant’s most recently completed second fiscal quarter: $25,511,503
Number of shares outstanding of the registrant’s common stock as of March 23, 2023: 12,619,434
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
FORM 10-K
PART I
Item 1. BUSINESS
Item 1A. RISK FACTORS
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. MINE SAFETY DISCLOSURES
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Item 6. [RESERVED]
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A. CONTROLS AND PROCEDURES
Item 9B. OTHER INFORMATION
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Item 11. EXECUTIVE COMPENSATION
PART III
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
PART IV
Item 16. FORM 10-K SUMMARY
SIGNATURES
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K contain “forward-looking statements” and information within the meaning of Section 27A of the Securities
Act of 1933, as amended, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, which are
subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements about our plans,
objectives, representations and intentions and are not historical facts and typically are identified by use of terms such as “may,” “should,” “could,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “will,” “would” and similar words, although some forward-looking
statements are expressed differently. You should be aware that the forward-looking statements included herein represent management’s current judgment
and expectations, but our actual results, events and performance could differ materially from those in the forward-looking statements. Specifically, this
Form 10-K contains forward-looking statements regarding:
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the effects of a challenging economy on the demand for our marketing services, on our clients’ financial condition and our business or
financial condition;
the impacts of the novel coronavirus (COVID-19) pandemic and the measures to contain its spread, including social distancing efforts and
restrictions on businesses, social activities and travel, any failure to realize anticipated benefits from the rollout of COVID-19 vaccination
campaigns and the resulting impact on the economy, our clients and demand for our services, which may precipitate or exacerbate other
risks and uncertainties;
risks associated with assumptions we make in connection with our critical accounting estimates, including changes in assumptions
associated with any effects of a weakened economy;
potential adverse effects if we are required to recognize impairment charges or other adverse accounting-related developments;
our expectations regarding the potential benefits and synergies we can derive from our acquisitions;
our expectations to offer clients a broad array of interrelated services, the impact of such strategy on our future profitability and growth and
our belief regarding our resulting market position;
our beliefs regarding our competitive advantages;
our intention to hire new individuals or teams whose existing books of business and talent rosters can be accretive to revenues and profits of
the business and our expectations regarding the impact of such additional hires on the growth of our revenues and profits;
our beliefs regarding the drivers of growth in the entertainment publicity and marketing segment, the timing of such anticipated growth trend
and its resulting impact on the overall revenue;
our intention to expand into television production in the near future;
our belief regarding the transferability of 42West, The Door, Shore Fire, Viewpoint, Be Social, Socialyte and B/HI’s skills and experience to
related business sectors and our intention to expand our involvement in those areas;
our intention to selectively pursue complementary acquisitions to enforce our competitive advantages, scale and grow, our belief that such
acquisitions will create synergistic opportunities and increased profits and cash flows, and our expectation regarding the timing of such
acquisitions;
our expectations to raise funds through loans, additional sales of our common stock, securities convertible into our common stock, debt
securities or a combination of financing alternatives;
our intention to implement improvements to address material weaknesses in internal control over financial reporting.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to
caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ
significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause
the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-
looking statements include, but are not limited to, the following:
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our ability to continue as a going concern;
our history of net losses and our ability to generate a profit;
our significant indebtedness and our ability to obtain additional financing or service the existing indebtedness;
the effect of the COVID-19 outbreak on our business and operations;
our ability to accurately predict our clients’ acceptance of our differentiated business model that offers interrelated services;
our ability to successfully identify and complete acquisitions in line with our growth strategy and anticipated timeline, and to realize the
anticipated benefits of those acquisitions;
our ability to maintain compliance with Nasdaq listing requirements;
adverse events, trends and changes in the entertainment or entertainment marketing industries that could negatively impact our operations
and ability to generate revenues;
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loss of a significant number of entertainment publicity and marketing clients;
the ability of key clients to increase their marketing budgets as anticipated;
our ability to continue to successfully identify and hire new individuals or teams who will provide growth opportunities;
uncertainty that our strategy of hiring of new individuals or teams will positively impact our revenues and profits;
lack of demand for strategic communications services by traditional and non-traditional media clients who are expanding their activities in
the content production, branding and consumer products PR sectors;
economic factors that adversely impact the entertainment industry, as well as advertising, production and distribution revenue in the online
and motion picture industries;
economic factors that adversely impact the food and hospitality industries, such as those economic factors from the global outbreak of
COVID-19;
competition for talent and other resources within the industry and our ability to enter into agreements with talent under favorable terms;
our ability to attract and/or retain the highly specialized services of the 42West, The Door, Viewpoint, Shore Fire, Be Social, Socialyte and
B/HI executives and employees and our CEO;
availability of financing from investors under favorable terms;
our ability to adequately address material weaknesses in internal control over financial reporting; and
uncertainties regarding the outcome of pending litigation.
The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you
should consult other disclosures made by the Company (such as in our other filings with the SEC or in Company press releases) for other factors that may
cause actual results to differ materially from those projected by the Company. Please refer to Part I, Item 1A, Risk Factors of this Form 10-K for additional
information regarding factors that could affect the Company’s results of operations, financial condition and liquidity. Any forward-looking statements,
which we make in this Form 10-K, speak only as of the date of such statement, and we undertake no obligation to update such statements, except as
otherwise required by applicable law. We can give no assurance that such forward-looking statements will prove to be correct. An occurrence of, or any
material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this report or included in our other periodic reports filed
with the SEC could materially and adversely impact our operations and our future financial results. Comparisons of results for current and any prior periods
are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Any public statements or disclosures made by us following this report that modify or impact any of the forward-looking statements contained in or
accompanying this report will be deemed to modify or supersede such outlook or other forward-looking statements in or accompanying this report.
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Unless the context otherwise requires, all references to “we”, “us”, “our, “Dolphin” and the “Company” refer to Dolphin Entertainment, Inc., a Florida
corporation, and its consolidated subsidiaries.
PART I
ITEM 1. BUSINESS
Overview
We are a leading independent entertainment marketing and premium content development company. Through our subsidiaries, 42West LLC
(“42West”), The Door Marketing Group LLC (“The Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation, Inc. (“Viewpoint”), Be
Social Public Relations, LLC (“Be Social”), B/HI Communications, Inc. (“B/HI”) and Socialyte LLC (“Socialyte”) we provide expert strategic marketing
and publicity services to many of the top brands, both individual and corporate, in the motion picture, television, music, gaming, culinary, hospitality and
lifestyle industries. 42West (Film and Television, Gaming), Shore Fire (Music), and The Door (Culinary, Hospitality, Lifestyle) are each recognized global
PR and marketing leaders for the industries they serve. (B/HI is considered a division of 42West throughout the rest of our discussion.) Viewpoint adds full-
service creative branding and production capabilities to our marketing group and Be Social and Socialyte provide influencer marketing capabilities through
their roster of highly engaged social media influencers. Dolphin’s legacy content production business, founded by our Emmy-nominated Chief Executive
Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital series, primarily aimed at family and young adult markets.
We were first incorporated in the State of Nevada on March 7, 1995 and domesticated in the State of Florida on December 4, 2014. Our common
stock trades on The Nasdaq Capital Market under the symbol “DLPN”.
We currently operate in two reportable segments: our entertainment publicity and marketing segment and our content production segment. The
entertainment publicity and marketing segment is composed of 42West, Shore Fire, The Door, Viewpoint, Be Social and Socialyte and provides clients with
diversified services, including public relations, entertainment content marketing, strategic communications, social media and influencer marketing, creative
branding, and the production of promotional video content. The content production segment is composed of Dolphin Films, Inc. (“Dolphin Films”) and a
department within Dolphin, which produce and distribute feature films and digital content.
With respect to our entertainment publicity and marketing segment, we currently see a favorable environment for organic growth. The original
content budgets of many large studios and streaming services have grown considerably the past few years and are expected to continue to do so for the
foreseeable future. Furthermore, we have seen the entrance of large streaming services such as Disney+, Apple TV, Peacock (from NBCUniversal), HBO
Max, Paramount+ and Discovery, all to compete with Netflix, Amazon and Hulu. We believe that the foremost differentiating factor for all of these
platforms will be original programming and, consequently, it is anticipated that there will be an increase of tens of billions of dollars in programming spent
across the market. We also believe that each of these original shows will need substantial public relations and marketing campaigns to drive consumer
awareness of both the shows themselves and the respective platforms on which to find them.
Additionally, we have endeavored to create a “marketing super group,” combining marketing, public relations, branding, and digital production,
that will serve as a platform for organic growth via the cross-selling of services among our subsidiaries. By way of example, our initial public relations
companies (42West, Shore Fire, and The Door) have identified the capability to run influencer marketing campaigns for clients as a “must have” in today’s
environment, which requires the ability to drive social media awareness and engagement. Thus, we believe that our subsidiaries, Be Social and Socialyte
provide a critical competitive advantage in the acquisition of new clients in the entertainment and lifestyle marketing space and will continue to fuel topline
revenue growth as the average revenue per client increases with the cross-selling of influencer marketing services. Furthermore, influencer marketing
campaigns are also considered essential to so many consumer products earned media campaigns in today’s online marketplace, creating large cross-selling
opportunities between our PR agencies and Be Social’s and Socialyte’s expertise and services.
We believe that our expanding portfolio of public relations and marketing companies will continue to attract future acquisitions. We believe that
our “marketing super group” is unique in the industry, as a collection of best-in-class service providers across a variety of entertainment and lifestyle
verticals. We further believe that with each new acquisition in this space, our portfolio will increase its breadth and depth of services and, therefore, be able
to offer an even more compelling opportunity for other industry leaders to join and enjoy the benefits of cross-selling to a wide variety of existing and
potential clients. Thus, we believe we can continue to grow both revenues and profits through future acquisitions into our entertainment publicity and
marketing segment.
Finally, we believe our ability to engage a broad consumer base through our best-in-class pop culture assets provides us an opportunity to make
investments in products or companies which would benefit from our collective marketing power. We call these investments “Dolphin 2.0” (with “Dolphin
1.0” being the underlying businesses of each of our subsidiaries).
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Simply put, we seek to own some of the assets we are marketing. Specifically, we want to own assets where our experience, industry relationships
and marketing power will most influence the likelihood of success. This leads us to seek investments in the following categories of assets: 1) Content; 2)
Live Events; and 3) Consumer Products.
The first of our 2.0 investments was in the new world of NFTs (Non-Fungible Tokens). Initially, we had seen a large opportunity in this sector.
Even without broad consumer adoption, the NFT market grew dramatically in 2021, from an estimated $250 million in 2020 to over $40 billion in 2021,
according to Bloomberg. We had believed the NFT market would continue to grow at a rapid pace for years to come, driven by the combination of 1) the
ability of consumers to purchase using a credit card (and not just with cryptocurrencies); 2) consumer-friendly pricing options (previously not readily
available due to large “gas fees” charged by both sellers and buyers of NFTs to offset the energy consumption required to “mint” the NFT for sale); and 3)
popular entertainment and pop culture collectibles being offered.
In March 2021, we announced our intentions to enter into the production and marketing of NFTs. In August, 2021, we announced we would
develop and launch NFT collections across all major entertainment industry verticals (film, television, music, gaming, etc.). In October, 2021, we
announced the hiring of Anthony Francisco, former Senior Visual Development Artist at Marvel Studios, and designer of many iconic characters in the
Marvel Cinematic Universe, to be Creative Director of our NFT studios. And in December, 2021, we unveiled our first collection, entitled “Creature
Chronicles: Exiled Aliens,” a generative art collection of 10,000 unique avatars created by Mr. Francisco. On October 2, 2022, the Company minted and
offered for sale a collection of 7,777 Creature Chronicles: Exiled Aliens NFTs. The collection generated approximately 13,175 Solana (“SOL”) equivalent
to approximately $429,000 on the date of the sale, of which we netted approximately $300,000.
Despite the success of a “sold out” collection (in approximately 90 minutes on a Sunday afternoon), we no longer have immediate plans to design
and sell additional NFT collections, due to the tremendously uncertain macro environment surrounding cryptocurrencies in general (still the primary
payment form for NFTs), and NFTs in particular.
Our second Dolphin 2.0 investment was made in October, 2021, when we acquired an ownership stake in Midnight Theatre, a state-of-the-art
contemporary variety theater and restaurant in the heart of Manhattan. An anchor of Brookfield Properties’ recently opened $4.5 billion Manhattan West
development, the Midnight Theatre held its soft opening in September 2022 and is expected to be fully operating by fourth quarter of 2023. The Midnight
Theatre will feature three distinct experiences for guests: the theatre itself; a separate pan-Asian restaurant, Hidden Leaf; and a ground-level café. We
manage all aspects of publicity and marketing for the venue (both theatre and restaurant), as well as facilitate talent and commercial relationships within the
entertainment and culinary industries.
The Midnight Theatre will have a weekly schedule of performances and immersive experiences across music, comedy, Broadway, and narrative
magic shows programmed at the 160-seat venue. The contemporary variety theatre integrates state-of-the-art 270 degree projection mapped visuals into live
performances, allowing for unprecedented intimacy between performers and guests. The Midnight Theatre also has built in live-stream capabilities,
allowing for events inside the theatre to expand beyond into other theaters, people’s homes and corporate offices. The theatre will be available to host live
streamed podcasts, comedy specials, music events, Broadway cabarets, corporate keynote events and more.
Hidden Leaf, the modern pan-Asian restaurant concept on the second floor of The Midnight Theatre space, led by acclaimed restauranteur Josh
Cohen, commenced operations on July 2022. The restaurant features a 75-seat dining room, 20-seat private dining room and a 40-seat lounge/bar area.
Hidden Leaf will be open for both lunch and dinner and will incorporate world-class food with interactive elements such as table-side prep, wine
consignments, and memberships.
Our third Dolphin 2.0 investment was made in December, 2021, when we acquired an ownership stake in Crafthouse Cocktails, a pioneering brand
of ready-to-drink, all-natural classic cocktails created by world renowned mixologist, Charles Joly and esteemed restaurateur, Matt Lindner. Founded in
2013, Crafthouse Cocktails is an award-winning pioneer in the premium ready-to-drink cocktail category, with eight different, made-from-scratch cocktails,
using all-natural ingredients and premium craft spirits, available in more than 2,000 retail locations nationally. We will manage all aspects of publicity and
marketing for the brand through our network of agencies and will facilitate talent and commercial relationships within the entertainment and culinary
industries.
Lastly our fourth Dolphin 2.0 investment was made in June, 2022, when we entered into a multi-year deal with IMAX to jointly finance the
development and production of a slate of feature-length documentaries for the global market. The first project under this deal is for “The Blue Angels,” co-
produced by legendary Hollywood filmmaker J.J. Abrams and his Bad Robot Productions. “The Blue Angels” follows the newest class of the storied Navy
and Marine Corps flight squadron through intense training and into their first season of heart-stopping aerial artistry, while also sharing the emotional
stories of the veterans on the team who, this year, will take their final flights. It will mark the first time the iconic blue and yellow F/A-18 Super Hornets
will be featured in IMAX. The film is expected to be released in IMAX theaters in the second half of 2023.
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Growth Opportunities and Strategies
For Dolphin 1.0, we are focused on driving growth through the following efforts:
Expand and grow 42West to serve more clients with a broad array of interrelated services. We believe that the launch and growth of a large
number of streaming services over the last three years represents tremendous organic growth opportunities for 42West, due to the increase in potential new
clients and a larger number of individual projects to promote.
Enhanced by Dolphin’s acquisitions of Be Social, Socialyte and Viewpoint, 42West has the ability to both structure influencer marketing
campaigns and create promotional and marketing content for clients, which are critical services for entertainment content marketers in today’s digital
world.
Through our acquisition of B/HI in January, 2021 (considered a division of 42West), 42West has entered into the “sister” entertainment verticals of
video gaming and e-sports. We believe these industries represent a tremendous growth opportunity for 42West.
Furthermore, the growing involvement in non-entertainment businesses by many of our existing entertainment clients has allowed 42West to
establish a presence and develop expertise outside its traditional footprint. Using this as a foundation, we are now working to expand our involvement in
these new areas, including consumer products “fronted” by recognizable celebrities or “branded” with recognizable intellectual property.
Expand and grow Shore Fire Media to serve more clients in more genres of music and in more markets. For over 30 years, Shore Fire has been
a leader in providing public relations and marketing services to a broad array of songwriters, recording artists, publishers and others within the music
industry, all from its headquarters in Brooklyn. We plan to significantly expand Shore Fire’s presence in other major music markets, including Los Angeles,
Nashville and Miami, which we believe will provide access to potential clients across a wide array of popular musical genres, including pop, country and
Latin.
Expand and grow The Door through the expansion of its Consumer Products PR business. The Door’s market-leading position in both the food
and hospitality verticals, with many clients that have consumer-facing products and the need for attendant marketing campaigns, has provided the Company
with the requisite experience for a successful entry into the high-margin consumer products PR business with potential clients both inside and outside of the
food and hospitality verticals. We plan to significantly increase the number of consumer products PR accounts at The Door. Such accounts often generate
higher monthly fees and longer-term engagements than any other of our customer verticals.
Diversify Viewpoint’s Client Base. Viewpoint is a leading creative branding agency and promotional video content producer for the television
industry, with long-term clients such as HBO, Discovery Networks, Showtime and AMC. Through 42West, The Door and Shore Fire, Viewpoint can offer
its best-in-class services to several new verticals, including motion picture production and distribution companies, video game publishers, musical artists,
restaurant groups, the hospitality and travel industry and the marketers of consumer products. The ability for Viewpoint to reach clients of 42West, The
Door and Shore Fire provides Viewpoint with the opportunity to diversify its client base, while allowing 42West, The Door and Shore Fire to increase their
service offerings to, existing and future clients, potentially driving increased revenues.
Diversify Be Social’s and Socialyte’s Client Bases. Be Social and Socialyte are leading influencer marketing agencies, with a specialization in the
beauty, fashion and wellness industries. Through 42West, The Door and Shore Fire, Be Social and Socialyte can offer their services to several new
verticals, including motion picture and television content, podcasts, musical artists and labels, restaurant groups, hotels and resorts, the travel industry, the
gaming and e-sports industry, and the marketers of broader consumer products. The ability for Be Social and Socialyte to reach clients of 42West, The Door
and Shore Fire provides Be Social and Socialyte with the opportunity to diversify their client bases, while allowing 42West, The Door and Shore Fire to
increase their service offerings to, existing and future clients, potentially driving increased revenues.
Cross-Sell Be Social’s and Socialyte’s Expertise Across Both Paid and Organic Influencer Campaigns. Be Social has a well-regarded brand
marketing division specializing in organic influencer campaigns (i.e. wherein brands supply free product to influencers to sample, but do not pay the
influencers for guaranteed posts). Socialyte has a well-regarded brand marketing division specializing in paid influencer campaigns (i.e. wherein brands
pay influencers to promote their products, whether or not free products are distributed to the influencer). Brands often run both types of campaigns, organic
and paid, during the same campaign cycle. By being able to offer both services to brands, we anticipate a strong “cross-selling” business between the brand
divisions of Be Social and Socialyte, increasing the “wallet share” from each of the brand clients of the respective companies.
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Opportunistically grow through complementary acquisitions. We plan to selectively pursue acquisitions to further enhance our competitive
advantages, scale our revenues, and increase our profitability. Our acquisition strategy is based on identifying and acquiring companies that complement
our existing entertainment publicity services businesses. We believe that complementary businesses, such as live event production companies and PR firms
in other entertainment verticals, can create synergistic opportunities that may increase profits and operating cash flow.
For Dolphin 2.0, we are focused on driving growth through the following efforts:
Build a portfolio of premium film, television and digital content. We intend to grow and diversify our portfolio of film, television and digital
content by capitalizing on demand for high quality digital media and film content throughout the world marketplace. We plan to balance our financial risks
against the probability of commercial success for each project. We believe that our strategic focus on content and creation of innovative content distribution
strategies will enhance our competitive position in the industry, ensure optimal use of our capital, build a diversified foundation for future growth and
generate long-term value for our shareholders. Finally, we believe that marketing strategies that will be developed by our best-in-class entertainment PR
and marketing companies will drive our creative content, thus creating greater potential for profitability.
Promotion of Midnight Theatre. As noted above, Midnight Theatre is currently scheduled to fully open with seven days a week of programming,
by the end of the fourth quarter of this year. All Dolphin PR and Marketing subsidiaries will support the promotional campaigns for the opening of
Midnight Theatre. We will also seek to support the programming slate of the theatre itself, through our relationships across music, Broadway and other
forms of entertainment.
Assist Crafthouse Cocktails on its expansion. We believe Crafthouse Cocktails is a fantastic product, poised for growth. We will seek to create
and execute PR and marketing campaigns to assist Crafthouse in growing its retail presence, both in states where the brand currently is available, as well as
new states across the country.
Entertainment Publicity and Marketing
42West
Through 42West, an entertainment public relations agency, we offer talent publicity, entertainment (motion picture and television) marketing,
video game and eSports marketing, and strategic communications services. Prior to its acquisition, 42West grew to become one of the largest
independently-owned public relations firms in the entertainment industry, and in March 2022 (the most recent year of such rankings), 42West was ranked
#2 in the annual rankings of the nation’s Power 50 PR firms by the New York Observer, the highest position held by an entertainment PR firm. As such, we
believe that 42West has served, and will continue to serve, as an “acquisition magnet” for us to acquire new members of our marketing “super group,”
which has the ability to provide synergistic new members with the opportunity to grow revenues and profits through 42West’s access, relationships and
experience in the entertainment industry.
Marketing professionals at 42West develop and execute marketing and publicity strategies for dozens of movies and television shows annually, as
well as for individual actors, filmmakers, recording artists, video game publishers, and authors. Through 42West, we provide services in the following
areas:
Entertainment Marketing
We provide marketing direction, public relations counsel and media strategy for productions (including theatrical films, DVD and VOD releases,
television programs, and online series) as well as content producers, ranging from individual filmmakers and creative artists to production companies, film
financiers, DVD distributors, and other entities. Our capabilities include worldwide studio releases, independent films, television programming and web
productions. We provide entertainment marketing services in connection with film festivals, awards campaigns, event publicity and red-carpet
management.
Talent Publicity
We focus on creating and implementing strategic communication campaigns for performers and entertainers, including film, television and
Broadway stars. Our talent roster includes multiple Oscar-, Emmy- and Tony-winning actors. Our services in this area include ongoing strategic counsel,
media relations, studio, network, charity, corporate liaison and event support.
Video Game and eSports Publicity
We provide marketing direction, public relations counsel and media strategy for video game publishers as well as eSports leagues, and other
entities in the gaming industry. Our capabilities include global game releases (web, console and mobile), independent releases, eSports tournament and
league publicity, and various gaming events.
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Strategic Communications
Our strategic communications team advises brands and non-profits seeking to utilize entertainment and pop culture in their marketing campaigns.
We also help companies define objectives, develop messaging, create brand identities, and construct long-term strategies to achieve specific goals, as well
as manage functions such as media relations or internal communications on a day-to-day basis. Our clients include major studios and production
companies, record labels, media conglomerates, technology companies, philanthropic organizations, talent guilds, and trade associations, as well as a wide
variety of high-profile individuals, ranging from major movie and pop stars to top executives and entrepreneurs.
Shore Fire
Through Shore Fire, we represent musical artists and culture makers at the top of their fields. Shore Fire’s dedicated teams in New York, Los
Angeles, and Nashville wield extensive, varied expertise to strategically amplify narratives and shape reputations for career-advancing effect. We believe
Shore Fire is the largest public relations agency in the music business, representing top recording artists in multiple genres, songwriters, music producers,
record labels, music industry businesses, venues, trade organizations, authors, comedians, social media personalities and cultural institutions.
The Door
Through The Door, a hospitality, lifestyle and consumer products public relations agency, we offer traditional public relations services, as well as
social media marketing, creative branding, and strategic counsel. Prior to its acquisition, The Door was widely considered the leading independent public
relations firm in the hospitality and lifestyle industries. Among other benefits, The Door acquisition has expanded our entertainment verticals through the
addition of celebrity chefs and their restaurants, as well as with live events, such as some of the most prestigious and well-attended food and wine festivals
in the United States. Our public relations and marketing professionals at The Door develop and execute marketing and publicity strategies for dozens of
restaurant and hotel groups annually, as well as for individual chefs, live events, and consumer-facing corporations.
Be Social and Socialyte
Through Be Social and Socialyte, our influencer marketing agencies, we offer brand marketing services ( both paid and organic influencer
marketing campaigns) and management for individual influencers. Be Social is a recognized leader in its field, especially within the beauty, fitness and
wellness industries. Socialyte is an influencer marketing powerhouse, with teams in New York, Los Angeles, Miami and Nashville representing some of the
most sought-after creators, from digital-only to celebrity-level talent. Combined, Be Social and Socialyte have a client roster of more than 200 market-
leading influencers. Lytehouse, Socialyte’s sister agency, represents some of the world's most iconic brands, providing a full suite of services for paid
influencer campaigns, from strategy and casting, through execution and delivery, with in-depth analytics and reporting.
Viewpoint
Viewpoint is a full-service, boutique creative branding and production agency that has earned a reputation as one of the top producers of
promotional brand-support videos for a wide variety of leading cable networks in the television industry. Viewpoint’s capabilities run the full range of
creative branding and production, from concept creation to final delivery, and include: brand strategy, concept and creative development, design & art
direction, script & copywriting, live action production & photography, digital development, video editing & composite, animation, audio mixing &
engineering, project management and technical support.
Content Production
Dolphin Films and Dolphin Digital Studios
Dolphin Films is a content producer of motion pictures. We own the rights to several scripts that we intend to produce at a future date. Dolphin
Digital Studios creates original content to premiere online. We own several concepts and scripts that we intend to further develop and produce at a future
date.
In June, 2022, we entered into a multi-year deal with IMAX Corporation to jointly finance the development and production of a slate of feature-
length documentaries for the global market. The first project under this deal is for “The Blue Angels,” co-produced by legendary Hollywood filmmaker J.J.
Abrams and his Bad Robot Productions. We agreed to finance up to $2 million of the production budget, and as of December 31, 2022, we have invested
approximately $1.5 million, of The Blue Angels that is expected to be released in the second half of 2023.
5
Competition
The businesses in which we engage are highly competitive. Through 42West, Shore Fire and The Door, we compete against other public relations
and marketing communications companies, as well as independent and niche agencies to win new clients and maintain existing client relationships.
Through Viewpoint, Be Social and Socialyte, we compete against other creative branding and influencer marketing agencies as well as in-house teams at
many of our clients. Our content production business faces competition from companies within the entertainment business and from alternative forms of
leisure entertainment, such as travel, sporting events, video games and computer-related activities. We are subject to competition from other digital media
and motion production companies, as well as from large, well-established companies within the entertainment industry that have significantly greater
development, production, distribution and capital resources than us. We compete for the acquisition of literary properties and for the services of producers,
directors, actors and other artists as well as creative and technical personnel and production financing, all of which are essential to the success of our
business. In addition, our productions compete for audience acceptance and advertising dollars.
We believe that we compete on the basis of the following competitive strengths:
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Market Reputations of 42West, Shore Fire and The Door — 42West, Shore Fire and The Door consistently rank among the most prestigious
and powerful public relations firms in the United States (each ranking in the Top 50 Most Powerful PR Firms in recent rankings, as
published by the New York Observer), which is a significant competitive advantage given the nature of the entertainment marketing and
public relations industry, in which “perception is power;”
An Exceptional Management Team—our CEO, Mr. O’Dowd, has a 25-year history of producing and delivering high-quality family
entertainment. In addition, 42West’s CEO, Amanda Lundberg, The Door’s CEO, Charlie Dougiello, and President, Lois O’Neill, and Shore
Fire’s President Marilyn Laverty are all longtime PR practitioners, with decades of experience, and are widely recognized as among the top
communications strategists in the entertainment, hospitality and music industries, as evidenced by the market reputation of their companies;
and
Our Ability to Offer Interrelated Services—we believe that our ability to offer influencer marketing expertise and creative branding
opportunities for our 42West, The Door and Shore Fire clients, primarily through the services of Be Social, Socialyte and Viewpoint, will
allow us to expand and grow our relationships with existing clients and also attract new ones.
Our Ability to Offer Services Across Multiple Verticals of Entertainment – we believe that our ability to offer relationship access and
marketing reach across all of the film, television, podcast, music, celebrity chef, hospitality, gaming and e-sports industries will be attractive
to marketers of consumer products who desire a broad campaign across pop culture, which will allow us to expand our client base and grow
the size of our campaigns.
Human Capital Management
Our People and Culture
Because our business is predominantly service-based, the quality of the personnel we employ is crucial to our success and growth. Our employees
and contractors are our most valuable assets. We believe our relationship with our employees is great, and we also utilize consultants in the ordinary course
of our business and hire additional employees on a project-by-project basis in connection with the production of digital media projects or motion pictures.
We conduct training and development in our subsidiaries to ensure our employees maintain the quality for which we are known.
As of March 10, 2023, we had 244 full-time employees, all of which are located within the United States.
Diversity and Inclusion
Dolphin and our subsidiaries are committed to diversity and inclusion, and our culture reinforce these values on a day-to-day basis, beginning with
our leadership team. Our leadership team, which includes our Chief Executive Officer, Chief Financial and Operating Officer and the leaders of our
subsidiaries, is composed 70% of women. Likewise, the Board of Directors is composed 29% of women.
6
Other Compensation and Benefits
The Company offers competitive compensation and benefits packages that meet the needs of its employees, including equity incentive awards,
retirement plans, health, dental, and vision benefits, basic life insurance and short and long-term disability coverage, among other benefits. The Company
analyzes market trends and monitors its own compensation practices to attract, retain, and promote employees and reduce turnover and associated costs.
Regulatory Matters
We are subject to state and federal work and safety laws and disclosure obligations, under the jurisdiction of the U.S. Occupational Safety and
Health Administration and similar state organizations.
As a public company, we are subject to the reporting requirements under Section 13(a) and Section 15(d) of the Exchange Act.
Corporate Offices
Our corporate headquarters is located at 150 Alhambra Circle, Suite 1200, Coral Gables, Florida 33134. Our telephone number is (305) 774-0407.
We also have offices located at:
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600 3rd Avenue, 23rd Floor, New York, New York 10016,
37 West 17th Street, 5th Floor, New York, New York, 10011;
1840 Century Park East, Suite 200, Los Angeles, California 90067; and
12 Court Street, Suite 1800, Brooklyn, New York 11201;
Available Information
The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are
available free of charge through the “Investor Relations” section of the Company’s website, www.dolphinentertainment.com, as soon as reasonably
practical after they are filed with the Securities and Exchange Commission (“SEC”). The SEC maintains a website, www.sec.gov, which contains reports,
proxy and information statements, and other information filed electronically with the SEC by the Company. In addition, you may automatically receive
email alerts and other information when you enroll your email address by visiting the “Investor Relations” section of our website. The content of any
website referred to in this document is not incorporated by reference into this document.
ITEM 1A. RISK FACTORS
Risks Related to our Business and Financial Condition
Our results of operations are highly susceptible to unfavorable economic conditions.
We are exposed to risks associated with weak or uncertain regional economic conditions and disruptions in the financial markets. Following the
severe downturn in most markets following the outbreak of the COVID-19 pandemic, the global economy continues to be challenging. Economic
downturns or uncertainty about the strength of the global economy in general, or economic conditions in certain regions or market sectors, and caution on
the part of marketers, can have an effect on the demand for advertising and marketing communication services. In addition, market conditions can be and
have been adversely affected by natural and human disruptions, such as natural disasters, public health crises, severe weather events, military conflict or
civil unrest. Our industry can be affected more severely than other sectors by an economic downturn and can recover more slowly than the economy in
general. In the past, including in connection with the outbreak of the COVID-19 pandemic, some clients have responded to weak economic and financial
conditions by reducing their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating
expenses. This pattern may recur in the future. Furthermore, unexpected revenue shortfalls can result in misalignments of costs and revenues, resulting in a
negative impact to our operating margins. If our business is significantly adversely affected by unfavorable economic conditions or other market
disruptions that adversely affect client spending, the negative impact on our revenue could pose a challenge to our operating income and cash generation
from operations.
We have a history of net losses and may continue to incur net losses.
We have a history of net losses and may be unable to generate sufficient revenue to achieve profitability in the future. For the fiscal years ended
December 31, 2022 and 2021, respectively, our net loss was $4,780,135 and $6,462,303. Our accumulated deficit was $109,214,479 and $104,434,344 at
December 31, 2022 and 2021, respectively. Our ability to generate net profit in the future will depend on our ability to realize the financial benefits from
the operations of 42West, The Door, Shore Fire, Viewpoint, Be Social and Socialyte and the success of our Dolphin 2.0 initiatives, as no single project is
likely to generate sufficient revenue to cover our operating expenses. If we are unable to generate net profit at some point, we will not be able to meet our
debt service or working capital requirements. As a result, we may need to (i) issue additional equity, which could substantially dilute the value of your
share holdings, (ii) sell a portion or all of our assets, including any project rights which might have otherwise generated revenue, or (iii) cease operations.
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We currently have substantial indebtedness which may adversely affect our cash flow and business operations and may affect our ability to continue to
operate as a going concern.
The table below sets forth our total principal amount of debt as of December 31, 2022 and 2021.
Related party debt (noncurrent)
Notes payable (current and noncurrent)
Convertible notes payable (current and noncurrent)
Convertible notes payable – fair value option
Term loan (current and noncurrent)
Non-convertible promissory note – Socialyte (current)
December 31,
2022
1,107,873 $
1,368,960 $
5,050,000 $
343,556 $
2,867,592 $
3,000,000 $
2021
1,107,873
1,176,644
3,400,000
998,135
—
—
$
$
$
$
$
$
Our indebtedness could have important negative consequences, including:
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our ability to obtain additional financing for working capital, capital expenditures, future productions or other purposes may be impaired or
such financing may not be available on favorable terms or at all;
we may have to pay higher interest rates upon obtaining future financing, thereby reducing our cash flows; and
we may need a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, reducing
the funds that would otherwise be available for operations and future business opportunities.
Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance and our ability to
obtain additional financing, which will be affected by prevailing economic conditions, the profitability of our content production and entertainment
publicity and marketing businesses and other factors contained in these Risk Factors, some of which are beyond our control.
If we are not able to generate sufficient cash to service our current or future indebtedness, we will be forced to take actions such as reducing or
delaying digital or film productions, delaying or abandoning potential acquisitions, delaying Dolphin 2.0 initiatives, selling assets, restructuring or
refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to effect any of these remedies on
satisfactory terms or at all and our indebtedness may affect our ability to continue to operate as a going concern.
Our stock price has recently been volatile and may be volatile in the future, and as a result, investors in our common stock could incur substantial
losses.
Our stock price has recently been volatile and may be volatile in the future. We may incur rapid and substantial increases or decreases in our stock
price in the foreseeable future that may or may not coincide in timing with the disclosure of news or developments by us. The stock market in general, and
the market for entertainment companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors may experience losses on their investment in our common stock. The market price for our
common stock may be influenced by many factors, including the following:
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announcements of state-of-the-art means of content production and entertainment publicity and marketing, or those of companies that are
perceived to be similar to us;
announcements related to any delays in production or rollout of entertainment content;
our ability to meet or exceed the rapidly-changing expectations of our clients;
news that audience acceptance of and interest in our digital media productions, and therefore the commercial success of our content
production business, is lower or higher than we expected;
our ability to adapt to rapid change in technology, forms of delivery, storage, and consumer preferences related to digital content;
announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our strategic collaboration
partners or our competitors;
variations in our financial results or those of companies that are perceived to be similar to us;
trading volume of our common stock;
developments concerning our collaborations or partners;
the impact of any local or global pandemic and its effect on us;
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the perception of the entertainment publicity and marketing or digital content production by the public, legislatures, regulators and the
investment community;
developments or disputes concerning intellectual property rights;
significant lawsuits, including patent or stockholder litigation;
our ability or inability to raise additional capital and the terms on which we raise it;
sales of our common stock by us or our stockholders;
declines in the market prices of stocks generally or of companies that are perceived to be similar to us; and
general economic, industry and market conditions.
Our management has determined that our disclosure controls and procedures and our internal controls over financial reporting are not effective as we
have identified material weaknesses in our internal controls.
As disclosed in Part II, Item 9A. Controls and Procedures of this Annual Report on Form 10-K, management concluded that for the years ended
December 31, 2022 and 2021, our internal control over financial reporting was not effective and we identified several material weaknesses. Our
management concluded that our disclosure controls and procedures were not effective due to material weaknesses in our internal control over financial
reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We have commenced our remediation efforts as discussed in Part II, 9A. Controls and Procedures of this Annual Report on Form 10-K to address
the material weaknesses in internal control over financial reporting and ineffective disclosure controls and procedures. If our remedial measures are
insufficient, or if additional material weaknesses or significant deficiencies in our internal controls occur in the future, we could be required to restate our
financial results, which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the
capital markets, require us to expend significant resources to correct the weakness or deficiencies, harm our reputation and otherwise cause a decline in
investor confidence. In addition, we could be subject to, among other things, regulatory or enforcement actions by the Securities and Exchange
Commission, (the “SEC” or the “Commission”).
We rely on information technology systems that are susceptible to cybersecurity risks. In the event of a cybersecurity incident, we could experience
operational interruptions, incur substantial additional costs, become subject to legal or regulatory proceedings or suffer damage to our reputation.
We rely on information technologies and infrastructure to manage our businesses, including digital storage of marketing strategies and client
information, films and digital programming and delivery of digital marketing services for our businesses. Data maintained in digital form is subject to the
risk of intrusion, tampering and theft. The incidence of malicious technology-related events, such as cyberattacks, computer hacking, computer viruses,
worms or other destructive or disruptive software, denial of service attacks or other malicious activities is on the rise worldwide. Power outages, equipment
failure, natural disasters (including extreme weather), terrorist activities or human error may also affect our systems and result in disruption of our services
or loss or improper disclosure of personal data, business information or other confidential information.
Likewise, data privacy breaches, as well as improper use of social media, by employees and others may pose a risk that sensitive data, such as
personally identifiable information, strategic plans and trade secrets, could be exposed to third parties or to the general public. We also utilize third parties,
including third-party “cloud” computing services, to store, transfer or process data, and system failures or network disruptions or breaches in the systems of
such third parties could adversely affect our reputation or business. Any such breaches or breakdowns could lead to business interruption, exposure of our
or our clients’ proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings and other
costs. Such events could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, we could be adversely
affected if any of our significant customers or suppliers experience any similar events that disrupt their business operations or damage their reputation.
Efforts to develop, implement and maintain security measures are costly, may not be successful in preventing these events from occurring and require
ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Although we maintain
monitoring practices and protections of our information technology to reduce these risks, there can be no assurance that our efforts will prevent the risk of a
security breach of our databases or systems that could adversely affect our business.
9
We will require additional financing, and we may not be able to raise funds on favorable terms or at all.
We had negative working capital of $1,423,825 as of December 31, 2022. With our current cash on hand, expected revenues, and based on our
current average monthly expenses, we anticipate we will need additional funding in order to continue our operations at their current levels, and to pay the
costs associated with being a public company, for the next 12 months. To the extent we acquire additional businesses, we will also require additional
funding in the future to support our operations.
The most likely source of future funds presently available to us will be through the sale of equity capital. Any sale of share capital will result in
dilution to existing stockholders. Furthermore, we may incur debt in the future, and may not have sufficient funds to repay our future indebtedness or may
default on our future debts, jeopardizing our business viability.
The profitability of our investments is uncertain.
During 2021, we acquired an ownership stake in Midnight Theatre, a contemporary variety theater and restaurant in Manhattan and in Crafthouse
Cocktails, a brand of ready-to-drink, all-natural classic cocktails. During the year ended December 31, 2022, we incurred losses related to our investment in
Midnight Theatre and Crafthouse Cocktails in the amount of $246,789. We also started an NFT studio to produce and market NFTs. On October 2, 2022,
the Company minted and offered for sale a collection of 7,777 NFTs, titled Creature Chronicles: Exiled Aliens. The collection generated approximately
13,175 Solana (“SOL”) equivalent to approximately $429,000 on the date of the sale. Investments in these new ventures entail risks those businesses will
fail to perform in accordance with expectations. In undertaking these investments, we will incur certain risks, including the expenditure of funds on, and the
devotion of management’s time to, synergies that may not come to fruition. Additional risks inherent in these investments include risks that the ventures
will not achieve anticipated success and that estimates of the costs of bringing these ventures to profitability may prove inaccurate. Expenses may also be
greater than anticipated.
Risks Related to Our Entertainment Publicity and Marketing Business
Our business could be adversely affected if we fail to retain the principal sellers, and other key employees of 42West, The Door, Viewpoint, Shore Fire,
Be Social and Socialyte and the clients they serve.
The success of our entertainment publicity and marketing business operated by 42West, The Door, Viewpoint, Shore Fire, Be Social and Socialyte,
our marketing subsidiaries, substantially depends on our ability to retain the services of their former owners and certain key employees. If we lose the
services of one or more of these individuals, our ability to successfully implement our business plan with respect to our entertainment publicity and
marketing business and the value of our common stock could be materially adversely affected. Although we entered into employment agreements with each
of the principal sellers, there can be no assurance that they will serve the terms of their respective employment agreements or choose to remain with us
following the expiration of such terms. In addition, the employees of our marketing subsidiaries, and their skills and relationships with clients, are among
our most valuable assets. An important aspect of the business’ competitiveness is its ability to retain such key employees. If our marketing subsidiaries fail
to hire and retain a sufficient number of these key employees, it may have a material adverse effect on our overall business and results of operations.
Our marketing subsidiaries’ talent rosters currently include some of the best known and most highly respected members of the entertainment,
hospitality, and musical communities. These include major studios and networks, corporations, well-known consumer brands, celebrity chefs, leading
restaurant and hotel brands, recording artists and social media influencers. These clients often form highly loyal relationships with certain public relations
and marketing professionals rather than with a particular firm. The employment agreements with the principal sellers currently contain non-competition
provisions that prohibit the principal sellers from continuing to provide services to such clients should they leave our company, however, clients are free to
engage other public relations and marketing professionals and there can be no assurance that they will choose to remain with our company. The success of
our marketing subsidiaries, therefore, depend on our ability to continue to successfully maintain such client relationships should the principal sellers or
other key employees leave our company. If we are unable to retain the current marketing subsidiaries’ current clients or attract new clients, then we could
suffer a material adverse effect on our business and results of operations.
We operate in a highly competitive industry.
The entertainment publicity and marketing business is highly competitive. Through our marketing subsidiaries, we must compete with other
agencies, and with other providers of marketing and publicity services, in order to maintain existing client relationships and to win new clients. Through
Viewpoint, we compete against other creative branding agencies, as well as in-house creative teams at many of our clients. The client’s perception of the
quality of an agency’s creative work and the agency’s reputation are critical factors in determining its competitive position.
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The success of our entertainment publicity and marketing business depends on its ability to consistently and effectively deliver marketing and public
relations services to its clients.
Our marketing subsidiaries’ success depends on its ability to effectively and consistently staff and execute client engagements to achieve the
clients’ unique personal or professional goals. Our marketing subsidiaries work to design customized communications or publicity campaigns tailored to
the particular needs and objectives of particular projects. In some of their engagements, our marketing subsidiaries rely on other third parties to provide
some of the services to its clients, and we cannot guarantee that these third parties will effectively deliver their services or that we will have adequate
recourse against these third parties in the event they fail to effectively deliver their services. Other contingencies and events outside of our control may also
impact our marketing subsidiaries’ ability to provide its services. Our marketing subsidiaries’ failure to effectively and timely staff, coordinate and execute
its client engagements may adversely impact existing client relationships, the amount or timing of payments from clients, its reputation in the marketplace
and ability to secure additional business and our resulting financial performance. In addition, our contractual arrangements with our clients may not provide
us with sufficient protections against claims for lost profits or other claims for damages.
If we are unable to adapt to changing client demands, social and cultural trends or emerging technologies, we may not remain competitive and our
business, revenues and operating results could suffer.
We operate in an industry characterized by rapidly changing client expectations, marketing technologies, and social mores and cultural trends that
impact our target audiences. The entertainment industry continues to undergo significant developments as advances in technologies and new methods of
message delivery and consumption emerge. These developments drive changes in our target audiences’ behavior to which we must adapt in order to reach
our target audiences. In addition, our success depends on our ability to anticipate and respond to changing social mores and cultural trends that impact the
entertainment industry and our target audiences. We must adapt our business to these trends, as well as shifting patterns of content consumption and
changing behaviors and preferences of our target audiences, through the adoption and exploitation of new technologies. If we cannot successfully exploit
emerging technologies or if the marketing strategies we choose misinterpret cultural or social trends and prove to be incorrect or ineffective, any of these
could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
A significant labor dispute in our clients’ industries could have a material adverse effect on our business.
An industry-wide strike or other job action by or affecting the Writers Guild, Screen Actors Guild or other major entertainment industry union
could reduce the supply of original entertainment content, which would in turn reduce the demand for our talent and entertainment marketing services. An
extensive work stoppage would affect feature film production as well as television and commercial production and could have a material adverse effect on
our clients and the motion picture production industry in general. Contracts between entertainment industry unions and the Alliance of Motion Picture and
Television Producers, which we refer to as AMPTP, expire from time to time. The failure to finalize and ratify a new agreement with the AMPTP or the
failure to enter into new commercial contracts upon expiration of the current contracts could lead to a strike or other job action. Any such severe or
prolonged work stoppage could have an adverse effect on the television and/or motion picture production industries and could severely impair our clients’
prospects. Any resulting decrease in demand for our talent and entertainment marketing and other public relations services would have a material adverse
effect on our cash flows and results of operations.
Clients may terminate or reduce their relationships with us on short notice.
As is customary in the industry, our marketing subsidiaries’ agreements with their respective clients generally provide for termination by either
party on relatively short notice, usually 30 days. Consequently, these clients may choose to reduce or terminate their relationships with us, on a relatively
short time frame and for any reason. If a significant number of the marketing subsidiaries’ clients were to reduce the volume of business they conduct with
us or terminate their relationships with us completely, this could have a material adverse effect upon our business and results of operations. Viewpoint’s
revenue is derived on a project-by-project basis. Clients may decide to use other creative branding and production companies for their projects which
would have an adverse effect upon our business and results of operations.
Revenues from our Entertainment Publicity and Marketing segment are susceptible to declines as a result of unfavorable economic conditions.
Economic downturns often severely affect the marketing services industry. Some of our corporate clients may respond to weak economic
performance by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in the short-term than other expenses
related to operations. In addition, economic downturns could lead to reduced public demand for varying forms of entertainment for which we are engaged
to provide public relations and media strategy and promotional services. Such reduced demand for our services could have a material adverse effect on our
revenues and results of operations.
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If our clients experience financial distress, or seek to change or delay payment terms, it could negatively affect our own financial position and results.
We have a large and diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy
protection or go out of business. Unfavorable economic and financial conditions, such as the events surrounding the COVID-19 global outbreak, could
result in an increase in client financial difficulties that affect us. The direct impact on us included reduced revenues, write-offs of accounts receivable and
expenditures billable to clients, and negatively impacted our operating cash flow.
Risks Related to Acquisitions
We are subject to risks associated with acquisitions and we may not realize the anticipated benefits of such acquisitions.
We regularly undertake acquisitions that we believe will enhance our service offering to our clients. These transactions can involve significant
challenges and risks, including that the transaction does not advance our business strategy or fails to produce a satisfactory return on our investment. Our
customary business, legal and financial due diligence with the goal of identifying and evaluating the material risks involved may be unsuccessful in
ascertaining or evaluating all such risks. Though we typically structure our acquisitions to provide for future contingent purchase payments that are based
on the future performance of the acquired entity, our forecasts of the investment’s future performance also factor into the initial consideration. When actual
financial results differ, our returns on the investment could be adversely affected. Identifying suitable acquisition candidates can be difficult, time-
consuming and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis or at all.
Even if we complete an acquisition, we may not realize the anticipated benefits of such transaction. Our recent acquisitions have required, and any
similar future transactions may also require, significant efforts and expenditures, including with respect to integrating the acquired business with our
historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection with acquisition activities and integration efforts,
including, without limitation:
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diversion of management attention from managing our historical core business;
potential disruption of our historical core business or of the acquired business;
the strain on, and need to continue to expand, our existing operational, technical, financial and administrative infrastructure;
inability to achieve synergies as planned;
challenges in controlling additional costs and expenses in connection with and as a result of the acquisition;
dilution to existing shareholders from the issuance of equity securities;
becoming subject to adverse tax consequences or substantial depreciation;
difficulties in assimilating employees and corporate cultures or in integrating systems and controls;
difficulties in anticipating and responding to actions that may be taken by competitors;
difficulties in realizing the anticipated benefits of the transaction;
inability to generate sufficient revenue from acquisitions to offset the associated acquisition costs;
potential loss of key employees, key clients or other partners of the acquired business as a result of the change of ownership; and
the assumption of and exposure to unknown or contingent liabilities of the acquired businesses.
If any of our acquisitions do not perform as anticipated for any of the reasons noted above or otherwise, there could be a negative impact on our
results of operations and financial condition.
Losses incurred by us subsequent to completion of an acquisition may not be indemnifiable by the seller or may exceed the seller’s indemnification
obligations.
As discussed above, there may be liabilities assumed in any acquisition that we did not discover or that we underestimated in the course of
performing our due diligence. Although a seller generally will have indemnification obligations to us under an acquisition agreement, these obligations are
usually subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations. We cannot assure you that
our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any
losses that we incur with respect to a particular acquisition. Any such liabilities, individually or in the aggregate, could have a material adverse effect on
our business, financial condition and operating results.
12
Risks Related to our Common Stock and Preferred Stock
We have recently issued, and may in the future issue, a significant amount of equity securities and, as a result, your ownership interest in our company
has been, and may in the future be, substantially diluted and your investment in our common stock could suffer a material decline in value.
From January 1, 2021 to December 31, 2022, the number of shares of our common stock issued and outstanding has increased from 6,690,579 to
12,340,664 shares. During this period, we issued approximately (i) 2.7 million aggregate shares of our common stock as consideration or earnout
consideration for 42West, The Door, Shore Fire, Viewpoint, Be Social, B/HI and Socialyte acquisitions; (ii) 1.2 million to certain holders of convertible
notes and warrants that exercised their right to convert all or a portion of their convertible notes or warrants; (iii) 1.7 million to Lincoln Park Capital Fund
LLC related to our purchase agreement with them and (iv) 43,000 as stock compensation to certain employees. As of December 31, 2022, we had
outstanding convertible notes payable that as of the date of this report are still outstanding in the aggregate principal amount of $5.1 million, which are
convertible using a 90-day trading average stock price. As a result of these past issuances and potential future issuances, your ownership interest in the
Company has been, and may in the future be, substantially diluted.
The market price for our common stock has been volatile, and these issuances could cause the price of our common stock to continue to fluctuate
substantially. Once restricted stock issued in either private placements or to the sellers of the companies we acquired becomes freely tradable, these
shareholders may decide to sell their shares of common stock and, if our stock is thinly traded, this could have a material adverse effect on its market price.
We may need to raise additional capital and may seek to do so by conducting one or more private placements of equity securities, securities
convertible into equity securities or debt securities, or through a combination of one or more of such financing alternatives. Such issuances of additional
securities would further dilute the equity interests of our existing shareholders, perhaps substantially, and may further exacerbate any or all of the above
risks.
The Series C Convertible Preferred Stock has super voting rights that may adversely affect our shareholders.
The Series C Convertible Preferred Stock is held by Dolphin Entertainment LLC, an entity owned by Mr. O’Dowd. Except as required by law,
holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional
conversion threshold (as defined in the Series C Certificate of Designation) has occurred. On November 12, 2020, such determination by the Board was
made, and the holder of Series C Convertible Preferred Stock (indirectly Mr. O’Dowd) is entitled to super voting rights of three votes for each share of
common stock into which such holder’s shares of Series C Convertible Preferred Stock could then be converted. As of December 31, 2022 and 2021, the
Series C Preferred Stock could be converted into 4,738,940 shares of our common stock and the holder was entitled to 14,216,819 votes, which is
approximately 55% of our voting securities. The holder of Series C Convertible Preferred Stock is entitled to vote together as a single class on all matters
upon which common stockholders are entitled to vote. Your voting rights will be diluted as a result of these super voting rights. On November 12, 2020, we
entered into a stock restriction agreement with Mr. O’Dowd that prohibits the conversion of Series C Convertible Preferred Stock into common stock
unless the majority of the independent directors of the board of directors vote to remove the restriction. The stock restriction agreement will be immediately
terminated upon a change of control as defined in the agreement.
If we are unable to maintain compliance with Nasdaq listing requirements, our stock could be delisted, and the trading price, volume and marketability
of our stock could be adversely affected.
Our common stock is listed on the Nasdaq Capital Market. We cannot assure you, that we will be able to maintain compliance with Nasdaq’s
current listing standards, or that Nasdaq will not implement additional listing standards with which we will be unable to comply. During 2022, we received
deficiency notices from Nasdaq informing us that because we had not filed our Form 10-K for the year ended December 31, 2021 and our Form 10-Q for
the quarter ended March 31, 2022, we were no longer compliant with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all
required periodic financial reports with the Securities and Exchange Committee. On July 19, 2022, after filing both the Form 10-K for the year ended
December 31, 2021 and the Form 10-Q for the quarter ended March 31, 2022, Nasdaq notified us that we were in compliance with the Nasdaq listing
requirements.
Failure to maintain compliance with Nasdaq listing requirements could result in the delisting of our shares from Nasdaq, which could have a
material adverse effect on the trading price, volume and marketability of our common stock. Furthermore, a delisting could adversely affect our ability to
issue additional securities and obtain additional financing in the future or result in a loss of confidence by investors or employees.
13
The sale or issuance of our common stock to Lincoln Park may cause dilution and the sale of the shares of common stock acquired by Lincoln Park, or
the perception that such sales may occur, could cause the price of our common stock to fall.
On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) with Lincoln Park, pursuant to
which Lincoln Park committed to purchase up to $25 million of our common stock. Concurrently with the execution of the LP 2022 Purchase Agreement,
we issued 57,313 shares of common stock to Lincoln Park as a commitment fee.
The purchase shares sold pursuant to the Purchase Agreement may be sold by us to Lincoln Park at our discretion from time to time over a 36-
month period. The purchase price for shares that we may sell to Lincoln Park under the Purchase Agreement will fluctuate based on the price of our
common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our common stock to fall.
We have the right to control the timing and amount of any sales of our shares to Lincoln Park in our sole discretion, subject to certain limits on the
number of shares that can be sold on a given date. Sales of shares of our common stock, if any, to Lincoln Park will depend upon market conditions and
other factors to be determined by us. Therefore, Lincoln Park may ultimately purchase all, some or none of the shares of our common stock that may be
sold pursuant to the Purchase Agreement and, after it has acquired shares, Lincoln Park may sell all, some or none of those shares. Sales to Lincoln Park by
us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our
common stock to Lincoln Park, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at
a time and at a price that we might otherwise wish to effect sales, which could have a materially adverse effect on our business and operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of the date of this report, we do not own any real property. For our headquarters and content production business, we lease 3,024 square feet of
office space in Coral Gables, Florida. For our entertainment publicity and marketing business, we lease three office spaces in New York City, New York
and one office space in Los Angeles, California.
We believe that our properties are sufficient to meet our current and projected business needs. We periodically review our facility requirements
and may acquire new facilities, or modify, update, consolidate, dispose of or sublet existing facilities, based on evolving business needs.
ITEM 3. LEGAL PROCEEDINGS
We currently do not have any material legal proceedings, including those relating to claims arising in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
14
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
PART II
Market Information and Holders of our Common Stock
Our common stock trades on The Nasdaq Capital Market under the symbol “DLPN.”
As of March 23, 2023, there were approximately 302 shareholders of record, of our issued and outstanding shares of common stock based on
information provided by our transfer agent.
Recent Sales of Unregistered Securities
None.
Company Purchases of Equity Securities
None.
ITEM 6. [Reserved].
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations are to provide users of our consolidated
financial statements with a narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity
and certain other factors that may affect future results. This Management’s Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K. This
Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical
facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our
actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those
discussed in other sections of this Annual Report on Form 10-K. See “Special Note Regarding Forward-Looking Statements” for additional factors relating
to such statements and see “Risk Factors” included in Item 1A of this Annual Report on Form 10-K. Our past operating results are not necessarily
indicative of operating results in any future periods.
Overview
We are a leading independent entertainment marketing and premium content development company. We were first incorporated in the State of
Nevada on March 7, 1995 and domesticated in the State of Florida on December 4, 2014. Our common stock trades on The Nasdaq Capital Market under
the symbol “DLPN.”
On November 14, 2022 (the “Closing Date”), we acquired all of the issued and outstanding membership interest of Socialyte LLC, a NY and Los
Angeles-based creative agency specializing in social media influencer marketing campaigns for brands. The fair value of the total consideration on the
acquisition date, amounted to $14.3 million, plus the potential to earn up to an additional $5.0 million upon meeting certain financial targets in 2022. As of
December 31, 2022, such financial targets were not met. On the Closing Date, we paid $5.0 million cash, issued NSL Ventures, LLC (the “Seller”)
1,346,257 shares of our common stock and a $3.0 million unsecured promissory note, which is to be repaid in two equal installments on June 30, 2023 and
September 30, 2023. In addition, we issued the Seller 685,234 shares of our common stock in satisfaction of the Closing Date working capital adjustment.
We partially financed the cash portion of the consideration with a $3.0 million five-year secured loan from Bank Prov with Socialyte as co-borrowers,
which carries a fixed rate of 7.37% and a five-year term.
Through our subsidiaries 42West, Shore Fire and The Door, we provide expert strategic marketing and publicity services to many of the top
brands, both individual and corporate, in the entertainment and hospitality industries. 42West, Shore Fire and The Door are each recognized global leaders
in PR services for the respective industries they serve. Viewpoint adds full-service creative branding and production capabilities to our marketing group and
Be Social and Socialyte provide influencer marketing capabilities through its roster of highly engaged social media influencers. Dolphin’s legacy content
production business, founded by Emmy-nominated Chief Executive Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital
series, primarily aimed at family and young adult markets.
15
We have established an acquisition strategy based on identifying and acquiring companies that complement our existing entertainment publicity
and marketing services and content production businesses. We believe that complementary businesses, such as live event production, can create synergistic
opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion with such targets. We
completed the Socialyte acquisition during 2022 and intend to complete at least one acquisition during 2023, but there is no assurance that we will be
successful in doing so, whether in 2023 or at all.
We have also established an investment strategy, “Dolphin 2.0,” based upon identifying opportunities to develop internally owned assets, or
acquire ownership stakes in others’ assets, in the categories of entertainment content, live events and consumer products. We believe these categories
represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various
stages of internal development and outside conversations on a wide range of opportunities within Dolphin 2.0. We intend to enter into additional
investments during 2023, but there is no assurance that we will be successful in doing so, whether in 2023 or at all.
Socialyte Acquisition
On November 14, 2022, (the “Closing Date”), we acquired all of the issued and outstanding membership interest of Socialyte for a total fair value
of consideration amounting to $14.3 million. This includes: (1) a working capital adjustment of $2.1 million that was settled by issuing 685,234 shares of
our common stock; (2) $5.1 million cash; (3) issued the Seller 1,346,257 shares of our Common Stock with a fair value of $4.1 million; and (4) issued the
Seller the Socialyte Promissory Note in the amount of $3 million, which is to be repaid in two equal installments on June 30, 2023 and September 30, 2023.
The Socialyte purchase agreement also included the potential to earn up to an additional $5.0 million upon meeting certain financial targets in 2022, that
were not met.
We partially financed the cash portion of the consideration with a secured loan from BankProv with Socialyte and Social Midco 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.
For more information on the Socialyte Acquisition, refer to Note 5 to our consolidated financial statements.
HOW WE ASSESS THE PERFORMANCE OF OUR BUSINESS
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial
condition and operating performance of our business are revenues, direct costs, payroll and benefits, selling, general and administrative expenses, legal and
professional expenses, other income/expense and net income. Other income/expense consists mainly of interest expense, non-cash changes in fair value of
liabilities, costs directly relating to our acquisitions, and gains or losses on extinguishment of debt and disposal of fixed assets.
We operate in two reportable segments: our entertainment publicity and marketing segment and our content production segment. The
entertainment publicity and marketing segment is composed of 42West, The Door, Shore Fire, Viewpoint, Be Social, B/HI and Socialyte and provides
clients with diversified services, including public relations, entertainment content marketing, strategic communications, social media marketing, creative
branding, and the production of promotional video content. The content production segment is composed of Dolphin Films, Inc. (“Dolphin Films”) and
Dolphin Digital Studios, which produce and distribute feature films and digital content.
Revenues
For the years ended December 31, 2022 and 2021, we derived substantially all of our revenues from our entertainment publicity and marketing
segment. The entertainment publicity and marketing segment derives its revenues from providing public relations services for celebrities and musicians, as
well as for entertainment and targeted content marketing for film and television series, strategic communications services for corporations and public
relations, marketing services and brand strategies for hotels and restaurants. Additionally, for the year ended December 31, 2021, we derived revenues from
the content production segment from the domestic distribution of our feature film Believe. We expect to generate income in our content production segment
in the second half of 2023 with the release of “The Blue Angels” documentary motion picture, discussed in the “Project Development and Related
Services”.
The table below sets forth the percentage of total revenue derived from our two segments for the years ended December 31, 2022 and 2021:
Revenues:
Entertainment publicity and marketing
Content production
Total revenue
16
December 31,
2022
2021
98.9%
1.1%
100.0%
99.9%
0.1%
100.0%
Entertainment Publicity and Marketing (“EPM”)
Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we
have a stable client base, and we have continued to grow organically through referrals and by actively soliciting new business. We earn revenues primarily
from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed
project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv)
strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of
brands; (vii) arranging strategic marketing agreements between brands and social media influencers and (viii) content production of marketing materials on
a project contract basis. For these revenue streams, we collect fees through either fixed fee monthly retainer agreements, fees based on a percentage of
contracts or project-based fees.
We earn entertainment publicity and marketing revenues primarily through the following:
·
·
·
·
·
Talent – We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including Oscar,
Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs and Grammy winning recording artists. Our
services in this area include ongoing strategic counsel, media relations, studio and/or network liaison work, and event and tour support. We
believe that the proliferation of content, both traditional and on social media, will lead to an increasing number of individuals seeking such
services, which will drive growth and revenue in our Talent departments for several years to come.
Entertainment Marketing and Brand Strategy – We earn fees from providing marketing direction, public relations counsel and media
strategy for entertainment content (including theatrical films, television programs, DVD and VOD releases, and online series) from virtually
all the major studios and streaming services, as well as content producers ranging from individual filmmakers and creative artists to
production companies, film financiers, DVD distributors, and other entities. In addition, we provide entertainment marketing services in
connection with film festivals, food and wine festivals, awards campaigns, event publicity and red-carpet management. As part of our
services, we offer marketing and publicity services tailored to reach diverse audiences. We also provide marketing direction targeted to the
ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups. We expect that increased
digital streaming marketing budgets at several large key clients will drive growth of revenue and profit in 42West’s Entertainment Marketing
division over the next several years.
Strategic Communications – We earn fees by advising companies looking to create, raise or reposition their public profiles, primarily in the
entertainment industry. We also help studios and filmmakers deal with controversial movies, as well as high-profile individuals address
sensitive situations. We believe that growth in the Strategic Communications division will be driven by increasing demand for these varied
services by traditional and non-traditional media clients who are expanding their activities in the content production, branding, and
consumer products PR sectors.
Creative Branding and Production – We offer clients creative branding and production services from concept creation to final delivery. Our
services include brand strategy, concept and creative development, design and art direction, script and copyrighting, live action production
and photography, digital development, video editing and composite, animation, audio mixing and engineering, project management and
technical support. We expect that our ability to offer these services to our existing clients in the entertainment and consumer products
industries will be accretive to our revenue.
Digital Media Influencer Marketing Campaigns – We arrange strategic marketing agreements between brands and social media influencers,
for both organic and paid campaigns. We also offer services for social media activations at events. Our services extend beyond our own
captive influencer network, and we manage custom campaigns targeting specific demographics and locations, from ideation to delivery of
results reports. We expect that our relationship with social media influencers will provide us the ability to offer these services to our existing
clients in the entertainment and consumer products industries and will be accretive to our revenue.
Content Production (“CPD”)
Project Development and Related Services
We have a team that dedicates a portion of its time to identifying scripts, story treatments and novels for acquisition, development and production.
The scripts can be for either digital, television or motion picture productions. We have acquired the rights to certain scripts that we intend to produce and
release in the future, subject to obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical
distribution.
17
We have completed development of several feature films, which means that we have completed the script and can begin pre-production once
financing is obtained. We are planning to fund these projects through third-party financing arrangements, domestic distribution advances, pre-sales, and
location-based tax credits, and if necessary, sales of our common stock, securities convertible into our common stock, debt securities or a combination of
such financing alternatives; however, there is no assurance that we will be able to obtain the financing necessary to produce any of these feature films.
In October 2022, we minted and offered for sale a collection of 7,777 non-fungible tokens (“NFT’s) titled Creature Chronicles: Exiled Aliens. The
collection generated gross sales of approximately $429,000. We entered into an agreement with a third party to market the collection and mint the NFT’s
for a fixed fee of $50,000 and 30% of the value of the sale of the NFT collection.
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 which is estimated at approximately $4 million.
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 consolidated statements of operations.
(7)
Legal and professional fees – includes fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees
for general business consultants.
Other Income and Expenses
For the years ended December 31, 2022 and 2021, other income and expenses consisted primarily of: (1) gain on extinguishment of debt; (2) changes
in the fair values of (i) put rights, (ii) warrants, and (iii) convertible notes; (3) acquisition costs; and (4) interest expense.
RESULTS OF OPERATIONS
Year ended December 31, 2022 as compared to year ended December 31, 2021
Revenues
For the years ended December 31, 2022 and 2021, our revenues were as follows:
Revenues:
Entertainment publicity and marketing
Content production
Total revenue
18
December 31,
2022
2021
$
$
40,058,880 $
446,678
40,505,558 $
35,705,305
21,894
35,727,199
Revenues from entertainment publicity and marketing increased by approximately $4.4 million, or 12%, for the year ended December 31, 2022 as
compared to the year ended December 31, 2021. The increase is primarily driven by increased revenues across most of our subsidiaries, as cross-selling
across our subsidiaries has provided additional customers as well as increased demand for the services our subsidiaries provide.
For the year ended December 31, 2022, the content production segment revenue was derived was from the sale of the our NFT collection and from
the domestic distribution of Believe, a feature film that was released in 2013, as we have not distributed any other projects. During the year ended
December 31, 2021, the revenues in the content production segment were from the domestic distribution of Believe. We expect to begin generating income
in our content production segment in the fourth quarter of 2023 with the release of the Blue Angels documentary film.
Expenses
For the years ended December 31, 2022 and 2021, our operating expenses were as follows:
Expenses:
Direct costs
Payroll and benefits
Selling, general and administrative
Acquisition costs
Impairment of goodwill
Change in fair value of contingent consideration
Depreciation and amortization
Legal and professional
Total expenses
December 31,
2022
2021
$
$
3,566,336 $
28,947,730
6,572,020
480,939
906,337
(47,285)
1,751,211
2,903,412
45,080,700 $
3,879,409
23,819,327
5,836,235
22,907
—
3,754,221
1,905,354
2,013,436
41,230,889
Direct costs are mainly attributable to the EPM segment and decreased by approximately $0.3 million for the year ended December 31, 2022, as
compared to the year ended December 31, 2021. The decrease in direct costs is mainly driven by an increase of $0.5 million related to NFT production and
marketing costs for the year ended December 31, 2022, that were not present in the same period in 2021, offset by approximately $1.0 million decrease in
direct costs primarily attributable to a decrease in Viewpoint’s revenue as compared to the year ended December 31, 2021.
Payroll and benefits expenses increased by approximately $5.0 million for the year ended December 31, 2022, as compared to the year ended
December 31, 2021, primarily due to additional headcount in 2022 to support the growth of our business, salary increases to our employees, stock
compensation issued to our employees under the 2017 Plan in the amount of approximately $0.2 million and inclusion of Socialyte payroll for the period
between November 14, 2022 and December 31, 2022 in the amount of approximately $0.6 million, which were not present in the year ended December 31,
2021.
Selling, general and administrative expenses increased by approximately $0.7 million for the year ended December 31, 2022, as compared to the
year ended December 31, 2021.
The increase is primarily related to:
·
·
·
·
$0.5 million increases in travel, meals and entertainment expense;
$0.1 million of additional computer expenses;
$0.2 million fair value of the commitment shares issued as consideration for the Lincoln Park agreement; and
$0.1 million impairment of an ROU asset.
These increases were partially offset by:
·
$0.2 million reduction in rent expense primarily due to subleasing several of our offices and leases that expired.
Acquisition costs for the year ended December 31, 2022 were $0.5 million, primarily related to our acquisition of the membership interest of
Socialyte LLC on November 14, 2022. Acquisition costs for the year ended December 31, 2021 were not significant, as the Company did not have any
significant acquisition activity during 2021.
19
During the fourth quarter of 2022, we bypassed the optional qualitative assessment and performed a quantitative assessment of goodwill. We
concluded that, except as it relates to Viewpoint, it is more likely than not that the fair value of the reporting unit was not less than its carrying amount. For
the goodwill value assigned to Viewpoint, we concluded the fair value of that reporting unit’s goodwill was below its carrying amount. As a result, an
impairment charge of $0.9 million was recorded during the year ended December 31, 2022. No impairment charges were recorded during the year ended
December 31, 2021.
Change in fair value of the contingent consideration was approximately a $47,000 gain for the years ended December 31, 2022, compared a $3.7
million loss for the years ended December 31, 2021. The main components of the change in fair value of contingent consideration were the following:
·
·
·
The Door: this contingent consideration was settled during 2022. The Company did not record any changes in the fair value of contingent
consideration pertaining to The Door as it determined the fixed number of shares needed to settle the contingent consideration and
reclassified the liability to equity. During the year ended December 31, 2021, a $2.0 million loss was recorded related to The Door’s
contingent consideration.
B/HI: this contingent consideration was settled in June 2022. The Company recorded a $76,100 gain and $1.2 million loss for the year ended
December 31, 2022 and 2021, respectively.
Be Social: The Company recorded a $28,200 and $0.6 million loss for the year ended December 31, 2022 and 2021, respectively.
Depreciation and amortization had a small decrease of $0.1 million for the year ended December 31, 2022, as compared to the year ended
December 31, 2021 primarily due to certain of the intangible assets from our acquisitions that became fully amortized.
Legal and professional fees increased by approximately $0.9 million for the year ended December 31, 2022 as compared to the year ended
December 31, 2021, primarily to 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)
Other Income and (expenses):
Gain on extinguishment of debt
Change in fair value of convertible notes
Change in fair value of warrants
Change in fair value of put rights
Interest expense
Total
December 31,
2022
2021
$
$
— $
654,579
120,000
—
(555,802)
218,777 $
2,988,779
(570,844)
(2,482,877)
(71,106)
(785,209)
(921,257)
We did not record any gain or loss on extinguishment of debt for the year ended December 31, 2022. During the year ended December 31, 2021,
we recorded a gain on extinguishment of debt of approximately $3.0 million in connection with forgiveness of the PPP Loans of 42West, Dolphin,
Viewpoint, Shore Fire and The Door. The year ended December 31, 2021 was 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 certain convertible notes issued in 2020. The embedded conversion feature of a convertible note issued in
2019 met the criteria for a derivative. The fair value of these convertible notes and embedded conversion feature are remeasured at every balance sheet date
and any changes are recorded on our consolidated statements of operations. For the year ended December 31, 2022 we recorded a change in the fair value
of the convertible notes issued in 2020 in the amount of a gain of $0.7 million. For the year ended December 31, 2021 we recorded a change in the fair
value of the convertible notes issued in 2020 in the amount of a loss of $0.7 million. None of the decrease in the value of the convertible notes was
attributable to instrument specific credit risk.
Warrants issued with convertible notes payable issued in 2020, were initially measured at fair value at the time of issuance and subsequently
remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant
liability recognized as other income or expense. During the year ended December 31, 2022, the fair value of the 2020 warrants that were not exercised
decreased by approximately $0.1 million; therefore, we recorded a gain in the change in the fair value of the warrants for the year ended December 31,
2022 for those amounts, on our consolidated statements of operations. 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 approximately $2.5 million on our consolidated statement of operations.
20
The fair value of put rights related to the 42West acquisition were recorded on our consolidated balance sheet on the date of the acquisition. The
fair value of the put rights are measured at every balance sheet date and any changes are recorded on our consolidated statements of operations. The fair
value of the put rights increased by approximately $71,100 for the year ended December 31, 2021. The final put rights were settled in March of 2021; as a
result, we did not have a liability related to the put rights as of December 31, 2021 and did not record any fair value of put rights during the year ended
December 31, 2022.
Interest expense decreased by $0.2 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily
due to lower principal amount of convertible and nonconvertible notes outstanding during most of 2022, as compared to the year ended December 31,
2021.
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 year ended December 31, 2022, we recorded losses of $0.2 million, $0.1 million from each of our equity investments in Midnight Theater
and Crafthouse Cocktails, respectively. No equity gains or losses have been recorded for the year ended December 31, 2021.
Income Tax Benefit
We had an income tax expense of $0.2 million for the year ended December 31, 2022, compared to an expense of $37.4 thousand for year ended
December 31, 2021. The income tax expense for years ended December 31, 2022 reflect 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”).
As of December 31, 2022, we have approximately $49.1 million of pre-tax net operating loss carryforwards for U.S. federal income tax purposes
that begin to expire in 2028; federal net operating losses generated after December 31, 2017 have an indefinite life and do not expire. Additionally, we have
state net operating loss carryforwards amounting to $52.9 million that begin to expire in 2029. A portion of the carryforwards may expire before being
applied to reduce future income tax liabilities.
In assessing the ability to realize the deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. We believe it is more likely than not that the deferred tax asset will not be realized and we have
accordingly recorded a full valuation allowance as of both December 31, 2022 and 2021.
Net Loss
Net loss was approximately $4.8 million or $0.49 per share based on 9,799,021 weighted average shares outstanding for basic loss per share and
$0.56 per share based on 9,926,926 weighted average shares outstanding on a fully diluted basis for the year ended December 31, 2022.
Net loss was approximately $6.5 million or $0.85 per share based on 7,614,774 weighted average shares outstanding on a basic and on a fully
diluted basis for the year ended December 31, 2021.
Net loss for the years ended December 31, 2022 and 2021, respectively, were related to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Statement of Cash Flows Data:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net decrease in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of period
Cash and cash equivalents and restricted cash, end of period
21
Year Ended December 31,
2022
2021
$
(4,027,227) $
(7,919,355)
10,913,806
(1,032,776)
(1,318,717)
(3,025,856)
3,937,823
(406,750)
8,230,626
7,197,849 $
8,637,376
8,230,626
$
Operating Activities
Net cash used in operating activities was $4.0 million for the year ended December 31, 2022, an increase of $2.7 million from cash used in
operating activities of $1.3 million for the year ended December 31, 2021.
Our net loss of $4.8 million for the year ended December 31, 2022 was adjusted for the following items to arrive at cash used in operating
activities:
·
·
·
·
·
·
$0.9 million of goodwill impairment;
$0.5 million of share-based payments for compensation and Lincoln Park Capital commitment shares;
$0.4 million of non-cash items such as bad debt expense and other non-cash losses;
$0.1 million of non-cash lease expense;
$1.9 million of depreciation and amortization and other items such as impairments of fixed assets, ROU asset and capitalized production
costs; and
$0.2 million of equity in losses on unconsolidated affiliates.
The above were offset by:
·
·
$0.8 million of non-cash changes in the fair value of liabilities;
$2.6 million of changes in operating assets and liabilities.
Our net loss of $6.5 million for the year ended December 31, 2021 was adjusted for the following items to arrive at cash provided by operating
activities:
·
·
·
·
$6.9 million of non-cash changes in the fair value of liabilities;
$0.5 million of non-cash items such as impairments, bad debt expense and other non-cash losses;
$2.0 million of non-cash lease expense; and
$2.2 million of depreciation and amortization and other items such as impairments of fixed assets and capitalized production costs.
The above were offset by:
·
·
$3.1 million of a gain on extinguishment of debt, primarily related to the forgiveness of PPP Loans; and
$3.3 million of changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was $7.9 million, which related primarily to:
Outflows:
·
·
·
$3.1 million of issuance of notes receivable;
$4.7 million payment related to the acquisition of Socialyte, net of cash acquired; and
$72,200 purchases of fixed assets.
Net cash used in investing activities for the year ended December 31, 2021 was $3.0 million, which related to:
Outflows:
·
·
·
$1.5 million issuance of convertible notes receivables;
$1.0 million investment in Midnight Theatre; and
$0.5 million payment related to the acquisition of B/HI, net of cash acquired.
Financing Activities
Net cash provided by financing activities was $10.9 million for the year ended December 31, 2022, an increase of $7.0 million from net cash
provided by financing activities of $3.9 million for the year ended December 31, 2021.
22
Net cash provided by financing activities for the year ended December 31, 2022 mainly related to:
Inflows:
·
·
·
$5.8 million of proceeds from the Lincoln Park equity line of credit described below;
$3.1 million proceeds from convertible and non-convertible notes payable and
$2.9 million proceeds from the term loan related to the Socialyte acquisition;
Outflows:
·
·
$0.3 of repayment of notes payable; and
$0.6 payment of B/HI contingent consideration;
Net cash provided by financing activities for the year ended December 31, 2021 mainly related to:
Inflows:
·
$6.0 million of proceeds from convertible notes payable
Outflows:
·
·
·
$1.0 million from the exercise of put rights;
$0.9 million of repayment of the term loan; and
$0.1 million of repayment of notes payable.
Debt and Financing Arrangements
As described below in further detail, we have taken measures to position the Company with a stronger balance sheet position, extending current
loans to longer term maturities and reducing our overall debt position. Total debt amounted to $13.7 million as of December 31, 2022 compared to $6.2
million as of December 31, 2021, an increase of $7.5 million or 220.9%. The increase related primarily to $3.0 million and $2.9 million of a promissory
note and term loan, respectively, both in connection with the acquisition of Socialyte.
Our debt obligations in the next twelve months from December 31, 2022 increased from the obligations as of December 31, 2021. The current
portion of the debt increased to $4.3 million from $0.3 million, mainly driven by $3.0 million of promissory notes and $0.4 million of current portion of
term loan, both related to the Socialyte acquisition. We expect our current cash position, cash expected to be generated from our operations and other
availability of funds, as detailed below, to be sufficient to meet our debt requirements.
2022 Lincoln Park Transaction
On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights
agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company could
sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of common stock from time to time
over a 36-month period. Pursuant to the terms of the LP 2022 Registration Rights Agreement, the issuance of shares pursuant to the LP 2022 Purchase
Agreement have been registered pursuant to our effective registration statement on Form S-1, and the related prospectus dated September 15, 2022.
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. The purchase price for Regular Purchases (the “Purchase Price”) shall be equal to
98.75% of the lesser of: (i) the lowest sale price of the Common Stock during the Purchase Date, or (ii) the average of the three (3) lowest closing sale
prices of the Common Stock during the ten (10) business days prior to the Purchase Date. 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 for the accelerated and additional accelerated purchases shall be equal to the lesser of 96% of (i) the closing sale price on the
accelerated purchase date, or (ii) such date’s volume weighted average price.
23
Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022
Registration Rights Agreement, the Company issued 57,313 shares of common stock to Lincoln Park as consideration for its commitment (“LP 2022
commitment shares”) to purchase shares of our common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period
expense and included within selling, general and administrative expenses in the consolidated statements of operations.
Under applicable rules of the NASDAQ Capital Market, we could not issue or sell more than 19.99% of the shares of our common stock
outstanding immediately prior to the execution of the LP 2022 Purchase Agreement to Lincoln Park under the LP 2022 Purchase Agreement without
stockholder approval. At a meeting held on September 27, 2022, our stockholders approved the issuance of up to $25 million of shares of our common
stock pursuant to the LP 2022 Purchase Agreement.
During the year ended December 31, 2022, excluding the additional commitment shares disclosed above, the Company sold 548,000 shares of
common stock at prices ranging between $1.92 and $3.72 pursuant to the LP 2022 Purchase Agreement and received proceeds of $1,436,259. Subsequent
to December 31, 2022, the Company sold 250,000 shares of common stock at prices ranging between $1.88 and $2.27 pursuant to the LP 2022 Purchase
Agreement and received proceeds of $529,450.
The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of common stock in the future (“put right”)
considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an
equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of
the freestanding put right and has concluded that it has an insignificant value as of December 31, 2022.
2021 Lincoln Park Transaction
On December 29, 2021, we entered into a purchase agreement (the “LP 2021 Purchase Agreement”) and a registration rights agreement (the “LP
2021 Registration Rights Agreement”) with Lincoln Park. Pursuant to the terms of the LP 2021 Purchase Agreement, Lincoln Park has agreed to purchase
from us up to $25,000,000 of our common stock (subject to certain limitations) from time to time during the term of the LP 2021 Purchase Agreement. The
purchase price for the shares was the lowest of (1) lowest sale price on the date of the purchase or (2) the average of the lowest three closing prices on the
last 10 business days, with a floor of $1.00. Pursuant to the terms of the LP 2021 Registration Rights Agreement, the issuance of shares pursuant to the LP
2021 Purchase Agreement were registered pursuant to our effective shelf registration statement on Form S-3, and the related base prospectus included in
the registration statement, as supplemented by a prospectus supplement filed on January 21, 2022.
Pursuant to the terms of the LP 2021 Purchase Agreement, at the time we signed the LP 2021 Purchase Agreement and the LP 2021 Registration
Rights Agreement, we issued 51,827 shares of common stock to Lincoln Park as consideration for its commitment (“commitment shares”) to purchase
shares of our common stock under the LP 2021 Purchase Agreement. Pursuant to the LP 2021 Purchase Agreement, we issued an additional 37,019
commitment shares on March 7, 2022.
During the year ended December 31, 2022, excluding the additional commitment shares disclosed above, we sold 1,035,000 shares of common
stock at prices ranging between $3.47 and $5.15, pursuant to the LP 2021 Purchase Agreement and received proceeds of $4,367,640. The LP 2021
Purchase Agreement was terminated effective August 12, 2022 and the Company did not sell any shares pursuant to this agreement subsequent to that date.
During the year ended December 31, 2021, excluding the commitment shares mentioned above, the Company did not sell any shares of common
stock under the LP 2021 Purchase Agreement.
Convertible Notes Payable
During the year ended December 31, 2022, the Company issued seven convertible promissory notes to four noteholders in the aggregate amount
of $2.7 million. The convertible promissory notes bear interest at a rate of 10% per annum. Five of the convertible promissory notes mature on the second
anniversary of their respective issuances and two of the convertible promissory notes mature on the fourth anniversary of their respective issuances. The
balance of each convertible promissory note and any accrued interest may be converted at the noteholder’s option at any time at a conversion price based
on a 90-day average closing market price per share of the common stock. Three of the convertible notes may not be converted at a price less than $2.50 per
share and four of the convertible notes may not be converted at a price less than $2.00 per share.
During the year ended December 31, 2022, the holder of one convertible note issued during 2021 converted the principal balance of $0.5 million
into 125,604 shares of common stock at a conversion price of $3.98 per share. At the moment of conversion, accrued interest related to this note amounted
to $5.3 thousand and was paid in cash.
24
As of December 31, 2022, the aggregate principal balance of the convertible promissory notes of $5.1 million was recorded in noncurrent
liabilities under the caption convertible promissory notes on the Company’s consolidated balance sheets.
It is our experience that convertible notes, including their accrued interest are converted into shares of the Company’s common stock and not
settled through payment of cash. Although we are unable to predict the noteholder’s intentions, we do not expect any change from our past experience.
Subsequent to December 31, 2022, on January 9, 2023 and January 13, 2023, the Company issued two convertible promissory notes in the
aggregate amount of $0.8 million. 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 purchase price based on a 90-day average closing market price
per share of the common stock. The convertible notes may not be converted at a price less than $2.00 per share.
Convertible Notes Payable at Fair Value
As of December 31, 2022, we have convertible promissory notes outstanding with aggregate principal amounts of $0.5 million 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 note with any changes in the fair value recorded in the consolidated statements of operations. The convertible
promissory note at fair value matures on March 4, 2030 and as of December 31, 2022, we had a balance of $0.3 million in noncurrent liabilities related to
this convertible promissory note measured 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 December 30, 2022, we have outstanding unsecured nonconvertible promissory notes in the aggregate amount of $1.4 million which bear
interest at a rate of 10% per annum and mature between June 2023 and November 2024. For these nonconvertible promissory notes, $0.9 million was
recorded as current liabilities and $0.5 million was recorded as noncurrent liabilities as of December 31, 2022.
Subsequent to December 31, 2022, on February 22, 2023, we entered into a nonconvertible promissory note in the amount of $2.2 million. The
note bears interest at a rate of 10% per annum and matures on March 31, 2028.
Nonconvertible Promissory Notes – Socialyte
As discussed in Note 5 and Note 15 to our consolidated financial statements, as part of the acquisition of Socialyte, we entered into an unsecured
promissory note amounting to $3.0 million (“Socialyte Promissory Note”). The Socialyte Promissory Note matures on September 30, 2023 and will be
payable in two payments: $1.5 million on June 30, 2023 and $1.5 million on September 30, 2023, its maturity date. The Socialyte Promissory Note bears
interest at a rate of 4% per annum, which accrues monthly and all accrued interest shall be due and payable on September 30, 2023, its maturity date.
IMAX Agreement
As discussed in Note 26 to our consolidated financial statements, on June 24, 2022, we entered into the Blue Angels Agreement with IMAX.
Under the terms of this agreement, we have funded $1.5 million through December 31, 2022 and we have committed to funding up to an additional $0.5
million of the production budget, which is expected to be disbursed in the second quarter of 2023.
Convertible Notes Receivable
As of December 31, 2022, we hold convertible notes receivable from JDDC Elemental LLC which operates Midnight Theatre. These convertible
notes receivable are recorded at their principal face amount plus accrued interest. Due to their short-term maturity and conversion terms (described below),
these have been recorded at the face value of the note and an allowance for credit losses has not been established.
As of December 31, 2022, the Midnight Theatre notes amount to $4.4 million, including accrued interest receivable of $0.3 million, and are
convertible at the option of the Company into Class A and B Units of Midnight Theatre. During the year ended December 31, 2022, Midnight Theatre
issued the Company 16 notes amounting to $3.1 million in the aggregate on the same terms as the previous notes.
25
In addition, during the year ended December 31, 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 December 31, 2022, the Company does not have an outstanding note
receivable from Stanton South LLC.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires
management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes,
as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies,
estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are
believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our
significant accounting policies are discussed in Part II, Item 8, Financial Statements and Supplementary Data, Note 2, “Summary of Significant Accounting
Policies.”
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that
are reasonably likely to occur, could materially impact the consolidated financial statements.
We consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related
contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the
portrayal of our financial condition and require significant or complex judgment and estimates on the part of management. Further details on each item are
discussed below. See Note 17 – Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual
Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.
Goodwill
Goodwill results from business combination acquisitions. Goodwill is recorded as the difference, if any, between the aggregate consideration paid
for an acquisition and the fair value of the net tangible assets and other intangible assets acquired. As of December 31, 2022, in connection with its
acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte we have a balance of $29.3 million of goodwill on our
consolidated balance sheets which management has assigned to the entertainment publicity and marketing segment. We account for goodwill in accordance
with FASB ASC No. 350, Intangibles—Goodwill and Other (“ASC 350”). Goodwill is not amortized; however, it is assessed for impairment at least
annually, or more frequently if triggering events occur. The Company’s annual assessment is performed in the fourth quarter.
For purposes of the annual assessment, management initially performs a qualitative assessment, which includes consideration of the economic,
industry and market conditions in addition to our overall financial performance and the performance of these assets. If our qualitative assessment does not
conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, we perform a quantitative
analysis. In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis. A discounted cash flow analysis
requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future
cash flows and growth rates are based on our long-term projections. Assumptions used in our impairment testing are consistent with our internal forecasts
and operating plans. If the fair value of the reporting unit exceeds its carrying amount, there is no impairment. If not, we recognize an impairment equal to
the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of goodwill.
During the fourth quarter of 2022, we bypassed the optional qualitative assessment and performed a quantitative assessment. We concluded that,
except as it relates to Viewpoint, it is more likely than not that the fair value of the reporting unit was not less than its carrying amount. For the goodwill
value assigned to Viewpoint, we concluded the fair value of that reporting unit’s goodwill was below its carrying amount. As a result, an impairment charge
of $0.9 million was recorded during the year ended December 31, 2022. No impairment charges were recorded during the year ended December 31, 2021.
Intangible assets
In connection with the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte, the Company acquired in
aggregate an estimated $18.7 million of intangible assets with finite useful lives initially estimated to range from 2 to 13 years. The intangible assets consist
primarily of customer relationships, trade names and non-compete agreements.
26
Intangible assets are initially recorded at fair value and are amortized using the straight-line method over their respective estimated useful lives
and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If a
triggering event has occurred, an impairment analysis is required. The impairment test first requires a comparison of undiscounted future cash flows
expected to be generated over the useful life of an asset to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash
flows, the asset would not be deemed recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value. See
Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion. Events or circumstances that
might require impairment testing include the loss of a significant client or clients, the identification of other impaired assets within a reporting unit, loss of
key personnel, the disposition of a significant portion of a reporting unit, significant decline in stock price or a significant adverse change in business
climate or regulations. During the year ended December 31, 2022, we amortized $1.5 million that was recorded in our consolidated statement of operations
related to our intangible assets.
Business Combinations and Contingent Consideration
The determination of the fair value of net assets acquired in a business combination and specifically the estimates of acquisition-related contingent
consideration (sometimes referred to as “earn-out liabilities”) requires estimates and judgments of future cash flow expectations for the acquired business
and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using expected cash flows and industry-standard
valuation techniques. Fair values of earn-out liabilities are estimated using income approaches such as discounted cash flows or option pricing models.
Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one
year in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new
information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the
acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition of, or an adjustment to the fair values
of, acquisition-related assets and liabilities and/or consideration paid, and are referred to as “measurement period” adjustments. Measurement period
adjustments are recorded to goodwill. Other revisions to fair value estimates for acquisitions are reflected as income or expense, as appropriate. See Note 5
– Acquisitions in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information
pertaining to acquisition-related fair value adjustments.
Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an
acquired business, could materially affect our operating results in the period such changes are recognized.
Convertible debt
The terms of our convertible debt agreements are evaluated to determine whether the convertible debt instruments contain both liability and equity
components, in which case the instrument is a compound financial instrument. Convertible debt agreements are also evaluated to determine whether they
contain embedded derivatives, in which case the instrument is a hybrid financial instrument. Judgement is required to determine the classification of such
financial instruments based on the terms and conditions of the convertible debt agreements.
Estimation methods are used to determine the fair values of the liability and equity components of compound financial instruments and to
determine the fair value of embedded derivatives included in hybrid financial instruments. Fair values of convertible debt are estimated using pricing
models such as the Monte Carlo Simulation. Evaluating the reasonableness of these estimations and the assumptions and inputs used in the valuation
methods requires a significant amount of judgement and is therefore subject to an inherent risk of error. See Notes 14 – Convertible Notes Payable At Fair
Value and 17 – Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form
10-K, for information pertaining to acquisition-related fair value adjustments.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 to the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are included at the end of this Report beginning on page F-1 as follows:
Reports of Independent Registered Public Accounting Firm (Grant Thornton LLP, Fort Lauderdale, FL, Auditor Firm ID: 248)
Report of Independent Registered Public Accounting Firm (BDO USA, LLP, Miami, FL, Auditor Firm ID: 243)
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Page
F-2
F-3
F-4
F-6
F-7
F-9
F-10
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial 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 December 31, 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 identified in our internal control over financial
reporting described below.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Exchange Act
Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in
accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further,
because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
28
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness
of our internal control over financial reporting as of December 31, 2022, as required by Exchange Act Rule 13a-15(c). The framework on which such
evaluation was based is contained in the report entitled “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 Framework) (the “COSO Report”). We concluded that based on our evaluation, our internal control over financial
reporting was not effective as of December 31, 2022, due to the following material weaknesses:
Control Environment, Risk Assessment, and Monitoring
As previously reported, we did not maintain appropriately designed entity-level controls impacting the control environment, risk assessment
procedures, and monitoring activities to prevent or detect material misstatements in the consolidated financial statements. These deficiencies were
attributed to: (i) lack of structure and responsibility, insufficient number of qualified resources and inadequate oversight and accountability over the
performance of controls, (ii) ineffective identification and assessment of risks impacting internal control over financial reporting, including fraud risks, and
(iii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.
Control Activities and Information and Communication
These material weaknesses contributed to the following additional material weaknesses within certain business processes and the information
technology environment:
·
·
·
We did not fully design, implement and monitor general information technology controls in the areas of user access, and segregation of
duties for systems supporting substantially all of the Company’s internal control processes.
We did not design and implement, and retain appropriate documentation of formal accounting policies, procedures and controls across
substantially all of the Company’s business processes to achieve timely, complete and accurate financial accounting, reporting, and
disclosures. Additionally, we did not design and implement adequate controls pertaining to the period-end financial reporting, classification
of contingent consideration, journal entries, completeness and accuracy of underlying data used in the performance of controls and account
reconciliations.
We did not appropriately design and implement management review controls at a sufficient level of precision to detect a material
misstatement over complex accounting areas and disclosures including business combinations, complex transactions, revenue recognition,
income tax, and lease accounting.
We are neither an accelerated filer nor a large accelerated filer, as defined in Rule 12b-2 under the Exchange Act, and are not otherwise including
in this 2022 Form 10-K an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
Management’s report was not required to be attested to by our registered public accounting firm pursuant to Item 308(b) of Regulation S-K.
Management’s Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
The Company and its Board are committed to maintaining a strong internal control environment. We have begun the process of designing and
implementing effective internal controls measures to improve our internal control over financial reporting and remediate the material weaknesses. Our
internal control remediation efforts include the following:
·
·
·
·
·
·
·
Developing formal policies and procedures over the Company’s fraud risk assessment and risk management function;
Developing policies and procedures to enhance the precision of management review of financial statement information and control impact of
changes in the external environment;
We have entered into an agreement with a third-party consultant that assists us in analyzing complex transactions and the appropriate
accounting treatment;
We have implemented a new enterprise resource planning systems that will allow us to setup proper review and approval of transactions;
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.
29
Management is beginning the process of implementing and monitoring the effectiveness of these and other processes, procedures and controls and
will make any further changes deemed appropriate. Management believes our planned remedial efforts will effectively remediate the identified material
weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to
take additional measures to address control deficiencies or determine it necessary to modify the remediation plan described above
Limitations on Effectiveness of Controls and Procedures
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. We do not expect that our disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or
by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls
may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of
the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Controls
During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable
30
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Shareholders to be
filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Shareholders to be
filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Shareholders to be
filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Shareholders to be
filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Shareholders to be
filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 and is incorporated herein by reference.
31
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
(1) Financial Statements
See Item 8 for Financial Statements included with this Annual Report on Form 10-K.
(2) Financial Statement Schedules
None.
(3) Exhibits
The exhibits identified in the Exhibit Index below are included herein or incorporated by reference.
Exhibit Index
Description
Incorporated by Reference
Exhibit No.
2.1
2.2
3.1
3.2
4.1
4.2
Agreement and Plan of Merger, dated July 5, 2018, by and among the
Company, The Door, Merger Sub and the Members.
Membership Interest Purchase Agreement, dated August 17, 2020, by
and among the Company and Alison Grant
Amended and Restated Articles of Incorporation of Dolphin
Entertainment, Inc. (conformed copy incorporating all amendments
through September 29, 2022).
Bylaws of Dolphin Digital Media, Inc., dated as of December 3,
2014.
Registration Rights Agreement, dated July 5, 2018, by and among the
Company and the Members party thereto.
Description of Common Stock
10.1
Dolphin Entertainment Inc., 2017 Equity Incentive Plan.†
32
Incorporated herein by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K, filed on July 11, 2018.
Incorporated herein by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K, filed on August 26, 2020.
Filed herewith.
Incorporated herein by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K, filed on December 9, 2014.
Incorporated herein by reference to Exhibit 4.1 to Current Report
on Form 8-K, filed on July 11, 2018.
Incorporated herein by reference to Exhibit 4.1 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2020
Incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8, filed on August 8, 2017.
10.2
10.3
10.4
10.5
10.6
10.7
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Promissory Note, dated October 1, 2016, in favor of Dolphin
Entertainment, LLC (formerly, Dolphin Entertainment, Inc.).
Purchase agreement dated December 29, 2021 with Lincoln Park
Capital Fund LLC.
Registration Rights Agreement dated December 29, 2021 with
Lincoln Park Capital Fund LLC
Purchase agreement dated August 10, 2022 with Lincoln Park Capital
Fund LLC
Registration Rights Agreement dated August 10, 2022 with Lincoln
Park Capital Fund LLC
Membership Interest Purchase Agreement dated as of November 14,
2022, by and between Dolphin Entertainment, Inc. and NSL
Ventures, LLC.
List of Subsidiaries of the Company.
Consent of BDO USA, LLP.
Certification of Chief Executive Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of the Company pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer of the Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of the Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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)
Incorporated herein by reference to Exhibit 10.18 to the
Registration Statement on Form S-1/A (SEC File No. 333-
219029), filed on December 05, 2017.
Incorporated herein by reference to Exhibit 10.1 to Current Report
on Form 8-K, filed on December 30, 2021.
Incorporated herein by reference to Exhibit 10.2 to Current Report
on Form 8-K filed on December 30, 2021.
Incorporated herein by reference to Exhibit 10.1 to Current Report
on Form 10-Q, filed on August 15, 2022.
Incorporated herein by reference to Exhibit 10.2 to Current Report
on Form 10-Q, filed on August 15, 2022.
Incorporated herein by reference to Exhibit 10.1 to Current Report
on Form 10-Q, filed on November 14, 2022.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
Furnished herewith.
Filed herewith.
Filed herewith.
Inline XBRL Taxonomy Extension Schema Document
Filed herewith.
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith.
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith.
Cover Page Interactive Data File (formatted as Inline XBRL and
contained in Exhibit 101)
† Management contract or compensatory plan or arrangement.
* Schedules (and similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a
copy of any omitted schedule to the Securities and Exchange Commission upon request.
ITEM 16 FORM 10-K SUMMARY
None.
33
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 31, 2023
Dated: March 31, 2023
DOLPHIN ENTERTAINMENT, INC.
By:/s/ William O’Dowd, IV
William O’Dowd, IV
Chief Executive Officer
By:/s/ Mirta A Negrini
Mirta A Negrini
Chief Financial and Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
/s/ William O’Dowd, IV
William O’Dowd, IV
/s/ Mirta A Negrini
Mirta A Negrini
/s/ Michael Espensen
Michael Espensen
/s/ Nelson Famadas
Nelson Famadas
/s/ Anthony Leo
Anthony Leo
/s/ Nicholas Stanham
Nicholas Stanham
/s/ Claudia Grillo
Claudia Grillo
Title
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial and Operating Officer and Director
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
34
Date
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
INDEX TO FINANCIAL STATEMENTS
Dolphin Entertainment, Inc.
Audited Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm (Grant Thornton LLP, Fort Lauderdale, FL, Auditor Firm ID: 248)
Report of Independent Registered Public Accounting Firm (BDO USA, LLP, Miami, FL, Auditor Firm ID: 243)
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-6
F-7
F-9
F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Dolphin Entertainment, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Dolphin Entertainment, Inc. (a Florida corporation) and subsidiaries (the “Company”) as
of December 31, 2022, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment – 42West Reporting Unit
As described further in Note 2 and Note 6 to the financial statements, management evaluates goodwill for impairment on an annual basis, or more
frequently if impairment indicators exist, at the reporting unit level. Management estimated the fair values of its reporting units using a combination of the
income and market approaches. The determination of the fair value of the reporting units requires management to make significant estimates and
assumptions related to forecasts of future revenues, earnings before interest and tax (“EBITA”) and discount rates. We identified the goodwill impairment
assessment of the 42West reporting unit as a critical audit matter.
The principal considerations for our determination that the goodwill impairment assessment of the 42West reporting unit is a critical audit matter is that
changes in the assumptions related to forecasts of future revenues, EBITA and discount rates could materially affect the determination of the fair value of
the reporting unit, the amount of any goodwill impairment charge, or both. Management utilized significant judgment when estimating the fair value of the
42West reporting unit and auditing management’s judgments regarding forecasts of revenue, EBITA and discount rates involved a high degree of
subjectivity due to the estimation uncertainty of management’s significant judgments.
Our audit procedures related to the goodwill impairment assessment of the 42West reporting unit included the following, among others:
· We evaluated management’s process for determining the fair value of the 42West reporting unit.
· We evaluated the appropriateness of the valuation method utilized.
· We tested that the forecasts were reasonable and consistent with historical performance and third-party market data.
· We evaluated management’s ability to accurately forecast future revenue and EBITA by comparing the prior year forecast to actual results in the
current year.
· We evaluated the reasonableness of the discount rate utilized in the discounted cash flow model with the assistance of our internal valuation specialists.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2022.
Fort Lauderdale, Florida
March 31, 2023
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Dolphin Entertainment, Inc.
Coral Gables, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Dolphin Entertainment, Inc. (the “Company”) as of December 31, 2021, the related
consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively
referred to as the “consolidated financial statements”. In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor from 2014 to 2021.
Miami, Florida
May 25, 2022
F-3
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2022 and 2021
Current
Cash and cash equivalents
Restricted cash
Accounts receivable:
ASSETS
Trade, net of allowance of $736,820 and $627,553, respectively
Other receivables
Notes receivable
Other current assets
Total current assets
Capitalized production costs, net
Employee receivable
Right-of-use assets
Goodwill
Intangible assets, net
Property, equipment and leasehold improvements, net
Other long-term assets
Total Assets
2022
2021
$
6,069,889 $
1,127,960
7,688,743
541,883
6,162,472
5,552,993
4,426,700
523,812
23,863,826
1,598,412
604,085
7,341,045
29,314,083
9,884,336
293,206
2,477,839
75,376,832 $
$
4,513,179
3,583,357
1,510,137
450,060
18,287,359
137,235
366,085
6,129,411
20,021,357
6,142,067
473,662
1,234,275
52,791,451
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
As of December 31, 2022 and 2021
LIABILITIES
$
2022
2021
4,798,221 $
408,905
3,868,960
500,000
1,744,723
2,625,000
2,073,547
1,641,459
7,626,836
25,287,651
2,458,687
500,000
5,050,000
343,556
1,107,873
238,821
6,012,049
253,188
15,000
18,915
41,285,740
942,085
—
307,685
600,000
1,621,437
2,625,000
1,600,107
406,373
6,850,584
14,953,271
—
868,959
2,900,000
998,135
1,107,873
3,684,221
5,132,895
76,207
135,000
—
29,856,561
Current
Accounts payable
Term loan, current portion
Notes payable, current portion
Contingent consideration
Accrued interest – related party
Accrued compensation – related party
Lease liability, current portion
Deferred revenue
Other current liabilities
Total current liabilities
Noncurrent
Term loan, noncurrent portion
Notes payable, noncurrent portion
Convertible notes payable
Convertible notes payable at fair value
Loan from related party
Contingent consideration
Lease liability
Deferred tax liability
Warrant liability
Other noncurrent liabilities
Total Liabilities
Commitments and contingencies (Note 27)
Preferred Stock, Series C, $0.001 par value, 50,000 shares authorized, 50,000 shares issued and outstanding at
STOCKHOLDERS’ EQUITY
December 31, 2022 and 2021
Common stock, $0.015 par value, 200,000,000 shares authorized, 12,340,664 and 8,020,381 shares issued and
outstanding at December 31, 2022 and December 31, 2021, respectively
Additional paid in capital
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
1,000
1,000
185,110
143,119,461
(109,214,479)
34,091,092
75,376,832 $
120,306
127,247,928
(104,434,344)
22,934,890
52,791,451
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 2022 and 2021
Revenues
Expenses:
Direct costs
Payroll and benefits
Selling, general and administrative
Acquisition costs
Impairment of goodwill
Change in fair value of contingent consideration
Depreciation and amortization
Legal and professional
Total expenses
Loss from operations
Other (expenses) income:
Gain on extinguishment of debt
Change in fair value of convertible notes
Change in fair value of warrants
Change in fair value of put rights
Interest expense
Total other income (expense), net
$
2022
40,505,558 $
2021
35,727,199
3,566,336
28,947,730
6,572,020
480,939
906,337
(47,285)
1,751,211
2,903,412
45,080,700
3,879,409
23,819,327
5,836,235
22,907
—
3,754,221
1,905,354
2,013,436
41,230,889
(4,575,142)
(5,503,690)
—
654,579
120,000
—
(555,802)
218,777
2,988,779
(570,844)
(2,482,877)
(71,106)
(785,209)
(921,257)
Loss before income taxes and equity in losses of unconsolidated affiliates
$
(4,356,365) $
(6,424,947)
Income tax expense
Net loss before equity in losses of unconsolidated affiliates
Equity in losses of unconsolidated affiliates
Net loss
Loss per share:
Basic
Diluted
Weighted average number of shares used in per share calculation
Basic
Diluted
(176,981)
(37,356)
(4,533,346)
(6,462,303)
(246,789)
—
$
(4,780,135) $
(6,462,303)
$
$
(0.49) $
(0.56) $
(0.85)
(0.85)
9,799,021
9,926,926
7,614,774
7,614,774
The accompanying notes are an integral part of these consolidated financial statements.
F-6
DOLPHIN ENTERTAINMENT, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2022 and 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
2022
2021
$
(4,780,135) $
(6,462,303)
Depreciation and amortization
Share-based compensation
Equity in losses of unconsolidated affiliates
Commitment shares issued to Lincoln Park Capital LLC
Bonus payment issued in shares
Gain on extinguishment of debt
Loss on disposal of fixed assets
Impairment of right-of-use asset
Impairment of capitalized production costs
Impairment of goodwill
Bad debt net expense
Deferred tax expense (benefit)
Change in fair value of put rights
Change in fair value of contingent consideration
Change in fair value of warrants
Change in fair value of convertible notes
Changes in operating assets and liabilities:
Accounts receivable, trade and other
Other current assets
Capitalized production costs
Other long-term assets and employee receivable
Deferred revenue
Accounts payable
Accrued interest – related party
Lease liability
Other current liabilities
Other noncurrent liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold improvements
Investment in JDDC Elemental LLC
Issuance of notes receivable
Acquisition of Socialyte, LLC, net of cash acquired
Acquisition of B/HI Communications, Inc, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable
Proceeds from notes payable
Proceeds from the term loan
Repayment of term loan
Repayment of notes payable
Exercise of put rights
Payment of contingent consideration BHI
Proceeds from Lincoln Park equity line
Net cash provided by financing activities
Net decrease in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of period
Cash and cash equivalents and restricted cash, end of period
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
1,751,211
215,528
246,789
232,118
50,000
—
—
98,857
87,323
906,337
411,302
176,981
—
(47,285)
(120,000)
(654,579)
(539,546)
277,501
(1,548,500)
(228,353)
(938,308)
812,267
123,286
42,103
(621,040)
18,915
(4,027,227)
(72,198)
—
(3,108,080)
(4,739,077)
—
(7,919,355)
2,650,000
500,000
2,903,305
(35,714)
(307,684)
—
(600,000)
5,803,899
10,913,806
(1,032,776)
8,230,626
7,197,849 $
1,905,354
—
—
—
17,858
(2,988,779)
48,461
—
234,734
—
327,891
37,356
71,106
3,754,221
2,482,877
570,844
(3,243,164)
(107,020)
(100,830)
(378,563)
(40,113)
(352,823)
(161,684)
(46,178)
3,112,038
—
(1,318,717)
—
(1,000,000)
(1,500,000)
—
(525,856)
(3,025,856)
5,950,000
—
—
(900,292)
(96,750)
(1,015,135)
—
—
3,937,823
(406,750)
8,637,376
8,230,626
(Continued)
DOLPHIN ENTERTAINMENT, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the years ended December 31, 2022 and 2021
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest paid
Lease liability obtained in exchange for obtaining right-of-use assets
SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW INFORMATION:
Issuance of shares related to conversion of notes payable
Issuance of shares related to cashless exercise of warrants
Issuance of shares of common stock related to the acquisitions
Issuance of shares related to extinguishment of debt
Issuance of shares to Lincoln Park Capital LLC
Settlement of contingent consideration in shares of common stock
Receipt of Crafthouse equity in connection with marketing agreement
Put rights exchanged for shares of common stock
Interest on notes paid in stock
Employee bonus paid in stock
2022
2021
677,081 $
3,098,102 $
916,538
1,044,864
500,000 $
— $
6,236,677 $
— $
231,258 $
516,247 $
1,000,000 $
— $
— $
50,000 $
5,603,612
2,797,877
586,716
29,075
777
2,974,222
—
706,688
8,611
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:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows
$
$
2022
6,069,889 $
1,127,960
7,197,849 $
2021
7,688,743
541,883
8,230,626
The accompanying notes are an integral part of these consolidated financial statements.
F-8
DOLPHIN ENTERTAINMENT INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2022 and 2021
Balance December 31, 2020
Net loss
Issuance of shares related to conversion of note payable
Issuance of shares related to cashless exercise of warrants
Issuance of shares issued to seller of Be Social
Issuance of shares related to acquisition of The Door
Issuance of shares related to exchange of Put Rights for stock
Issuance of shares related to acquisition of B/HI Communications, Inc
Shares retired from exercise of puts
Issuance of shares for employee bonus
Issuance of shares related to extinguishment of debt
Issuance of shares related to acquisition of Shore Fire Media
Commitment shares issued to Lincoln Park Capital LLC
Balance December 31, 2021
Net loss
Share-based compensation
Issuance of shares related to an employment agreement
Issuance of shares related to conversion of note payable
Issuance of shares to Lincoln Park Capital LLC
Issuance of common stock on vesting of restricted stock units, net of
shares withheld for taxes
Issuance of shares to sellers of The Door Marketing Group LLC for
earnout consideration
Issuance of shares to seller of B/HI Communication Inc for earnout
consideration
Shares issued in relation to acquisition of Socialyte LLC
Balance December 31, 2022
Preferred Stock
Shares
Amount
$
$
50,000
—
—
—
—
—
—
—
—
—
—
—
—
50,000
—
—
—
—
—
—
1,000
—
—
—
—
—
—
—
—
—
—
—
—
1,000
—
—
—
—
—
—
Common Stock
Amount
$
Shares
6,618,785
—
963,985
146,027
103,245
10,238
115,366
4,075
(18,347)
1,935
3,228
20,017
$
51,827
8,020,381
—
—
11,571
125,604
1,677,332
31,404
279,562
Additional
Paid-in
Capital
$ 117,540,557
—
5,589,152
2,795,687
348,451
(154)
704,958
36,654
(13,153)
17,829
29,024
199,700
Accumulated
Deficit
Total
Stockholders’
Equity
(6,462,303)
$ (97,972,041) $ 19,668,797
(6,462,303)
5,603,612
2,797,877
350,000
—
706,688
36,715
(13,429)
17,858
29,075
200,000
—
—
—
—
—
—
—
—
—
—
99,281
—
14,460
2,190
1,549
154
1,730
61
(276)
29
51
300
777
120,306
—
—
173
1,884
25,159
$ 127,247,928
—
215,528
49,827
498,116
6,010,857
472
(472)
4,193
2,377,676
(777)
—
—
$ (104,434,344) $ 22,934,890
(4,780,135)
215,528
(4,780,135)
—
—
—
—
—
—
50,000
500,000
6,036,016
—
2,381,869
—
—
50,000
$
—
—
1,000
163,369
2,031,491
12,340,664
$
2,451
30,472
185,110
513,796
6,206,205
$ 143,119,461
516,247
—
6,236,677
—
$ (109,214,479) $ 34,091,092
The accompanying notes are an integral part of these consolidated financial statements.
F-9
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 1 — BASIS OF PRESENTATION AND ORGANIZATION
Dolphin Entertainment, Inc., a Florida corporation (the “Company,” “Dolphin,” “we,” “us” or “our”), is a leading independent entertainment
marketing and premium content development company. Through its acquisitions of 42West LLC (“42West”), The Door Marketing Group, LLC (“The
Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation Incorporated (“Viewpoint”), Be Social Public Relations, LLC (“Be
Social”), B/HI Communications, Inc. (“B/HI”) and Socialyte, LLC (“Socialyte”), the Company provides expert strategic marketing and publicity services
throughout the United States of America (“U.S.”) to all of the major film studios and many of the leading independent and digital content providers, A-list
celebrity talent, including actors, directors, producers, celebrity chefs, social media influencers and recording artists. The Company also provides strategic
marketing publicity services and creative brand strategies for prime hotel and restaurant groups and consumer brands throughout the U.S. The strategic
acquisitions of 42West, The Door, Shore Fire, Viewpoint, Be Social, B/HI and Socialyte bring together premium marketing services, including digital and
social media marketing capabilities, with premium content production, creating significant opportunities to serve respective constituents more strategically
and to grow and diversify the Company’s business. Dolphin’s content production business is a long established, leading independent producer, committed
to distributing premium, best-in-class film and digital entertainment. Dolphin produces original feature films and digital programming primarily aimed at
family and young adult markets.
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles (“US GAAP”) include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films, Inc. (“Dolphin Films”),
Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC, Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The
Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company applies the equity method of accounting for its investments in entities for which it does not have a controlling financial interest, but over
which it has the ability to exert significant influence.
On September 24, 2021, the Company filed an amendment to its Amended and Restated Articles of Incorporation with the Secretary of the State
of Florida to increase its authorized shares of common stock to 200,000,000 from 40,000,000 as adopted by the shareholders of the Company on September
23, 2021.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements
relate to the estimates in the fair value of acquisitions, estimates in assumptions used to calculate the fair value of certain liabilities and impairment
assessments for investment in capitalized production costs, goodwill and long-lived assets. Actual results could differ materially from such estimates.
Statement of Comprehensive Income
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 220, Comprehensive
Income, a statement of comprehensive income has not been included as the Company has no items of other comprehensive income. Comprehensive loss is
the same as net loss for all periods presented.
Revenue Recognition
The Company’s revenues are primarily derived from the following sources: (i) celebrity talent services; (ii) content marketing services under
multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for
durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food
and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers
and (viii) content productions of marketing materials on a project contract basis. For these revenue streams, we collect fees through either fixed fee
monthly retainer agreements, fees based on a percentage of contracts or project-based fees. In addition, the Company also earns revenue from content
production for digital marketing services, primarily by usage-based royalties for domestic sales. The Company recognizes revenue when our customer
obtains control of promised goods or services, in an amount that reflects the consideration to which we expect to receive in exchange for those goods or
services.
F-10
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
To determine recognition, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contracts; and (v)
recognize revenue as or when we satisfy the performance obligation. We only apply the five-step model to contracts when it is probable that Dolphin will
collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, we assess the goods or
services promised within each contract and determine those that are distinct performance obligations. We then assess whether we act as an agent or a
principal for each identified performance obligation and include revenue within the transaction price for third-party costs when we determine that we act as
principal. We typically do not capitalize costs to obtain a contract as these amounts would generally be recognized over a period of one year or less.
The majority of our fees are recognized over time as services are performed, and are generally recognized on a straight-line or monthly basis, as
the services are consumed by our clients, which approximates the proportional performance on such contracts. We also enter into management agreements
with a roster of social media influencers and are paid a percentage of the revenue earned by the social media influencer. Due to the short-term nature of
these contracts, the performance obligation is typically completed and revenue is recognized at a point in time, typically the date of publication.
Principal vs. Agent
When a third-party is involved in the delivery of our services to the client, we assess whether or not we are acting as a principal or an agent in the
arrangement. The assessment is based on whether we control the specified services at any time before they are transferred to the customer. We have
determined that in our events and public relations businesses, we generally act as a principal as our agencies provide a significant service of integrating
goods or services provided by third parties into the specified deliverable to our clients. In addition, we have determined that we are responsible for the
performance of the third-party suppliers, which are combined with our own services, before transferring those services to the customer. We have also
determined that we act as principal when providing creative services and media planning services, as we perform a significant integration service in these
transactions. For performance obligations in which we act as principal, we record the gross amount billed to the customer within total revenue and the
related incremental direct costs incurred as billable expenses.
When a third-party is involved in the production and execution of an advertising campaign and for media buying services, we have determined
that we act as the agent and are solely arranging for the third-party suppliers to provide services to the customer. Specifically, we do not control the
specified services before transferring those services to the customer, we are not primarily responsible for the performance of the third-party services, nor
can we redirect those services to fulfill any other contracts. We do not have inventory risk or discretion in establishing pricing in our contracts with
customers. For performance obligations for which we act as the agent, we record our revenue as the net amount of our gross billings less amounts remitted
to third parties. In these types of arrangements, the gross billings are recorded as other receivables in the consolidated balance sheets and the amounts
remitted to third parties are recorded as “talent liability” within other current liabilities in the consolidated balance sheets.
Collaborative Arrangements
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 consolidated statements of operations. To date, there has been no revenue generated from collaboration arrangements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposits at financial institutions. The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
F-11
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Restricted Cash
Restricted cash represents amounts held by banking institutions as collateral for security deposits under leases for office space in New York City.
As of December 31, 2022 and 2021 the Company had a balance of $1,127,960 and $541,883, respectively, in restricted cash.
Accounts Receivable
The Company’s trade accounts receivable relate to its entertainment publicity and marketing business, and are recorded at their net realizable
value, which is net of an allowance for doubtful accounts. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts
that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all delinquent accounts receivable
balances and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. When preparing
these estimates, management considers a number of factors, including the age of the receivables, current economic conditions, historical losses and other
information management obtains regarding the financial condition of customers. The policy for determining past due status is based on the contractual
payment terms of each customer, which are generally net 30 days. Once collection efforts by the Company and its collection agency are exhausted, the
determination for charging off uncollectible receivables is made.
Other Receivables
Prior to the Company’s acquisition, Socialyte entered into a factoring agreement with Peblo LLC (“Peblo”) and agreed to to sell trade receivables
in exchange for a fee of 1% of the trade receivables purchased. The receivables purchased are paid within forty-eight hours of the purchase, net of the 1%
fee (“First Agreement”). The initial term of the First Agreement is for a twenty-four month period and expires on June 1, 2024. On January 13, 2023, the
Company’s subsidiary entered into a new agreement with Peblo and agreed to sell the trade receivables for a fee of 0.9% and receive the funds for purchase
of the trade receivables within thirteen days of the sale of the trade receivable (“Second Agreement” and together with the First Agreement, the “Factoring
Agreements”). The initial term of the Second Agreement is for a period of twenty-four months and upon the purchase of the trade receivables all rights and
obligations of the trade receivable transfers to Peblo and the Company is not required to repurchase any trade receivable that is not collected by Peblo. For
the period between November 14, 2022, the acquisition date and December 31, 2022, Socialyte sold $3.1 million of trade receivables to Peblo and recorded
approximately $31,300 for the 1% Peblo fee under general and administrative costs in the Company’s consolidated statement of operations of the year
ended December 31, 2022. As of December 31, 2022, the outstanding principal balance of receivables sold under the Factoring Agreements amounted to
$1,025,239, net of the 1% fee ($10,356) charged by Peblo and is included under the caption “Other receivables” on our consolidated balance sheets.
Other receivables also include gross amounts to be collected from third party suppliers in transactions in which we act as an agent (refer to
Revenue Recognition, “Principal vs. Agent” section), which amount to $5,552,993 and $3,583,357 as of December 31, 2022 and 2021, respectively.
Notes Receivable
The notes receivable held by the Company are convertible note receivables from JDDC Elemental LLC (“Midnight Theatre”) and Stanton South
LLC (“Crafthouse Cocktails”) (the “Notes Receivable”). The Notes Receivable are recorded at their principal face amount plus accrued interest. Due to
their short-term maturity and conversion terms (see Note 9), these have been recorded at the face value of the note and an allowance for doubtful notes
receivable has not been established.
Employee Receivable
The Company records receivables from employees separately on its consolidated balance sheets. During the years ended December 31, 2022 and
2021, the Company made payments to Amanda Lundberg, the CEO of 42West, in the aggregate amount of $238,000 and $366,085, respectively. On March
23, 2022, the Company and Ms. Lundberg entered into a Secured Promissory Note (“Lundberg Note”) agreement that provides for additional payments in
the amount of $16,000 monthly to be made to Ms. Lundberg through December 31, 2027. The Lundberg Note matures on December 31, 2027 and bears
interest of 2% per annum that will accrue and be payable upon maturity. The Lundberg Note also provides for note repayment to begin on March 31, 2025
through twelve equal consecutive quarterly installments. On the same date as the Lundberg Note and as security for the balance of the Lundberg Note, Ms.
Lundberg and the Company entered into a Stock Pledge Agreement whereby Ms. Lundberg pledged common stock of the Company held by her as
collateral for the Lundberg Note. As of December 31, 2022 and 2021, Ms. Lundberg owes the Company $604,085 and $366,085, respectively under the
Lundberg Note.
F-12
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Other Current Assets and Other Long-Term Assets
Other current assets consist primarily of prepaid expenses, interest receivable, and other non-customer receivables. Other long-term assets consist
of equity method investments (see Note 10) and security deposits. From time to time, indemnification assets for certain acquisitions are recorded in Other
long-term assets; however, there were no indemnification assets as of December 31, 2022 and 2021.
Capitalized Production Costs
Capitalized production costs include the Company’s investment in the production costs of the Blue Angels, the first co-produced, co-financed deal
under the IMAX Corporation (“IMAX”) agreement discussed further in Note 26. Capitalized production costs also include the costs of scripts for projects
that have not been produced and are in various stages of development. Capitalized productions costs are initially recorded at cost that is also deemed to be
its fair value and reviewed at each balance sheet date for impairment. Whenever the carrying amount is determined to be above the fair value, the
capitalized production cost is impaired.
Investments and Strategic Arrangements
From time to time, the Company may participate in selected investment or strategic arrangements to expand its operations or customer base,
including arrangements that combine the Company’s skills and resources with those of others to allow for the performance of particular projects.
Management determines whether each business entity in which it has equity interests, debt, or other investments constitutes a variable interest
entity (“VIE”) based on the nature and characteristics of such arrangements. If an investment arrangement is determined to be a VIE, then management
determines if the Company is the VIE’s primary beneficiary by evaluating several factors, including the Company’s: (i) risks and responsibilities; (ii)
ownership interests; (iii) decision making powers; and (iv) financial interests, among other factors. If management determines the Company is the primary
beneficiary of a VIE, then it would be consolidated, and other parties’ interests in the VIE would be accounted for as non-controlling interests. The primary
beneficiary consolidating the VIE must normally have both (i) the power to direct the primary activities of the VIE and (ii) the obligation to absorb losses
of the VIE or the right to receive benefits from the VIE, which, in either case, could be significant to the VIE. The Company has determined that it is the
primary beneficiary of JB Believe, LLC, formed on December 4, 2012 in the State of Florida; as such it has included it in its consolidated financial
statements as of and for the years ended December 31, 2022 and 2021 as a VIE. Refer to Note 18 for additional information on Variable Interest Entities.
The Company’s investments in entities for which it does not have a controlling interest and is not the primary beneficiary, but for which it has the
ability to exert significant influence, are accounted for using the equity method of accounting. Under the equity method of accounting, the initial
investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses, including consideration of basis
differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. The equity method
investments are recorded in other long-term assets in the consolidated balance sheets. Refer to Note 10 for additional information on Equity Method
Investments.
Intangible Assets
In connection with the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte, the Company acquired in
aggregate an estimated $18,680,000 of intangible assets with finite useful lives initially estimated to range from 2 to 13 years. The finite-lived intangible
assets consist primarily of customer relationships, trade names and non-compete agreements.
Intangible assets are initially recorded at fair value and are amortized over their respective estimated useful lives (see table below) and reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If a triggering event has
occurred, an impairment analysis is required. The impairment test first requires a comparison of undiscounted future cash flows expected to be generated
over the useful life of an asset to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, the asset would not
be deemed recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value. See Note 8 for further discussion.
The range of estimated useful lives to be used to calculate amortization for finite-lived intangibles are as follow:
Intangible Asset
Customer relationships
Trademarks and trade names
Non-compete agreements
Amortization Method
Accelerated Method
Straight-line
Straight-line
Amortization Period
(Years)
3 – 13
2 – 10
2 – 3
F-13
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Goodwill
Goodwill results from business combinations and is recorded as the difference, if any, between the aggregate consideration paid for an acquisition
and the fair value of the net tangible assets and other intangible assets acquired. The Company accounts for goodwill in accordance with FASB ASC No.
350, Intangibles—Goodwill and Other (“ASC 350”). Goodwill is not amortized; however, it is assessed for impairment at least annually, or more frequently
if triggering events occur. The Company’s annual assessment is performed in the fourth quarter.
Each period and for each reporting unit the Company can elect to first assess qualitatively whether it is necessary to perform goodwill impairment
testing. If the Company believes, as a result of its qualitative assessment, that it is not more likely than not that the fair value of any reporting unit
containing goodwill is less than its carrying amount, the quantitative goodwill impairment test is unnecessary. If the Company elects to bypass the
qualitative assessment option, or if the qualitative assessment was performed and resulted in the Company being unable to conclude that it is not more
likely than not that the fair value of a reporting unit containing goodwill is greater than its carrying amount, the Company will perform the quantitative
goodwill impairment test.
The Company evaluates various factors affecting a reporting unit in its qualitative assessment, including, but not limited to, macroeconomic
conditions, industry and market considerations, cost factors, and financial performance. If the Company concludes from its qualitative assessment that
goodwill impairment testing is required or if the Company bypasses the qualitative test, the fair value of the reporting unit is compared to its carrying
amount.
Property, Equipment and Leasehold Improvements
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. 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:
Asset Category
Furniture and fixtures
Computers, office equipment and software
Leasehold improvements
Depreciation/Amortization Period
(Years)
5 - 7
3 - 5
5 - 8, not to exceed the lease terms
The Company periodically reviews and evaluates the recoverability of property, equipment and leasehold improvements. Where applicable,
estimates of net future cash flows, on an undiscounted basis, are calculated based on future revenue estimates. If appropriate and where deemed necessary,
a reduction in the carrying amount is recorded. The Company has not had any material impairments of property, equipment and leasehold improvements.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. Identifiable assets acquired, liabilities assumed and
any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Goodwill is recognized to the extent by
which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interest in the acquiree exceeds the
recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired, liabilities assumed and
noncontrolling interest requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with
respect to future cash flows, discount rates and asset lives among other items.
Contingent Consideration
The Company records contingent consideration as a result of certain acquisitions (see Note 5). The Company records the fair value of the
contingent consideration liability in the consolidated balance sheets under the caption “Contingent Consideration” and records changes to the liability
against earnings or loss under the caption “Changes in fair value of contingent consideration” in the consolidated statements of operations.
F-14
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Put Rights
In connection with the 42West acquisition in 2017, the Company entered into put right agreements, pursuant to which it granted put rights to the
sellers and certain 42West employees. The Company records the fair value of the liability in the consolidated balance sheets under the caption “Put rights”
and records changes to the liability against earnings or loss as part of operating expenses under the caption “Changes in fair value of put rights” in the
consolidated statements of operations. The final put rights were settled in March 2021; therefore, we did not have a liability related to the put rights as of
December 31, 2022 or 2021, and no changes in fair value occurred during the year ended December 31, 2022.
Acquisition Costs
Direct costs related to business combinations are expensed as incurred and included as Acquisition costs in the consolidated statements of
operations. These costs include all internal and external costs directly related to acquisitions, consisting primarily of legal, consulting, accounting, advisory
and financing fees.
Convertible Debt and Convertible Preferred Stock
On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2020-06 that simplifies the accounting for convertible
instruments. ASU 2020-06 (i) reduced the number of accounting models for convertible instruments, by eliminating the models that require separation of
cash conversion or beneficial conversion features from the host and (ii) revised the derivative scope exception and (iii) provided targeted improvements for
Earnings Per Share (“EPS”). The adoption of ASU 2020-06 did not have a material impact on the Company’s outstanding convertible debt instruments as
of January 1, 2021.
When the Company issues convertible debt or convertible preferred stock, it evaluates the balance sheet classification to determine whether the
instrument should be classified either as debt or equity, and whether the conversion feature should be accounted for separately from the host instrument. A
conversion feature of a convertible debt instrument or certain convertible preferred stock would be separated from the convertible instrument and classified
as a derivative liability if the conversion feature, were it a standalone instrument, meets the definition of an “embedded derivative” in ASC 815, Derivatives
and Hedging. Generally, characteristics that require derivative treatment include, among others, when the conversion feature is not indexed to the
Company’s equity, as defined in ASC 815-40, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When a
conversion feature meets the definition of an embedded derivative, it would be separated from the host instrument and classified as a derivative liability
carried on the consolidated balance sheet at fair value, with any changes in its fair value recognized currently in the consolidated statements of operations.
Fair Value Option (“FVO”) Election
The Company accounts for certain convertible notes issued during the year ended December 31, 2020 under the fair value option election of ASC
825, Financial Instruments (“ASC 825”) as discussed below.
The convertible notes accounted for under the FVO election are each debt host financial instruments containing embedded features which would
otherwise be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic
estimated fair value measurements under ASC 815. Notwithstanding, ASC 825-10-15-4 provides for the “fair value option” (“FVO”) election, to the extent
not otherwise prohibited by ASC 825-10-15-5, to be afforded to financial instruments, wherein bifurcation of an embedded derivative is not necessary, and
the financial instrument is initially measured at its issue-date estimated fair value and then subsequently remeasured at estimated fair value on a recurring
basis at each reporting period date.
The estimated fair value adjustment, as required by ASC 825-10-45-5, is recognized as a component of other comprehensive income (“OCI”) with
respect to the portion of the fair value adjustment attributed to a change in the instrument-specific credit risk, with the remaining amount of the fair value
adjustment recognized as other income (expense) in the accompanying consolidated statement of operations. With respect to the above notes, as provided
for by ASC 825-10-50-30(b), the estimated fair value adjustment is presented in a respective single line item within other income (expense) in the
accompanying consolidated statements of operations, since the change in fair value of the convertible notes payable was not attributable to instrument
specific credit risk.
Warrants
When the Company issues warrants, it evaluates the proper balance sheet classification of the warrant to determine whether the warrant should be
classified as equity or as a derivative liability on the consolidated balance sheets. In accordance with ASC 815-40, Derivatives and Hedging-Contracts in
the Entity’s Own Equity (ASC 815-40), the Company classifies a warrant as equity so long as it is “indexed to the Company’s equity” and several specific
conditions for equity classification are met. A warrant is not considered indexed to the Company’s equity, in general, when it contains certain types of
exercise contingencies or adjustments to exercise price. If a warrant is not indexed to the Company’s equity or it has net cash settlement that results in the
warrants to be accounted for under ASC 480, Distinguishing Liabilities from Equity, or ASC 815-40, it is classified as a derivative liability which is carried
on the consolidated balance sheet at fair value with any changes in its fair value recognized currently in the statement of operations. As of December 31,
2022 and 2021, the Company had warrants that were classified as liabilities.
F-15
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market
and the degree that the inputs are observable. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk. Observable inputs are based on market data obtained from sources independent of the Company. Unobservable inputs
reflect 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, defined as follows:
Level 1 — Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.
Level 2 — Inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be
corroborated with observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and
liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant
unobservable inputs. Unobservable inputs for the asset or liability that reflect management’s own assumptions about the assumptions
that market participants would use in pricing the asset or liability as of the reporting date.
To account for the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte, the Company made a number of fair
value measurements related to the different forms of consideration paid and of the identified assets acquired and liabilities assumed. In addition, the
Company makes fair value measurements of its Contingent Consideration. See Notes 5 and17 for further discussion and disclosures.
Right-of-Use Asset and Lease Liability
The Company accounts for leases under ASC 842, Leases. The Company reviews all agreements to determine if a leasing arrangement exists. The
Company determines if an arrangement is a lease at the lease commencement date. In addition to the Company’s lease agreements, the Company reviews
all material new vendor arrangements for potential embedded lease obligations. The asset balance related to operating leases is presented within “right-of-
use (ROU) asset” on the Company’s consolidated balance sheet. The current and noncurrent balances related to operating leases are presented as “Lease
liability,” in their respective classifications, on the Company’s consolidated balance sheet.
The lease liability is recognized based on the present value of the remaining fixed lease payments discounted using the Company’s incremental
borrowing rate on the date of the lease. The ROU asset is calculated based on the lease liability adjusted for any lease payments paid to the lessor at or
before the commencement date (i.e. prepaid rent) and initial direct costs incurred by the Company and excluding any lease incentives received from the
lessor. If a lease does not provide a discount rate and the rate cannot be readily determined, an incremental borrowing rate is used to determine the present
value of future lease payments. For operating leases, the lease expense is recognized on a straight-line basis over the lease term. The Company accounts for
its lease and non-lease components as a single component, and therefore both are included in the calculation of lease liability recognized on the
consolidated balance sheets.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases using tax rates in effect for the years in which the differences are expected to reverse. The effects of
changes in tax laws on deferred tax balances are recognized in the period the new legislation in enacted. Valuation allowances are recognized to reduce
deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of
future taxable income. We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results
reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties
related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.
F-16
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss) attributable to the shareholders of Common Stock (the numerator) by the
weighted-average number of shares of Common Stock outstanding (the denominator) for the period.
Diluted earnings (loss) per share equals net income (loss) available to common stock stockholders divided by the weighted-average number of
common shares outstanding, plus any additional common shares that would have been outstanding if potentially dilutive shares had been issued. Diluted
earnings (loss) per share reflects the potential dilution that would occur if certain potentially dilutive instruments were exercised. The potential issuance of
common stock is assumed to occur at the beginning of the year (or at the time of issuance of the potentially dilutive instrument, if later), under the if-
converted method. Incremental shares are also included using the treasury stock method. The proceeds utilized in applying the treasury stock method
consist of the amount, if any, to be paid upon exercise. These proceeds are then assumed to be used to purchase common stock at the average market price
of the Company’s common stock during the period. The incremental shares (difference between the shares assumed to be issued and the shares assumed to
be purchased), to the extent they would have been dilutive, are included in the denominator of the diluted earnings per share calculation. Potentially dilutive
instruments are not included in the computation of diluted loss per share because their inclusion is anti-dilutive.
Concentration of Risk
The Company maintains its cash and cash equivalents with financial institutions, which at times, may exceed federally insured limits. The
Company has not incurred any losses on these accounts.
Reclassification
Certain prior year amounts have been reclassified to conform with current year presentation. These changes did not have any effect on net loss,
stockholders’ equity, the statement of operations or the net change in cash, cash equivalents and restricted cash in the statement of cash flows.
Recent Accounting Pronouncements
Accounting guidance adopted in fiscal year 2022
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers”, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing
diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue
recognized by the acquirer. The guidance is effective for annual reporting periods beginning after December 15, 2022, including interim periods within that
reporting period. Early adoption is permitted. The Company adopted this guidance on a prospective basis during the fourth quarter of 2022. Resulting from
the adoption of this new guidance in relation to the Socialyte acquisition in November 2022, the Company recorded contract liabilities consistent with those
recorded immediately prior to the acquisition date. The Company did not consider this to have a significant impact on the consolidated financial statements.
Accounting guidance not yet adopted
In June 2016, the FASB issued new guidance on measurement of credit losses (ASU 2016-13, “Measurement of Credit Losses on Financial
Instruments”) with subsequent amendments issued in November 2018 (ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the accounting
for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for
credit losses. It is applicable to trade accounts receivable. The guidance is effective for fiscal years beginning after December 15, 2022 with a cumulative-
effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted. The Company is in the process of evaluating
the impact of the adoption of ASU 2016-13 on the Company's consolidated financial statements and disclosures.
NOTE 3 – PRIOR INTERIM PERIOD REVISIONS AND UNAUDITED FINANCIAL DATA
Revision of previously issued financial statements – Settlement of Contingent Consideration
During the preparation of the consolidated financial statements for the year ended December 31, 2022, the Company identified certain errors
related to its accounting of the settlement of and related change in fair value of contingent consideration reported in Form 10-Q for the quarters ended
March 31, 2022 and June 30, 2022. On December 31, 2021, the Company had a liability in the amount of $2,381,869 related to the contingent
consideration owed to the sellers of The Door. On June 7, 2022, the Company issued 279,562 shares of Common Stock to settle the contingent
consideration. For the three months ended March 31, 2022 and the three and six months ended June 30, 2022, the Company erroneously recorded changes
in the fair value of the contingent consideration because during this period, the Company knew the number of shares needed for the settlement of the
contingent consideration payment. To correct this error, the Company is revising its previously issued interim consolidated financial statements to (a)
record the settlement and reclassification of the contingent consideration liability to additional paid-in-capital on January 1, 2022; and (b) eliminate the
changes in fair value of contingent consideration recorded from January 1, 2022 through June 7, 2022.
F-17
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
In accordance with SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,” the Company determined that the unaudited interim condensed consolidated financial statements for
the quarterly and year-to-date periods ended March 31, 2022, June 30, 2022 and September 30, 2022 were materially misstated and should be revised. In
addition, the change in fair value table disclosed in the Fair Value Measurements footnote and segment information disclosed in the Segment Reporting
footnote has been revised for these periods. The revised unaudited interim consolidated financial statements are included below. The amounts and
disclosures included in this Annual Report have been revised to reflect the corrected presentation.
As discussed above, the Company determined that its unaudited interim condensed consolidated financial statements for the quarterly and year-to-
date periods ended March 31, 2022, June 30, 2022 and September 30, 2022 should be revised. The tables below set forth the impact of the revisions on the
Company’s unaudited interim condensed consolidated financial statements.
Unaudited Financial Data
Revisions
Nine Months Ended September 30, 2022 (Unaudited, As Revised)
Consolidated Statement of Operations
Change in fair value of contingent consideration
Total expenses
Loss from operations
Loss before income taxes and equity in losses of unconsolidated affiliates
Net loss before income taxes and equity in losses of unconsolidated affiliates
Net loss
EPS – Basic
EPS – Diluted
Consolidated Statements of Cash Flows
Net loss
Change in fair value of contingent consideration
Net cash provided by (used in) operating activities
Segment Information
Segment Operating Income (Loss):
EPM
CPD
Total operating income (loss)
Interest expense
Other income, net
Loss before income taxes and equity in losses of unconsolidated affiliates
F-18
For the Nine Months Ended
September 30, 2022
Revision
Adjustment
As Revised
As Reported
$
$
$
$
(1,439,778) $
30,975,282
(1,608,534)
(1,326,896)
(1,348,568)
(1,492,191) $
1,358,672 $
1,358,672
(1,358,672)
(1,358,672)
(1,358,672)
(1,358,672) $
(81,106)
32,333,954
(2,967,206)
(2,685,568)
(2,707,240)
(2,850,863)
(0.16) $
(0.23) $
(0.15) $
(0.14) $
(0.31)
(0.37)
For the Nine Months Ended
September 30, 2022
Revision
Adjustment
As Revised
As Reported
$
$
(1,492,191) $
(1,439,778)
(3,634,388) $
(1,358,672) $
1,358,672
— $
(2,850,863)
(81,106)
(3,634,388)
For the Nine Months Ended
September 30, 2022
Revision
Adjustment
As Revised
As Reported
$
$
3,336,688 $
(4,945,222)
(1,608,534)
(400,884)
(682,522)
(1,326,896) $
(1,358,672) $
—
(1,358,672)
—
—
(1,358,672) $
1,978,016
(4,945,222)
(2,410,358)
(400,884)
682,522)
(3,819,243)
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Three and Six Months Ended June 30, 2022 (Unaudited, As Revised)
Consolidated Balance Sheet
Stockholders' Equity:
Additional paid in capital
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Consolidated Statement of Operations
Change in fair value of contingent consideration
Total expenses
Loss from operations
Loss before income taxes and equity in losses of unconsolidated affiliates
Net loss before income taxes and equity in losses of unconsolidated affiliates
Net loss
EPS – Basic
EPS – Diluted
Change in fair value of contingent consideration
Total expenses
Loss from operations
Loss before income taxes and equity in losses of unconsolidated affiliates
Net loss before income taxes and equity in losses of unconsolidated affiliates
Net loss
As Reported
As of June 30, 2022
Revision
Adjustment
As Revised
$
$
133,246,100
(104,614,817)
28,775,563
52,536,655
1,358,672 $
(1,358,672)
—
— $
134,604,772
(105,973,489)
28,775,563
52,536,655
For the Three Months Ended
June 30, 2022
Revision
Adjustment
As Revised
As Reported
(670,878) $
9,801,668
488,958
642,632
635,408
612,008 $
433,321 $
433,321
(433,321)
(433,321)
(433,321)
(433,321) $
(237,557)
10,234,989
55,637
209,311
202,087
178,687
0.06 $
0.04 $
(0.04) $
(0.05) $
0.02
(0.01)
For the Six Months Ended
June 30, 2022
Revision
Adjustment
As Revised
As Reported
(1,434,778) $
19,942,502
(474,751)
(122,625)
(137,073)
(180,473) $
1,358,672 $
1,358,672
(1,358,672)
(1,358,672)
(1,358,672)
(1,358,672) $
(76,106)
21,301,174
(1,833,423)
(1,481,297)
(1,495,745)
(1,539,145)
(0.02) $
(0.09) $
(0.15) $
(0.14) $
(0.17)
(0.23)
$
$
$
$
$
$
$
$
EPS – Basic
EPS – Diluted
Segment Information
Segment Operating Income
(Loss):
EPM
CPD
Total operating income (loss)
Interest expense
Other income, net
Loss before income taxes and
equity in losses of
unconsolidated affiliates
For the three months ended
June 30, 2022
Restatement
Adjustment
As Reported
As Restated
As Reported
For the six months ended
June 30, 2022
Restatement
Adjustment
As Restated
$
2,217,043 $
(1,728,085)
488,958
(125,348)
279,022
(433,321) $
—
(433,321)
—
—
1,783,722 $
(1,728,085)
55,637
(125,348)
279,022
2,731,850 $
(3,206,618)
(474,768)
(274,737)
626,880
(1,358,672) $
—
(1,358,672)
—
—
1,373,178
(3,206,618)
(1,833,440)
(274,737)
626,880
$
642,632 $
(433,321) $
209,311 $
(122,625) $
(1,358,672) $
(1,481,297)
F-19
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Fair Value Measurements
Beginning fair value balance reported on the condensed consolidated balance sheet at
December 31, 2021
Gain in fair value reported in the condensed consolidated statements of operations
Settlement of contingent consideration (Reclassified to additional paid in capital)
Ending fair value balance reported in the condensed consolidated balance sheet at June 30,
2022
Revision
Three Months Ended March 31, 2022 (Unaudited, As Revised)
Consolidated Balance Sheet
Noncurrent liabilities
Contingent consideration
Total Liabilities
Stockholders' Equity:
Additional paid in capital
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders' Equity
Consolidated Statement of Operations
Change in fair value of contingent consideration
Total expenses
Loss from operations
Loss before income taxes and equity in losses of unconsolidated affiliates
Net loss before income taxes and equity in losses of unconsolidated affiliates
Net loss
EPS – Basic
EPS – Diluted
Segment Information
Segment Operating Income (Loss):
EPM
CPD
Total operating income (loss)
Interest expense
Other income, net
Loss before income taxes and equity in losses of unconsolidated affiliates
F-20
As Reported
The Door
Restatement
Adjustment
As Restated
2,381,869 $
(1,358,672)
(1,023,197)
— $
1,358,672
(1,358,672)
2,381,869
—
(2,381,869)
— $
— $
—
As Reported
As of March 31, 2022
Revision
Adjustment
As Revised
2,920,321 $
29,426,402 $
(1,456,518) $
(1,456,518) $
1,463,803
27,969,884
129,813,123
(105,226,825)
24,717,064 $
54,143,466 $
2,381,869 $
(925,351)
1,456,518 $
— $
132,194,992
(106,152,176)
26,173,582
54,143,466
For the Three Months Ended
March 31, 2022
Revision
Adjustment
As Revised
As Reported
(763,900) $
10,140,834
(963,709)
(765,257)
(772,481)
(792,481) $
925,351 $
925,351
(925,351)
(925,351)
(925,351)
(925,351) $
161,451
11,066,185
(1,889,060)
(1,690,608)
(1,697,832)
(1,717,832)
(0.09) $
(0.13) $
(0.11) $
(0.10) $
(0.20)
(0.23)
For the three months ended
March 31, 2022
Restatement
Adjustment
As Reported
As Restated
861,141 $
(1,824,850)
(963,709)
(149,406)
(347,858)
(765,257) $
(925,351) $
—
(925,351)
—
—
(925,351) $
(64,210)
(1,824,850)
(1,889,060)
(149,406)
(347,858)
(1,690,608)
$
$
$
$
$
$
$
$
$
$
$
$
$
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Fair Value Measurements
Beginning fair value balance reported on the condensed consolidated balance sheet at
December 31, 2021
(Gain) Loss in fair value reported in the condensed consolidated statements of operations
Settlement of contingent consideration (Reclassified to additional paid in capital)
Ending fair value balance reported in the condensed consolidated balance sheet at March 31,
2022
NOTE 4 – REVENUE
Disaggregation of Revenue
As Reported
The Door
Restatement
Adjustment
As Restated
$
2,381,869 $
(925,351)
—
— $
925,351
(2,381,869)
2,381,869
—
(2,381,869)
$
1,456,518 $
(1,456,518) $
—
The Company’s principal geographic markets are within the U.S. The following is a description of the principal activities, by reportable segment,
from which we generate revenue. For more detailed information about reportable segments, see Note 23.
Entertainment Publicity and Marketing
The Entertainment Publicity and Marketing (“EPM”) segment generates revenue from diversified marketing services, including public relations,
entertainment and hospitality content marketing, strategic marketing consulting and content production of marketing materials. Within the EPM segment,
we typically identify one performance Is of publication.
Content Production
The Content Production (“CPD”) segment generates revenue from the production of original motion pictures and other digital content production.
In the CPD segment, we typically identify performance obligations depending on the type of service, which we generally act as the principal. Revenue from
motion pictures is recognized upon transfer of control of the licensing rights of the motion picture or web series to the customer. For minimum guarantee
licensing arrangements, the amount related to each performance obligation is recognized when the content is delivered, and the window for exploitation
right in that territory has begun, which is the point in time at which the customer is able to begin to use and benefit from the content. For sales or usage-
based royalty income, revenue is recognized starting at the exhibition date and is based on the Company’s participation in the box office receipts of the
theatrical exhibitor and the performance of the motion picture. For the years ended December 31, 2022 and 2021, the Company derived $18,078 and
$21,894, respectively, in revenues from its motion picture Believe released in 2013.
During the year ended December 31, 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 $429,000. The Company
entered into an agreement with a third party to market the collection and mint the NFT’s. Per the terms of the agreement, the Company paid the third party
a fixed $50,000 fee and 30% of the sale of the NFT collection. The Company acted as principal in the sale of the NFT’s and as such recorded the gross
revenues in its consolidated statement of operations for the year ended December 31, 2022. The revenue was recognized at a point in time when the NFT’s
were transferred to the consumer.
The revenues recorded by the EPM and CPD segments is detailed below:
Entertainment publicity and marketing
Content production
Total Revenues
Contract Balances
December 31,
$
$
2022
40,058,880 $
446,678
40,505,558 $
2021
35,705,305
21,894
35,727,199
Contract assets are comprised of services provided for which consideration has not been received and are transferred to accounts receivable when
the right to payment becomes unconditional. Contract assets are presented within other current assets in the consolidated balance sheets.
F-21
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
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.
The opening and closing balances of our contract asset and liability balances from contracts with customers as of December 31, 2022 and 2021
were as follows:
Balance as of December 31, 2021
Balance as of December 31, 2022
Change
Revenues for the years ended December 31, 2022 and 2021, include the following:
Amounts included in the beginning of year contract liability balance
Contracts
Assets
Contracts
Liabilities
$
$
62,500 $
—
(62,500) $
406,373
1,641,459
1,235,086
December 31,
2022
2021
$
384,373 $
389,492
The Company’s unsatisfied performance obligations are for contracts that have an original expected duration of one year or less and, as such, the
Company is not required to disclose the remaining performance obligation.
NOTE 5 —ACQUISITIONS
Socialyte, LLC
On November 14, 2022 (“Closing Date”), the Company, through its wholly owned subsidiary, Social MidCo LLC, (“MidCo”), acquired all of the
issued and outstanding membership interests of Socialyte, a Delaware limited liability company (the “Socialyte Purchase”), pursuant to a membership
interest purchase agreement dated the Closing Date (the “Socialyte Purchase Agreement”) between the Company and NSL Ventures, LLC (the “Socialyte
Seller). Socialyte is a New York and Los Angeles-based creative agency specializing in social media influencer marketing campaigns for brands.
The total consideration paid to the Socialyte Seller in respect to the Socialyte Purchase is $14,290,504, including a provisional working capital
adjustment in the amount of $2,103,668, plus the potential to earn up to an additional $5,000,000 upon meeting certain financial targets in 2022. However,
on the acquisition date, the Company’s assessment was that the targets were not expected to be achieved, therefore no contingent consideration has been
recorded for the Socialyte Purchase. On the Closing Date, the Company paid the Seller $5,053,827 cash, issued the Seller 1,346,257 shares of its Common
Stock and issued the Seller a $3,000,000 unsecured promissory note (the “Socialyte Promissory Note”), which is to 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 from Bank
Prov with MidCo and Socialyte as co-borrowers, which the Company guaranteed. The common stock that was issued as part of the consideration was not
registered under the Securities Act. Acquisition related costs for the Socialyte purchase amounted to $456,273 and are included in acquisition costs in the
consolidated statement of operations.
The consolidated statement of operations includes revenues and net income from Socialyte amounting to $1,078,153 and $236,031, respectively,
for the year ended December 31, 2022.
The following table summarizes the fair value of the consideration transferred:
Closing Common stock (Consideration)
Common Stock issued at Closing as working capital adjustment
Cash consideration paid at closing
Cash consideration paid subsequent to closing (Unsecured Promissory Note issued to Seller)
Fair value of the consideration transferred
F-22
$
$
4,133,009
2,103,668
5,053,827
3,000,000
14,290,504
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed by the Socialyte Purchase on the Closing
Date. Amounts in the table are estimates that may change, as described below. There were no measurement period adjustments from the Closing Date
through December 31, 2022. The measurement period of the Socialyte Purchase concludes on November 14, 2023.
Cash
Accounts receivable
Accrued revenue
Property, equipment and leasehold improvements
Prepaid expenses
Intangibles
Total identifiable assets acquired
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Total liabilities assumed
Net identifiable assets acquired
Goodwill
Fair value of the consideration transferred
November 14, 2022
314,752
$
2,758,265
1,040,902
30,826
351,253
5,210,000
9,705,998
(3,043,871)
(1,397,292)
(1,173,394)
(5,614,557)
4,091,441
10,199,063
14,290,504
$
Due to the characteristics of the industry and services Dolphin provides, the acquisitions typically do not have significant amounts of physical
assets since the principal assets acquired are client relationships and trade names. As a result, a substantial portion of the purchase price is primarily
allocated to intangibles assets and goodwill. Socialyte provides Dolphin an expanded market for the growing social media and influencer market. Goodwill
resulting from the Socialyte acquisition is not deductible for tax purposes.
Intangible assets acquired in the Socialyte acquisition amounted to:
·
·
Customer relationships: $5,060,000. The customer relationships intangible was valued using the multi-period excess earnings method, which
was based on the estimate of future revenues and net income attributable to the existing customers, as well as any expected increases from
existing customers and potential loss of customer relationships. The historical and estimated customer retention rate utilized was 88% and
the assigned useful life for this asset was 10 years representing the period we expect to benefit from the asset.
Trade name: $150,000. Trade name refers to the Socialyte brand, which is somewhat well recognized in the target market. The fair value for
the trade name was determined using the Royalty Relief Method based on the Profit Split Method, which is based on the Company’s
expected revenues and a royalty rate estimated using comparable industry and market data. As a result of the acquisition, the Company
determined it was appropriate to assign a finite useful life of 3 years to the trade name. The Company decided that a finite life would be
more appropriate, providing better matching of the amortization expense during the period of expected benefits.
The weighted-average useful life of the intangible assets acquired was 9.80 years.
Unaudited Pro Forma Consolidated Statements of Operations
The following presents the unaudited pro forma consolidated operations as if Socialyte had been acquired on January 1, 2021:
Revenues
Net loss
$
$
2022
47,079,183 $
(4,365,589) $
2021
43,937,936
(5,454,024)
The pro forma amounts for 2022 and 2021 have been calculated after applying the Company’s accounting policies and adjusting the results of the
acquisitions to reflect (a) the amortization that would have been charged, assuming the intangible assets resulting from the acquisitions had been recorded
on January 1, 2021, (b) to exclude $456,273 of acquisition costs that were expensed by the Company for the year ended December 31, 2022 and (c) include
interest expense on the term loan and the unsecured promissory note in the amount of $249,189.
F-23
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The impact of the acquisition of Socialyte on the Company’s actual results for periods following the acquisitions may differ significantly from that
reflected in this unaudited pro forma information for a number of reasons. As a result, this unaudited pro forma information is not necessarily indicative of
what the combined company’s financial condition or results of operations would have been had the acquisitions been completed on January 1, 2021, as
provided in this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition
and results of operations of the combined company.
B/HI Communications, Inc.
Effective January 1, 2021, the Company acquired all of the issued and outstanding shares of B/HI, a California corporation (the “B/HI Purchase”)
pursuant to a share purchase agreement (the “B/HI Share Purchase Agreement”) between the Company and Dean G. Bender and Janice L. Bender, as co-
trustees of the Bender Family Trust dated May 6, 2013 (collectively, the “B/HI Sellers). B/HI is an entertainment public relations agency that specializes in
corporate and product communications programs for interactive gaming, e-sports, entertainment content and consumer product organizations.
The total consideration paid to the B/HI Seller in respect to the B/HI Purchase is $0.8 million of shares of common stock based on a 30-day
trailing trading average closing price immediately prior to, but not including, the applicable payment date adjusted for working capital, cash targets and the
B/HI indebtedness as defined in the B/HI Share Purchase Agreement. During 2021, subsequent to the initial measurement, the B/HI Seller achieved certain
financial performance targets pursuant to the B/HI Purchase Agreement and earned an additional $1.2 million of which 50% was paid in cash and 50% was
paid in Common Stock during the second quarter of 2022. The common stock issued as part of the consideration has not been registered under the
Securities Act. Acquisition related costs for the B/HI purchase amounted to $22,907 and are included in acquisition costs in the consolidated statement of
operations. The consolidated statement of operations includes revenues from B/HI amounting to $3.5 million for the year ended December 31, 2021.
The following table summarizes the fair value of the consideration transferred:
Payments made to settle final indebtedness, net of minimum operating cash as defined in the B/HI Share Purchase Agreement
Working capital adjustment
Fair value of common stock issued to the B/HI Sellers
Fair value of the consideration transferred
$
$
575,856
192,986
36,715
805,557
As a condition to the B/HI Purchase, Dean Bender, one of the sellers and Shawna Lynch, a key employee of B/HI entered into employment
agreements with the Company to continue as employees after the closing of the B/HI Purchase. Mr. Bender’s agreement is for a period of two years
through December 31, 2022 and he served as Co-President of B/HI during that term and until his retirement on December 31, 2022. Ms. Lynch’s agreement
is for a period of four years and may be renewed on the same terms for two successive two-year terms. Ms. Lynch serves as Co-President of B/HI during
the term of her agreement.
The following table summarizes the fair values of the assets acquired and liabilities assumed by the B/HI Purchase.
Cash
Accounts receivable
Other current assets
Property, equipment and leasehold improvements
Right-of-use asset
Other assets
Intangibles
Total identifiable assets acquired
Accrued payable
Accrued expenses and other current liabilities
Lease liability
Deferred revenue
Line of credit
Deferred tax liability
Loans payable
Total liabilities assumed
Net identifiable liabilities acquired
Goodwill
Net assets acquired
F-24
December 31, 2021
65,465
$
154,162
15,262
24,639
1,044,864
23,617
270,000
1,598,009
(104,724)
(259,936)
(1,044,864)
(56,994)
(456,527)
(38,851)
(75,550)
(2,037,446)
(439,437)
476,152
36,715
$
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Due to the characteristics of the industry and services Dolphin provides, the acquisitions typically do not have significant amounts of physical assets since
the principal assets acquired are client relationships, talent and trade names. As a result, a substantial portion of the purchase price is primarily allocated to
intangibles assets and goodwill. B/HI provided an additional customer vertical in which Dolphin did not have a presence and was interested in expanding.
Goodwill resulting from the B/HI acquisition is not deductible for tax purposes.
NOTE 6 — GOODWILL AND INTANGIBLE ASSETS
As of December 31, 2022, the Company has a balance of $29,314,083 of goodwill on its consolidated balance sheet resulting from its acquisitions
of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte. All goodwill has been assigned to the entertainment publicity and marketing
segment.
Goodwill
All of the Company’s goodwill is related to the entertainment, publicity and marketing segment. Changes in the carrying value of goodwill were as
follows:
Balance as of December 31, 2020
Measurement period adjustments(1)
Acquisitions(2)
Balance as of December 31, 2021
Acquisitions(3)
Goodwill impairment(4)
Balance as of December 31, 2022
$
$
$
19,627,856
(77,094)
470,595
20,021,357
10,199,063
(906,337)
29,314,083
(1) Measurement period adjustments recorded in connection with the Be Social and B/HI acquisitions.
(2) Acquisition of B/HI in January 2021.
(3) Acquisition of Socialyte in November 2022.
(4)
The Company recorded an impairment of goodwill, specifically for the Goodwill assigned to Viewpoint.
During the fourth quarter of 2022, management bypassed the optional qualitative assessment and performed a quantitative assessment and
concluded that, except as it relates to Viewpoint, it is more likely than not that the fair value of the reporting units was not less than its carrying amount. For
the goodwill value assigned to Viewpoint, management concluded the fair value of that reporting unit’s goodwill was below its carrying amount. As a
result, an impairment charge of $0.9 million was recorded during the year ended December 31, 2022. No impairment charges were recorded during the year
ended December 31, 2021.
Intangible Assets
Intangible assets consisted of the following as of December 31, 2022 and 2021:
Gross Carrying
Amount
December 31, 2022
Accumulated
Amortization
Net Carrying
Amount
Gross Carrying
Amount
December 31, 2021
Accumulated
Amortization
Net Carrying
Amount
Intangible assets
subject to
amortization:
Customer
relationships
Trademarks and
trade names
Non-compete
agreements
$
13,350,000 $
5,842,498 $
7,507,502 $
8,290,000 $
4,880,016 $
3,409,984
4,640,000
2,283,166
2,356,834
4,490,000
1,797,917
2,692,083
$
690,000
18,680,000 $
670,000
8,795,664 $
20,000
9,884,336 $
690,000
13,470,000 $
650,000
7,327,933 $
40,000
6,142,067
The following table presents the changes in intangible assets for the years ended December 31, 2022 and 2021:
Balance as of December 31, 2020
Intangible assets from B/HI acquisition
Amortization expense
Balance as of December 31, 2021
Intangible assets from Socialyte acquisition
Amortization expense
Balance as of December 31, 2022
F-25
$
$
$
7,452,059
270,000
(1,579,992)
6,142,067
5,210,000
(1,467,731)
9,884,336
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Amortization expense related to intangible assets for the next five years is as follows:
2023
2024
2025
2026
2027
Thereafter
Total
$
$
2,015,910
1,701,993
1,597,789
1,465,978
854,992
2,247,674
9,884,336
NOTE 7 — CAPITALIZED PRODUCTION COSTS
There were no revenues earned from the domestic distribution of motion pictures for the year ended December 31, 2022. Revenue earned from the
domestic distribution of motion pictures was $21,894 for the year ended December 31, 2021. These revenues were attributable to Believe released
December 25, 2013. The Company amortizes capitalized production costs (included as direct costs) in the consolidated statements of operations using the
individual film forecast computation method. The Company had previously amortized all existing capitalized production costs, and as such, it did not
record any amortization for the years ended December 31, 2022 and 2021. During the year ended December 31, 2022, the Company capitalized $1,548,000
of production costs, primarily related to the Blue Angels documentary film, as discussed in Note 26.
The Company purchases scripts and incurs other costs, such as preparation of budgets, casting, etc., for other motion picture or digital productions.
During the years ended December 31, 2022 and 2021, the Company recorded impairments of $87,323 and $234,734 related to costs of projects it does not
intend to produce. The Company intends to produce the remaining projects, but they were not yet in production as of December 31, 2022 or 2021. The
Company has assessed events and changes in circumstances that would indicate whether the Company should assess if the fair value of the productions is
less than the unamortized costs capitalized and, aside from the ones mentioned above, did not identify other indicators of impairment.
As of December 31, 2022 and 2021, the Company had total, net capitalized production costs of $1,598,412 and $137,235, respectively, on its
consolidated balance sheets.
NOTE 8 — PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvement consists of:
Furniture and fixtures
Computers, office equipment and software
Leasehold improvements
Property plant and equipment gross
Less: accumulated depreciation and amortization
Property plant and equipment net
December 31,
2022
933,618 $
2,288,986
505,424
3,728,028
(3,434,822)
293,206 $
2021
910,169
1,754,737
505,425
3,170,331
(2,696,669)
473,662
$
$
The Company recorded depreciation expense of $283,480 and $325,362, respectively, for the years ended December 31, 2022 and 2021.
NOTE 9 — NOTES RECEIVABLE
Midnight Theatre
As of December 31, 2022, the Midnight Theatre Notes, as defined herein, amount to $4,426,700, inclusive of $318,620 of interest receivable, and
are convertible at the option of the Company into Class A and B Units of Midnight Theatre. During the year ended December 31, 2022, Midnight Theatre
issued 16 unsecured convertible promissory notes to the Company (the “Midnight Theatre Notes”) with an aggregate principal of $3,108,080 each with a
ten percent (10%) per annum simple coupon rate. The Midnight Theatre Notes each originally had maturity dates six months from their issuance date but
the maturity date for all of the Midnight Theatre Notes has been extended to September 30, 2023. The Midnight Theatre Notes allow the Company to
convert the principal and accrued interest into common interest of JDDC Elemental, LLC on the maturity date. For the years ended December 31, 2022 and
2021, the Company recorded $308,483 and $10,137, respectively, of interest income related to the Midnight Theatre Notes.
F-26
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Crafthouse Cocktails
On November 30, 2021 Crafthouse Cocktails issued a $500,000 unsecured convertible promissory note (the “Crafthouse Note”) to the Company
with an eight percent (8%) per annum simple coupon rate and a mandatorily redemption date of February 1, 2022. The Crafthouse Note allows the
Company to convert the principal and accrued interest into common interest of Crafthouse on the mandatory conversion date. On February 1, 2022, the
Crafthouse Note was converted and the Company was issued common interests of Stanton South LLC.
NOTE 10 — EQUITY METHOD INVESTMENTS
The Company’s equity method investment consisted of: (1) Class A and Class B units of JDDC Elemental LLC, a Limited Liability Company
operating under the name Midnight Theatre (“Midnight Theatre”) and (2) Series 2 common interest of Stanton South LLC, which operates Crafthouse
Cocktails (“Crafthouse Cocktails”).
The Company evaluated these investments under the VIE guidance and determined the Company is not the primary beneficiary of either Midnight
Theatre or Crafthouse Cocktails, however it does exercise significant influence over Midnight Theatre and Crafthouse Cocktails; as a result, it accounts for
these investments under the equity method of accounting.
Midnight Theatre
As of December 31, 2022 and 2021, the investment in Midnight Theatre amounted to $891,494 and $1,000,000, respectively, which is the
Company’s maximum exposure to loss. The Company will manage all aspects of publicity and marketing for the venue, as well as facilitate talent and
commercial relationships within the entertainment and culinary industries. The Company’s balance as of both December 31, 2022 and 2021 represent an
ownership percentage of approximately 13%.
Hidden Leaf, the restaurant at Midnight Theatre, commenced operations in early July 2022. The theater opened with limited capacity in late
September 2022 and is expected to fully open in the Summer of 2023.
During the year ended December 31, 2022, the Company recorded a loss of $108,506, in connection with its equity method investment in
Midnight Theatre. Midnight Theatre did not have any operations during the year ended December 31, 2021 and, as such, the Company did not report any
equity in earnings or losses of Midnight Theatre for the year ended December 31, 2021.
Crafthouse Cocktails
As of December 31, 2022, the investment in Crafthouse Cocktails amounted to $361,717.
During the year ended December 31, 2022, the Crafthouse Note discussed in Note 9 was converted and Dolphin was issued common memberships
interests of Stanton South LLC. In addition, during the year ended December 31, 2022, the Company received an additional $1,000,000 of equity
investment in Stanton South LLC in connection with an agreement to render marketing services to Crafthouse Cocktails during a two-year term
commencing on November 15, 2021. During the year ended December 31, 2022, the Company recognized $500,000 for the marketing services related to
this agreement. The Company’s balance as of December 31, 2022, represents an ownership percentage of approximately 5.3%.
During the year ended December 31, 2022, the Company recorded a loss of $138,238, in connection with its equity method investment in
Crafthouse Cocktails.
NOTE 11 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
Accrued funding under Max Steel marketing agreement
Accrued audit, legal and other professional fees
Accrued commissions
Accrued bonuses
Due to seller of Be Social (2021)
Talent liability
Accumulated customer deposits
Other
Other current liabilities
December 31,
2022
2021
620,000 $
573,049
702,410
469,953
—
3,990,984
550,930
719,510
7,626,836 $
620,000
429,299
457,269
360,817
304,169
2,908,357
1,206,864
563,809
6,850,584
$
$
F-27
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 12 — DEBT
Total debt of the Company was as follows as of December 31, 2022 and 2021:
Debt Type
Convertible notes payable (see Note 13)
Convertible notes payable - fair value option (see Note 14)
Non-convertible promissory notes (see Note 15)
Non-convertible promissory notes – Socialyte (see Note 15)
Loans from related party (see Note 16)
Term loan, net of debt issuance costs (see Note 12)
Total debt
Less current portion of debt
Noncurrent portion of debt
December 31,
2022
5,050,000 $
343,556
1,368,960
3,000,000
1,107,873
2,867,592
13,737,981
(4,277,697)
9,460,284 $
2021
2,900,000
998,135
1,176,644
—
1,107,873
—
6,182,652
(307,685)
5,874,967
$
$
The table below details the maturity dates of the principal amounts for the Company’s debt as of December 31, 2022:
Debt Type
Convertible notes
payable
Nonconvertible
promissory notes
Nonconvertible
unsecured
promissory notes -
Socialyte
Term loan
Loan from related
party
$
Maturity
Date
Ranging
between
June 2023
and
March
2030
Ranging
between
June 2023
and
November
2024
Ranging
between
June and
September
2023
November
14, 2027
July 31,
2024
$
Credit and Security Agreement
2023
2024
2025
2026
2027
Thereafter
— $
2,200,000 $
— $
450,000 $
2,400,000 $
500,000
868,960
500,000
—
—
—
—
3,000,000
—
—
—
—
408,737
408,737
408,737
408,737
1,232,644
—
—
—
4,277,697 $
1,107,873
4,216,610 $
—
408,737 $
—
858,737 $
—
3,632,644 $
—
500,000
In connection with the Socialyte Acquisition discussed in Note 5, Socialyte, with MidCo entered into a Credit and Security Agreement with
BankProv (“Credit Agreement”), which includes a $3,000,000 secured term note (“Term Loan”) and $0.5 million of a secured revolving line of credit
(“Revolver”). The Credit Agreement carried an annual facility fee of $5,000 payable on the first anniversary of the Closing Date and of $875 on each one
year anniversary thereafter.
The Credit Agreement contains financial covenants that require the Socialyte to maintain: (1) a quarterly minimum debt service ratio of 1.25:1.00; (2) a
quarterly senior funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 3.00:1.00 and (3) quarterly total funded debt to EBITDA (as
defined in the Credit Agreement) not to exceed 5.00:1.00, as well as the Company to maintain a minimum liquidity of $1,500,000. The Credit Agreement
also contains covenants that limit Socialyte’s and MidCo’s ability to, among other things, grant liens, incur additional indebtedness, make acquisitions or
investments, dispose of certain assets, change the nature of their businesses, enter into certain transactions with affiliates or amend the terms of material
indebtedness. Under the Credit Agreement, all of the assets of Socialyte are pledged as security for the term loan described below.
Term Loan
The Term Loan has a term of five years, with a maturity date of November 14, 2027. The Company shall repay the Term Loan through 60
consecutive monthly payments of principal (based upon a straight-line amortization period of 84 months, based on the principal amount outstanding, plus
interest at an annual rate of 7.37%, commencing on December 14, 2022, and continuing on the corresponding day of each month thereafter until it is paid in
full. Any remaining unpaid principal balance, including accrued and unpaid interest and fees, if any) shall be due and payable in full on November 14,
2027, its maturity date. Interest is calculated on the basis of actual days elapsed and a three hundred sixty (360) day year. During the year ended December
31, 2022, the Company made a payment of $54,139, inclusive of $18,425 of interest.
F-28
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Interest on the Term Loan shall be payable on a monthly basis. Interest shall be computed on the basis of a three hundred sixty (360) day year, for
the actual number of days elapsed. Default interest shall be charged in accordance with the terms of the Term Note.
Revolver
There is no amount drawn on the Revolver as of December 31, 2022 and no amounts were drawn from the Closing Date through December 31,
2022. When drawn, the outstanding principal balance of the revolver shall accrue interest from the date of the draw of the greater of (i) 5.50% per annum,
or (ii) the Prime Rate (as defined in the Revolver) plus 0.75% per annum.
NOTE 13 — CONVERTIBLE NOTES PAYABLE
As of December 31, 2022 and 2021, the principal balance of the convertible promissory notes of $5,050,000 and $2,900,000, respectively, was
recorded in noncurrent liabilities under the caption Convertible notes payable on the Company’s consolidated balance sheets. The following is a summary
of the Company’s convertible notes payable as of December 31, 2022 and 2021:
Maturity Date
October 2024
November 2024
December 2024
November 2026
December 2026
August 2027
September 2027
2023 Convertible Debt
December 31,
2022
2021
Principal
Amount
Net Carrying
Amount
Principal
Amount
Net Carrying
Amount
$
$
800,000 $
500,000
900,000
300,000
150,000
2,000,000
400,000
5,050,000 $
800,000 $
500,000
900,000
300,000
150,000
2,000,000
400,000
5,050,000 $
— $
—
—
—
—
2,000,000
900,000
2,900,000 $
—
—
—
—
—
2,000,000
900,000
2,900,000
Subsequent to December 31, 2022, on January 9, 2023 and January 13, 2023, the Company issued two convertible promissory notes in the
aggregate amount of $800,000. 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 purchase price based on a 90-day average closing market price per
share of the common stock. The convertible promissory notes may not be converted at a price less than $2.00 per share.
2022 Convertible Debt
During the year ended December 31, 2022, the Company issued seven convertible promissory notes to four noteholders in the aggregate amount
of $2,650,000 (collectively, “2022 Convertible Debt”). The convertible promissory notes bear interest at a rate of 10% per annum. Five of the convertible
promissory notes mature on the second anniversary of their respective issuances and two of the convertible promissory notes mature on the fourth
anniversary of their respective issuances. The balance of each convertible promissory note and any accrued interest may be converted at the noteholder’s
option at any time at a conversion price based on a 90-day average closing market price per share of the common stock. Three of the convertible notes may
not be converted at a price less than $2.50 per share and four of the convertible notes may not be converted at a price less than $2.00 per share.
There were no conversions of the 2022 Convertible Debt during the year ended December 31, 2022. The Company recorded interest expense of
$33,292 and made cash interest payments amounting to $11,500 during the year ended December 31, 2022, related to the 2022 Convertible Debt.
2021 Convertible Debt
During the year ended December 31, 2021, the Company issued ten convertible promissory notes to four noteholders in the aggregate amount of
$5,950,000 (collectively, “2021 Convertible Debt”). The convertible promissory notes bear interest at a rate of 10% per annum and mature on the second
anniversary of their respective issuances. The balance of each convertible promissory note and any accrued interest may be converted at the noteholder’s
option at any time at a conversion price based on a 90-day average closing market price per share of the common stock but not at a price less than $2.50 per
share.
F-29
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
During the year ended December 31, 2022, the holder of one convertible promissory note issued during 2021 converted the principal balance of
$500,000 into 125,604 shares of common stock at a conversion price of $3.98 per share. At the moment of conversion, accrued interest related to this note
amounted to $5,278 and was paid in cash.
During the year ended December 31, 2021, the holders of seven convertible promissory notes issued during 2021 converted the principal balance
of $3,050,000 plus accrued interest of $3,333 into 300,830 shares of common stock at conversion prices ranging between $9.27 and $10.74 per share.
The Company recorded interest expense of $275,278 and $193,153 and made cash interest payments amounting to $277,778 and $170,653 during
the years ended December 31, 2022 and 2021, respectively, related to the 2021 Convertible Debt.
2020 Convertible Debt
During 2020, the Company issued five convertible promissory notes to five noteholders in the aggregate amount of $1,445,000 (collectively,
“2020 Convertible Debt”). The convertible promissory notes bear interest at a rate of 10% per annum and mature on the second anniversary of their
respective issuances. The balance of each convertible promissory note and any accrued interest may be converted at the noteholder’s option at any time at a
purchase price based on a 90-day average closing market price per share of the common stock but not at a price less than $2.50 per share, except for two
convertible promissory notes in the aggregate amount of $195,000 for which 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 of $3.90 per share of our common stock.
During the year ended December 31, 2021, the holders of the 2020 Convertible Debt converted the principal balance of $1,445,000 plus accrued
interest of $8,611 into 381,601 shares of common stock at conversion prices ranging between $3.69 and $3.96 per share. There were no convertible
promissory notes issued in 2020 outstanding as of December 31, 2022 and 2021.
The Company recorded interest expense of $15,565 and made cash interest payments amounting to $27,538 during the year ended December 31,
2021, related to the 2020 Convertible Debt.
NOTE 14 — CONVERTIBLE NOTES PAYABLE AT FAIR VALUE
The following is a summary of the Company’s convertible notes payable for which it elected the fair value option as of December 31, 2022 and
2021:
March 4th Note
Total convertible notes payable at fair value(a)
(a)
All amounts as of December 31, 2022 and 2021 are recorded in noncurrent liabilities.
2020 Lincoln Park Note and Warrants
Fair Value Outstanding as of December 31,
2022
2021
$
$
343,556 $
343,556 $
998,135
998,135
On January 3, 2020, the Company entered into a securities purchase agreement with Lincoln Park Capital Fund LLC, an Illinois limited liability
company (“Lincoln Park”) and issued a convertible promissory note with a principal amount of $1.3 million (the “2020 Lincoln Park Note”) at a purchase
price of $1.2 million together with warrants to purchase up to 41,518 shares of our common stock at an exercise price of $3.91 per share (the “2020 Lincoln
Park Warrants”).
The Company elected the fair value option to account for the 2020 Lincoln Park Note and determined that the 2020 Lincoln Park Warrants met the
criteria to be accounted for as a derivative liability due to its net cash settlement provision upon a fundamental transaction. The fair value of the 2020
Lincoln Park Note on issuance was recorded as $885,559. The fair value of the note increased by $103,845 for the year ended December 31, 2021 and was
recognized as current period other expense in the Company’s consolidated statement of operations (as no portion of such fair value adjustment resulted
from instrument-specific credit risk).
During 2020, Lincoln Park converted an aggregate principal balance of $760,000 at conversion prices between $4.35 and $4.45 per share and was
issued 172,181 shares of common stock. During 2021, Lincoln Park converted the remaining principal balance of $540,000 at a conversion price of $3.91
and was issued 137,966 shares of common stock. The fair value of these shares of common stock issued was $561,522 based on the closing trading price of
the common stock on the respective trading day.
As a result of the conversions during 2021 described above, there was no amount outstanding on the 2020 Lincoln Park Note as of December 31,
2022 or 2021.
F-30
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
2020 Lincoln Park Warrants
As described above, in connection with the 2020 Lincoln Park Note, the Company issued the 2020 Lincoln Park Warrants to purchase up to
41,518 shares of its common stock on January 3, 2020, as well as on each of the second, fourth, and six month anniversaries of the 2020 Lincoln Park Note
issuance date (collectively “Series E, F, G, and H Warrants”). The fair value of the 2020 Lincoln Park Warrants was recorded on issuance as a debt discount
of $314,441.
During 2021, the Series E, F, G, and H Warrants were all exercised for 146,027 shares via a cashless exercise formula pursuant to the warrant
agreement. As a result, there were no amounts outstanding for Series E, F, G, and H Warrants as of December 31, 2022 and 2021. Prior to their exercise,
the fair value of the warrants increased by $2,397,877, which was recognized as current period other expense in the Company’s consolidated statement of
operations for the year ended December 31, 2021.
As a result of the exercise during 2021 described above, there was no amount outstanding on the Series E, F, G, and H Warrants as of December
31, 2022 or 2021.
March 4th Note
On March 4, 2020, the Company issued a convertible promissory note to a third-party investor and in exchange received $500,000. The Company
also agreed to issue a warrant (“Series I Warrant”) to purchase up to 20,000 shares of our common stock at a purchase price of $3.91 per share. The
convertible promissory note bears interest at a rate of 8% per annum and matures on March 4, 2030. The Company elected the fair value option to account
for the convertible promissory note and determined that the Series I Warrant met the criteria to be accounted for as a derivative liability due to its net cash
settlement provision upon a fundamental transaction. As such, the Company recorded the fair value on issuance of the convertible promissory note and
Series I Warrant as $460,000 and $40,000, respectively. The balance of the convertible promissory note and any accrued interest may be converted at the
noteholder’s option at any time at a purchase price $3.91 per share of our common stock.
For the years ended December 31, 2022 and 2021, the fair value of the convertible promissory note decreased by $654,579 and increased
$486,999, respectively, which were recognized as current period other income/(expense) in the Company’s consolidated statement of operations for their
respective period (as no portion of such fair value adjustment resulted from instrument-specific credit risk).
For the year ended December 31, 2022 and 2021, the fair value of the Series I Warrant decreased by $120,000 and increased $85,000, respectively,
which was recognized as current period other income/(expense) in the Company’s consolidated statement of operations for their respective period.
As of both December 31, 2022 and 2021, the principal balance of the convertible promissory note was $500,000. As of December 31, 2022 and
2021, the fair value of the convertible promissory note of $343,556 and $998,135, respectively, and the fair value of the Series I Warrant of $15,000 and
$135,000, respectively, were recorded on the Company’s consolidated balance sheet.
March 25th Note
On March 25, 2020, the Company issued a convertible promissory note to a third-party investor for a principal amount of $560,000 (the “March
25th Note”) and received $500,000, net of transaction costs of $10,000 paid to the investor and original issue discount. The Company also issued 10,000
shares of our common stock related to this convertible note payable. The maturity date of the convertible promissory note was March 25, 2021 and the
balance of the convertible promissory note and any accrued interest could be converted at the noteholder’s option at any time at a purchase price of $3.90
per share of common stock. The Company elected the fair value option to account for the convertible promissory note. The fair value of the March 25th
Note on issuance was recorded at $500,000.
For the year ended December 31, 2021, the fair value of the note decreased by $20,000, which was recognized as current period other income in
the Company’s consolidated statement of operations (as no portion of such fair value adjustment resulted from instrument-specific credit risk).
During the year ended December 31, 2021, the March 25th Note was fully converted into 143,588 shares of Company’s common stock. As a
result, no amounts remain outstanding as of December 31, 2022 and 2021 related to the March 25th Note.
F-31
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 15 — NONCONVERTIBLE PROMISSORY NOTES
Nonconvertible Promissory Notes
As of December 30, 2022, the Company has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $1,368,960,
which bear interest at a rate of 10% per annum and mature between June 2023 and November 2024.
As of December 31, 2022 and 2021, the Company had a balance of $868,960 and $307,685, respectively, net of debt discounts, recorded as Notes
payable and $500,000 and $426,645, respectively as of December 31, 2022 and 2021 in Notes payable, noncurrent portion, on its consolidated balance
sheets related to these nonconvertible promissory notes. During the years ended December 31, 2022 and 2021, the Company recorded interest expense on
its consolidated statements of operations amounting to of $97,468 and $122,456, respectively and paid interest of $95,318 and $123,025, respectively
related to these nonconvertible notes payable.
On January 15, 2022, its maturity date, a non-convertible promissory note amounting to $200,000 was repaid in cash.
Subsequent to December 31, 2022, on February 22, 2023, the Company entered into a nonconvertible promissory note in the amount of $2.2
million. The note bears interest at a rate of 10% per annum and matures on March 31, 2028.
Nonconvertible unsecured promissory notes - Socialyte Promissory Note
As discussed in Note 5, as part of the Socialyte Purchase, the Company entered into the Socialyte Promissory Note amounting to $3,000,000. The
Socialyte Promissory Note matures on September 30, 2023 and will be payable in two payments: $1,500,000 on June 30, 2023 and $1,500,000 on
September 30, 2023. The Socialyte Promissory Note carries an interest of 4% per annum, which accrues monthly, and all accrued interest shall be due and
payable on September 30, 2023.
NOTE 16 — LOANS FROM RELATED PARTY
Dolphin Entertainment, LLC (“DE LLC”), an entity wholly owned by the Company’s Chief Executive Officer, William O’Dowd (the “CEO”),
previously advanced funds for working capital to Dolphin Films. In prior years, Dolphin Films entered into a promissory note with DE LLC (the “Original
DE LLC Note”) in the principal amount of $1,009,624, which was payable on demand. The Original DE LLC Note was payable on demand and accrued
interest at a rate of 10% per annum. The Original DE LLC Note allowed for additional advances of working capital during its term. Additional funds in the
amount of $98,249 were advanced to the Company prior to 2021 and on June 15, 2021 the Company exchanged the Original DE LLC Note for a new note
with an initial maturity date of July 31, 2023 and a principal amount of $1,107,873 (“New DE LLC Note” and together with the Original DE LLC Note,
“the DE LLC Notes”). Other than the change in maturity date and principal amount, there were no other changes to the interest or any other terms of the
Original DE LLC Note. On June 30, 2022, the New DE LLC Note’s maturity date was extended to December 31, 2026.
For the years ended December 30, 2022 and 2021, the Company did not repay any principal balance of the New DE LLC Note. During both the
years ended December 31, 2022 and 2021, the Company recorded interest expense related to the DE LLC Notes $110,787 on its consolidated statements of
operations and repaid $81,621 of interest during the year ended December 31, 2021. There were no interest repayments during the year ended December
31, 2022.
As of both December 31, 2022, and 2021, the Company had a principal balance of $1,107,873, and accrued interest of $166,637 and $55,849,
respectively, relating to the DE LLC Notes.
NOTE 17 — FAIR VALUE MEASUREMENTS
The Company’s non-financial assets measured at fair value on a nonrecurring basis include goodwill and intangible assets. The determination of
our intangible fair values includes several assumptions and inputs (Level 3) that are subject to various risks and uncertainties. Management believes it has
made reasonable estimates and judgments concerning these risks and uncertainties. All other financial assets and liabilities are carried at amortized cost.
The Company’s cash balances are representative of their fair values, as these balances are comprised of deposits available on demand. The
carrying amounts of accounts receivable, notes receivable, prepaid and other current assets, accounts payable and other non-current liabilities approximate
their fair values because of the short turnover of these instruments.
F-32
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Financial Disclosures about Fair Value of Financial Instruments
The tables below set forth information related to the Company’s consolidated financial instruments:
Assets:
Cash and cash equivalents
Restricted cash
Liabilities:
Convertible notes payable
Convertible note payable at fair value
Warrant liability
Contingent consideration
Put Rights
Level in
Fair Value
Hierarchy
December 31, 2022
December 31, 2021
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
$
1
1
3
3
3
3
6,069,889 $
1,127,960
6,069,889 $
1,127,960
7,688,743 $
541,883
7,688,743
541,883
5,050,000 $
343,556
15,000
738,821
4,865,000 $
343,556
15,000
738,821
2,900,000 $
998,135
135,000
4,284,221
2,900,000
998,135
135,000
4,284,221
As of December 31, 2022 or 2021, there were no amounts due to the sellers of 42West and certain 42West employees from the exercise of the put
rights. During the year ended December 31, 2021, the sellers exercised their put rights in accordance with their respective put agreements and caused the
Company to purchase the remaining shares of common stock.
Due to the change in the fair value of the put rights for the period in which the put rights were outstanding during the year ended December 31,
2021, the Company recorded a loss of $71,106 in the consolidated statements of operations.
For the put rights, which are measured at fair value and categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of
the fair values for the years ended December 31, 2021. As there were no amounts outstanding as of December 31, 2021, there was no movement in the Put
Rights during the year ended December 31, 2022:
Ending fair value balance reported in the consolidated balance sheet at December 31, 2020
Put rights paid in 2021
Loss due to change in fair value
Loss in exchange of shares for put rights(a)
Put rights converted into 115,366 shares of common stock
Ending fair value of put rights reported in the consolidated balance sheet at December 31, 2021
$
$
1,544,029
(1,015,135)
71,106
106,688
(706,688)
—
(a)
The loss in exchange of shares for the put rights is included in gain on extinguishment of debt in the consolidated statements of operations.
Convertible notes payable
As of December 31, 2022, the Company has ten outstanding convertible notes payable with aggregate principal amount of $5,050,000. See Note 13
for further information on the terms of these convertible notes.
10% convertible notes due in October 2024
10% convertible notes due in November 2024
10% convertible notes due in December 2024
10% convertible notes due in November 2026
10% convertible notes due in December 2026
10% convertible notes due in August 2027
10% convertible notes due in September 2027
Level
Carrying Amount
Fair Value
Carrying Amount
Fair Value
December 31, 2022
December 31, 2021
3
3
3
3
3
3
3
$
$
F-33
800,000 $
500,000
900,000
300,000
150,000
2,000,000
400,000
5,050,000 $
817,000 $
513,000
912,000
285,000
143,000
1,834,000
361,000
4,865,000 $
— $
—
—
—
—
2,000,000
900,000
2,900,000 $
—
—
—
—
—
1,998,000
902,000
2,900,000
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The estimated fair value of the convertible notes was computed using a Monte Carlo Simulation, using the following assumptions:
Fair Value Assumption – Convertible Debt
Stock Price
Minimum Conversion Price
Annual Asset Volatility Estimate
Risk Free Discount Rate (based on U.S. government treasury obligation with a term similar to that of the
convertible note)
Fair Value Option (“FVO”) Election – Convertible note payable and freestanding warrants
Convertible note payable, at fair value
December 31,
2022
2021
$
$
1.81 $
2.00 - 2.50 $
100%
8.52
2.50
100%
4.02% - 4.49%
0.61% - 0.64%
As of December 31, 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 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 consolidated statements of operations under the caption “Change in fair
value of convertible notes.”
The March 4th Note is measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair
values from December 31, 2021 to December 31, 2022:
Beginning fair value balance reported on the consolidated balance sheet at December 31, 2020
Loss on change of fair value reported in the consolidated statements of operations
Beginning fair value balance reported on the consolidated balance sheet at December 31, 2021
(Gain) on change of fair value reported in the consolidated statements of operations
Ending fair value balance reported on the consolidated balance sheet at December 31, 2022
March 4th Note
$
511,136
486,999
998,135
(654,579)
343,556
$
The estimated fair value of the March 4th Note as of December 31, 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:
Face value principal payable
Original conversion price
Value of Common Stock
Expected term (years)
Volatility
Risk free rate
Warrants
$
$
$
December 31,
2022
2021
500,000 $
3.91 $
1.81 $
7.18
100%
3.96%
500,000
3.91
8.52
8.18
100%
1.47%
In connection with the March 4th Note, the Company issued the Series I Warrants. The Series I Warrants are measured at fair value and categorized
within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2020 to December 31, 2022:
Fair Value:
Beginning fair value balance reported on the consolidated balance sheet at December 31, 2020
Loss on change of fair value reported in the consolidated statements of operations
Beginning fair value balance reported on the consolidated balance sheet at December 31, 2021
(Gain) on change of fair value reported in the consolidated statements of operations
Ending fair value balance reported on the consolidated balance sheet at December 31, 2022
Series I
50,000
85,000
135,000
(120,000)
15,000
$
$
$
F-34
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The estimated fair value of the Series I Warrants was computed using a Black-Scholes valuation model, using the following assumptions:
Fair Value Assumption - Series I Warrants
Exercise Price per share
Value of Common Stock
Expected term (years)
Volatility
Dividend yield
Risk free rate
Contingent consideration
$
$
December 31,
2022
2021
3.91 $
1.81 $
2.67
100%
0%
4.28%
3.91
8.52
3.67
100%
0%
1.07%
The Company records the fair value of the contingent consideration liability in the consolidated balance sheets under the caption “Contingent
consideration” and records changes to the liability against earnings or loss under the caption “Change in fair value of contingent consideration” in the
consolidated statements of operations.
As discussed in Note 5, during the year ended December 31, 2021, the B/HI seller met the conditions for payment of contingent consideration. As a
result, the contingent consideration has been recorded as the actual amount of the payout to the B/HI seller, $1.1 million, of which $600,000 was paid in
cash on June 29, 2022 and the remainder in common stock, which was settled on June 14, 2022 by the issuance of 163,369 shares of Company common
stock.
For the contingent consideration related to Be Social, the Company utilized a Monte Carlo Simulation model, which incorporates significant inputs
that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring
the fair value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing
the contingent consideration as of the acquisition date. The Company determined the fair value by using the following key inputs to the Monte Carlo
Simulation Model:
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the contingent consideration)
Annual Asset Volatility Estimate
Inputs
As of December 31,
2021
0.73%
85.00%
For the contingent consideration, which is measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a
reconciliation of the fair values from December 31, 2020 to December 31, 2022:
Beginning fair value balance reported on the consolidated balance sheet at December 31, 2020 $
Loss on change of fair value reported in the consolidated statements of operations
370,000 $
2,011,869
160,000 $
550,000
The Door(1)
Be Social(3)
B/HI(2)
—
1,192,352
Ending fair value balance reported on the consolidated balance sheet at December 31, 2021
$
2,381,869 $
710,000 $
1,192,352
Loss on change of fair value reported in the consolidated statements of operations, as revised
Settlement of contingent consideration
Ending fair value balance reported in the consolidated balance sheet at December 30, 2022
$
—
(2,381,869)
— $
(5,000)
—
705,000 $
(76,106)
(1,116,246)
—
(1) Based on the net income for the year ended December 31, 2021, The Door achieved the conditions for the earnout consideration, which was settled
on June 7, 2022 by payment of 279,562 shares of common stock.
(2) During the year ended December 31, 2021, B/HI achieved the conditions for the earnout consideration, which were settled on June 14 and June 29,
2022, as described above.
NOTE 18 — VARIABLE INTEREST ENTITIES
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated
financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations
through voting rights, or do not have the obligation to absorb the expected losses or the right to receive the residual returns of the entity.
F-35
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The primary beneficiary of a VIE is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both
(1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the
obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. To assess whether the Company has
the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all the facts and
circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities.
To assess whether the Company has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be
significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and derivative or other
arrangements deemed to be variable interests in the VIE. This assessment requires that the Company apply judgment in determining whether these
interests, in the aggregate, are considered potentially significant to the VIE.
The Company evaluated the entities in which it did not have a majority voting interest and determined that it had (1) the power to direct the
activities of the entities that most significantly impact their economic performance and (2) had the obligation to absorb losses or the right to receive benefits
from these entities. As such the financial statements of JB Believe, LLC are consolidated in the consolidated balance sheets as of December 31, 2022 and
2021, and in the consolidated statements of operations and statements of cash flows presented herein for the years ended December 31, 2022 and 2021.
This entity was previously under common control and has been accounted for at historical costs for all periods presented.
Assets
Liabilities
Revenues
Expenses
JB Believe LLC
As of and for the years ended December 31,
$
$
$
$
2022
7,354 $
(6,491,314) $
18,078 $
— $
2021
265,778
(6,749,738)
21,894
(7,437)
The Company performs ongoing reassessments of (1) whether entities previously evaluated under the majority voting-interest framework have
become VIEs, based on certain triggering events, and therefore would be subject to the VIE consolidation framework, and (2) whether changes in the facts
and circumstances regarding the Company’s involvement with a VIE cause the Company’s consolidation conclusion to change. The consolidation status of
the VIEs with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively with
assets and liabilities of a newly consolidated VIE initially recorded at fair value unless the VIE is an entity which was previously under common control,
which in that case is consolidated based on historical cost. A gain or loss may be recognized upon deconsolidation of a VIE depending on the amounts of
deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
JB Believe LLC, an entity owned by Believe Film Partners LLC, of which the Company owns a 25% membership interest, was formed for the
purpose of recording the production costs of the motion picture “Believe”. The Company was given unanimous consent by the members to enter into
domestic and international distribution agreements for the licensing rights of the motion picture, Believe, until such time as the Company had been repaid
$3,200,000 for the investment in the production of the film and $5,000,000 for the publicity and advertising expenses to market and release the film in the
US. The Company has not been repaid these amounts and as such is still in control of the distribution of the film. For the year ended December 31, 2021,
the Company recorded revenues of $21,894, related to domestic distribution of Believe. There were revenues recorded during the year ended December 31,
2022. The capitalized production costs related to Believe were either amortized or impaired in previous years. JB Believe LLC’s primary liability is to the
Company which it owes $6,491,834, which eliminates in consolidation.
NOTE 19 — STOCKHOLDERS’ EQUITY
Preferred Stock
The Company’s Amended and Restated Articles of Incorporation authorize the issuance of 10,000,000 shares of preferred stock. The Company’s
Board of Directors (the “Board”) has the power to designate the rights and preferences of the preferred stock and issue the preferred stock in one or more
series.
F-36
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
On July 6, 2017, pursuant to the Second Amended and Restated Articles of Incorporation, each share of Series C is convertible into one share of
common stock, subject to adjustment for each issuance of common stock (but not upon issuance of common stock equivalents) that occurred, or occurs,
from the date of issuance of the Series C (the “issue date”) until the fifth (5th) anniversary of the issue date (i) upon the conversion or exercise of any
instrument issued on the issued date or thereafter issued (but not upon the conversion of the Series C), (ii) upon the exchange of debt for shares of common
stock, or (iii) in a private placement, such that the total number of shares of common stock held by an “Eligible Class C Preferred Stock Holder” (based on
the number of shares of common stock held as of the date of issuance) will be preserved at the same percentage of shares of common stock outstanding
held by such Eligible Class C Preferred Stock Holder on such date. An Eligible Class C Preferred Stock Holder means any of (i) DE LLC for so long as Mr.
O’Dowd continues to beneficially own at least 90% and serves on the board of directors or other governing entity, (ii) any other entity in which Mr.
O’Dowd beneficially owns more than 90%, or a trust for the benefit of others, for which Mr. O’Dowd serves as trustee and (iii) Mr. O’Dowd individually.
Series C will only be convertible by the Eligible Class C Preferred Stock Holder upon the Company satisfying one of the “optional conversion thresholds.”
Specifically, a majority of the independent directors of the Board, in its sole discretion, must determine that the Company accomplished any of the
following (i) EBITDA of more than $3.0 million in any calendar year, (ii) production of two feature films, (iii) production and distribution of at least three
web series, (iv) theatrical distribution in the United States of one feature film, or (v) any combination thereof that is subsequently approved by a majority of
the independent directors of the Board based on the strategic plan approved by the Board. At a meeting of the Board on November 12, 2020, a majority of
the independent directors of the Board approved that the “optional conversion threshold” had been met. As a result, the Series C became immediately
convertible and as of December 31, 2021 is convertible into 4,738,940 shares of common stock, subject to the restriction discussed below. Additionally, DE
LLC, as the holder of the Series C is entitled to 14,216,819 votes, which are equal to approximately 54% of the voting securities of the Company.
At the meeting of the Board on November 12, 2020, the Board and Mr. O’Dowd agreed to restrict the conversion of the Series C until the Board
approved its conversion. Therefore, on November 16, 2020, the Company and DE, LLC entered into a Stock Restriction Agreement pursuant to which the
conversion of the Series C is prohibited until such time as a majority of the independent directors of the Board approves the removal of the prohibition. The
Stock Restriction Agreement also prohibits the sale or other transfer of the Series C until such transfer is approved by a majority of the independent
directors of the Board. The Stock Restriction Agreement shall terminate upon a Change of Control (as such term is defined in the Stock Restriction
Agreement) of the Company.
On September 27, 2022, the Company’s shareholders approved a proposed amendment to the terms of the Series C Convertible Preferred Stock
included in our Articles of Incorporation to increase the number of votes per share of common stock the Series C is convertible into from three votes per
share to five votes per share.
The Certificate of Designation also provides for a liquidation value of $0.001 per share and dividend rights of the Series C on parity with the
Company’s common stock.
Common Stock
On September 24, 2021, the Company, filed Articles of Amendment (the “Articles of Amendment”) to its Amended and Restated Articles of
Incorporation effecting an amendment to increase the number of authorized shares of the Company’s common stock from 40,000,000 shares to 200,000,000
shares. The Articles of Amendment were approved by the Company’s shareholders at the 2021 annual meeting of shareholders.
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 Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company could
sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of common stock from time to time
over a 36-month period. Pursuant to the terms of the LP 2022 Registration Rights Agreement, the issuance of shares pursuant to the LP 2022 Purchase
Agreement have been registered pursuant to our effective registration statement on Form S-1, and the related prospectus dated September 15, 2022.
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. The purchase price for Regular Purchases (the “Purchase Price”) shall be equal to
98.75% of the lesser of: (i) the lowest sale price of the Common Stock during the Purchase Date, or (ii) the average of the three (3) lowest closing sale
prices of the Common Stock during the ten (10) business days prior to the Purchase Date. 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 for the accelerated and additional accelerated purchases shall be equal to the lesser of 96% of (i) the closing sale price on the
accelerated purchase date, or (ii) such date’s volume weighted average price.
F-37
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022
Registration Rights Agreement, the Company issued 57,313 shares of common stock to Lincoln Park as consideration for its commitment (“LP 2022
commitment shares”) to purchase shares of our common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period
expense and included within selling, general and administrative expenses in the consolidated statements of operations.
Under applicable rules of the NASDAQ Capital Market, the Company could not issue or sell more than 19.99% of the shares of Common Stock
outstanding immediately prior to the execution of the LP 2022 Purchase Agreement to Lincoln Park under the LP 2022 Purchase Agreement without
stockholder approval. At a meeting held on September 27, 2022, our stockholders approved the issuance of up to $25 million of shares of our common
stock pursuant to the LP 2022 Purchase Agreement.
During the year ended December 31, 2022, excluding the additional commitment shares disclosed above, the Company sold 548,000 shares of
common stock at prices ranging between $1.92 and $3.72 pursuant to the LP 2022 Purchase Agreement and received proceeds of $1,436,259. Subsequent
to December 31, 2022, the Company sold 250,000 shares of common stock at prices ranging between $1.88 and $2.27 pursuant to the LP 2022 Purchase
Agreement and received proceeds of $529,450.
The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of common stock in the future (“put right”)
considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an
equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of
the freestanding put right and has concluded that it has insignificant value as of December 31, 2022.
2021 Lincoln Park Transaction
On December 29, 2021, the Company entered into a purchase agreement (the “LP 2021 Purchase Agreement”) and a registration rights agreement
(the “LP 2021 Registration Rights Agreement”) with Lincoln Park. Pursuant to the terms of the LP 2021 Purchase Agreement, Lincoln Park agreed to
purchase from the Company up to $25,000,000 of the Company’s common stock (subject to certain limitations) from time to time during the term of the LP
2021 Purchase Agreement. The purchase price for the shares was the lowest of (1) lowest sale price on the date of the purchase or (2) the average of the
lowest three closing prices on the last 10 business days, with a floor of $1.00. Pursuant to the terms of the LP 2021 Registration Rights Agreement, the
issuance of shares pursuant to the LP 2021 Purchase Agreement were registered pursuant to the Company’s effective shelf registration statement on Form
S-3, and the related base prospectus included in the registration statement, as supplemented by a prospectus supplement filed on January 21, 2022.
Pursuant to the terms of the LP 2021 Purchase Agreement, at the time the Company signed the LP 2021 Purchase Agreement and the LP 2021
Registration Rights Agreement, the Company issued 51,827 shares of common stock to Lincoln Park as consideration for its commitment (“commitment
shares”) to purchase shares of our common stock under the LP 2021 Purchase Agreement. Pursuant to the LP 2021 Purchase Agreement, the Company
issued an additional 37,019 commitment shares on March 7, 2022.
During the year ended December 31, 2022, excluding the additional commitment shares disclosed above, the Company sold 1,035,000 shares of
common stock at prices ranging between $3.47 and $5.15, pursuant to the LP 2021 Purchase Agreement and received proceeds of $4,367,640. The LP 2021
Purchase Agreement was terminated effective August 12, 2022 and the Company did not sell any shares pursuant to this agreement subsequent to that date.
During the year ended December 31, 2021, excluding the commitment shares mentioned above, the Company did not sell any shares of common
stock under the LP 2021 Purchase Agreement.
F-38
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 20 — LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share:
Numerator
Net loss attributable to Dolphin Entertainment Common Stock holders and numerator for basic loss per share
Change in fair value of convertible notes payable
Change in fair value of warrants
Interest expense
Numerator for diluted loss per share
$
$
(4,780,135) $
(654,579)
(120,000)
39,452
(5,515,262) $
(6,462,303)
—
—
—
(6,462,303)
Year ended December 31,
2022
2021
Denominator
Denominator for basic EPS - weighted-average shares
Effect of dilutive securities:
Convertible note payable
Warrants
Denominator for diluted EPS - adjusted weighted-average shares
Basic loss per share
Diluted loss per share
9,799,021
7,614,774
127,877
28
9,926,926
—
—
7,614,774
$
$
(0.49) $
(0.56) $
(0.85)
(0.85)
Basic loss per share is computed by dividing income or loss attributable to the shareholders of Common Stock (the numerator) by the weighted-
average number of shares of Common Stock outstanding (the denominator) for the period. Diluted earnings per share assume that any dilutive equity
instruments, such as convertible notes payable and warrants were exercised and outstanding common stock adjusted accordingly, if their effect is dilutive.
One of the Company’s convertible note payable, the warrants and the Series C 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 years ended December 31, 2022 and 2021, the Company had a net loss and as such the two-class method is not
presented.
For year ended December 31, 2022, the convertible promissory note carried at fair value and the outstanding warrants were included in the
calculation of fully diluted loss per share. The other convertible notes payable carried at their principal loan amount, convertible into an aggregate
1,901,924 weighted average shares for the year ended December 31, 2022 were not included in the calculation of diluted loss per share as their effect would
be anti-dilutive. For the year ended December 31, 2021, the Company excluded 506,674 common stock equivalents such as warrants and shares to be
issued for convertible debt as inclusion would be anti-dilutive.
NOTE 21 — WARRANTS
A summary of warrant activity during the years ended December 31, 2022 and 2021 is as follows:
Warrants:
Balance at December 31, 2020
Issued
Exercised
Expired
Balance at December 31, 2021
Issued
Exercised
Expired
Balance at December 31, 2022
Shares
Weighted Avg.
Exercise Price
221,513 $
—
(166,072)
(35,441)
20,000 $
—
—
—
20,000 $
7.08
—
3.91
23.70
3.91
—
—
—
3.91
F-39
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Series E, F, G and H Warrants
During 2020, in relation to the 2020 Lincoln Park Note, the Company issued the 2020 Lincoln Park Warrants (see Note 21), collectively Series E,
F, G, and H Warrants. The 2020 Lincoln Park Warrants became exercisable on the six-month anniversary of issuance and for a period of five years
thereafter. If a resale registration statement covering the shares of common stock underlying the 2020 Lincoln Park Warrants was not effective and
available at the time of exercise, the 2020 Lincoln Park Warrants were exercisable by means of a “cashless” exercise formula.
The Company recorded a loss of $2,397,877 in its consolidated statements of operations due to change in fair value for the year ended December
31, 2021 in connection with the Series E, F, G and H warrants which were exercised in March 2021 using a cashless exercise formula pursuant to the
warrant agreement. During the year ended December 31, 2021, all outstanding 2020 Lincoln Park Warrants were exercised and, therefore there is no
amount recorded in the consolidated balance sheet as of December 31, 2022 or 2021.
Series I Warrants
On March 4, 2020, in connection with the issuance of a $500,000 convertible note payable, the Company issued the Series I Warrant to purchase
up to 20,000 shares of common stock at a purchase price of $3.91 per share. The warrants became exercisable on the six-month anniversary and for a
period of five years thereafter. If a resale registration statement covering the shares of common stock underlying the warrants is not effective and available
at the time of exercise, the warrants may be exercised by means of a “cashless” exercise formula. The Company determined that the Series I Warrant should
be classified as a freestanding financial instrument that meets the criteria to be accounted for as a derivative liability and recorded a fair value at issuance of
$40,000.
The Company recorded $120,000 of other income and $85,000 of other expense due to change in fair value of the Series I Warrants during the
years ended December 31, 2022 and 2021, respectively, and had a balance of $15,000 and $135,000 as of December 31, 2022 and 2021, respectively,
recorded under the caption Warrant liability in its consolidated balance sheet.
NOTE 22 — RELATED PARTY TRANSACTIONS
As part of the employment agreement with its CEO, the Company provided a $1,000,000 signing bonus in 2012, which has not been paid and is
recorded in accrued compensation on the consolidated balance 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 his employment agreement will accrue interest on the principal
amount at a rate of 10% per annum from the date of his employment agreement until it is paid. Even though the employment agreement expired and has not
been renewed, the Company has an obligation under the agreement to continue to accrue interest on the unpaid balance.
As of December 31, 2022 and 2021, the Company had accrued $2,625,000 of compensation as accrued compensation and has balances of
$1,578,088 and $1,565,588, respectively, in accrued interest in current liabilities on its consolidated balance sheets, related to the CEO’s employment
agreement. Amounts owed under this arrangement are payable on demand. The Company recorded interest expense related to the accrued compensation in
the consolidated statements of operations amounting to $262,498 and $262,500, respectively, for the years ended December 31, 2022 and 2021. The
Company paid interest amounting to $250,000 and $453,345 in connection with the accrued compensation to the CEO during years ended December 31,
2022 and 2021, respectively.
The Company entered into the New DE LLC Note with an entity wholly owned by our CEO. See Note 16 for further discussion.
For the period between October 5, 2021 and December 20, 2021, Aircraft Pictures Limited (“Aircraft”), a company in which Anthony Leo, one
the Company’s Directors was a shareholder at the time, hired 42West to provide publicity for Aircraft in exchange for retainer fees of $8,500 per month and
made payments to the Company of $17,000 in the aggregate related to these services. During the year ended December 31, 2022, the Company provided
services to Aircraft amounting to $87,700 and Aircraft made payments to the Company amounting to $91,714.
In connection with the acquisition of 42West, the Company and its CEO, as personal guarantor, entered into put agreements with each of the
sellers of 42West, pursuant to which the Company granted the put rights. During each of the years ended December 31, 2021, the Company made payments
amounting to $400,000 to Ms. Leslee Dart, while she was a member of the Board, related to the put rights. Pursuant to the terms of one such Put
Agreement, Ms. Dart exercised 6,507 put rights at a purchase price of $46.10 per share during the year ended December 31, 2021. As of December 31,
2021, the Company does not owe Ms. Dart any amounts related to the exercise of these put rights. On May 16, 2021, Ms. Dart resigned from her position
as a member of the Board effective as of such date.
F-40
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 23 — SEGMENT INFORMATION
The Company operates in two reportable segments, Entertainment Publicity and Marketing Segment (“EPM”) and Content Production Segment
(“CPD”).
·
·
The Entertainment Publicity and Marketing segment is composed of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and
Socialyte. This segment primarily provides clients with diversified marketing services, including public relations, entertainment and
hospitality content marketing, strategic marketing consulting and content production of marketing materials.
The Content Production segment is composed of Dolphin Entertainment and Dolphin Films. This segment engages in the production and
distribution of digital content and feature films. During the year ended December 31, 2022, the
Company also designed, minted and sold an NFT collection titled Creature Chronicles: Exiled Aliens. The activities of our Content Production
segment also include all corporate overhead activities.
The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating
segment performance is operating income (loss) which is the same as Loss from operations on the Company’s consolidated statements of operations for the
years ended December 31, 2022 and 2021. Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. Legal
and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services,
which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of
property, equipment and leasehold improvements for properties occupied by corporate office employees. All segments follow the same accounting policies
as those described in Note 2.
In connection with the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte, the Company assigned
$18,680,000 of intangible assets, net of accumulated amortization of $8,795,664, and goodwill of $29,314,083, net of impairments, as of December 31,
2022 to the EPM segment. The balances reflected as of December 31, 2022 for EPM segment only include the activity of Socialyte for the period between
the acquisition date (November 14, 2022) and December 31, 2022. Equity method investments are included within the EPM segment.
Revenue:
EPM
CPD
Total
Segment operating income (loss):
EPM
CPD
Total operating loss
Interest expense
Other (loss) income, net
Loss before income taxes
Assets:
EPM
CPD
Total assets
Year ended December 31,
2022
2021
40,058,880 $
446,678
40,505,558 $
35,705,305
21,894
35,727,199
1,964,803 $
(6,539,945)
(4,575,142)
(555,802)
774,579
(4,356,365) $
(451,406)
(5,029,377)
(5,480,783)
(785,209)
(158,955)
(6,424,947)
As of December 31,
2022
2021
68,678,335 $
6,698,497
75,376,832 $
48,645,789
4,099,512
52,745,301
$
$
$
$
$
$
F-41
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 24 — INCOME TAXES
The Company’s current and deferred income tax provision (benefits) are as follows:
Current income tax expense (benefit)
Federal
State
Current
Deferred income tax expense (benefit)
Federal
State
Deferred
Change in valuation allowance
Federal
State
Change in valuation allowance
Income tax provision expense
December 31,
2022
2021
— $
—
— $
—
—
—
(853,835) $
(292,832)
(1,146,667) $
(1,107,490)
(37,908)
(1,145,398)
881,436 $
442,212
1,323,648
176,981 $
1,145,789
36,965
1,182,754
37,356
$
$
$
$
$
$
At December 31, 2022 and 2021, the Company had deferred tax assets and liabilities as a result of temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred income taxes at December 31, 2022 and 2021 are as follows:
Deferred Tax Assets:
Accrued Expenses
IRC 163(j)
Lease liability
Accrued Compensation
Intangibles
Other Assets
Capitalized Production Costs
Net Operating Losses and Credits
Total Deferred Tax Assets
Deferred Tax Liabilities:
Fixed Assets
Right of use asset
Other Liabilities
Total Deferred Tax Liability
Subtotal
Valuation Allowance
Net Deferred Tax Liability
December 31,
2022
2021
815,951 $
1,047,643
2,190,548
701,205
2,139,179
227,798
520,866
13,986,154
21,629,345 $
769,500
762,603
1,847,098
720,129
2,268,504
152,709
502,104
13,224,955
20,247,602
(506)
(1,988,834)
—
(1,989,340) $
(51,528)
(1,681,512)
(19,290)
(1,752,330)
19,640,005 $
18,495,272
(19,893,193) $
(18,569,544)
(253,188) $
(74,272)
$
$
$
$
$
$
F-42
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The Company had the following net operating loss (“NOL”) carry-forwards, gross, as of December 31, 2022:
Jurisdiction
U.S. Federal(1)
Florida
California
New York State
New York City
Illinois
Massachusetts
Total
NOL Amount
Expires
$
$
49,127,354
26,247,222
16,584,057
3,767,266
4,686,957
540,460
1,101,829
102,055,145
2028
2029
2032
2039
2039
2031
2038
(1)
Federal net operating losses generated after December 31, 2017 have an indefinite life and do not expire.
Utilization of net operating losses and tax credit carryforwards may be subject to an annual limitation provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. Further, a portion of the carryforwards may expire before being applied to reduce future income tax
liabilities.
In assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during
the periods in which these temporary differences become deductible. Management believes it is more likely than not that the deferred tax asset will not be
realized and has recorded a net valuation allowance of $19,900,309 and $18,569,545 as of December 31, 2022 and 2021, respectively.
A reconciliation of the federal statutory tax rate with the effective tax rate from continuing operations is as follows:
Federal statutory tax rate
PPP loan forgiveness
Goodwill impairment
Change in fair value of contingent consideration
Change in fair value of derivative liabilities
State income taxes, net of federal income tax benefit
Change in state tax rate
Return to provision adjustment
Business combination
Other
Change in valuation allowance
Effective tax rate
December 31,
2022
2021
21.0%
0.0%
(4.1)%
0.2%
3.5%
7.5%
(1.4)%
0.4%
—%
(2.2)%
(28.8)%
(3.9)%
21.0%
10.6%
—%
(12.4)%
(10.4)%
0.0%
1.3%
(0.6)%
0.4%
(0.8)%
(9.7)%
(0.6)%
As of December 31, 2022 and 2021, the Company does not have any material unrecognized tax benefits and accordingly has not recorded any
interest or penalties related to unrecognized tax benefits. The Company does not believe that unrecognized tax benefits will significantly change within the
next twelve months. The Company and its subsidiaries file Federal, California, Florida, Illinois, Massachusetts, New York State, and New York City
income tax returns. These returns remain subject to examination by taxing authorities for all years after December 31, 2019.
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the
future tax consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled.
F-43
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 25 — LEASES
The Company and its subsidiaries are party to various office leases with terms expiring at different dates through November 2027. The
amortizable life of the right-of-use asset is limited by the expected lease term. Although certain leases include options to extend the Company did not
include these in the right-of-use asset or lease liability calculations because it is not reasonably certain that the options will be executed.
Assets
Right-of-use asset
Liabilities
Current
Lease liability
Noncurrent
Lease liability
Total lease liability
December 31,
2022
2021
$
7,341,045 $
6,129,411
$
2,073,547 $
1,600,107
$
$
6,012,049 $
5,132,895
8,085,596 $
6,733,002
The table below shows the lease expenses recorded in the consolidated statements of operations incurred during year ended December 31, 2022
and 2021.
Lease costs
Operating lease costs
Operating lease costs
Sublease income
Net lease costs
Lease Payments
Classification
Selling, general and administrative expenses
Direct costs
Selling, general and administrative expenses
December 31,
2022
2,316,745 $
—
(107,270)
2,209,475 $
2021
2,642,798
60,861
—
2,703,659
$
$
For the years ended December 31, 2022 and 2021, the Company made cash payments related to its operating leases in the amount of $2,256,551
and $2,733,158, respectively.
Future minimum payments for operating leases in effect at December 31, 2022 were as follows:
2023
2024
2025
2026
2027
Thereafter
Total
Less: Imputed interest
Present value of lease liabilities
$
$
$
2,640,164
2,531,307
1,979,589
1,782,057
719,794
—
9,652,911
(1,567,315)
8,085,596
As of December 31, 2022, the Company’s weighted average remaining lease terms on its operating lease is 3.49 years and the Company’s
weighted average discount rate is 8.68% related to its operating leases.
Rent expense for the years ended December 31, 2022 and 2021 was $2,316,745 and $2,703,659, respectively.
F-44
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 26 — COLLABORATIVE ARRANGEMENT
IMAX Co-Production Agreement
On June 24, 2022, the Company entered into an agreement with 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 year ended December 31, 2022, the Company paid $1,500,000, respectively, pursuant to the Blue Angels Agreement,
which were recorded as capitalized production costs. The Company expects the final payment of $500,000 pursuant to the Blue Angels Agreement to be
made during the second quarter of 2023.
We have evaluated the Blue Angels Agreement and have determined that it is a collaborative arrangement under FASB ASC Topic 808
“Collaborative Arrangements”. We will reevaluate whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there
is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards, dependent upon the ultimate commercial
success of documentary motion picture.
As production of the documentary motion picture is still in the production process, no income or expense has been recorded in connection with the
Blue Angels Agreement during the year ended December 31, 2022.
NOTE 27 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. In the opinion of
management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in
the Company’s financial position, results of operations and cash flows. The Company is not aware of any pending litigation as of the date of this report.
Letter of Credit
Pursuant to the lease agreement of 42West’s New York office location, the Company is required to issue a letter of credit to secure the leases. On
July 24, 2018, the Company renewed the letter of credit issued by City National Bank for the 42West office space in New York. The original letter of credit
was for $677,354 and originally expired on August 1, 2018. This letter of credit renews automatically annually unless City National Bank notifies the
landlord 60-days prior to the expiration of the bank’s election not to renew the letter of credit. In connection with the annual renewal in 2021, the letter of
credit was reduced to $541,883. The Company granted City National Bank a security interest in bank account funds totaling $541,883 pledged as collateral
for the letter of credit. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit under certain conditions. If this
were to occur, the Company would be required to reimburse the issuer of the letter of credit.
Pursuant to the sublease agreement of Dolphin’s Los Angeles office location, the Company issued the sublessor a letter of credit from City
National Bank in the amount of $586,077 to secure the sublease. The letter of credit, issued on September 15, 2022, expires a year after issuance and is
deemed automatically extended for one year from the expiration date unless City National Bank notifies the landlord 90-days prior to the expiration of the
bank’s election not to renew the letter of credit. The Company granted City National Bank a security interest in bank account funds totaling $586,077
pledged as collateral for the letter of credit. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit under certain
conditions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit.
The Company is not aware of any claims relating to its outstanding letters of credit as of December 31, 2022.
NOTE 28 — EMPLOYEE BENEFIT PLAN AND EQUITY INCENTIVE PLAN
The Company and its wholly owned subsidiaries have 401(K) profit sharing plan that covers substantially all of its employees. The Company’s
401(K) plan matches up to 4% of the employee’s contribution. The plans match dollar for dollar the first 3% of the employee’s contribution and then 50%
of contributions up to 5%. There are certain limitations for highly compensated employees. The Company’s contributions to these plans for the years ended
December 31, 2022 and 2021, were approximately $582,912 and $424,423, respectively.
F-45
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Equity Incentive Plan
On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”).
There are 2,000,000 shares available to grant under the 2017 Plan. During the year ended December 31, 2022, the Company granted Restricted Stock Units
(“RSUs”) to certain employees under the 2017 Plan, as detailed in the table below. During the year ended December 31, 2021, the Company did not issue
any awards under the 2017 Plan.
The Company accounts for its share-based compensation expense related to equity instruments under GAAP, which requires the measurement and
recognition of compensation costs for all equity-based payment awards made to employees based on estimated fair values. The Company uses the value of
its common stock on the grant date to establish the grant date fair value of the RSUs granted. We have elected to account for forfeitures as they occur. The
Company uses authorized and unissued shares to meet share issuance requirements.
During the year ended December 31, 2022, the Company granted RSU’s to its employees under the 2017 Plan that 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 $212,782 for the year ended December 31, 2022, which is included in payroll and benefits in the consolidated statements of operations. There was
no share-based compensation recognized for the year ended December 31, 2021. As of December 31, 2022, all RSUs where vested and there is no
unrecognized compensation expense.
The following table sets forth the activity for the RSUs for the year ended December 31, 2022:
Outstanding (nonvested), December 31, 2021
Granted
Forfeited
Vested
Outstanding (nonvested), December 31, 2022
Shares issued related to an employment agreement
Number of
Shares
Weighted Average
Grant Date
Fair Value
— $
36,434
(4,942)
(31,492)
— $
—
6.86
6.86
6.86
—
Pursuant to the employment agreement between the Company and Mr. Anthony Francisco, on July 27, 2022, the Company issued to Mr. Francisco
11,521 shares of Common Stock at a price of $4.34 per share, the closing sale price for the Common Stock on the date the shares were issued. Mr.
Francisco’s employment agreement also entitles him to receive share awards amounting to $25,000 at each of certain dates in 2023 and 2024, in the
aggregate amounting to $100,000. Relating to this agreement, subsequent to December 31, 2022, on January 11, 2023 the Company issued to Mr. Francisco
6,366 shares of Common Stock at a price of $2.24 per share, the 30-day trailing closing sale price for the Common Stock on the date the shares were
issued.
F-46
EXHIBIT __
SUBSIDIARIES OF DOLPHIN ENTERTAINMENT, INC
EXHIBIT 21.1
42WEST, LLC
THE DOOR MARKETING GROUP, LLC
VIEWPOINT COMPUTER ANIMATION, INCORPORATED
SHORE FIRE MEDIA, LTD
BE SOCIAL PUBLIC RELATIONS, LLC
CYBERGEDDON PRODUCTIONS, LLC
DOLPHIN WOODSTOCK PRODUCTIONS, LLC
DOLPHIN FILMS, INC
B/HI COMMUNICATIONS, INC.
DLPN PRODUCTIONS LLC
DOLPHIN NFT STUDIOS, INC
SOCIALYTE, LLC
The following are subsidiaries of Dolphin Films, Inc
YOUNGBLOOD PRODUCTIONS LLC
DOLPHIN MAX STEEL HOLDINGS LLC
DOLPHIN JB BELIEVE FINANCING LLC
THE WISHING SEASON PRODUCTIONS LLC
DOLPHIN CP PRODUCTIONS LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 31, 2023, with respect to the consolidated financial statements included in the Annual Report of Dolphin
Entertainment, Inc. on Form 10-K for the year ended December 31, 2022. We consent to the incorporation by reference of said report in these Registration
Statements of Dolphin Entertainment, Inc. on Form S-1 (File No. 333-267336) and Form S-8 (File No. 333-219770).
EXHIBIT 23.1
/s/ GRANT THORNTON LLP
Fort Lauderdale, Florida
March 31, 2023
Dolphin Entertainment, Inc.
Coral Gables, Florida
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-1 No. 333-267336 and Form S-8 No. 333-219770 of
Dolphin Entertainment, Inc. of our report dated May 25, 2022, relating to the consolidated financial statements of Dolphin Entertainment Inc., which
appears in this Form 10-K.
EXHIBIT 23.2
/s/ BDO USA, LLP
Miami, Florida
March 31, 2023
Exhibit 31.1
1.
2.
3.
4.
CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO SECTION 302
I, William O’Dowd IV, Chief Executive Officer, certify that:
I have reviewed this Annual Report on Form 10-K of Dolphin Entertainment, Inc.;
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Report.
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the Registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: March 31, 2023
/s/ William O’Dowd IV
William O’Dowd IV
Chief Executive Officer
Exhibit 31.2
1.
2.
3.
4.
CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO SECTION 302
I, Mirta A Negrini, Chief Financial Officer, certify that:
I have reviewed this Annual Report on Form 10-K of Dolphin Entertainment, Inc.;
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Report.
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the Registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: March 31, 2023
/s/ Mirta A Negrini
Mirta A Negrini
Chief Financial Officer
CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the accompanying Annual Report of Dolphin Entertainment, Inc. (the “Company”) on Form 10-K for the year ended December
31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William O’Dowd IV, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
By:
/s/ William O’Dowd IV
William O’Dowd IV
Chief Executive Officer
March 31, 2023
CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the accompanying Annual Report of Dolphin Entertainment, Inc. (the “Company”) on Form 10-K for the year ended December
31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mirta A Negrini, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
By:
/s/ Mirta A Negrini
Mirta A Negrini
Chief Financial Officer
March 31, 2023