UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
———————
FORM
For the quarterly period ended
OR
For the transition period from __________ to __________
Commission file number:
(Exact name of registrant as specified in its charter)
———————
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number)
———————
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of common stock outstanding was as of May 13, 2024.
TABLE OF CONTENTS
i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable: | ||||||||
| Trade, net of allowance of $ | ||||||||
| Other receivables | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Capitalized production costs, net | ||||||||
| Employee receivable | ||||||||
| Right-of-use asset | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Property, equipment and leasehold improvements, net | ||||||||
| Other long-term assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
| March 31, 2024 | December 31, 2023 | |||||||
| LIABILITIES | ||||||||
| Current | ||||||||
| Accounts payable | $ | $ | ||||||
| Term loan, current portion | ||||||||
| Revolving line of credit | ||||||||
| Notes payable, current portion | ||||||||
| Accrued interest – related party | ||||||||
| Accrued compensation – related party | ||||||||
| Lease liability, current portion | ||||||||
| Deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Term loan, noncurrent portion | ||||||||
| Notes payable | ||||||||
| Convertible notes payable | ||||||||
| Convertible note payable at fair value | ||||||||
| Loan from related party | ||||||||
| Lease liability | ||||||||
| Deferred tax liability | ||||||||
| Warrant liability | ||||||||
| Other noncurrent liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 16) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred Stock, Series C, $ par value, shares authorized, shares issued and outstanding at March 31, 2024 and December 31, 2023 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | $ | ||||||
| Expenses: | ||||||||
| Direct costs | ||||||||
| Payroll and benefits | ||||||||
| Selling, general and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Change in fair value of contingent consideration | ||||||||
| Legal and professional | ||||||||
| Total expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other (expenses) income: | ||||||||
| Change in fair value of convertible note | ( | ) | ||||||
| Change in fair value of warrants | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total other (expenses) income, net | ( | ) | ( | ) | ||||
| Loss before income taxes and equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ||||
| Income tax expense | ( | ) | ( | ) | ||||
| Net loss before equity in losses of unconsolidated affiliates | ( | ) | ( | ) | ||||
| Equity in losses of unconsolidated affiliates | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss per share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Share-based compensation | ||||||||
| Share-based consulting fees | ||||||||
| Amortization of capitalized production costs | ||||||||
| Equity in losses of unconsolidated affiliates | ||||||||
| Change in allowance for credit losses | ||||||||
| Change in fair value of contingent consideration | ||||||||
| Change in fair value of warrants | ( | ) | ||||||
| Change in fair value of convertible notes | ( | ) | ||||||
| Deferred income tax expense, net | ||||||||
| Debt origination costs amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, trade and other | ( | ) | ||||||
| Other current assets | ( | ) | ( | ) | ||||
| Capitalized production costs | ( | ) | ||||||
| Other long-term assets and employee receivable | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued interest – related party | ||||||||
| Other current liabilities | ( | ) | ||||||
| Lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from equity line of credit agreement | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Repayment of term loan | ( | ) | ( | ) | ||||
| Proceeds from related party notes payable | ||||||||
| Repayment of notes payable | ( | ) | ||||||
| Payment of interest to related party | ( | ) | ( | ) | ||||
| Principal payments on finance leases | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | ( | ) | ||||||
| Cash and cash equivalents and restricted cash, beginning of period | ||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| Lease liabilities arising from obtaining right-of-use assets. | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Employee compensation paid in shares of common stock | $ | $ | ||||||
| Consulting services paid in shares of common stock | $ | $ | ||||||
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:
Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
| For the three months ended March 31, 2024 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capitol | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended March 31, 2024 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital LLC | — | |||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Issuance of shares related to employment agreements | — | |||||||||||||||||||||||||||
| Issuance of shares related to services received | — | |||||||||||||||||||||||||||
| Balance March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| For the three months ended March 31, 2023 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares to Lincoln Park Capital LLC | — | |||||||||||||||||||||||||||
| Issuance of shares related to employment agreements | — | |||||||||||||||||||||||||||
| Balance March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
Dolphin Entertainment, Inc., a Florida corporation (the “Company,” “Dolphin,” “we,” “us” or “our”), is a leading independent entertainment marketing and production company. Through its subsidiaries 42West LLC (“42West”) including BHI Communications Inc (“BHI”) that merged with 42West effective January 1, 2024, The Door Marketing Group, LLC (“The Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation Incorporated (“Viewpoint), The Digital Dept., LLC (“The Digital Dept.”) formerly known as Socialyte, LLC (“Socialyte”) and Be Social Public Relations LLC (“Be Social”) that merged effective January 1, 2024 and Special Projects LLC (“Special Projects”), the Company provides 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. Viewpoint adds full-service creative branding and production capabilities to the marketing group. The Digital Dept. (formerly, Socialyte and Be Social), provides influencer marketing capabilities through divisions dedicated to influencer talent management, brand campaign strategy and execution, and influencer event ideation and production. Special Projects is the entertainment industry’s leading celebrity booking firm, specializing in uniting brands and events with celebrities and influencers across the entertainment, media, fashion, consumer product and tech industries. 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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films, Inc. (“Dolphin Films”), Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC, Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The Door, Viewpoint, Shore Fire, The Digital Dept. and Special Projects. The Company applies the equity method of accounting for its investments in entities for which it does not have a controlling financial interest, but over which it has the ability to exert significant influence.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of its financial position as of March 31, 2024, and its results of operations and cash flows for the three months ended March 31, 2024 and 2023. All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2024. The condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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.
Recent Accounting Pronouncements
Accounting Guidance Not Yet Adopted
In December 2023, the FASB issued new guidance on income tax disclosures (ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”). Among other requirements, this update adds specific disclosure requirements for income taxes, including: (1) disclosing specific categories in the rate reconciliation and (2) providing additional information for reconciling items that meet quantitative thresholds. The guidance is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2023-09 on the Company’s condensed consolidated financial statements and disclosures.
In November 2023, the FASB issued new guidance on segment reporting (ASU 2023-08, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”). The amendments in the ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2023-08 on the Company’s condensed consolidated financial statements and disclosures.
| 7 |
NOTE 2 – REVENUE
Disaggregation of Revenue
The Company’s principal geographic markets are within the U.S. The following is a description of the principal activities, by reportable segment, from which we generate revenue. For more detailed information about reportable segments, see Note 12.
Entertainment Publicity and Marketing
The Entertainment Publicity and Marketing (“EPM”) segment generates revenue from diversified marketing services, including public relations, entertainment and hospitality content marketing, strategic marketing consulting and content production of marketing materials. Within the EPM segment, we typically identify one performance obligation, the delivery of professional publicity services, in which we typically act as the principal. Fees are generally recognized on a straight-line or monthly basis, as the services are consumed by our clients, which approximates the proportional performance on such contracts.
We also enter into management agreements with a roster of social media influencers and are paid a percentage of the revenue earned by the social media influencer. Due to the short-term nature of these contracts, in which we typically act as the agent, the performance obligation is typically completed and revenue is recognized net at a point in time, typically the date of publication.
Content Production
The Content Production (“CPD”) segment generates revenue from the production of original motion pictures and other digital content production. In the CPD segment, we typically identify performance obligations depending on the type of service, for which we generally act as the principal. Revenue from motion pictures is recognized upon transfer of control of the licensing rights of the motion picture or web series to the customer. For minimum guarantee licensing arrangements, the amount related to each performance obligation is recognized when the content is delivered, and the window for exploitation right in that territory has begun, which is the point in time at which the customer is able to begin to use and benefit from the content. For sales or usage-based royalty income, revenue is recognized starting at the exhibition date and is based on the Company’s participation in the box office receipts of the theatrical exhibitor and the performance of the motion picture.
In June 2022, the Company
entered into an agreement with IMAX Corporation (“IMAX”) to co-produce and co-finance a documentary motion picture on
the flight demonstration squadron of the United States Navy called The Blue Angels. On April 25, 2023, IMAX entered into an
acquisition agreement with Amazon Content Services, LLC (the “Amazon Agreement”) for the distribution rights of The Blue
Angels. During the three months ended March 31, 2024, we recorded net revenues of $
The revenues recorded by the EPM and CPD segments is detailed below:
For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Entertainment publicity and marketing | $ | $ | ||||||
| Content production | ||||||||
| Total Revenues | $ | $ | ||||||
Contract Balances
The opening and closing balances of our contract liability balances from contracts with customers as of March 31, 2024 and December 31, 2023 were as follows:
| Contract Liabilities | |||||
| Balance as of December 31, 2023 | $ | ||||
| Balance as of March 31, 2024 | |||||
| Change | $ | ||||
Contract liabilities are recorded when the Company receives advance payments from customers for public relations projects or as deposits for promotional or brand-support video projects. Once the work is performed or the projects are delivered to the customer, the contract liabilities are deemed earned and recorded as revenue. Advance payments received are generally for short duration and are recognized once the performance obligation of the contract is met.
Revenues for the three months ended March 31, 2024 and 2023 include the following:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Amounts included in the beginning of year contract liability balance | $ | $ | ||||||
The Company’s unsatisfied performance obligations are for contracts that have an original expected duration of one year or less and, as such, the Company is not required to disclose the remaining performance obligation.
| 8 |
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of March 31, 2024, the Company
had a balance of $
The Company evaluates goodwill in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) significant decline in market capitalization or (4) an adverse action or assessment by a regulator. There were no triggering events noted during the three months ended March 31, 2024, that would require the Company to reassess goodwill for impairment outside of its regular annual impairment test.
Intangible Assets
Finite-lived intangible assets consisted of the following as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Gross
Carrying Amount | Accumulated
Amortization | Net
Carrying Amount | Carrying
Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Trademarks and trade names | ||||||||||||||||||||||||
| Non-compete agreements | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
Amortization expense associated
with the Company’s intangible assets was $
Amortization expense related to intangible assets for the remainder of 2024 and thereafter is as follows:
| 2024 | $ | |||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| 2028 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
NOTE 4 —ACQUISITIONS
Business Acquisitions
Special Projects Media LLC
On October 2, 2023, (the “Special Projects Closing Date”), the Company acquired all of the issued and outstanding membership interests of Special Projects Media LLC, a New York limited liability company (“Special Projects”), pursuant to a membership interest purchase agreement (the “Special Projects Purchase Agreement”) between the Company and Andrea Oliveri, Nicole Vecchiarelli, Foxglove Corp and Alexandra Alonso (“Special Projects Sellers”). Special Projects is a talent booking and events agency that elevates media, fashion, and lifestyle brands. Special Projects has headquarters in New York and Los Angeles.
| 9 |
The total consideration paid by
the Company in connection with the acquisition of Special Projects was approximately $10.2 million, which is subject to adjustments based
on a customary post-closing cash consideration adjustment. On the Special Projects Closing Date, the Company paid the Sellers $
As part of the Special Projects Purchase Agreement, the Company entered into employment agreements with Andrea Oliveri and Nicole Vecchiarelli, each for a period of four years.
The following table summarizes the fair value of the consideration transferred:
| Cash paid to sellers at closing | $ | |||
| Working capital and excess cash adjustment | ||||
| Fair value of common stock issued to the Special Projects Sellers | ||||
| Fair value of the consideration transferred | $ | |||
The following table summarizes the fair values of the assets acquired and liabilities assumed by the acquisition of Special Projects on the Special Projects Closing Date. Amounts in the table are estimates that may change, as described below. The measurement period of the Special Projects acquisition concludes on October 2, 2024. There were no measurement period adjustments from the Special Projects Closing Date through March 31, 2024.
| October 2, 2023 | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Other current assets | ||||
| Right-of-use asset | ||||
| Other assets | ||||
| Intangibles | ||||
| Total identifiable assets acquired | ||||
| Accrued payable | ( | ) | ||
| Accrued expenses and other current liabilities | ( | ) | ||
| Lease liability | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net identifiable liabilities acquired | ||||
| Goodwill | ||||
| Fair value of the consideration transferred | $ | |||
Unaudited Pro Forma Consolidated Statements of Operations
The following presents the unaudited pro forma consolidated operations as if Special Projects had been acquired on January 1, 2023:
| Three Months Ended March 31, 2023 | ||||
| Revenue | $ | |||
| Net Loss | $ | ( | ) | |
The impact of the acquisition of Special Projects on the Company’s actual results for periods following the acquisition 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 acquisition been completed on January 1, 2023, 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.
| 10 |
NOTE 5 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued funding under Max Steel production agreement | $ | $ | ||||||
| Accrued audit, legal and other professional fees | ||||||||
| Accrued commissions | ||||||||
| Accrued bonuses | ||||||||
| Talent liability | ||||||||
| Accumulated customer deposits | ||||||||
| Other | ||||||||
| $ | $ | |||||||
NOTE 6 — DEBT
Total debt of the Company was as follows as of March 31, 2024 and December 31, 2023:
| Debt Type | March 31, 2024 | December 31, 2023 | ||||||
| Convertible notes payable | $ | $ | ||||||
| Convertible note payable - fair value option | ||||||||
| Nonconvertible promissory notes | ||||||||
| Nonconvertible promissory note – Socialyte | ||||||||
| Loans from related party | ||||||||
| Revolving line of credit | ||||||||
| Term loan, net of debt issuance costs | ||||||||
| Total debt | $ | $ | ||||||
| Less current portion of debt | ( | ) | ( | ) | ||||
| Noncurrent portion of debt | $ | $ | ||||||
The table below details the maturity dates of the principal amounts for the Company’s debt as of March 31, 2024:
| Debt Type | Maturity Date | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | |||||||||||||||||||
| Convertible notes payable | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Nonconvertible promissory notes | ||||||||||||||||||||||||||
| Nonconvertible promissory note - Socialyte | ||||||||||||||||||||||||||
| Revolving line of credit | — | |||||||||||||||||||||||||
| Term loan | ||||||||||||||||||||||||||
| Loans from related party | ||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
(A) |
Convertible Notes Payable
As of March 31, 2024, the Company
has ten convertible notes payable outstanding. The convertible notes payable bear interest at a rate of
| 11 |
The Company recorded interest expense
related to these convertible notes payable of $
Convertible Note Payable at Fair Value
The Company had one convertible promissory note outstanding with aggregate principal amount of $500,000 as of March 31, 2024 for which it elected the fair value option. As such, the estimated fair value of the note was recorded on its issue date. At each balance sheet date, the Company records the fair value of the convertible promissory note with any changes in the fair value recorded in the condensed consolidated statements of operations.
The Company had a balance of $
The Company recorded a gain in
fair value of $
The Company recorded interest expense
related to this convertible promissory note payable at fair value of $
Nonconvertible Promissory Notes
As of March 31, 2024, the Company
has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $
As of both March 31, 2024 and
December 31, 2023, the Company had a balance of $
The Company recorded interest
expense related to these nonconvertible promissory notes of $
Nonconvertible unsecured promissory note - Socialyte Promissory Note
In connection with the purchase
agreement with Socialyte (“Socialyte Purchase Agreement”), the Company entered into a promissory note with Socialyte (“the
Socialyte Promissory Note”) amounting to $
The Socialyte Purchase Agreement allows the Company to offset a working capital deficit against the Socialyte Promissory Note. As such, on June 30, 2023, the Company deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the Socialyte Seller.
The Company recorded interest
expense related to this Socialyte Promissory Note of $
BankUnited Loan Agreement
The BKU Term Loan carries a 1.0% origination fee and matures in September 2028, the BKU Line of Credit carries an initial origination fee of 0.5% and an 0.25% fee on each annual anniversary and matures in September 2026; the BKU Commercial Card does not have any initial or annual fee and matures in September 2026. The BKU Term Loan has a declining prepayment penalty equal to 5% in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five of the outstanding balance. The BKU Line of Credit and BKU Commercial Card can be repaid without any prepayment penalty.
Interest on the BKU Term Loan accrues at 8.10% fixed rate per annum. Principal and interest on the BKU Term Loan shall be payable on a monthly basis based on a 5-year amortization. Interest on the BKU Line of credit is payable on a monthly basis, with all principal due at maturity. The BKU Commercial Card payment is due in full at the end of each bi-weekly billing cycle.
| 12 |
The BankUnited Credit Facility
contains financial covenants tested semi-annually on a trailing twelve-month basis that require the Company to maintain a minimum debt
service coverage ratio of 1.25:1.00 and a maximum funded debt/EBITDA ratio of 3.00:1.00. In addition, the BankUnited Credit Facility contains
a liquidity covenant that requires the Company to hold a cash balance at BankUnited with a daily minimum deposit balance of $
As of March 31, 2024 and December
31, 2023, the Company had a balance of $
Amortization of debt origination
costs under the BKU Credit Facility is included as a component of interest expense in the condensed consolidated statements of operations
and amounted to approximately $
During the three months ended March 31, 2024, the Company did not use the BKU Commercial Card.
NOTE 7 — LOANS FROM RELATED PARTY
The Company issued Dolphin Entertainment, LLC (“DE LLC”), an entity wholly owned by the Company’s Chief Executive Officer, William O’Dowd (the “CEO”), a promissory note (the “DE LLC Note”) which matures on December 31, 2026.
As of both March 31, 2024 and
December 31, 2023, the Company had a principal balance of $
On January 16, 2024, the Company
issued a nonconvertible promissory note to Mr. Donald Scott Mock, brother of Mr. O’Dowd in the amount of $
The Company recorded interest expense
of $
NOTE 8 — FAIR VALUE MEASUREMENTS
The Company’s non-financial assets measured at fair value on a nonrecurring basis include goodwill and intangible assets. The determination of our intangible fair values includes several assumptions and inputs (Level 3) that are subject to various risks and uncertainties. Management believes it has made reasonable estimates and judgments concerning these risks and uncertainties. All other financial assets and liabilities are carried at amortized cost.
The Company’s cash balances are representative of their fair values, as these balances are comprised of deposits available on demand. The carrying amounts of accounts receivable, notes receivable, prepaid and other current assets, accounts payable and other non-current liabilities approximate their fair values because of the short turnover of these instruments.
Financial Disclosures about Fair Value of Financial Instruments
The tables below set forth information related to the Company’s consolidated financial instruments:
| Level in | March 31, 2024 | December 31, 2023 | |||||||||||||||||
| Fair Value | Carrying | Fair | Carrying | Fair | |||||||||||||||
| Hierarchy | Amount | Value | Amount | Value | |||||||||||||||
| Assets: | |||||||||||||||||||
| Cash and cash equivalents | 1 | $ | $ | $ | $ | ||||||||||||||
| Restricted cash | 1 | ||||||||||||||||||
| Liabilities: | |||||||||||||||||||
| Convertible notes payable | 3 | $ | $ | $ | $ | ||||||||||||||
| Convertible note payable at fair value | 3 | ||||||||||||||||||
| Warrant liability | 3 | ||||||||||||||||||
| 13 |
Convertible notes payable
As of March 31, 2024, the Company
has ten outstanding convertible notes payable with aggregate principal amount of $
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||
| Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
| 10% convertible notes due in October 2026 | 3 | $ | $ | $ | $ | ||||||||||||||
| 10% convertible notes due in November 2026 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in December 2026 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in January 2027 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in June 2027 | 3 | ||||||||||||||||||
| 10% convertible notes due in August 2027 | 3 | $ | |||||||||||||||||
| 10% convertible notes due in September 2027 | 3 | $ | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||
The estimated fair value of the convertible notes was computed using a Monte Carlo Simulation, using the following assumptions:
| Fair Value Assumption – Convertible Debt | March 31, 2024 | December 31, 2023 | ||||||
| Stock Price | $ | $ | ||||||
| Minimum Conversion Price | $ | $ | ||||||
| Annual Asset Volatility Estimate | % | % | ||||||
| Risk Free Discount Rate (based on U.S. government treasury obligation with a term similar to that of the convertible note) | % - | % - | ||||||
Fair Value Option (“FVO”) Election – Convertible note payable and freestanding warrants
Convertible note payable, at fair value
As of March 31, 2024, the Company
had one outstanding convertible note payable with a face value of $
The March 4th Note is measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2023 to March 31, 2024:
| March 4th Note | ||||
| Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2023 | $ | |||
| (Gain) Loss on the change in fair value reported in the condensed consolidated statements of operations | ( | ) | ||
| Ending fair value balance reported on the condensed consolidated balance sheet at March 31, 2024 | $ | |||
The estimated fair value of the March 4th Note as of March 31, 2024 and December 31, 2023, 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:
| March 31, 2024 | December 31, 2023 | |||||||
| Face value principal payable | $ | $ | ||||||
| Original conversion price | $ | $ | ||||||
| Value of common stock | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk free rate | % | % | ||||||
Warrants
In connection with the March 4th Note, the Company issued the Series I Warrants. The Series I Warrants are measured at fair value and categorized within Level 3 of the fair value hierarchy. The fair values of the Series I Warrants were nominal as of March 31, 2024 and December 31, 2023.
NOTE 9 — STOCKHOLDERS’ EQUITY
2022 Lincoln Park Transaction
On August 10, 2022, the Company entered into a purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park, pursuant to which the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $ in value of its shares of the Company’s common stock from time to time over a 36-month period.
During the three months
ended March 31, 2024, the Company sold
shares of its common stock, at prices ranging between $ and
$ and
received proceeds of $
| 14 |
During the three months ended
March 31, 2023, the Company sold shares of its common stock, at prices ranging between $ and $ and received
proceeds of $
The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of its common stock in the future (“put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it has insignificant value as of March 31, 2024.
The following table sets forth the computation of basic and diluted loss per share:
Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Numerator | ||||||||
| Net loss attributable to Dolphin Entertainment common stock shareholders and numerator for basic loss per share | $ | ( | ) | $ | ( | ) | ||
| Change in fair value of convertible notes payable | ( | ) | ||||||
| Interest expense | ||||||||
| Numerator for diluted loss per share | $ | ( | ) | $ | ( | ) | ||
| Denominator | ||||||||
| Denominator for basic EPS - weighted-average shares | ||||||||
| Effect of dilutive securities: | ||||||||
| Convertible notes payable | ||||||||
| Denominator for diluted EPS - adjusted weighted-average shares | ||||||||
| Basic loss per share | $ | ( | ) | $ | ( | ) | ||
| Diluted loss per share | $ | ( | ) | $ | ( | ) | ||
Basic (loss) earnings per share is computed by dividing income or loss attributable to the shareholders of common stock (the numerator) by the weighted-average number of shares of common stock outstanding (the denominator) for the period. Diluted (loss) earnings per share assume that any dilutive equity instruments, such as convertible notes payable and warrants were exercised and outstanding common stock adjusted accordingly, if their effect is dilutive.
One of the Company’s convertible notes payable, the warrants and the Series C Preferred Stock have clauses that entitle the holder to participate if dividends are declared to the common stockholders as if the instruments had been converted into shares of common stock. As such, the Company uses the two-class method to compute earnings per share and attribute a portion of the Company’s net income to these participating securities. These securities do not contractually participate in losses. For the three months ended March 31, 2024 and 2023, the Company had a net loss and as such the two-class method is not presented.
For the three months ended March 31, 2024 potentially dilutive instruments including shares of common stock issuable upon conversion of convertible notes payable and shares of common stock issuable upon exercise of warrants were not included in the diluted loss per share as inclusion was considered to be antidilutive.
For the three months ended March 31, 2023 potentially dilutive instruments including shares of Common Stock issuable upon conversion of convertible notes payable and shares of common stock issuable upon exercise of warrants were not included in the diluted loss per share as inclusion was considered to be antidilutive.
NOTE 11 — RELATED PARTY TRANSACTIONS
As part of the employment agreement
with its CEO, the Company provided a $
| 15 |
As of March 31, 2024 and December
31, 2023, the Company had accrued $
The Company entered into the DE LLC Note with an entity wholly owned by our CEO and into a nonconvertible promissory note with our CEO’s brother. See Note 7 for further discussion.
NOTE 12 — 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, The Digital Dept and Special Projects. 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. During the three months ended March 31, 2024, BHI merged into 42West and Be Social and Socialyte merged to become The Digital Dept. |
| • | The Content Production segment is composed of Dolphin Entertainment and Dolphin Films. This segment engages in the production and distribution of digital content and feature films. The activities of our Content Production segment also include all corporate overhead activities. |
The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating segment performance is operating income (loss) which is the same as Income (loss) from operations on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023. Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. Legal and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees. All segments follow the same accounting policies as those described in the Annual Report on Form 10-K for the year ended December 31, 2023.
In connection with the acquisitions
of our wholly owned subsidiaries, the Company assigned $
Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| EPM | $ | $ | ||||||
| CPD | ||||||||
| Total | $ | $ | ||||||
| Segment Operating Income (Loss): | ||||||||
| EPM | $ | ( | ) | $ | ( | ) | ||
| CPD | ( | ) | ||||||
| Total operating income (loss) | ( | ) | ||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Other income (expenses), net | ||||||||
| Loss before income taxes and equity in losses of unconsolidated affiliates | $ | ( | ) | $ | ( | ) | ||
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| Total assets: | ||||||||
| EPM | $ | $ | ||||||
| CPD | ||||||||
| Total | $ | $ | ||||||
| 16 |
NOTE 13 — LEASES
The Company and its subsidiaries are party to various office leases with terms expiring at different dates through November 2027. The amortizable life of the right-of-use asset is limited by the expected lease term. Although certain leases include options to extend, the Company did not include these in the right-of-use asset or lease liability calculations because it is not reasonably certain that the options will be executed.
| Operating Leases | As of March 31, 2024 | As of December 31, 2023 | ||||||
| Assets | ||||||||
| Right-of-use asset | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Lease liability | $ | $ | ||||||
| Noncurrent | ||||||||
| Lease liability | $ | $ | ||||||
| Total operating lease liability | $ | $ | ||||||
| Finance Lease | As of March 31, 2024 | As of December 31, 2023 | ||||||
| Assets | ||||||||
| Right-of-use asset | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Lease liability | $ | $ | ||||||
| Noncurrent | ||||||||
| Lease liability | $ | $ | ||||||
| Total finance lease liability | $ | $ | ||||||
The tables below show the lease income and expenses recorded in the condensed consolidated statements of operations incurred during the three months ended March 31, 2024 and 2023 for operating and financing leases, respectively.
| Three Months Ended March 31, | ||||||||
| Operating Lease costs | Classification | 2024 | 2023 | |||||
| Operating lease costs | Selling, general and administrative expenses | $ | $ | |||||
| Sublease income | Selling, general and administrative expenses | ( | ) | ( | ) | |||
| Net operating lease costs | $ | $ | ||||||
| Three Months Ended March 31, | ||||||||
| Finance Lease costs | Classification | 2024 | 2023 | |||||
| Amortization of right-of-use assets | Selling, general and administrative expenses | $ | $ | |||||
| Interest on lease liability | Selling, general and administrative expenses | |||||||
| Total finance lease costs | $ | $ | ||||||
Lease Payments
For the three months ended March
31, 2024 and 2023, the Company made payments in cash related to its operating leases in the amounts of $
Future minimum lease payments for leases for the remainder of 2024 and thereafter, were as follows:
| Year | Operating Leases | Finance Leases | ||||||||
| 2024 | $ | $ | ||||||||
| 2025 | ||||||||||
| 2026 | ||||||||||
| 2027 | ||||||||||
| 2028 | ||||||||||
| Thereafter | ||||||||||
| Total lease payments | $ | $ | ||||||||
| Less: Imputed interest | ( | ) | ( | ) | ||||||
| Present value of lease liabilities | $ | $ | ||||||||
As of March 31, 2024, the Company’s
weighted average remaining lease term on its operating and finance leases is
| 17 |
NOTE 14 — 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 each agreed to fund 50% of the production budget. As of March 31, 2024, we had paid $2,250,000 in connection with this agreement.
On
April 25, 2023, IMAX entered into the Amazon Agreement for the distribution rights of The Blue Angels. The Amazon Agreement was determined
to be entity-customer relationship, and the revenue recognized from the agreement was recorded separately as revenue from a customer.
During the three months ended March 31, 2024, IMAX delivered The Blue Angels
to Amazon Content Services LLC and the Company recorded net revenues of $
The Blue Angels documentary motion picture will be released in theatres on May 17, 2024 and will begin streaming on Amazon Prime Video on May 23, 2024.
On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), allowing for shares to be granted under the 2017 Plan. During the three months ended March 31, 2024, the Company granted Restricted Stock Units (“RSUs”) to certain employees under the 2017 Plan, as detailed in the table below. During the three months ended March 31, 2023, the Company did not issue any awards under the 2017 Plan.
The RSUs granted under the 2017
Plan to the Company’s employees vest in four equal installments on the following dates: March 15, 2024, June 15, 2024, September
15, 2024 and December 15, 2024. The Company recognized compensation expense for RSUs of $ for the three months ended March 31,
2024, which is included in payroll and benefits in the condensed consolidated statements of operations. There was no share-based compensation
recognized for the three months ended March 31, 2023. As of March 31, 2024, unrecognized compensation expense related to RSUs of
approximately $
The following table sets forth the activity for the RSUs:
| Number
of Shares | Weighted
Average Grant Date Fair Value | |||||||||
| Outstanding (nonvested), December 31, 2023 | $ | |||||||||
| Granted | ||||||||||
| Forfeited | ||||||||||
| Vested | ( | ) | ||||||||
| Outstanding (nonvested), March 31, 2024 | $ | |||||||||
NOTE 16 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. The Company is not aware of any pending litigation as of the date of this report and, therefore, in the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows.
NOTE 17 — SUBSEQUENT EVENTS
On April 29, 2024, the Company
issued a nonconvertible promissory note to its CEO in the amount of $
On
May 1, 2024, JDDC Elemental LLC (“Midnight Theatre”) issued an unsecured convertible promissory note to the Company
with an aggregate principal of $
On May 14, 2024, the Company entered into an agreement with the sellers of Special Projects to amend the Special Projects Purchase Agreement to revise the working capital mechanism to provide that the working capital surplus, as defined in the Special Projects Purchase Agreement, plus a ten percent premium be paid to the sellers of Special Projects by issuing 714,578 shares of its common stock on May 15, 2024.
| 18 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading independent entertainment marketing and production company. We were first incorporated in the State of Nevada on March 7, 1995 and domesticated in the State of Florida on December 4, 2014. Our common stock trades on The Nasdaq Capital Market under the symbol “DLPN.”
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 (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. Viewpoint adds full-service creative branding and production capabilities to our marketing group. The Digital Dept. provides influencer marketing capabilities through divisions dedicated to influencer talent management, brand campaign strategy and execution, and influencer event ideation and production. Special Projects is the entertainment industry’s leading celebrity booking firm, specializing in uniting brands and events with celebrities and influencers across the entertainment, media, fashion, consumer product and tech industries. Dolphin’s legacy content production business, founded by our Emmy-nominated Chief Executive Officer, Bill O’Dowd, has produced multiple feature films and award-winning digital series, primarily aimed at family and young adult markets.
We have established an acquisition strategy based on identifying and acquiring companies that complement our existing entertainment publicity and marketing services and content production businesses. We believe that complementary businesses, such as public relations companies in new and distinct entertainment verticals, 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 Special Projects acquisition during 2023 (discussed below), and intend to complete at least one acquisition during 2024, but there is no assurance that we will be successful in doing so, whether in 2024 or at all.
We have also established an investment strategy, “Ventures” or “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 these Ventures. We intend to enter into additional investments during 2024, but there is no assurance that we will be successful in doing so, whether in 2024 or at all.
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, The Digital Dept. and Special Projects, and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, influencer marketing, celebrity booking and live event production, creative branding, and the production of promotional video content. The content production segment is composed of Dolphin Films, Inc. (“Dolphin Films”) and Dolphin Digital Studios, which produce and distribute feature films and digital content.
Entertainment Publicity and Marketing
Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and we have continued to grow organically through referrals and by actively soliciting new business. We earn revenues primarily from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers or celebrities, (viii) curating and booking celebrities for live events; and (ix) 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.
| 19 |
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. |
| • | Celebrity Booking and Live Event Programming – We arrange for brands and events to book celebrity and influencer talent. Our services include the creation of the strategy to elevate the brand or event through celebrity and/or influencer inclusion, to the booking of celebrities and influencers for commercial endorsements or appearances, to the curation of event lists and securing attendance, to the coordination and production of live events. We believe the expansion of brands seeking celebrity and/or influencer endorsements, as well as celebrity and/or influencers to attend brand-sponsored live events, will drive growth and revenue for the next several years. |
Content Production
Project Development and Related Services
We have a team that dedicates a portion of its time to identifying scripts, story treatments and novels for acquisition, development and production. The scripts can be for either digital, television or motion picture productions. We have acquired the rights to certain scripts that we intend to produce and release in the future, subject to obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical distribution.
We have completed development of several feature films, which means that we have completed the script and can begin pre-production once financing is obtained. We are planning to fund these projects through third-party financing arrangements, domestic distribution advances, pre-sales, and location-based tax credits, and if necessary, sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there is no assurance that we will be able to obtain the financing necessary to produce any of these feature films.
In June 2022, we entered into an agreement with IMAX Corporation (“IMAX”) to co-produce and co-finance a documentary motion picture on the flight demonstration squadron of the United States Navy called The Blue Angels. As of March 31, 2024, we had paid $2,250,000 in connection with this agreement. On April 25, 2023, IMAX entered into an acquisition agreement with Amazon Content Services LLC, (the “Amazon Agreement”) for the distribution rights of The Blue Angels. During the three months ended March 31, 2024, we recorded revenue of $3.4 million related to the Amazon Agreement. On February 22, 2024, we received $777,905 from IMAX, as a first installment in connection with the Amazon Agreement.
The Blue Angels documentary will be released in theatres on May 17, 2024 and available for streaming on Amazon Prime Video on May 23, 2024.
| 20 |
Revenues
For the three months ended March 31, 2024 and 2023, we derived a majority of our revenues from our entertainment publicity and marketing segment. During the three months ended March 31, 2024, we generated income in our content production segment related to the “The Blue Angels” documentary motion picture.
The table below sets forth the percentage of total revenue derived from our segments for the three months ended March 31, 2024 and 2023:
For the three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| Entertainment publicity and marketing | $ | 78 | % | $ | 100 | % | ||
| Content production | 22 | % | — | % | ||||
| Total revenue | $ | 100 | % | $ | 100 | % | ||
Expenses
Our expenses consist primarily of:
| (1) | Direct costs – includes the amortization of film production costs related to The Blue Angels, using the individual film-forecast-computation method which amortizes film production costs in the same ratio as the current period actual revenue bears to estimated remaining unrecognized ultimate revenue. Direct costs also include certain costs of services, as well as certain production costs, related to our entertainment publicity and marketing business. |
| (2) | Payroll and benefits expenses – includes wages, stock-based compensation, payroll taxes and employee benefits. |
| (3) | Selling, general and administrative expenses – includes all overhead costs except for payroll, depreciation and amortization and legal and professional fees that are reported as a separate expense item. |
| (4) | Depreciation and amortization – includes the depreciation of our property and equipment and amortization of intangible assets and leasehold improvements. |
| (5) | Change in fair value of contingent consideration – includes changes in the fair value of the contingent earn-out payment obligations for the Company’s acquisitions. The fair value of the related contingent consideration is measured at every balance sheet date and any changes recorded on our consolidated statements of operations. There was no contingent consideration outstanding during the three months ended March 31, 2024. |
| (6) | Legal and professional fees – includes fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants. |
Other Income and Expenses
For the three months ended March 31, 2024 and 2023, other income and expenses consisted primarily of: (1) changes in fair value of convertible notes and warrants; (2) interest income; and (3) interest expense.
RESULTS OF OPERATIONS
Three months ended March 31, 2024 as compared to three months ended March 31, 2023
Revenues
For the three months ended March 31, 2024 and 2023 revenues were as follows:
For the three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| Entertainment publicity and marketing | $ | 11,814,751 | $ | 9,891,421 | ||||
| Content production | 3,421,141 | — | ||||||
| Total revenue | $ | 15,235,892 | $ | 9,891,421 | ||||
Revenues from entertainment publicity and marketing increased by approximately $1.9 million for the three months ended March 31, 2024 as compared to the same period in the prior year. The increase is primarily driven by increases across substantially all subsidiaries, as well as the inclusion of $0.8 million of Special Projects revenues for 2024, which was not present in 2023.
Revenues from content production increased by approximately $3.4 million in connection with revenue generated from The Blue Angels documentary film, which will be released in theatres on May 17, 2024.
| 21 |
Expenses
For the three months ended March 31, 2024 and 2023, our expenses were as follows:
For the three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Expenses: | ||||||||
| Direct costs | $ | 2,319,227 | $ | 218,896 | ||||
| Payroll and benefits | 9,574,251 | 9,054,730 | ||||||
| Selling, general and administrative | 1,976,990 | 1,871,937 | ||||||
| Depreciation and amortization | 553,103 | 533,096 | ||||||
| Change in fair value of contingent consideration | — | 15,485 | ||||||
| Legal and professional | 647,781 | 763,277 | ||||||
| Total expenses | $ | 15,071,352 | $ | 12,457,421 | ||||
Direct costs increased by approximately $2.1 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The increase in direct costs is directly attributable to (i) $1.8 million of capitalized production costs being amortized for the production of The Blue Angels and (ii) the increase in subsidiaries’ revenues as compared with the same periods in the prior year.
Payroll and benefits expenses increased by approximately $0.5 million, for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to the inclusion of the Special Projects payroll expenses in the three months ended March 31, 2024.
Selling, general and administrative expenses increased by approximately $0.1 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The small increase was primarily due the inclusion of Special Projects selling, general and administrative expenses in the three months ended March 31, 2024.
Depreciation and amortization remained consistent for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The minor increase, related primarily to the amortization of Special Projects property and equipment during the three months ended March 31, 2024.
Change in fair value of the contingent consideration was a loss of $15.5 thousand for the three months ended March 31, 2023. As all contingent consideration was settled by June 2023, there were no changes in fair value of contingent consideration for the three months ended March 31, 2024. The main components of the change in fair value of contingent consideration for the three months ended March 31, 2023 were the following:
| • | Be Social: losses of $15.5 thousand the three months ended March 31, 2023. The Company settled this contingent consideration on April 25, 2023 through a combination of $500,000 in cash and 148,687 shares of the Company’s stock, with a value of $272,047. |
Legal and professional fees decreased by approximately $0.1 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023 due to reductions of $0.8 million in audit and accounting expenses and $40.4 thousand of legal fees, offset by a small increase in other professional fees.
Other Income and Expenses
For the three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Other Income and expenses: | ||||||||
| Change in fair value of convertible note | $ | 25,000 | $ | (10,444 | ) | |||
| Change in fair value of warrants | 5,000 | — | ||||||
| Interest income | 5,869 | 102,017 | ||||||
| Interest expense | (503,637 | ) | (355,870 | ) | ||||
| Total other (expenses) income, net | $ | (467,768 | ) | $ | (264,297 | ) | ||
Change in fair value of Convertible Notes at Fair Value – We elected the fair value option for one convertible note issued in 2020. The fair value of this convertible note is remeasured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. For the three months ended March 31, 2024 and 2023, we recorded a $25.0 thousand gain and $10.4 thousand loss, respectively, in the fair value of the convertible notes issued in 2020. None of the decrease in the value of the convertible notes was attributable to instrument specific credit risk and as such, all of the gain in the change in fair value was recorded within net loss.
| 22 |
Change in fair value of warrants – Warrants issued with convertible notes payable issued in 2020, were initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant liability recognized as other income or expense. The fair value of the 2020 warrants that were not exercised decreased by approximately $5.0 thousand during the three months ended March 31, 2024; therefore, we recorded a change in the fair value of the warrants for the three months ended March 31, 2024 for that amount on our condensed consolidated statement of operations. We did not record any change in the value of the warrants for the three months ended March 31, 2023 on our condensed consolidated statements of operations.
Interest income – Interest income decreased by $0.1 million for the three months ended March 31, 2024 as compared to the same period in the prior year, primarily due to the write-off of notes receivable in the fourth quarter of 2023.
Interest expense – Interest expense increased by $0.1 million for the three months ended March 31, 2024, respectively, as compared to the same period in the prior year. The increases were primarily due to increased convertible and nonconvertible notes and the term loan outstanding during 2023 as compared to the same period in the prior year.
Income Taxes
We recorded an income tax expense of approximately $24 thousand and $27 thousand for the three months ended March 31, 2024 and 2023, respectively, which reflects the accrual of a valuation allowance in connection with the limitations of our indefinite lived tax assets to offset our indefinite lived tax liabilities. To the extent the tax assets are unable to offset the tax liabilities, we have recorded a deferred expense for the tax liability (a “naked credit”).
Equity in losses of unconsolidated affiliates
Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investments. The Company impaired its equity investment in the unconsolidated affiliates during the fourth quarter of 2023, therefore no income or loss has been recorded during the three months ended March 31, 2024.
For the three months ended March 31, 2023, we recorded losses of approximately $30.0 thousand and $82.0 thousand from our equity investments in Crafthouse Cocktails and Midnight Theatre, respectively.
Net Loss
Net loss was approximately $0.3 million or $0.02 per share based on 18,477,825 weighted average shares outstanding for basic loss per share and $0.02 per share based on 18,605,702 weighted average shares outstanding for fully diluted loss per share for the three months ended March 31, 2024. Net loss was approximately $3.0 million or $0.23 per share based on 12,640,285 weighted average shares outstanding for both basic and fully diluted loss per share for the three months ended March 31, 2023. The change in net loss for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, is related to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Statement of Cash Flows Data: | ||||||||
| Net cash used in operating activities | $ | (983,229 | ) | $ | (1,424,822 | ) | ||
| Net cash provided by financing activities | 934,957 | 3,213,503 | ||||||
| Net decrease in cash and cash equivalents and restricted cash | (48,272 | ) | (1,788,681 | ) | ||||
| Cash and cash equivalents and restricted cash, beginning of period | 7,560,691 | 7,197,849 | ||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 7,512,419 | $ | 8,986,530 | ||||
Operating Activities
Cash used in operating activities was $1.0 million for the three months ended March 31, 2024, a change of $0.4 million from cash used in operating activities of $1.4 million for the three months ended March 31, 2023. The decrease in net cash used in operations was primarily as a result of $2.7 million of decreased net loss for the period, offset by a $1.7 million increase in non-cash items such as depreciation and amortization, bad debt expense, share-based compensation, impairment of capitalized production costs, impairment of goodwill and intangible asset and other non-cash losses and a $4.0 million net change in working capital.
Investing Activities
There were no cash flows used in investing activities for the three months ended March 31, 2024 or 2023.
| 23 |
Financing Activities
Cash flows provided by financing activities for the three months ended March 31, 2024 were $0.9 million, which mainly related to:
Inflows:
| • | $0.9 million of proceeds from notes payable; | |
| • | $0.5 million of proceeds from the LP 2022 Purchase Agreement (described below); and |
Outflows:
| • | $0.2 million of repayment of existing term loan; | |
| • | $0.2 million of payment of interest to related party; and | |
| • | $17.9 thousand on principal payments on finance leases. |
Cash flows provided by financing activities for the three months ended March 31, 2023 were $3.2 million, which mainly related to:
Inflows:
| • | $2.2 million of proceeds from notes payable; | |
| • | $0.8 million of proceeds from convertible notes payable; and | |
| • | $0.5 million of proceeds from the LP 2022 Purchase Agreement. |
Outflows:
| • | $0.3 million of repayment of notes payable, term loan, and interest to related party. |
Debt and Financing Arrangements
Total debt amounted to $20.0 million as of March 31, 2024 compared to $19.3 million as of December 31, 2023, an increase of $0.7 million, primarily related to an increase in related party nonconvertible promissory notes.
Our debt obligations in the next twelve months from March 31, 2024 of $4.9 million remained consistent with those of December 31, 2023. We expect our current cash position, cash expected to be generated from our operations and other availability of funds, as detailed below, to be sufficient to meet our debt requirements.
2022 Lincoln Park Transaction
On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park, pursuant to which the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of the Company’s common stock from time to time over a 36-month period.
The Company may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of its common stock on any business day (a “Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances up to 75,000 shares if the closing price is not below $7.50 and up to 100,000 shares if the closing price is not below $10.00, provided that Lincoln Park’s committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the event we purchase the full amount allowed for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as accelerated and additional accelerated purchases. The purchase price of shares of the Company’s common stock related to the future funding will be based on the then prevailing market prices of such shares at the time of sales as described in the LP 2022 Purchase Agreement.
During the three months ended March 31, 2024, the Company sold 350,000 shares of its common stock, at prices ranging between $1.27 and $1.53 and received proceeds of $495,200. Subsequent to March 31, 2024, the Company sold 300,000 shares of Common Stock at prices ranging between $1.09 and $1.27 and received proceeds of $350,150.
The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of its common stock in the future (“put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it has insignificant value as of March 31, 2024.
Convertible Notes Payable
As of March 31, 2024, the Company has ten convertible notes payable outstanding. The convertible notes payable bear interest at a rate of 10% per annum, with initial maturity dates ranging between the second anniversary and the sixth anniversary of their respective issuances. The balance of each convertible note payable and any accrued interest may be converted at the noteholder’s option at any time at a purchase price based on a 90-day average closing market price per share of the common stock. Three of the convertible notes payable may not be converted at a price less than $2.50 per share, four of the convertible notes payable may not be converted at a price less than $2.00 per share, and three of the convertible notes payable may not be converted at a price less than $1.00 per share. As of both March 31, 2024 and December 31, 2023, the principal balance of the convertible notes payable $5,100,000 was recorded in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance sheets.
| 24 |
The Company recorded interest expense related to these convertible notes payable of $127,750 and $144,556 during the three months ended March 31, 2024 and 2023, respectively. In addition, the Company made cash interest payments amounting to $127,750 and $137,597 during the three months ended March 31, 2024 and 2023, respectively, related to the convertible notes payable.
As of both March 31, 2024 and December 31, 2023, the principal balance of the convertible notes payable of $5,100,000 was recorded in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance sheets.
Convertible Note at Fair Value
The Company has one convertible promissory note outstanding with aggregate principal amount of $500,000 as of March 31, 2024 for which it elected the fair value option. As such, the estimated fair value of the note was recorded on its issue date. At each balance sheet date, the Company records the fair value of the convertible promissory note with any changes in the fair value recorded in the condensed consolidated statements of operations.
The Company had a balance of $330,000 and $355,000 in noncurrent liabilities as of March 31, 2024 and December 31, 2023, respectively, on its condensed consolidated balance sheets related to the convertible promissory note measured at fair value.
The Company recorded a gain in fair value of $25,000 and a loss in fair value of $10,444 for the three months ended March 31, 2024 and 2023, respectively, on its condensed consolidated statements of operations related to this convertible promissory note at fair value.
The Company recorded interest expense related to this convertible promissory note at fair value of $9,863 for both the three months ended March 31, 2024 and 2023. In addition, the Company made cash interest payments amounting to $9,863 for both the three months ended March 31, 2024 and 2023, related to this convertible promissory note at fair value.
Nonconvertible Promissory Notes
As of both March 31, 2024 and December 31, 2023, the Company had a balance of $500,000, respectively, net of debt discounts recorded as current liabilities and $3,380,000, in noncurrent liabilities on its condensed consolidated balance sheets related to these unsecured nonconvertible promissory notes. The nonconvertible promissory notes bear interest at a rate of 10% per annum and mature between November 2024 and March 2029.
The Company recorded interest expense related to these nonconvertible promissory notes of $97,000 and $56,585 for the three months ended March 31, 2024 and 2023, respectively. The Company made interest payments of $97,000 and $34,264 during the three months ended March 31, 2024 and 2023, respectively, related to the nonconvertible promissory notes.
Nonconvertible unsecured promissory notes - Socialyte Promissory Note
In connection with the purchase agreement with Socialyte (“Socialyte Purchase Agreement”), the Company entered into a promissory note with Socialyte (“the Socialyte Promissory Note”) amounting to $3,000,000. The Socialyte Promissory Note matured on September 30, 2023 and was payable in two payments: $1,500,000 on June 30, 2023 and $1,500,000 on September 30, 2023. The Socialyte Promissory Note carries an interest of 4% per annum, which accrues monthly, and all accrued interest was to be due and payable on September 30, 2023.
The Socialyte Purchase Agreement allows the Company to offset a working capital deficit against the Socialyte Promissory Note. As such, on June 30, 2023, the Company deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the Socialyte Seller.
The Company recorded interest expense related to these Socialyte Promissory Note of $30,000 for the three months ended March 31, 2024.
Nonconvertible Promissory Note from Related Parties
On January 16, 2024, the Company issued an unsecured nonconvertible promissory note in the amount of $900,000 to its CEO’s brother Donald Scott Mock and received proceeds of $900,000. The nonconvertible promissory note bears interest at 10% per annum and matures on January 16, 2029. During the three months ended March 31, 2024, the Company recorded $18,500 of interest expense in its condensed consolidated statement of operations and had a balance of $18,500 recorded in accrued interest – related party in its condensed consolidated balance sheet as of March 31, 2024, related to this related party nonconvertible promissory note.
BankUnited Loan Agreement
The Company entered into a loan agreement with BankUnited (“BankUnited Loan Agreement”), which includes: (i) $5,800,000 secured term loan (“BKU Term Loan”), (ii) $750,000 of a secured revolving line of credit (“BKU Line of Credit”), and (iii) $400,000 Commercial Card (“BKU Commercial Card”). The BankUnited Loan Agreement refinanced the Company’s previous credit facility with BankProv.
| 25 |
The BKU Term Loan carries a 1.0% origination fee and matures in September 2028, the BKU Line of Credit carries an initial origination fee of 0.5% and an 0.25% fee on each annual anniversary and matures in September 2026; the BKU Commercial Card does not have any initial or annual fee and matures in September 2026. The BKU Term Loan has a declining prepayment penalty equal to 5% in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five of the outstanding balance. The BKU Line of Credit and BKU Commercial Card can be repaid without any prepayment penalty.
Interest on the BKU Term Loan accrues at 8.10% fixed rate per annum. Principal and interest on the BKU Term Loan shall be payable on a monthly basis based on a 5-year amortization. Interest on the BKU Line of credit is payable on a monthly basis, with all principal due at maturity. The BKU Commercial Card payment is due in full at the end of each bi-weekly billing cycle.
The BankUnited Credit Facility contains financial covenants tested semi-annually on a trailing twelve-month basis that require the Company to maintain a minimum debt service coverage ratio of 1.25:1.00 and a maximum funded debt/EBITDA ratio of 3.00:1.00. In addition, the BankUnited Credit Facility contains a liquidity covenant that requires the Company to hold a cash balance at BankUnited with a daily minimum deposit balance of $1,500,000. As of March 31, 2024, the Company was in compliance with the covenants of the Bank United Credit Facility.
As of March 31, 2024 and December 31, 2023, the Company had a balance of $5,244,498 and $5,482,614 of principal outstanding under the BKU Term Loan, respectively, net of debt issuance costs of $75,701 and $79,907, respectively. As of March 31, 2024 and December 31, 2023, the Company had a balance of $400,000 of principal outstanding under the BKU Line of Credit.
Amortization of debt origination costs under the BKU Credit Facility is included as a component of interest expense in the condensed consolidated statements of operations and amounted to approximately $4,206 for the three months ended March 31, 2024.
During the three months ended March 31, 2024, the Company did not use the BKU Commercial Card.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are discussed in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2023.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements.
We consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
| 26 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, as well as statements, other than historical facts, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. These statements are often characterized by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” ”intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “goal” or “continue” or the negative of these terms or other similar expressions.
Forward-looking statements are based on assumptions and assessments made in light of our experience and perception of historical trends, current conditions, expected and future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of our control. You should not place undue reliance on these forward-looking statements, which reflect our views only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update these forward-looking statements in the future, except as required by applicable law.
Risks that could cause actual results to differ materially from those indicated by the forward-looking statements include those described as “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on the Effectiveness of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 1, 2024, which have not been remediated as of the date of the filing of this report.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
We have begun the process of designing and implementing effective internal controls measures to improve our internal control over financial reporting and remediate the material weaknesses. Our internal control remediation efforts include the following:
| • | Developing formal policies and procedures over the Company’s fraud risk assessment and risk management function; |
| • | Developing policies and procedures to enhance the precision of management review of financial statement information and control impact of changes in the external environment; |
| • | We have entered into an agreement with a third-party consultant that assists us in analyzing complex transactions and the appropriate accounting treatment; |
| • | We are enhancing our policies, procedures and documentation of period end closing procedures; |
| • | Implementing policies and procedures to enhance independent review and documentation of journal entries, including segregation of duties; and |
| • | Reevaluating our monitoring activities for relevant controls. |
Management is beginning the process of implementing and monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Management believes our planned remedial efforts will effectively remediate the identified material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address control deficiencies or determine it necessary to modify the remediation plan described above.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting for the fiscal quarter covered by this report.
| 27 |
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. In the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows. The Company is not aware of any pending litigation as of the date of this report.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on April 1, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
During
the quarter ended March 31, 2024,
Item 1.01 Entry into a Material Definitive Agreement
As previously disclosed, on October 2, 2023 (the “Closing Date”), Dolphin Entertainment, Inc., a Florida corporation (the “Company”), acquired all of the issued and outstanding membership interests of Special Projects Media LLC, a New York limited liability company (“Special Projects”), pursuant to a membership interest purchase agreement dated the Closing Date (the “Purchase Agreement”), by and among the Company and the sellers signatory thereto (collectively, the “Sellers”). Special Projects is a New York-based talent booking and creative content agency.
On May 14, 2024, the parties to the Purchase Agreement entered into an Amendment to the Membership Interest Purchase Agreement (the “Amendment”), pursuant to which the parties amended the Purchase Agreement to revise the working capital adjustment mechanism to provide that the Working Capital Surplus (as defined in the Purchase Agreement) plus a ten percent premium will be paid to the Sellers by issuing 714,578 shares of common stock of the Company on May 15, 2024.
The foregoing description of the Amendment does not purport to be complete and is subject to, and qualified in its entirety by reference to full text of the Amendment, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 2.1 hereto, and is incorporated herein by reference
| 28 |
ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 2.1* | Amendment to Share Purchase Agreement | |
| 31.1* | Certification of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1# | Certification of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2# | Certification of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. | |
| ** | Previously filed. | |
| # | Furnished herewith. |
| 29 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized May 15, 2024.
| DOLPHIN ENTERTAINMENT, INC. | ||
| By: | /s/ William O’Dowd IV | |
| Name: William O’Dowd IV | ||
| Chief Executive Officer | ||
| By: | /s/ Mirta A Negrini | |
| Name: Mirta A Negrini | ||
| Chief Financial Officer |
| 30 |