Reconciliation of cash, cash equivalents and restricted
cash. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statements of cash
flows that sum to the total of the same such amounts shown in the statements of cash flows:
The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
NOTES TO
CONDENSED Consolidated FINANCIAL Statements
(Unaudited)
NOTE 1 – GENERAL
Dolphin Entertainment, Inc.,
a Florida corporation (the “Company,” “Dolphin,” “we,” “us” or “our”), is
a leading independent entertainment marketing and premium content development company. Through its acquisitions of 42West LLC (“42West”),
The Door Marketing Group, LLC (“The Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation
Incorporated (“Viewpoint”), Be Social Public Relations, LLC (“Be Social”) and B/HI Communications, Inc. (“B/HI”),
the Company provides expert strategic marketing and publicity services throughout the United States of America (“U.S.”) to
virtually all of the major film studios and many of the leading streaming services, as well as to independent and digital content providers,
and A-list celebrity talent, including actors, directors, producers, celebrity chefs, social media influencers and recording artists.
The Company also provides strategic marketing publicity services and creative brand strategies for a wide variety of consumer brands,
including prime hotel and restaurant groups, throughout the U.S. Dolphin’s content production business is a long established, leading
independent producer, committed to distributing premium, best-in-class film and digital entertainment. Dolphin produces original feature
films and digital programming primarily aimed at family and young adult markets.
Impact of COVID-19
The continued spread of new COVID-19
variants did not have a significant impact on our business during the quarter ended September 30, 2022. The future course of the pandemic
could have adverse effects in the U.S and global economies and thus negatively impact our business and financial results.
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films,
Inc. (“Dolphin Films”), Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC, Dolphin JB Believe Financing, LLC, Dolphin
JOAT Productions, LLC, 42West, The Door, Viewpoint, Shore Fire, Be Social and B/HI. The Company applies the equity method of accounting
for its investments in entities for which it does not have a controlling financial interest, but over which it has the ability to exert
significant influence.
The unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.
GAAP”) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of its financial position as of September 30, 2022, and its results of operations and cash flows for the three and nine months
ended September 30, 2022 and 2021. All significant inter-company balances and transactions have been eliminated from the condensed consolidated
financial statements. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2022. The condensed consolidated balance sheet as of December 31, 2021 has
been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S.
GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together
with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2021.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
Use of Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial
statements relate to the estimates in the fair value of acquisitions, estimates in assumptions used to calculate the fair value of certain
liabilities, realizability of notes receivable and impairment assessments for investment in capitalized production costs, goodwill and
long-lived assets. Management bases its estimates on historical experience and on other various assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ materially from such estimates under different assumptions
and conditions.
Due to COVID-19 and the uncertainty
of the extent of the impacts related thereto, certain estimates and assumptions may require increased judgment. As events continue to
evolve and additional information becomes available, these estimates may change in future periods. It is difficult to predict what the
ongoing impact of the pandemic will be on future periods.
Update to Significant Accounting Policies
The Company’s significant
accounting policies are detailed in "Note 2: Summary of Significant Accounting Policies" within Item 8 of our Annual Report
on Form 10-K for the year ended December 31, 2021. As a result of entering into a collaborative arrangement in June 2022, the
Company updated its revenue recognition accounting policy to include the information as detailed below. There were no other significant
changes to the Company’s accounting policies during the three and nine months ended September 30, 2022.
Revenue Recognition
The Company analyzes our collaboration
agreements to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed
by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial
success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, the Company considers whether
the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaboration guidance and
those that are more reflective of a vendor-customer relationship and, therefore, within the scope of the revenue with contracts with customer
guidance. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties
in the arrangement.
For collaboration arrangements
that are in the scope of the collaboration guidance, we may analogize to the revenue from contracts with customers’ guidance for some aspects
of these arrangements. Revenue from transactions with collaboration participants is presented apart from revenue with contracts with customers
in our condensed consolidated statements of operations. To date, there has been no revenue generated from collaboration arrangements.
Recent Accounting Pronouncements
Accounting Guidance Not Yet Adopted
In
October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08,
“Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”,
to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice
and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized
by the acquirer. The guidance will be effective for the Company on January 1, 2023. The Company is currently evaluating the impact that
the adoption of this standard will have on its condensed consolidated financial statements in connection with any future business combinations.
In June 2016, the FASB issued
new guidance on measurement of credit losses (ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”)
with subsequent amendments issued in November 2018 (ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the accounting for
credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the
allowance for credit losses. It is applicable to trade accounts receivable. The guidance will be effective for the Company on January
1, 2023 with a cumulative-effect adjustment, if any, to retained earnings as of the beginning of the year of adoption. The Company is
in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s condensed consolidated financial statements
and disclosures.
Reclassifications
Certain prior year amounts have
been reclassified to conform with current year presentation. These reclassifications had no impact on the Company’s condensed consolidated
statements of operations or condensed consolidated statements of cash flows.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
NOTE 2 – REVENUE
Disaggregation of Revenue
The Company’s principal
geographic markets are within the U.S. The following is a description of the principal activities, by reportable segment, from which we
generate revenue. For more detailed information about reportable segments, see Note 15.
Entertainment Publicity and Marketing
The Entertainment Publicity and
Marketing (“EPM”) segment generates revenue from diversified marketing services, including public relations, entertainment
and hospitality content marketing, strategic marketing consulting and content production of marketing materials. Within the EPM segment,
we typically identify one performance obligation, the delivery of professional publicity services, in which we typically act as the principal.
Fees are generally recognized on a straight-line or monthly basis, as the services are consumed by our clients, which approximates the
proportional performance on such contracts.
We also enter into management
agreements with a roster of social media influencers and are paid a percentage of the revenue earned by the social media influencer. Due
to the short-term nature of these contracts, in which we typically act as the agent, the performance obligation is typically completed
and revenue is recognized net at a point in time, typically the date of publication.
Content Production
The Content Production (“CPD”)
segment generates revenue from the production of original motion pictures and other digital content production. In the CPD segment, we
typically identify performance obligations depending on the type of service, for which we generally act as the principal. Revenue from motion
pictures is recognized upon transfer of control of the licensing rights of the motion picture or web series to the customer. For minimum
guarantee licensing arrangements, the amount related to each performance obligation is recognized when the content is delivered, and the
window for exploitation right in that territory has begun, which is the point in time at which the customer is able to begin to use and
benefit from the content. For sales or usage-based royalty income, revenue is recognized starting at the exhibition date and is based
on the Company’s participation in the box office receipts of the theatrical exhibitor and the performance of the motion picture.
The revenues recorded by the
EPM and CPD segments is detailed below:
Schedule of Revenue by Segment | |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months Ended September 30, | | |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Entertainment publicity and marketing | |
$ | 9,899,013 | | |
$ | 9,399,432 | | |
$ | 29,366,748 | | |
$ | 25,219,793 | |
Content production | |
| — | | |
| — | | |
| — | | |
| — | |
Total Revenues | |
$ | 9,899,013 | | |
$ | 9,399,432 | | |
$ | 29,366,748 | | |
$ | 25,219,793 | |
Contract Balances
The opening and closing balances
of our contract asset and liability balances from contracts with customers as of September 30, 2022 and December 31, 2021 were as follows:
Schedule of contract asset and liability | |
| | | |
|
| |
| |
| |
Contract Assets | | |
Contract Liabilities |
Balance as of December 31, 2021 | |
$ | 62,500 | | |
$406,373 |
Balance as of September 30, 2022 | |
| — | | |
911,970 |
Change | |
$ | (62,500 | ) | |
$505,597 |
Contract
assets are comprised of services provided for which consideration has not been received and for which payments are not unconditional.
The change in the contract asset balance relates to the transfer to accounts receivable when the right to payment becomes unconditional.
Contract assets are presented within other current assets in the condensed consolidated balance sheets.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
Contract liabilities are recorded
when the Company receives advance payments from customers for public relations projects or as deposits for promotional or brand-support
video projects. Once the work is performed or the projects are delivered to the customer, the contract liabilities are deemed earned and
recorded as revenue. Advance payments received are generally for short duration and are recognized once the performance obligation of
the contract is met. Contract liabilities are presented within deferred revenue in the condensed consolidated balance sheets. The change
in the contract liability balance relates to the advanced consideration received from customers under the terms of our contracts, primarily
related to fees, which are generally recognized shortly after billing.
Revenues for the three and nine months ended September
30, 2022 and 2021 include the following:
Schedule of Revenues | |
| | |
| | |
| | |
| |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Amounts included in the beginning of year contract liability balance | |
$ | — | | |
$ | 10,000 | | |
$ | 329,937 | | |
$ | 347,221 | |
Remaining performance obligations
As of September 30, 2022, we
had approximately $911,970 of unsatisfied performance obligations, of which $849,469 are expected to be recognized
in the next twelve months, with the remainder recognized between twelve and fourteen months from September 30, 2022.
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of September 30, 2022, the
Company has a balance of $20,021,357 of goodwill on its condensed consolidated balance sheet arising from the prior acquisitions of 42West,
The Door, Viewpoint, Shore Fire, Be Social and B/HI. All of the Company’s goodwill is related to the entertainment, publicity and
marketing segment. There were no changes in the carrying value of goodwill during the three and nine months ended September 30, 2022.
The Company evaluates goodwill
in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are
not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) significant
decline in market capitalization or (4) an adverse action or assessment by a regulator. There were no triggering events noted during the
three and nine month period ended September 30, 2022, that would require the Company to reassess goodwill for impairment outside of its
regular annual impairment test.
Intangible Assets
Finite-lived intangible assets consisted
of the following as of September 30, 2022 and December 31, 2021:
Schedule of Intangible Assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | | |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
Intangible assets subject to amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Customer relationships | |
$ | 8,290,000 | | |
$ | 5,531,265 | | |
$ | 2,758,735 | | |
$ | 8,290,000 | | |
$ | 4,880,016 | | |
$ | 3,409,984 | |
Trademarks and trade names | |
| 4,490,000 | | |
| 2,157,167 | | |
| 2,332,833 | | |
| 4,490,000 | | |
| 1,797,917 | | |
| 2,692,083 | |
Non-compete agreements | |
| 690,000 | | |
| 665,000 | | |
| 25,000 | | |
| 690,000 | | |
| 650,000 | | |
| 40,000 | |
| |
$ | 13,470,000 | | |
$ | 8,353,432 | | |
$ | 5,116,568 | | |
$ | 13,470,000 | | |
$ | 7,327,933 | | |
$ | 6,142,067 | |
Amortization expense associated
with the Company’s intangible assets was $341,833 and $394,998 for the three months ended September 30, 2022 and 2021, respectively,
and $1,025,499 and $1,184,994 for the nine months ended September 30, 2022 and 2021, respectively.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
Amortization expense related to
intangible assets for the remainder of 2022 and thereafter is as follows:
Schedule of amortization expense related to intangible assets for the next five years |
|
|
|
2022 |
$ |
341,833 |
|
2023 |
|
1,227,824 |
|
2024 |
|
991,715 |
|
2025 |
|
961,373 |
|
2026 |
|
934,001 |
|
Thereafter |
|
659,822 |
|
Total |
$ |
5,116,568 |
|
NOTE 4 —ACQUISITIONS
B/HI Communications, Inc.
Effective January 1, 2021, the
Company acquired all of the issued and outstanding shares of B/HI, a California corporation (the “B/HI Purchase”) pursuant
to a share purchase agreement (the “B/HI Share Purchase Agreement”) between the Company and Dean G. Bender and Janice L. Bender,
as co-trustees of the Bender Family Trust dated May 6, 2013 (collectively, the “B/HI Sellers). B/HI is an entertainment public relations
agency that specializes in corporate and product communications programs for interactive gaming, e-sports, entertainment content and consumer
product organizations.
The total consideration paid
to the B/HI Seller in respect to the B/HI Purchase is $0.8 million of shares of common stock based on a 30-day trailing trading average
closing price immediately prior to, but not including, the applicable payment date adjusted for working capital, cash targets and the
B/HI indebtedness as defined in the B/HI Share Purchase Agreement. During 2021, subsequent to the initial measurement, the B/HI Seller
achieved certain financial performance targets pursuant to the B/HI Share Purchase Agreement and earned an additional $1.1 million, which
was paid by $0.6 million in cash and the remainder in common stock, which was settled by the issuance of 163,369 shares of common stock
during the second quarter of 2022 pursuant to the B/HI Share Purchase Agreement. The common stock issued as part of the consideration
has not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Acquisition related costs for
the B/HI purchase amounted to $22,907 and are included in acquisition costs in the condensed consolidated statements of operations for
the nine months ended September 30, 2021. The condensed consolidated statements of operations includes revenues from B/HI amounting to
$1,082,856 and $2,509,697 for the three and nine months ended September 30, 2021, respectively. The measurement period of the BHI
purchase ended January 1, 2022.
NOTE 5 — NOTES RECEIVABLE
The notes receivable held by
the Company are unsecured convertible note receivables from JDDC Elemental LLC (“Midnight Theatre”) (the “Notes Receivable”).
The Notes Receivable are recorded at their principal face amount plus accrued interest. Due to their short-term maturity and conversion
terms, these have been recorded at the face value of the note and an allowance for credit losses has not been established.
Midnight Theatre
As of September 30, 2022, the
Midnight Theatre notes amount to $4,323,153, inclusive of $215,073 of interest receivable, and are convertible at the option of the Company
into Class A and B Units of Midnight Theatre. During the three and nine months ended September 30, 2022,
Midnight Theatre issued nine and sixteen unsecured convertible promissory notes, respectively, to the Company (the “Midnight Theatre
Notes”) with an aggregate principal of $869,280 and $3,108,080 respectively, each with a ten percent (10%) per annum simple coupon
rate, which have maturity dates six months from their respective issuance date. Before their initial maturity date, the maturity date
of the Midnight Theatre Notes was extended for an additional six months, and now mature between January and March 2023. The Midnight Theatre
Notes allow the Company to convert the principal and accrued interest into Class A and B units of Midnight Theatre on the respective maturity
date.
Crafthouse Cocktails
On November 30, 2021, Crafthouse
Cocktails issued a $500,000 unsecured convertible promissory note (the “Crafthouse Note”) to the Company with an eight percent
(8%) per annum simple coupon rate and a mandatorily redeemable date of February 1, 2022. The Crafthouse Note allows the Company to convert
the principal and accrued interest into membership interests of Crafthouse on the mandatory conversion date.
On February 1, 2022, the Crafthouse Note was converted and Dolphin was issued memberships interests of Crafthouse Cocktails; refer to
Note 6. There have been no notes receivable issued to Crafthouse Cocktails during the three and nine months ended September 30, 2022,
and no notes receivable remain outstanding as of September 30, 2022.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
NOTE 6 — EQUITY METHOD INVESTMENTS
Equity method investments are
included within other long-term assets in the condensed consolidated balance sheets. As of September 30, 2022, the investment in Midnight
Theatre and Crafthouse Cocktails amounted to $939,214 and $1,417,163, respectively.
Midnight Theatre
Hidden Leaf, the restaurant at
Midnight Theatre, commenced operations in early July 2022. During both the three and nine months ended September 30, 2022, the Company
recorded a loss of $60,786, in connection with its equity method investment in Midnight Theatre. The theater opened with limited capacity
in late September 2022 and is expected to fully open in January 2023.
Crafthouse Cocktails
During the nine months ended
September 30, 2022, the Crafthouse Note discussed in Note 5 was converted and Dolphin was issued common memberships interests of Crafthouse
Cocktails. During the nine months ended September 30, 2022, the Company received an additional $1,000,000 of equity investment in Stanton
South LLC in connection with an agreement to render marketing services to Crafthouse Cocktails during a two-year term commencing on November
15, 2021. In addition, during the three and nine months ended September 30, 2022, the Company recorded losses of $39,437 and $82,837,
respectively, in connection with its equity method investment in Crafthouse Cocktails.
NOTE 7 — OTHER CURRENT LIABILITIES
Other current liabilities consisted
of the following:
Schedule of Other liabilities | |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accrued funding under Max Steel production agreement | |
$ | 620,000 | | |
$ | 620,000 | |
Accrued audit, legal and other professional fees | |
| 698,304 | | |
| 429,299 | |
Accrued commissions | |
| 496,276 | | |
| 457,269 | |
Accrued bonuses | |
| 220,000 | | |
| 360,817 | |
Due to seller of Be Social | |
| — | | |
| 304,169 | |
Talent liability | |
| 2,343,906 | | |
| 2,908,357 | |
Accumulated customer deposits | |
| 801,247 | | |
| 1,206,864 | |
Other | |
| 512,867 | | |
| 563,809 | |
Other current liabilities | |
$ | 5,692,600 | | |
$ | 6,850,584 | |
NOTE 8 — DEBT
Total debt of the Company was
as follows as of September 30, 2022 and December 31, 2021:
Schedule of debt | |
| | | |
| | |
Debt Type | |
September 30, 2022 | | |
December 31, 2021 | |
Convertible notes payable | |
$ | 2,400,000 | | |
$ | 2,900,000 | |
Convertible note payable - fair value option | |
| 420,613 | | |
| 998,135 | |
Non-convertible promissory notes | |
| 896,895 | | |
| 1,176,644 | |
Loans from related party (see Note 9) | |
| 1,107,873 | | |
| 1,107,873 | |
Total debt | |
$ | 4,825,381 | | |
$ | 6,182,652 | |
Less current portion of debt | |
| (516,036 | ) | |
| (307,685 | ) |
Noncurrent portion of debt | |
$ | 4,309,345 | | |
$ | 5,874,967 | |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
The
table below details the maturity dates of the principal amounts for the Company’s debt as of September 30:
Schedule of Future Annual Contractual Principal Payment Commitments of Debt | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Debt Type | |
Maturity Date | |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Thereafter | |
Convertible notes payable | |
Ranging from August to September 2024 | |
$ | — | | |
$ | — | | |
$ | 2,400,000 | | |
$ | — | | |
$ | — | | |
$ | — | |
Convertible note payable - fair value option | |
March 2030 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 500,000 | |
Nonconvertible promissory notes | |
Ranging between June 2023 and December 2023(1) | |
| 27,935 | | |
| 868,960 | | |
| — | | |
| — | | |
| — | | |
| — | |
Loans from related party | |
July 2024 | |
| — | | |
| — | | |
| 1,107,873 | | |
| — | | |
| — | | |
| — | |
| |
| |
$ | 27,935 | | |
$ | 868,960 | | |
$ | 3,507,873 | | |
$ | — | | |
$ | — | | |
$ | 500,000 | |
| (1) | Pursuant to the terms of one of the nonconvertible promissory notes, the Company makes
monthly payments of principal and interest. This note matures on December 2023; however, the amounts in the 2022 column represent principal
payments to be made during the remainder of 2022. |
Convertible Notes Payable
As of September 30, 2022, the
Company has two outstanding convertible promissory notes in the aggregate principal amount of $2,400,000. The convertible promissory notes
bear interest at a rate of 10% per annum, with initial maturity dates on the second anniversary of their respective issuances. The maturity
date of each convertible promissory note has been extended by one year. The balance of each convertible promissory note and any accrued
interest may be converted at the noteholder’s option at any time at a purchase price based on a 90-day average closing market price
per share of the common stock but not at a price less than $2.50 per share.
The Company recorded interest
expense related to convertible notes payable of $80,278 and $88,000 during the three months ended September 30, 2022 and 2021, respectively,
and $215,278 and $130,482 during the nine months ended September 30, 2022 and 2021, respectively. In addition, the Company made cash interest
payments amounting to $199,445 and $109,176 during the nine months ended September 30, 2022 and 2021, respectively, related to the convertible
promissory notes.
As of September 30, 2022 and
December 31, 2021, the principal balance of the convertible promissory notes of $2,400,000 and $2,900,000, respectively, was recorded
in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance
sheets.
During the three and nine months
ended September 30, 2022, on August 8, 2022, the holder of one convertible note issued during 2021 converted
the principal balance of $500,000 into 125,604 shares of common stock at a conversion price of $3.98 per share. At the
moment of conversion, accrued interest related to this note amounted to $5,278 and was paid in cash.
Subsequent to September 30, 2022,
on October 4, 2022, October 18, 2022 and November 3, 2022, the Company issued three convertible promissory notes in the aggregate amount
of $1,300,000. The convertible promissory notes bear interest at 10% per annum, mature on the second anniversary of their issuance and
can be converted into shares of common stock, at the noteholder’s option at any time, at a purchase price based on a 90-day average
closing market price per share of the common stock. Two of the convertible notes may not be converted at a price less than $2.50 per share
and one of the convertible notes may not be converted at a price less than $2.00 per share.
Convertible Note Payable at Fair Value
The Company had one convertible
promissory note outstanding with aggregate principal amount of $500,000 as of September 30, 2022 for which it elected the fair value option.
As such, the estimated fair value of the note was recorded on its issue date. At each balance sheet date, the Company records the fair
value of the convertible promissory notes with any changes in the fair value recorded in the condensed consolidated statements of operations.
The Company had a balance of
$420,613 and $998,135 in noncurrent liabilities as of September 30, 2022 and December 31, 2021, 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 $45,642 and a loss in fair value of $223,923 for the three months ended September 30, 2022 and 2021, respectively, and a
gain in fair value of $577,522 and a loss in fair value of $826,398 for the nine months ended September 30, 2022 and 2021, respectively,
on its condensed consolidated statements of operations related to this convertible promissory note at fair value.
The Company recorded interest
expense related to the convertible note payable at fair value of $9,863 for both the three months ended September 30, 2022 and 2021,
and $29,589 for both the nine months ended September 30, 2022 and 2021, respectively. In addition, the Company made cash interest payments
amounting to $29,589 for both the nine months ended September 30, 2022 and 2021, related to the convertible promissory notes at fair value.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
Nonconvertible Promissory Notes
As of September 30, 2022, the Company
has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $896,895, which bear interest at a rate of 10% per
annum and mature between June and December 2023. On January 15, 2022, its maturity date, a non-convertible promissory note amounting to
$0.3 million was repaid in cash.
As of September 30, 2022 and December
31, 2021, the Company had a balance of $516,036 and $307,685, respectively, net of debt discounts recorded as current liabilities and
$380,859 and $868,959, respectively, in noncurrent liabilities on its condensed consolidated balance sheets related to these nonconvertible
promissory notes.
The Company recorded interest expense
related to these nonconvertible promissory notes of $22,719 and $30,317 for the three months ended September 30, 2022 and 2021, respectively,
and $70,996 and $92,765 for the nine months ended September 30, 2022 and 2021, respectively. The Company made interest payments of $73,127
and $93,186 during the nine months ended September 30, 2022 and 2021, respectively, related to the nonconvertible promissory notes.
NOTE 9 — LOANS FROM RELATED PARTY
The Company issued Dolphin Entertainment,
LLC (“DE LLC”), an entity wholly owned by the Company’s Chief Executive Officer, William O’Dowd (the “CEO”),
a promissory note (the “DE LLC Note”) which matures on July 31, 2024.
As of both September 30, 2022 and
December 31, 2021, the Company had a principal balance of $1,107,873, and accrued interest amounted to $138,712 and $55,849 as of September
30, 2022 and December 31, 2021, respectively. For the nine months ended September 30, 2022 and 2021, the Company did not repay any principal
balance on the DE LLC Note.
The Company recorded interest
expense of $27,924 for both the three months ended September 30, 2022 and 2021, and $82,863 for both the nine months ended September
30, 2022 and 2021, related to this loan from related party. The Company did not make cash payments during the nine months
ended September 30, 2022, related to this loan from related party. The Company made cash interest payments amounting to $81,621 during
the nine months ended September 30, 2021, related to this loan from related party.
NOTE 10 — FAIR VALUE MEASUREMENTS
The Company’s non-financial
assets measured at fair value on a nonrecurring basis include goodwill and intangible assets. The determination of our intangible fair
values includes several assumptions and inputs (Level 3) that are subject to various risks and uncertainties. Management believes it has
made reasonable estimates and judgments concerning these risks and uncertainties. All other financial assets and liabilities are carried
at amortized cost.
The Company’s cash balances
are representative of their fair values, as these balances are comprised of deposits available on demand. The carrying amounts of accounts
receivable, notes receivable, prepaid and other current assets, accounts payable and other non-current liabilities are representative
of their fair values because of the short turnover of these instruments.
Financial Disclosures about Fair Value of Financial
Instruments
The tables below set forth information
related to the Company’s consolidated financial instruments:
Schedule of consolidated financial instruments | |
| | |
| | | |
| | | |
| | | |
| | |
| |
Level in | | |
September 30, 2022 | | |
December 31, 2021 | |
| |
Fair Value | | |
Carrying | | |
Fair | | |
Carrying | | |
Fair | |
| |
Hierarchy | | |
Amount | | |
Value | | |
Amount | | |
Value | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
1 | | |
$ | 4,452,562 | | |
$ | 4,452,562 | | |
$ | 7,688,743 | | |
$ | 7,688,743 | |
Restricted cash | |
1 | | |
| 1,140,483 | | |
| 1,140,483 | | |
| 541,883 | | |
| 541,883 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Convertible notes payable | |
3 | | |
$ | 2,400,000 | | |
$ | 2,168,000 | | |
$ | 2,900,000 | | |
$ | 2,900,000 | |
Convertible note payable at fair value | |
3 | | |
| 420,613 | | |
| 420,613 | | |
| 998,135 | | |
| 998,135 | |
Warrant liability | |
3 | | |
| 30,000 | | |
| 30,000 | | |
| 135,000 | | |
| 135,000 | |
Contingent consideration | |
3 | | |
| 705,000 | | |
| 705,000 | | |
| 4,284,221 | | |
| 4,284,221 | |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
Convertible notes payable
As of September 30, 2022, the
Company has two outstanding convertible notes payable with aggregate principal amount of $2,400,000. See Note 8 for further information
on the terms of these convertible notes.
Schedule of convertible notes payable | |
| | |
| | | |
| | | |
| | | |
| | |
| |
| | |
September 30, 2022 | | |
December 31, 2021 | |
| |
Level | | |
Carrying Amount | | |
Fair Value | | |
Carrying Amount | | |
Fair Value | |
| |
| | |
| | |
| | |
| | |
| |
10% convertible notes due in August 2024 | |
3 | | |
$ | 2,000,000 | | |
$ | 1,811,000 | | |
$ | 2,000,000 | | |
$ | 1,998,000 | |
10% convertible notes due in September 2024 | |
3 | | |
| 400,000 | | |
| 357,000 | | |
| 900,000 | | |
| 902,000 | |
| |
| | | |
$ | 2,400,000 | | |
$ | 2,168,000 | | |
$ | 2,900,000 | | |
$ | 2,900,000 | |
The estimated fair value of the
convertible notes was computed using a Monte Carlo Simulation, using the following assumptions:
Schedule of estimated fair value | |
| | | |
| | |
Fair Value Assumption – Convertible Debt | |
September 30, 2022 | | |
December 31, 2021 | |
Stock Price | |
$ | 2.65 | | |
$ | 8.52 | |
Minimum Conversion Price | |
$ | 2.50 | | |
$ | 2.50 | |
Annual Asset Volatility Estimate | |
| 80 | % | |
| 100 | % |
Risk Free Discount Rate (based on U.S. government treasury obligation with a term similar to that of the convertible note) | |
| 4.02% - 4.05 | % | |
| 0.61% - 0.64 | % |
Fair Value Option (“FVO”) Election
– Convertible note payable and freestanding warrants
Convertible note payable, at fair value
As of September 30, 2022, the
Company has one outstanding convertible note payable with a face value of $500,000 (the “March 4th Note”), which is accounted
for under the Accounting Standards Codification (“ASC”) 825-10-15-4 FVO election. Under the FVO election, the financial instrument
is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis
at each reporting period date. The estimated fair value adjustment is presented as a single line item within other (expenses) income in
the accompanying condensed consolidated statements of operations under the caption “Change in fair value of convertible notes.”
The March 4th Note is measured
at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December
31, 2021 to September 30, 2022:
Schedule of fair value categorized within Level 3 | |
| | |
| |
March 4th Note | |
Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | |
$ | 998,135 | |
(Gain) on change of fair value reported in the condensed consolidated statements of operations | |
| (577,522 | ) |
Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2022 | |
$ | 420,613 | |
The estimated fair value of the
March 4th Note as of September 30, 2022 and December 31, 2021, was computed using a Black-Scholes simulation of the present value of its
cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:
Schedule of estimated fair value | |
| | | |
| | |
| |
September 30, 2022 | | |
December 31, 2021 | |
Face value principal payable | |
$ | 500,000 | | |
$ | 500,000 | |
Original conversion price | |
$ | 3.91 | | |
$ | 3.91 | |
Value of Common Stock | |
$ | 2.65 | | |
$ | 8.52 | |
Expected term (years) | |
| 7.43 | | |
| 8.18 | |
Volatility | |
| 100 | % | |
| 100 | % |
Risk free rate | |
| 3.95 | % | |
| 1.47 | % |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
Warrants
In connection with the March
4th Note, the Company issued the Series I Warrants. The Series I Warrants are measured at fair value and categorized within Level 3 of
the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2021 to September 30, 2022:
Schedule of fair value categorized within Level 3 | |
| | |
| |
| |
Fair Value: | |
Series I | |
Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | |
$ | 135,000 | |
(Gain) on change of fair value reported in the condensed consolidated statements of operations | |
| (105,000 | ) |
Ending fair value balance reported on the condensed consolidated balance sheet at September 30, 2022 | |
$ | 30,000 | |
The estimated fair value of the
Series “I” Warrants was computed using a Black-Scholes valuation model, using the following assumptions:
Schedule of estimated fair value | |
| | | |
| | |
Fair Value Assumption - Series “I” Warrants | |
September 30, 2022 | | |
December 31, 2021 | |
Exercise Price per share | |
$ | 3.91 | | |
$ | 3.91 | |
Value of Common Stock | |
$ | 2.65 | | |
$ | 8.52 | |
Expected term (years) | |
| 2.92 | | |
| 3.67 | |
Volatility | |
| 100 | % | |
| 100 | % |
Dividend yield | |
| 0 | % | |
| 0 | % |
Risk free rate | |
| 4.25 | % | |
| 1.07 | % |
Contingent consideration
The Company records the fair
value of the contingent consideration liability in the condensed consolidated balance sheets under the caption “Contingent consideration”
and records changes to the liability against earnings or loss under the caption “Change in fair value of contingent consideration”
in the condensed consolidated statements of operations.
As discussed in Note 4, during
the year ended December 31, 2021, the B/HI seller met the conditions for payment of contingent consideration. As a result, the contingent
consideration has been recorded as the actual amount of the payout to the B/HI seller, $1.1 million, of which $600,000 was paid in cash
on June 29, 2022 and the remainder in common stock, which was settled on June 14, 2022 by the issuance of 163,369 shares of Company common
stock.
For the contingent consideration
related to Be Social, the Company utilized a Monte Carlo Simulation model, which incorporates significant inputs that are not observable
in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair
value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would
use in valuing the contingent consideration as of the acquisition date. The Company determined the fair value by using the following key
inputs to the Monte Carlo Simulation Model:
Schedule of contingent consideration | |
| | | |
| | |
| |
Be Social | |
Inputs | |
As of September 30, 2022 | | |
As of December 31, 2021 | |
Risk Free Discount Rate (based on US government treasury obligation with a term similar to that of the contingent consideration) | |
| 3.33 | % | |
| 0.73 | % |
Annual Asset Volatility Estimate | |
| 60.00 | % | |
| 85.00 | % |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
For the contingent consideration,
which is measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair
values from December 31, 2021 to September 30, 2022:
Schedule of reconciliation of the fair values | |
| | | |
| | | |
| | |
| |
The Door(1) | | |
Be Social(2) | | |
B/HI(3) | |
Beginning fair value balance reported on the condensed consolidated balance sheet at December 31, 2021 | |
$ | 2,381,869 | | |
$ | 710,000 | | |
$ | 1,192,352 | |
(Gain) on change of fair value reported in the condensed consolidated statements of operations | |
| (1,358,672 | ) | |
| (5,000 | ) | |
| (76,106 | ) |
Settlement of contingent consideration | |
| (1,023,197 | ) | |
| — | | |
| (1,116,246 | ) |
Ending fair value balance reported in the condensed consolidated balance sheet at September 30, 2022 | |
$ | — | | |
$ | 705,000 | | |
$ | — | |
(1) |
During the year ended December 31, 2021, The Door achieved the conditions for the earnout consideration, which were settled on June 7, 2022 by payment of 279,562 shares of common stock. For the three and nine months ended September 30, 2021, the Company recorded gains of $280,000 and $100,000, respectively, in fair value of contingent consideration related to The Door in the condensed consolidated statements of operations. |
(2) |
For the three and nine months ended September 30, 2021, the Company recorded losses of $250,000 and $270,000, respectively, in fair value of contingent consideration related to Be Social in the condensed consolidated statements of operations. |
(3) |
For both the three and nine months ended September 30, 2021, the Company recorded a loss of $1,140,000 in fair value of contingent consideration related to B/HI in the condensed consolidated statements of operations. During the year ended December 31, 2021, B/HI achieved the conditions for the earnout consideration, which were settled on June 14 and June 29, 2022, as described above. |
NOTE 11 — STOCKHOLDERS’ EQUITY
2021 Lincoln Park Transaction
On December 29, 2021, the Company
entered into a purchase agreement (the “LP 2021 Purchase Agreement”) and a registration rights agreement (the “LP 2021
Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company
could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of common stock
from time to time over a 36-month period.
The Company may direct Lincoln
Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of common stock on any business day (a
“Regular Purchase”), provided that on such day the last closing sale price per-share of our common stock is not less than
$1.00 as reported by the Nasdaq Capital Market. The amount of a Regular Purchase may be increased under certain circumstances up to 75,000
shares if the closing price is not below $10.00, and up to 100,000 shares if the closing price is not below $12.50, provided that Lincoln
Park’s committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the event we purchase the
full amount allowed for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as
accelerated and additional accelerated purchases. The purchase price of shares of common stock related to the future funding will be based
on the then prevailing market prices of such shares at the time of sales as described in the LP 2021 Purchase Agreement.
Pursuant to the terms of the
LP 2021 Purchase Agreement, at the time the Company signed the LP 2021 Purchase Agreement and the LP 2021 Registration Rights Agreement,
the Company issued 51,827 shares of common stock to Lincoln Park as consideration for its commitment (“commitment shares”)
to purchase shares of our common stock under the LP 2021 Purchase Agreement. In addition, the Company issued an additional 37,019 commitment
shares on March 7, 2022.
During the nine months ended September
30, 2022, excluding the additional commitment shares disclosed above, the Company sold 1,035,000 shares of common stock, respectively,
at prices ranging between $3.47 and $5.15 pursuant to the LP 2021 Purchase Agreement and received proceeds of $4,367,640, respectively.
The LP 2021 Purchase Agreement was terminated effective August 12, 2022 and the Company did not sell any shares pursuant to this agreement
during the three months ended September 30, 2022.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
2022 Lincoln Park Transaction
On August 10, 2022, the Company
entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP
2022 Registration Rights Agreement”) with Lincoln Park, pursuant to which the Company could sell and issue to Lincoln Park, and
Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of common stock from time to time over a 36-month period.
The Company may direct Lincoln
Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of common stock on any business day (a
“Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances up to 75,000 shares if
the closing price is not below $7.50 and up to 100,000 shares if the closing price is not below $10.00, provided that Lincoln Park’s
committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the event we purchase the full amount allowed
for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as accelerated and additional
accelerated purchases. The purchase price of shares of common stock related to the future funding will be based on the then prevailing
market prices of such shares at the time of sales as described in the LP 2022 Purchase Agreement.
Pursuant to the terms of the
LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement,
the Company issued 57,313 shares of common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment
shares”) to purchase shares of our common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period
expense and included within selling, general and administrative expenses in the condensed consolidated statements of operations.
During both the three and nine months
ended September 30, 2022, excluding the additional commitment shares disclosed above, the Company sold 245,000 shares of common stock
at prices ranging between $2.42 and $3.72 pursuant to the LP 2022 Purchase Agreement and received proceeds of $681,460. Subsequent to
September 30, 2022, between October 1, 2022 and November 14, 2022, the Company sold 215,000 shares of common stock at prices ranging between
$2.31 and $2.65 pursuant to the LP 2022 Purchase Agreement and received proceeds of $547,375.
The Company evaluated the contract
that includes the right to require Lincoln Park to purchase shares of common stock in the future (“put right”) considering
the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”)
and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value
accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it has no value as of September 30,
2022.
NOTE 12 — SHARE-BASED COMPENSATION
On June 29, 2017, the shareholders
of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). There are 2,000,000
shares available to grant under the 2017 Plan. During the nine months ended September 30, 2022, the Company granted Restricted Stock Units
(“RSUs”) to certain employees under the 2017 Plan, as detailed in the table below. During the nine months ended September
30, 2021, the Company did not issue any awards under the 2017 Plan.
The RSUs granted under the 2017
Plan to the Company’s employees vest in four equal installments on the following dates: March 15, 2022, June 15, 2022, September
15, 2022 and December 15, 2022. The Company recognized compensation expense for RSUs of $52,520 and $166,582 for the three and nine months
ended September 30, 2022, respectively, which is included in payroll and benefits in the condensed consolidated statements of operations.
There was no share-based compensation recognized for the three and nine months ended September 30, 2021. As of September 30, 2022,
unrecognized compensation expense related to RSUs of $51,965 is expected to be recognized over a weighted-average period of 0.21 years.
The following table sets forth
the activity for the RSUs:
Schedule of RSUs | |
| | | |
| | |
| |
Number of Shares | | |
Weighted Average Grant Date Fair Value | |
Outstanding
(nonvested), December 31, 2021 | |
| — | | |
$ | — | |
Granted | |
| 36,336 | | |
| 6.86 | |
Forfeited | |
| (4,404 | ) | |
| 6.86 | |
Vested | |
| (24,357 | ) | |
| 6.86 | |
Outstanding
(nonvested), September 30, 2022 | |
| 7,575 | | |
$ | 6.86 | |
Shares issued related to an employment agreement
Pursuant to the employment agreement between the Company
and Mr. Anthony Francisco, on July 27, 2022, the Company issued to Mr. Francisco 11,521 shares of Common Stock at a price of $4.34 per
share, the closing sale price for the Common Stock on the date the shares were issued. Mr. Francisco’s employment agreement also
entitles him to receive share awards amounting to $25,000 at each of certain dates in 2023 and 2024, in the aggregate amounting to $100,000.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
NOTE 13 — EARNINGS (LOSS) PER SHARE
The following table sets forth the
computation of basic and diluted (loss) earnings per share:
Schedule of Basic and Diluted Income (Loss) Per Share | |
| | |
| | |
| | |
| |
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Numerator | |
| | | |
| | | |
| | | |
| | |
Net (loss) income | |
$ | (1,311,719 | ) | |
$ | 141,651 | | |
$ | (1,492,191 | ) | |
$ | (3,780,392 | ) |
Net income attributable to participating securities | |
| — | | |
| 5,833 | | |
| — | | |
| — | |
Net (loss) income attributable to Dolphin Entertainment common stock shareholders and numerator for basic (loss) earnings per share | |
| (1,311,719 | ) | |
| 135,818 | | |
| (1,492,191 | ) | |
| (3,780,392 | ) |
Change in fair value of convertible notes payable | |
| (45,642 | ) | |
| — | | |
| (577,522 | ) | |
| — | |
Change in fair value of warrants | |
| (10,000 | ) | |
| — | | |
| (105,000 | ) | |
| — | |
Interest expense | |
| 9,863 | | |
| — | | |
| 29,589 | | |
| — | |
Numerator for diluted (loss) earnings per share | |
$ | (1,357,498 | ) | |
$ | 135,818 | | |
$ | (2,145,124 | ) | |
$ | (3,780,392 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator | |
| | | |
| | | |
| | | |
| | |
Denominator for basic EPS - weighted-average shares | |
| 9,664,681 | | |
| 7,740,085 | | |
| 9,307,830 | | |
| 7,551,974 | |
Effect of dilutive securities: | |
| | | |
| | | |
| | | |
| | |
Warrants | |
| 1,157 | | |
| — | | |
| 2,100 | | |
| — | |
Convertible notes payable | |
| 127,877 | | |
| — | | |
| 127,877 | | |
| — | |
Denominator for diluted EPS - adjusted weighted-average shares | |
| 9,793,715 | | |
| 7,740,085 | | |
| 9,437,807 | | |
| 7,551,974 | |
| |
| | | |
| | | |
| | | |
| | |
Basic (loss) earnings per share | |
$ | (0.14 | ) | |
$ | 0.02 | | |
$ | (0.16 | ) | |
$ | (0.50 | ) |
Diluted (loss) earnings per share | |
$ | (0.14 | ) | |
$ | 0.02 | | |
$ | (0.23 | ) | |
$ | (0.50 | ) |
Basic (loss) earnings per share
is computed by dividing income or loss attributable to the shareholders of common stock (the numerator) by the weighted-average number
of shares of common stock outstanding (the denominator) for the period. Diluted (loss) earnings per share assume that any dilutive equity
instruments, such as convertible notes payable and warrants were exercised and outstanding common stock adjusted accordingly, if their
effect is dilutive.
One of the Company’s convertible
notes payable, the warrants and the Series C Preferred Stock have clauses that entitle the holder to participate if dividends are declared
to the common stockholders as if the instruments had been converted into shares of common stock. As such, the Company uses the two-class
method to compute earnings per share and attribute a portion of the Company’s net income to these participating securities. These
securities do not contractually participate in losses. For the three months ended September 30, 2021, the Company attributed $5,833 of
the Company’s net income to these participating securities and reduced the net income available to common shareholders by that amount
when calculating basic earnings per share. For the three months ended September 30, 2022 and the nine months ended September 30, 2022
and 2021, the Company had a net loss and as such the two-class method is not presented.
For the three and nine months
ended September 30, 2022, the convertible promissory note carried at fair value and the outstanding warrants were included in the calculation
of fully diluted loss per share. The other convertible notes carried at their principal loan amount, convertible into an aggregate of
578,313 and 663,801 weighted average shares for the three and nine months ended September 30, 2022 respectively, were not included in
the calculation of diluted loss per share as their effect would be antidilutive. For the three months ended September 30, 2021, convertible
promissory notes in the aggregate of 326,702 weighted average shares were not included in the calculation of diluted earnings per share
and for the nine months ended September 30, 2021, convertible promissory notes and warrants in the aggregate of 273,594 weighted average
shares were not included in the calculation of diluted loss per share because inclusion was considered to be anti-dilutive.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
NOTE 14 — RELATED PARTY TRANSACTIONS
As part of the employment agreement
with its CEO, the Company provided a $1,000,000 signing bonus in 2012, which has not been paid and is recorded in accrued compensation
on the condensed consolidated balance sheets, along with unpaid base salary of $1,625,000 in aggregate attributable for the period from
2012 through 2018. Any unpaid and accrued compensation due to the CEO under his employment agreement will accrue interest on the principal
amount at a rate of 10% per annum from the date of his employment agreement until it is paid. Even though the employment agreement expired
and has not been renewed, the Company has an obligation under the agreement to continue to accrue interest on the unpaid balance.
As of September 30, 2022 and
December 31, 2021, the Company had accrued $2,625,000 of compensation as accrued compensation and has balances of $1,511,929 and $1,565,588,
respectively, in accrued interest in current liabilities on its condensed consolidated balance sheets, related to the CEO’s employment
agreement. Amounts owed under this arrangement are payable on demand. The Company recorded interest expense related to the accrued compensation
in the condensed consolidated statements of operations amounting to $66,164 for both the three months ended September 30, 2022 and
2021, and $196,336 for both the nine months ended September 30, 2022 and 2021. On June 15, 2022, the Company paid $250,000 to its CEO
for interest owed on the accrued compensation.
The Company entered into the
DE LLC Note with an entity wholly owned by our CEO. See Note 9 for further discussion.
NOTE 15 — SEGMENT INFORMATION
The Company operates in two reportable
segments, Entertainment Publicity and Marketing Segment (“EPM”) and Content Production Segment (“CPD”).
|
· |
The Entertainment Publicity and Marketing segment is composed of 42West, The Door, Viewpoint, Shore Fire, Be Social, and B/HI. This segment primarily provides clients with diversified marketing services, including public relations, entertainment and hospitality content marketing, strategic marketing consulting and content production of marketing materials. |
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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. |
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
The profitability measure employed
by our chief operating decision maker, our President and Chief Executive Officer, for allocating resources to operating segments and assessing
operating segment performance is operating income (loss). Salaries and related expenses include salaries, bonuses, commissions and other
incentive related expenses. General and administrative expenses include rental expense and depreciation of property, equipment and leasehold
improvements for properties occupied by corporate office employees, as well as legal and professional expenses which primarily include
professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and
managed by each of the segments. All segments follow the same accounting policies as those described in the Annual Report on Form 10-K
for the year ended December 31, 2021.
In connection with the acquisitions
of 42West, The Door, Viewpoint, Shore Fire, Be Social, and B/HI, the Company assigned $5,116,568 of intangible assets, net of accumulated
amortization of $8,353,432, and goodwill of $20,021,357 as of September 30, 2022 to the EPM segment. Equity method investments are
included within the EPM segment.
Schedule of Revenue and Assets by Segment | |
| | | |
| | | |
| | | |
| | |
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues: | |
| | | |
| | | |
| | | |
| | |
EPM | |
$ | 9,899,013 | | |
$ | 9,399,432 | | |
$ | 29,366,748 | | |
$ | 25,219,793 | |
CPD | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 9,899,013 | | |
$ | 9,399,432 | | |
$ | 29,366,748 | | |
$ | 25,219,793 | |
| |
| | | |
| | | |
| | | |
| | |
Segment Operating Income (Loss): | |
| | | |
| | | |
| | | |
| | |
EPM | |
$ | 604,837 | | |
$ | 507,658 | | |
$ | 3,336,688 | | |
$ | 488,077 | |
CPD | |
| (1,738,604 | ) | |
| (1,579,369 | ) | |
| (4,945,222 | ) | |
| (2,921,342 | ) |
Total operating (loss) income | |
| (1,133,767 | ) | |
| (1,071,711 | ) | |
| (1,608,534 | ) | |
| (2,433,265 | ) |
Interest expense | |
| (126,147 | ) | |
| (241,115 | ) | |
| (400,884 | ) | |
| (576,146 | ) |
Other income (expenses), net | |
| 55,642 | | |
| 1,454,477 | | |
| 682,522 | | |
| (809,832 | ) |
(Loss) income before income taxes and equity in losses of unconsolidated affiliates | |
$ | (1,204,272 | ) | |
$ | 141,651 | | |
$ | (1,326,896 | ) | |
$ | (3,819,243 | ) |
| |
As of September 30, 2022 | | |
As of December 31, 2021 | |
| |
| | |
| |
Total assets: | |
| | | |
| | |
EPM | |
$ | 48,366,935 | | |
$ | 48,691,939 | |
CPD | |
| 7,358,533 | | |
| 4,099,512 | |
Total | |
$ | 55,725,468 | | |
$ | 52,791,451 | |
NOTE 16 — LEASES
The Company and its subsidiaries
are party to various office leases with terms expiring at different dates through December 2027. The amortizable life of the right-of-use
(“ROU”) asset is limited by the expected lease term. Although certain leases include options to extend, the Company did not
include these in the ROU asset or lease liability calculations because it is not reasonably certain that the options will be executed.
On July 18, 2022, the Company entered
into an agreement to sublet 17,554 rentable square feet in Los Angeles, California at a base rent of $3.61 per rentable square foot. The
term of the sublease commenced on July 27, 2022 and expires on November 29, 2027 and allows for annual increases of 3% per annum throughout
the term of the lease.
The table below shows the lease
income and expenses recorded in the condensed consolidated statements of operations incurred during the three and nine months ended September
30, 2022 and 2021.
Schedule of Lease Income and Expenses | |
| |
| | | |
| | | |
| | | |
| | |
| |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
Lease costs | |
Classification | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating lease costs | |
Selling, general and administrative expenses | |
$ | 709,542 | | |
$ | 620,121 | | |
$ | 1,876,153 | | |
$ | 2,029,524 | |
Operating lease costs | |
Direct costs | |
| — | | |
| — | | |
| — | | |
| 60,861 | |
Sublease income | |
Selling, general and administrative expenses | |
| (106,247 | ) | |
| — | | |
| (228,230 | ) | |
| — | |
Net lease costs | |
| |
$ | 603,295 | | |
$ | 620,121 | | |
$ | 1,647,923 | | |
$ | 2,090,385 | |
During the nine months ended September
30, 2022, the Company recorded an impairment of its ROU asset amounting to $98,857, related to the sublease of one of the Company’s
subsidiaries’ offices, which was included in selling, general and administrative expenses in the condensed consolidated statements
of operations.
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED Consolidated FINANCIAL Statements (Unaudited)
|
Lease Payments
For the nine months ended September
30, 2022 and 2021, the Company made payments in cash related to its operating leases in the amounts of $1,567,453 and $2,067,546, respectively.
Future maturities lease payments
for operating leases for the remainder of 2022 and thereafter, were as follows:
Schedule of Future Minimum Payments Under Operating Lease Agreements |
|
|
|
|
2022 |
|
$ |
695,949 |
|
2023 |
|
|
2,659,521 |
|
2024 |
|
|
2,550,664 |
|
2025 |
|
|
1,979,589 |
|
2026 |
|
|
1,782,057 |
|
Thereafter |
|
|
719,797 |
|
Total lease payments |
|
$ |
10,387,577 |
|
Less: Imputed interest |
|
|
(1,772,284 |
) |
Present value of lease liabilities |
|
$ |
8,615,293 |
|
As of September 30, 2022, the Company’s
weighted average remaining lease term on its operating leases is 3.60 years and the Company’s weighted average discount rate is
8.63% related to its operating leases.
NOTE 17 — COLLABORATIVE ARRANGEMENT
IMAX Co-Production Agreement
On June 24, 2022, the Company
entered into an agreement with IMAX Corporation (“IMAX”) to co-produce and co-finance a documentary motion picture on the
flight demonstration squadron of the United States Navy, called The Blue Angels (“Blue Angels Agreement”). IMAX and Dolphin
have each agreed to fund 50% of the production budget. During the three and nine months ended September 30, 2022, the Company paid $1,000,000
and $1,500,000, respectively, pursuant to the Blue Angels Agreement, which were recorded as capitalized production costs.
We have evaluated the Blue Angels
Agreement and have determined that it is a collaborative arrangement under FASB ASC Topic 808 “Collaborative Arrangements”. We
will reevaluate whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in
either the roles of the participants or the participants’ exposure to significant risks and rewards, dependent upon the ultimate
commercial success of documentary motion picture.
As production of the documentary
motion picture is still in the early stages, no income or expense has been recorded in connection with the Blue Angels Agreement during
the three and nine months ended September 30, 2022.
NOTE 18 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be subject to
legal proceedings, claims, and liabilities that arise in the ordinary course of business. The Company is not aware of any pending litigation
as of the date of this report and, therefore, in the opinion of management and based upon the advice of its outside counsels, the liability,
if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations
and cash flows.
IMAX Co-Production Agreement
As discussed in Note 17, on June
24, 2022, the Company entered into the Blue Angels Agreement with IMAX. Under the terms of this agreement, the Company has funded $1,500,000
and has committed to fund up to an additional $500,000 of the production budget, which is expected to be disbursed in the first quarter
of 2023.
NOTE 19 — SUBSEQUENT EVENTS
On
October 2, 2022, the Company minted and offered for sale a collection of 7,777 non-fungible tokens (“NFT”s), titled Creature
Chronicles: Exiled Aliens. The collection generated approximately 13,175 Solana (“SOL”) equivalent to approximately $435,000
on the date of the sale.
On November 14, 2022, (the “Closing
Date”), the Company, through its wholly owned subsidiary, MidCo LLC, (“MidCo”), acquired all of the issued and outstanding
membership interest of Socialyte, LLC, a Delaware limited liability company, (“Socialyte”), pursuant to a membership purchase
agreement between the Company and NSL Ventures, LLC (“Seller”). Socialyte is a New York and Los Angeles based creative agency
specializing in social media influencer marketing campaigns for brands.
The consideration paid by the
Company in connection with the acquisition of Socialyte is $13,000,000 plus the potential to earn up to an additional $5,000,000 upon
meeting certain financial targets in 2022. On the Closing Date, the Company paid the Seller $5,000,000 cash, issued the Seller 1,346,257
shares of its Common Stock and issued the Seller a $3,000,000 unsecured promissory note, which is to be repaid in two equal installments
on June 30, 2023 and September 30, 2023. In addition, the Company issued the Seller 685,234 shares of its Common Stock in satisfaction
of the Closing Date working capital adjustment. The Company partially financed the cash portion of the consideration with a $3,000,000
five-year secured loan from Bank Prov with MidCo and Socialyte as co-borrowers, which the Company guaranteed.