UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
———————
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-38331
DOLPHIN ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
150 Alhambra Circle, Suite 1200, Coral Gables, Florida33134
(Address of principal executive offices, including zip code)
(305) 774-0407
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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). Yes ☒ No ☐
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.
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 ☐ No ☒
The number of shares of common stock outstanding was 22,216,371 as of August 9, 2024.
TABLE OF CONTENTS
i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
June 30,
Six Months Ended
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Cash Flows (Continued)
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:
Consolidated Statements of Changes in Stockholders’ Equity
Additional
Paid-in
Total
Stockholders’
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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”), 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. 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 Computer Animation, Incorporated (“Viewpoint”), Shore Fire, The Digital Dept. and Special Projects. During the three months ended June 30, 2024, the Company ceased the operations of Viewpoint. 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 June 30, 2024, and its results of operations and cash flows for the three and six months ended June 30, 2024 and 2023. All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements. Operating results for the three and six months ended June 30, 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 Financial Accounting Standards Board (“FASB”) issued new guidance on income tax disclosures (Accounting Standards Update “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.
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 13.
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 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 rights 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 six months ended June 30, 2024, we recorded net revenues of $3,421,141 from the Amazon Agreement upon delivery of the film to Amazon Content Services LLC, our single performance obligation. Under this arrangement, we acted in the capacity of an agent. During the three and six months ended June 30, 2023, no revenues were recognized from the content licensing arrangement.
The revenues recorded by the EPM and CPD segments is detailed below:
For the Three Months Ended
For the Six Months Ended
Contract Balances
The opening and closing balances of our contract liability balances from contracts with customers as of June 30, 2024 and December 31, 2023 were as follows:
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 and six months ended June 30, 2024 and 2023 include the following:
The Company’s unsatisfied performance obligations are for contracts that have an original expected duration of one year or less and, as such, the Company is not required to disclose the remaining performance obligation.
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of June 30, 2024, the Company had a balance of $25,211,206 of goodwill on its condensed consolidated balance sheet resulting from its acquisitions of 42West, The Door, Shore Fire, The Digital Dept. and Special Projects. All of the Company’s goodwill is related to the entertainment, publicity and marketing segment.
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. During the three months ended June 30, 2024, the Company determined to close the Viewpoint subsidiary, and therefore the Company impaired goodwill for $190,565, which is the balance of goodwill attributable to Viewpoint as of June 30, 2024 immediately prior to the decision to shut down. This impairment is included in the condensed consolidated statement of operations for the three and six months ended June 30, 2024.
Intangible Assets
Finite-lived intangible assets consisted of the following as of June 30, 2024 and December 31, 2023:
Amortization expense associated with the Company’s intangible assets was $530,847 and $503,357 for the three months ended June 30, 2024, and 2023, respectively, and $1,061,694 and $1,009,197 for the six months ended June 30, 2024 and 2023, respectively.
Amortization expense related to intangible assets for the remainder of 2024 and thereafter is as follows:
NOTE 4 —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”). Headquartered in New York and Los Angeles, Special Projects is a talent booking and events agency that elevates media, fashion, and lifestyle brands.
The total consideration paid by the Company in connection with the acquisition of Special Projects was approximately $10.4 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 $5,000,000cash and issued the Sellers 2,500,000 shares of the Company’s common stock. On May 15, 2024, the Company issued 714,578 shares of the Company’s common stock as settlement for the working capital and excess cash adjustment, pursuant to the Special Projects Purchase Agreement. The Company partially financed the cash portion of the consideration with the BankUnited Loan Agreement described in Note 7.
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 final fair value of the consideration transferred, after measurement period adjustments:
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.
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:
The pro forma amounts for 2023 have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect (a) the amortization that would have been charged, assuming the intangible assets resulting from the acquisition had been recorded on January 1, 2023, (b) include interest expense on the BKU Term Loan (see Note 7) in the amount of $58,871 and $119,838 for the three and six months ended June 30, 2023, respectively, and (c) eliminate $97,238 and $208,610 of revenue and expenses related to work performed by Special Projects for Dolphin for the three and six months ended June 30, 2023, respectively.
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 several 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.
NOTE 5 — NOTES RECEIVABLE
The Company holds an equity method investment in JDDC Elemental LLC (“Midnight Theatre”). On various dates during the three months ended June 30, 2024, Midnight Theatre issued three unsecured convertible promissory notes to the Company with an aggregate principal of $1,135,000, respectively, each with a ten percent (10%) per annum simple coupon rate, which mature between May 2025 and June 2025.
On July 15, 2024 and August 9, 2024, Midnight Theatre issued two unsecured convertible promissory notes to the Company with aggregate principals of $110,000 and $135,000, respectively, with a ten percent (10%) per annum simple coupon rate, with maturity dates of July 15, 2025 and August 9, 2025.
NOTE 6 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
NOTE 7 — DEBT
Total debt of the Company was as follows as of June 30, 2024 and December 31, 2023:
The table below details the maturity dates of the principal amounts for the Company’s debt as of June 30, 2024:
Convertible Notes Payable
As of June 30, 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 $2.50per 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 $1.00per share. As of both June 30, 2024 and December 31, 2023, the principal balance of the convertible notes payable of $5,100,000was recorded in noncurrent liabilities under the caption “Convertible notes payable” on the Company’s condensed consolidated balance sheets.
The Company recorded interest expense related to these convertible notes payable of $127,500 and $141,583 during the three months ended June 30, 2024 and 2023, respectively, and $255,250 and $286,139 during the six months ended June 30, 2024 and 2023, respectively. In addition, the Company made cash interest payments amounting to $255,250 and $305,573, respectively, during the six months ended June 30, 2024 and 2023, related to the convertible notes payable.
Convertible Note Payable at Fair Value
The Company had one convertible promissory note outstanding with a principal amount of $500,000 as of June 30, 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 $290,000and $355,000 in noncurrent liabilities as of June 30, 2024 and December 31, 2023, respectively, on its condensed consolidated balance sheets related to the convertible promissory note payable measured at fair value. See Note 9 – Fair Value Measurements for further discussion on the valuation of the convertible promissory note payable.
The Company recorded gains in fair value of $40,000 and $4,000 for the three months ended June 30, 2024 and 2023, respectively, and a gain in fair value of $65,000and a loss in fair value of $6,444 for the six months ended June 30, 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 note payable at fair value of $9,863 for both the three months ended June 30, 2024 and 2023, and $19,726 for both the six months ended June 30, 2024 and 2023. In addition, the Company made cash interest payments amounting to $19,726 for both the six months ended June 30, 2024 and 2023, related to the convertible promissory notes at fair value.
Nonconvertible Promissory Notes
As of June 30, 2024, the Company has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $3,880,000, which bear interest at a rate of 10% per annum and mature between November 2024 and March 2029.
As of both June 30, 2024 and December 31, 2023, the Company had a balance of $900,000 and $500,000, respectively, recorded as current liabilities and $2,980,000 and $3,380,000, respectively, in noncurrent liabilities on its condensed consolidated balance sheets related to these unsecured nonconvertible promissory notes.
The Company recorded interest expense related to these nonconvertible promissory notes of $97,000 and $153,468 for the three months ended June 30, 2024 and 2023, respectively, and $194,000 and $210,053 for the six months ended June 30, 2024 and 2023, respectively. The Company made interest payments of $194,000and $127,211 during the six months ended June 30, 2024 and 2023, respectively, related to the nonconvertible promissory notes.
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 $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, the Company deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the seller of Socialyte. The Company has filed a lawsuit against the seller of Socialyte and certain of its principals related to the Socialyte Purchase Agreement. See Note 17.
The Company recorded interest expense related to this Socialyte Promissory Note of $30,000 and $60,000 for the three and six months ended June 30, 2024, respectively and $65,000 for the three and six months ended June 30, 2023. No interest payments were made during the three and six months ended June 30, 2024 and 2023, related to the Socialyte Promissory Note.
BankUnited Loan Agreement
On September 29, 2023, 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.
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 Loan Agreement 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 Loan Agreement 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 June 30, 2024 and December 31, 2023, the Company had a balance of $5,002,520 and $5,482,614 of principal outstanding under the BKU Term Loan, respectively, net of debt issuance costs of $71,496 and $79,907, respectively. As of June 30, 2024 and December 31, 2023, the Company had a balance of $400,000of principal outstanding under the BKU Line of Credit. On July 23, 2024, the Company repaid the outstanding BKU Line of Credit principal balance of $400,000.
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 and $8,411 for the three and six months ended June 30, 2024, respectively.
During the three and six months ended June 30, 2024, the Company did not use the BKU Commercial Card.
NOTE 8 — LOANS FROM RELATED PARTY
On June 1, 2021, the Company exchanged a promissory note that had been issued on October 1, 2016, for a nonconvertible promissory note with a principal balance of $1,107,873that matures on December 31, 2026 and bears interest at 10% per annum. The nonconvertible promissory note was issued to Dolphin Entertainment, LLC (“DE LLC”), an entity wholly owned by the Company’s Chief Executive Officer, William O’Dowd (the “CEO”). On April 29, 2024 and June 10, 2024, the Company issued two nonconvertible promissory notes to DE LLC in the amounts of $1,000,000 and $135,000, respectively, which mature on April 29, 2029 and June 10, 2029, respectively, (collectively, “the DE LLC Notes”). The DE LLC Notes each bear interest at a rate of 10% per annum.
As of June 30, 2024 and December 31, 2023, the Company had an aggregate principal balance of $2,242,873 and $1,107,873, respectively, and accrued interest amounted to $150,637 and $277,423, respectively, related to the DE LLC Notes. For both the six months ended June 30, 2024 and 2023, the Company did not repay any principal balance on the DE LLC Notes. During the six months ended June 30, 2024, the Company made cash interest payments in the amount of $200,000 related to the DE LLC Notes.
On January 16, 2024 and May 28, 2024, the Company issued two nonconvertible promissory notes to Mr. Donald Scott Mock, brother of Mr. O’Dowd in the amount of $900,000and $75,000, respectively, and received proceeds of $975,000 (the “Mock Notes”). The Mock Notes bear interest at a rate of10% per annum and mature on January 16, 2029 and May 28, 2029, respectively. As of June 30, 2024, the Company had a principal balance of $975,000, and accrued interest of $41,667. The Company did not make cash payments during the six months ended June 30, 2024 related to the Mock Notes.
The Company recorded interest expense of $68,760 and $27,621 for the three months ended June 30, 2024 and 2023, respectively, and $114,881 and $54,938 for the six months ended June 30, 2024 and 2023, respectively, related to the DE LLC Notes and Mock Notes.
NOTE 9 — 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:
Convertible notes payable
As of June 30, 2024, the Company has ten outstanding convertible notes payable with aggregate principal amount of $5,100,000. See Note 8 for further information on the terms of these convertible notes.
The estimated fair value of the convertible notes was computed using a Monte Carlo Simulation, using the following assumptions:
Fair Value Option (“FVO”) Election – Convertible note payable and freestanding warrants
Convertible note payable, at fair value
As of June 30, 2024, the Company had one outstanding convertible note payable with a face value of $500,000 (the “March 4th Note”), which is accounted for under the ASC 825-10-15-4 FVO election. Under the FVO election, the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The estimated fair value adjustment is presented as a single line item within other (expenses) income in the accompanying condensed consolidated statements of operations under the caption “Change in fair value of convertible note.”
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 June 30, 2024:
The estimated fair value of the March 4th Note as of June 30, 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:
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 June 30, 2024 and December 31, 2023. The Series I Warrants expire on September 4, 2025.
NOTE 10 — 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 $25,000,000 in value of its shares of the Company’s common stock from time to time over a 36-month period.
During the three and six months ended June 30, 2024, the Company sold 600,000 and 950,000 shares of its common stock, respectively, at prices ranging between $1.07 and $1.53 and received proceeds of $690,100 and $1,185,300.
During the three and six months ended June 30, 2023, the Company sold 600,000 and 850,000 shares of its common stock, respectively, at prices ranging between $1.65 and $2.27 pursuant to the LP 2022 Purchase Agreement and received proceeds of $1,081,850 and $1,611,300, respectively.
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 June 30, 2024.
NOTE 11 — LOSS PER SHARE
The following table sets forth the computation of basic and 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.
The Company’s convertible note payable at fair value, 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 and six months ended June 30, 2024 and 2023, the Company had a net loss and as such the two-class method is not presented.
For the three and six months ended June 30, 2024 potentially dilutive instruments including 4,468,085 shares and 3,982,869 shares, respectively, of common stock issuable upon conversion of convertible notes payable and 20,000 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 and six months ended June 30, 2023, potentially dilutive instruments including 2,653,993 shares and 2,993,588 shares, respectively, of common stock issuable upon conversion of convertible notes payable were not included in the diluted loss per share as inclusion was considered to be antidilutive. For the three and six months ended June 30, 2023, the warrants were not included in diluted loss per share because the warrants were not “in the money”.
NOTE 12 — 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 June 30, 2024 and December 31, 2023, the Company had accrued $2,625,000 of compensation as accrued compensation and has balances of $1,571,476 and $1,440,586, 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 $65,445 for both the three months ended June 30, 2024 and 2023, and $130,890 and $130,171 for the six months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024, the Company did not make cash interest payments in connection with the accrued compensation to the CEO. During the six months ended June 30, 2023, the Company made interest payments in the amount of $400,000 in connection with the accrued compensation to the CEO.
The Company entered into several DE LLC Notes with an entity wholly owned by its CEO and into two Mock Notes with its CEO’s brother. See Note 8 for further discussion.
NOTE 13 — SEGMENT INFORMATION
The Company operates in two reportable segments, Entertainment Publicity and Marketing Segment (“EPM”) and Content Production Segment (“CPD”).
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 and six months ended June 30, 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 $10,147,970 of intangible assets, net of accumulated amortization, and $25,211,206of goodwill, as of June 30, 2024 to the EPM segment. Equity method investments during the three and six months ended June 30, 2023 are included within the EPM segment. There were no equity investments during the three and six months ended June 30, 2024.
NOTE 14 — 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.
The tables below show the lease income and expenses recorded in the condensed consolidated statements of operations incurred during the three and six months ended June 30, 2024 and 2023 for operating and financing leases, respectively.
Lease Payments
For the six months ended June 30, 2024 and 2023, the Company made payments in cash related to its operating leases in the amounts of $1,333,342 and $1,386,214, respectively.
Future minimum lease payments for leases for the remainder of 2024 and thereafter, were as follows:
As of June 30, 2024, the Company’s weighted average remaining lease term on its operating and finance leases is 2.65 years and 2.10 years, respectively, and the Company’s weighted average discount rate is 8.92% and 8.46% related to its operating and finance leases, respectively.
NOTE 15 — 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 June 30, 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. The Blue Angels documentary motion picture was released in theatres on May 17, 2024 and began streaming on Amazon Prime Video on May 23, 2024.
During the six months ended June 30, 2024, the Company recorded net revenues of $3,421,141, from the Amazon Agreement. On February 22, 2024, the Company received $777,905from the Amazon Agreement upon delivery of the film by IMAX to Amazon Content Services LLC, the Company’s single performance obligation under the Amazon Agreement. On July 9, 2024, the Company received a second installment from IMAX in the amount of $2,556,452.
NOTE 16 — 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”), allowing for 2,000,000shares to be granted under the 2017 Plan. During the six months ended June 30, 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 June 30, 2024, and the three and six months ended June 30, 2023, the Company did not issue any awards under the 2017 Plan. The fair value of the RSUs granted is determined using the fair value of the Company’s common stock on the date of the grant, which was $1.44.
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 $4,638 and $9,522 for the three and six months ended June 30, 2024, respectively, which is included in payroll and benefits in the condensed consolidated statements of operations. The related income tax benefit for the three and six months ended June 30, 2024, was inconsequential. There was no share-based compensation recognized for the three and six months ended June 30, 2023. As of June 30, 2024, unrecognized compensation expense, net of actual forfeitures, related to RSUs of $8,436 is expected to be recognized over a weighted-average period of 0.55 years. No RSUs vested during the three and six months ended June 30, 2023.
The following table sets forth the activity for the RSUs:
NOTE 17 — COMMITMENTS AND CONTINGENCIES
Litigation
On June 21, 2024, the Company filed a complaint in Los Angeles County Superior Court against NSL Ventures, the Socialyte seller, and its principals alleging that the defendants breached the Socialyte Purchase Agreement and committed acts of fraud and negligence in connection with that transaction, and that the Company is entitled to monetary damages caused by those acts. The defendants have been served with the complaint and their response is due September 16, 2024. The Company is not aware of any other 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 other pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows.
NOTE 18 — SUBSEQUENT EVENTS
Elle Communications Acquisition
On July 15, 2024 (the “Elle Closing Date”), the Company acquired all of the issued and outstanding membership interests of Elle Communications, LLC, a California limited liability company (“Elle”), pursuant to a membership interest purchase agreement dated the Elle Closing Date (the “Elle Purchase Agreement”), by and between the Company and Danielle Finck (the “Seller”). Elle is a California-based communications agency. On the Elle Closing Date, Elle became a division of 42West.
On the Elle Closing Date, the Company paid the Seller an aggregate of $2,025,000 in cash and issued 2,089,783 shares of common stock of the Company, par value $0.015to the Seller, as consideration for the acquisition of Elle, which amount is subject to adjustment based on a customary post-closing cash consideration adjustment. The Company shall pay an additional $450,000 in cash on March 31, 2025, which amount is subject to adjustment based on Elle’s revenue for the year ended December 31, 2024.
The Seller entered into an executive employment agreement with the Company and will continue as an employee of the Company for a four-year term after the Elle Closing Date. The Seller also entered into a lock-up agreement with the Company restricting the Seller’s ability to transfer the shares of common stock received pursuant to the Elle Purchase Agreement for the period of two (2) years after the Elle Closing Date subject to certain leak out provisions. The Elle Purchase Agreement contains customary representations, warranties and covenants.
Nasdaq - Non-Compliance with Minimum Bid Price
On August 12, 2024, the Company received a deficiency notice from The Nasdaq Stock Market (“Nasdaq”) informing the Company that its common stock, par value $0.015 per share (the “Common Stock”), fails to comply with the $1 minimum bid price required for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) based upon the closing bid price of the Common Stock for the 30 consecutive business days prior to the date of the notice from Nasdaq.
Nasdaq’s notice has no immediate effect on the listing of the Common Stock on The Nasdaq Capital Market and, at this time, the Common Stock will continue to trade on The Nasdaq Capital Market under the symbol “DLPN”. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided an initial compliance period of 180 calendar days, or until February 10, 2025, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Common Stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days prior to February 10, 2025.
If the Company is unable to regain compliance by February 10, 2025, the Company may be eligible for an additional 180 calendar day compliance period to demonstrate compliance with the minimum bid price requirement. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the minimum bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure the deficiency during the second compliance period. If the Company does not qualify for the second compliance period or fails to regain compliance during the second 180 calendar day period, Nasdaq will notify the Company of its determination to delist the Common Stock, at which point the Company would have an opportunity to appeal the delisting determination to a Hearings Panel.
The Company intends to monitor the closing bid price of its Common Stock and is considering its options to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules, including holding its 2024 annual meeting of shareholders on September 24, 2024 (the “Annual Meeting”). At the Annual Meeting, the Company will seek shareholder approval for the option to implement a reverse stock split of the Company’s Common Stock at a ratio of 1-for-2 (the “Reverse Stock Split”).
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. 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 completed the acquisition of Special Projects during 2023 (discussed below) and completed the acquisition of Elle Communications, LLC in July of 2024. We will continue to identify potential acquisition targets but there is no assurance that one will be identified nor that we will be successful in completing the acquisition if one is identified.
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.
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.
We earn entertainment publicity and marketing revenues primarily through the following:
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 June 30, 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 six months ended June 30, 2024, we recorded revenue of $3,421,141 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 and on July 9, 2024, the Company received the second installment from IMAX in the amount of $2,556,452.
The Blue Angels documentary motion picture was released in theatres on May 17, 2024 and began streaming on Amazon Prime Video on May 23, 2024.
Revenues
For the three and six months ended June 30, 2024 and 2023, we derived a majority of our revenues from our entertainment publicity and marketing segment. During the six months ended June 30, 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 and six months ended June 30, 2024 and 2023:
For the six months ended
Expenses
Our expenses consist primarily of:
Other Income and Expenses
For the three and six months ended June 30, 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 and six months ended June 30, 2024 as compared to three and six months ended June 30, 2023
For the three and six months ended June 30, 2024 and 2023 revenues were as follows:
Revenues from entertainment publicity and marketing increased by approximately $0.4 million and $2.3 million for the three and six months ended June 30, 2024, respectively, as compared to the same periods in the prior year. The increase for the six months ended June 30, 2024 is primarily driven by increases across substantially all subsidiaries, as well as the inclusion of $1.6 million of Special Projects revenues that were not present in 2023. For the three months ended June 30, 2024, the increase is primarily driven by inclusion of $0.8 million in revenues of Special Projects that were not present in 2023 offset by a decrease in the revenues of Viewpoint. The Company decided to cease the operations of Viewpoint during the three months ended June 30, 2024.
Revenues from content production increased by approximately $3.4 million during the six months ended June 30, 2024, compared to the same period in the prior year, in connection with revenue generated from The Blue Angels documentary film, which was released in theatres on May 17, 2024.
For the three and six months ended June 30, 2024 and 2023, our expenses were as follows:
Direct costs remained consistent for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, and increased $2.1 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase in direct costs for the six months ended June 30, 2024 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 and $1.0 million, respectively, for the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, primarily due to the inclusion of the Special Projects payroll expenses in the three and six months ended June 30, 2024.
Selling, general and administrative expenses decreased by approximately $0.1 million and $35.4 thousand for the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023. The decrease is mainly due to a decrease in office rent expense from the expiration of one of our New York office leases in August of 2023.
Depreciation and amortization remained consistent for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023. The minor increases related primarily to the depreciation of Special Projects property and equipment during the three and six months ended June 30, 2024.
Impairment of goodwill was $0.2 million for both the three and six months ended June 30, 2024 relating to the goodwill allocated to one of our subsidiaries and $6.5 million for both the three and six months ended June 30, 2023 for the goodwill allocated to a different subsidiary. Refer to Note 3 – Goodwill and Intangibles Assets in the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional discussion on the impairment.
Change in fair value of the contingent consideration was $17.7 thousand and $33.2 thousand for the three and six months ended June 30, 2023 and all related to the settlement of the contingent consideration for the acquisition of Be Social. As all contingent consideration was settled by June 2023, there were no changes in fair value of contingent consideration for the three and six months ended June 30, 2024.
Legal and professional fees remained consistent for the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023.
Change in fair value of convertible notes – 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 June 30, 2024 and 2023, we recorded gains in the change in fair value of the convertible note issued in 2020 in the amount of $40.0 thousand and $4.0 thousand, respectively. For the six months ended June 30, 2024 and 2023, we recorded a change in fair value of the convertible note issued in 2020 in the amount of a gain of $65.0 thousand and a loss of $6.4 thousand, respectively. None of the decrease in the value of the convertible note was attributable to instrument specific credit risk and as such, all the gain in the change in fair value was recorded within net (loss) income.
Change in fair value of warrants– Warrants issued with the convertible note payable at fair value 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 change in fair value of the 2020 warrants that were not exercised decreased minimally for the three and six months ended June 30, 2024 and 2023.
Interest income – Interest income decreased by $0.1 million and $0.2 million for the three and six months ended June 30, 2024 as compared to the same periods 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 $69.5 thousand and $0.2 million for the three and six months ended June 30, 2024, respectively, as compared to the same periods 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 $23.5 thousand and $47.1 thousand for the three and six months ended June 30, 2024, respectively, and approximately $33.1 thousand and $60.2 thousand for the three and six months ended June 30, 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 and six months ended June 30, 2024.
Net Loss
Net loss was approximately $1.6 million or $(0.08) per share based on 19,446,310 weighted average shares outstanding for basic loss per share and $1.7 million of $(0.08) per share based on 19,574,187 weighted average shares outstanding fully diluted loss per share, for the three months ended June 30, 2024. Net loss was approximately $8.0 million or $(0.60) per share based on 13,212,311 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the three months ended June 30, 2023. The change in net loss for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, is related to the factors discussed above.
Net loss was approximately $2.0 million or $(0.10) per share based on both 18,962,067 weighted average shares outstanding for basic loss per share and 19,089,944 fully diluted loss per share, for the six months ended June 30, 2024. Net loss was approximately $10.9 million or $(0.85) per share based on 12,926,273 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the six months ended June 30, 2023. The change in net loss for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, is related to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Operating Activities
Cash provided by operating activities was $0.7 million for the six months ended June 30, 2024, a change of $3.8 million from cash used in operating activities of $3.1 million for six months ended June 30, 2023. The increase in cash flows from operations was primarily as a result a $9.0 million of decreased net loss for the period, offset by $4.9 million non-cash items such as depreciation and amortization, bad debt expense, share-based compensation, impairment of capitalized production costs, impairment of goodwill and other non-cash losses and $0.3 million net change in working capital.
Investing Activities
Cash flows used in investing activities for the six months ended June 30, 2024 were $1.1 million, mainly related to the issuance of notes receivable to Midnight Theatre. There were no significant cash flows used in investing activities for the six months ended June 30, 2023.
Financing Activities
Cash flows provided by financing activities for the six months ended June 30, 2024 were $2.8 million, which mainly related to:
Inflows:
Outflows:
Cash flows provided by financing activities for the six months ended June 30, 2023 were $4.0 million, which mainly related to:
Debt and Financing Arrangements
Total debt amounted to $20.9 million as of June 30, 2024, compared to $19.3 million as of December 31, 2023, an increase of $1.6 million, primarily related to an increase in related party nonconvertible promissory notes.
Our debt obligations in the next twelve months from June 30, 2024 are $5.3 million, an increase of $0.4 million from $4.9 million from those as 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.
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.
During the three and six months ended June 30, 2024, the Company sold 600,000 and 950,000 shares of its common stock, respectively, at prices ranging between $1.07 and $1.53 and received proceeds of $690,100 and 1,185,300.
As of June 30, 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.
The Company recorded interest expense related to these convertible notes payable of $127,500 and $141,583 during the three months ended June 30, 2024, and 2023, respectively, and $255,250 and $286,139 during the six months ended June 30, 2024, and 2023, respectively. In addition, the Company made cash interest payments amounting to $255,250 and $305,573 during the six months ended June 30, 2024 and 2023, respectively, related to the convertible notes payable.
As of both June 30, 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.
The Company had one convertible promissory note outstanding with aggregate principal amount of $500,000 as of June 30, 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 $290,000 and $355,000 in noncurrent liabilities as of June 30, 2024, and December 31, 2023, respectively, on its condensed consolidated balance sheets related to the convertible promissory note payable measured at fair value.
The Company recorded gains in fair value of $40,000 and $4,000 for the three months ended June 30, 2024, and 2023, respectively, and a gain in fair value of $65,000 and a loss in fair value of $6,444 for the six months ended June 30, 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 note payable at fair value of $9,863 for both the three months ended June 30, 2024 and 2023, and $19,726 for both the six months ended June 30, 2024 and 2023. In addition, the Company made cash interest payments amounting to $19,726 for both the six months ended June 30, 2024 and 2023, related to the convertible note payable at fair value.
As of both June 30, 2024 and December 31, 2023, the Company had a balance of $900,000 and $500,000, respectively, net of debt discounts recorded as current liabilities and $$2,980,000 and $3,380,000, respectively, in noncurrent liabilities on its condensed consolidated balance sheets related to these unsecured nonconvertible promissory notes.
The Company recorded interest expense related to these nonconvertible promissory notes of $97,000 and $153,468 for the three months ended June 30, 2024 and 2023, respectively, and $194,000 and $210,053 for the six months ended June 30, 2024 and 2023, respectively. The Company made interest payments of $194,000 and $127,211 during the six months ended June 30, 2024 and 2023, respectively, related to the nonconvertible promissory notes.
The Socialyte Purchase Agreement allows the Company to offset a working capital deficit against the Socialyte Promissory Note. As such, the Company deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the seller of Socialyte. The Company has filed a lawsuit against the seller of Socialyte and certain of its principals related to the Socialyte Purchase Agreement. See Note 17 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Nonconvertible Promissory Note from Related Parties
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 nonconvertible promissory note with a principal balance of $1,107,873 which matures on December 31, 2026. On April 29, 2024 and June 10, 2024, the Company issued two nonconvertible promissory notes to DE LLC in the amounts of $1,000,000 and $135,000, respectively, which mature on April 29, 2029 and June 10, 2029, respectively, (collectively, “the DE LLC Notes”). The DE LLC Notes each bear interest at a rate of 10% per annum.
On January 16, 2024 and May 28, 2024, the Company issued two nonconvertible promissory notes to Mr. Donald Scott Mock, the brother of Mr. O’Dowd, in the amount of $900,000 and $75,000, respectively, and received proceeds of $975,000 (the “Mock Notes”). The Mock Notes bear interest at a rate of 10% per annum and mature on January 16, 2029 and May 28, 2029, respectively. As of June 30, 2024, the Company had a principal balance of $975,000, and accrued interest of $41,667. The Company did not make cash payments during the six months ended June 30, 2024 related to this loan from related party.
As of June 30, 2024 and December 31, 2023, the Company had a balance of $5,002,520 and $5,482,614 of principal outstanding under the BKU Term Loan, respectively, net of debt issuance costs of $71,496 and $79,907, respectively. As of June 30, 2024 and December 31, 2023, the Company had a balance of $400,000 of principal outstanding under the BKU Line of Credit. On July 23, 2024, the Company repaid the outstanding BKU Line of Credit principal balance of $400,000.
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.
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.
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 June 30, 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:
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.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
During the quarter ended June 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS
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 August 14, 2024.
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