DOLPHIN ENTERTAINMENT, INC. The objectives of our Management's Discussion and Analysis of Financial
Condition and Results of Operations are to provide users of our consolidated
financial statements with a narrative explanation from the perspective of
management of our financial condition, results of operations, cash flows,
liquidity and certain other factors that may affect future results. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our Consolidated Financial
Statements and related Notes included elsewhere in this Annual Report on Form
10-K. This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The forward-looking statements are not
historical facts, but rather are based on current expectations, estimates,
assumptions and projections about our industry, business and future financial
results. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those discussed in other sections of this Annual Report on Form 10-
Overview
We are a leading independent entertainment marketing and premium content
development company. We were first incorporated in the
On
Through our subsidiaries 42West,
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We have established an acquisition strategy based on identifying and acquiring companies that complement our existing entertainment publicity and marketing services and content production businesses. We believe that complementary businesses, such as live event production, can create synergistic opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion with such targets. We completed the Socialyte acquisition during 2022 and intend to complete at least one acquisition during 2023, but there is no assurance that we will be successful in doing so, whether in 2023 or at all.
We have also established an investment strategy, "Dolphin 2.0," based upon identifying opportunities to develop internally owned assets, or acquire ownership stakes in others' assets, in the categories of entertainment content, live events and consumer products. We believe these categories represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various stages of internal development and outside conversations on a wide range of opportunities within Dolphin 2.0. We intend to enter into additional investments during 2023, but there is no assurance that we will be successful in doing so, whether in 2023 or at all.
Socialyte Acquisition
On
We partially financed the cash portion of the consideration with a secured loan
from BankProv with Socialyte and Social Midco as co-borrowers, which we
guaranteed. This loan amounted to
For more information on the Socialyte Acquisition, refer to Note 5 to our consolidated financial statements.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, direct costs, payroll and benefits, selling, general and administrative expenses, legal and professional expenses, other income/expense and net income. Other income/expense consists mainly of interest expense, non-cash changes in fair value of liabilities, costs directly relating to our acquisitions, and gains or losses on extinguishment of debt and disposal of fixed assets.
We operate in two reportable segments: our entertainment publicity and marketing
segment and our content production segment. The entertainment publicity and
marketing segment is composed of 42West, The Door,
Revenues
For the years ended
The table below sets forth the percentage of total revenue derived from our two
segments for the years ended
December 31,
2022 2021
Revenues:
Entertainment publicity and marketing 98.9 % 99.9 %
Content production 1.1 % 0.1 %
Total revenue 100.0 % 100.0 %
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Entertainment Publicity and Marketing ("EPM")
Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and we have continued to grow organically through referrals and by actively soliciting new business. We earn revenues primarily from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers and (viii) content production of marketing materials on a project contract basis. For these revenue streams, we collect fees through either fixed fee monthly retainer agreements, fees based on a percentage of contracts or project-based fees.
We earn entertainment publicity and marketing revenues primarily through the following:
· Talent - We earn fees from creating and implementing strategic communication
campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs andGrammy winning recording artists. Our services in this area include ongoing strategic counsel, media relations, studio and/or network liaison work, and event and tour support. We believe that the proliferation of content, both traditional and on social media, will lead to an increasing number of individuals seeking such services, which will drive growth and revenue in our Talent departments for several years to come.
· Entertainment Marketing and Brand Strategy - We earn fees from providing
marketing direction, public relations counsel and media strategy for entertainment content (including theatrical films, television programs, DVD and VOD releases, and online series) from virtually all the major studios and streaming services, as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. In addition, we provide entertainment marketing services in connection with film festivals, food and wine festivals, awards campaigns, event publicity and red-carpet management. As part of our services, we offer marketing and publicity services tailored to reach diverse audiences. We also provide marketing direction targeted to the ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups. We expect that increased digital streaming marketing budgets at several large key clients will drive growth of revenue and profit in 42West's Entertainment Marketing division over the next several years.
·
raise or reposition their public profiles, primarily in the entertainment industry. We also help studios and filmmakers deal with controversial movies, as well as high-profile individuals address sensitive situations. We believe that growth in theStrategic Communications division will be driven by increasing demand for these varied services by traditional and non-traditional media clients who are expanding their activities in the content production, branding, and consumer products PR sectors.
· Creative Branding and Production- We offer clients creative branding and
production services from concept creation to final delivery. Our services include brand strategy, concept and creative development, design and art direction, script and copyrighting, live action production and photography, digital development, video editing and composite, animation, audio mixing and engineering, project management and technical support. We expect that our ability to offer these services to our existing clients in the entertainment and consumer products industries will be accretive to our revenue.
· Digital Media Influencer Marketing Campaigns - We arrange strategic marketing
agreements between brands and social media influencers, for both organic and
paid campaigns. We also offer services for social media activations at events.
Our services extend beyond our own captive influencer network, and we manage
custom campaigns targeting specific demographics and locations, from ideation
to delivery of results reports. We expect that our relationship with social
media influencers will provide us the ability to offer these services to our
existing clients in the entertainment and consumer products industries and will
be accretive to our revenue.
Content Production ("CPD")
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.
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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
In
Expenses
Our expenses consist primarily of:
(1) Direct costs - includes certain costs of services, as well as certain
production costs, related to our entertainment publicity and marketing
business. Included within direct costs are immaterial impairments for any of
our content production projects.
(2) Payroll and benefits expenses - includes wages, stock-based compensation,
payroll taxes and employee benefits.
(3) Selling, general and administrative expenses - includes all overhead costs
except for payroll, depreciation and amortization and legal and professional
fees that are reported as a separate expense item.
(4) Acquisition costs include professional fees incurred as part of the
acquisition of our subsidiaries.
(5) Depreciation and amortization - includes the depreciation of our property and
equipment and amortization of intangible assets and leasehold improvements.
(6) Change in fair value of contingent consideration - includes changes in the
fair value of the contingent earn-out payment obligations for the Company'
acquisitions. The fair value of the related contingent consideration is
measured at every balance sheet date and any changes recorded on our
consolidated statements of operations.
(7) Legal and professional fees - includes fees paid to our attorneys, fees for
investor relations consultants, audit and accounting fees and fees for
general business consultants.
Other Income and Expenses
For the years ended
RESULTS OF OPERATIONS
Year ended
Revenues
For the years ended
December 31,
2022 2021
Revenues:
Entertainment publicity and marketing $ 40,058,880 $ 35,705,305
Content production 446,678 21,894
Total revenue $ 40,505,558 $ 35,727,199
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Revenues from entertainment publicity and marketing increased by approximately
For the year ended
Expenses For the years endedDecember 31, 2022 and 2021, our operating expenses were as follows: December 31, 2022 2021 Expenses: Direct costs$ 3,566,336 $ 3,879,409 Payroll and benefits 28,947,730 23,819,327 Selling, general and administrative 6,572,020 5,836,235 Acquisition costs 480,939 22,907 Impairment of goodwill 906,337 - Change in fair value of contingent consideration (47,285 ) 3,754,221 Depreciation and amortization 1,751,211 1,905,354 Legal and professional 2,903,412 2,013,436 Total expenses$ 45,080,700 $ 41,230,889
Direct costs are mainly attributable to the EPM segment and decreased by
approximately
Payroll and benefits expenses increased by approximately
Selling, general and administrative expenses increased by approximately
The increase is primarily related to:
·
·
·
the
·
These increases were partially offset by:
·
our offices and leases that expired.
Acquisition costs for the year ended
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During the fourth quarter of 2022, we bypassed the optional qualitative
assessment and performed a quantitative assessment of goodwill. We concluded
that, except as it relates to Viewpoint, it is more likely than not that the
fair value of the reporting unit was not less than its carrying amount. For the
goodwill value assigned to Viewpoint, we concluded the fair value of that
reporting unit's goodwill was below its carrying amount. As a result, an
impairment charge of
Change in fair value of the contingent consideration was approximately a
· The Door: this contingent consideration was settled during 2022. The Company
did not record any changes in the fair value of contingent consideration pertaining to The Door as it determined the fixed number of shares needed to settle the contingent consideration and reclassified the liability to equity. During the year endedDecember 31, 2021 , a$2.0 million loss was recorded related to The Door's contingent consideration.
· B/HI: this contingent consideration was settled in
recorded a$76,100 gain and$1.2 million loss for the year endedDecember 31, 2022 and 2021, respectively.
· Be Social: The Company recorded a
endedDecember 31, 2022 and 2021, respectively.
Depreciation and amortization had a small decrease of
Legal and professional fees increased by approximately
Other Income and (Expenses)
December 31,
2022 2021
Other Income and (expenses):
Gain on extinguishment of debt $ - $ 2,988,779 Change in fair value of convertible notes 654,579 (570,844 ) Change in fair value of warrants
120,000 (2,482,877 )
Change in fair value of put rights - (71,106 )
Interest expense (555,802 ) (785,209 )
Total $ 218,777 $ (921,257 ) We did not record any gain or loss on extinguishment of debt for the year ended
We elected the fair value option for certain convertible notes issued in 2020.
The embedded conversion feature of a convertible note issued in 2019 met the
criteria for a derivative. The fair value of these convertible notes and
embedded conversion feature are remeasured at every balance sheet date and any
changes are recorded on our consolidated statements of operations. For the year
ended
Warrants issued with convertible notes payable issued in 2020, were initially
measured at fair value at the time of issuance and subsequently remeasured at
estimated fair value on a recurring basis at each reporting period date, with
changes in estimated fair value of each respective warrant liability recognized
as other income or expense. During the year ended
20
The fair value of put rights related to the 42West acquisition were recorded on
our consolidated balance sheet on the date of the acquisition. The fair value of
the put rights are measured at every balance sheet date and any changes are
recorded on our consolidated statements of operations. The fair value of the put
rights increased by approximately
Interest expense decreased by
Equity in losses of unconsolidated affiliates
Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investees.
For the year ended
Income Tax Benefit
We had an income tax expense of
As of
In assessing the ability to realize the deferred tax assets, we consider whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. We believe it is more
likely than not that the deferred tax asset will not be realized and we have
accordingly recorded a full valuation allowance as of both
Net Loss
Net loss was approximately
Net loss was approximately
Net loss for the years ended
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Year Ended December 31,
2022 2021
Statement of Cash Flows Data:
Net cash used in operating activities $ (4,027,227 ) $ (1,318,717 )
Net cash used in investing activities (7,919,355 ) (3,025,856 )
Net cash provided by financing activities 10,913,806 3,937,823
Net decrease in cash and cash equivalents and restricted cash
(1,032,776 ) (406,750 )
Cash and cash equivalents and restricted cash, beginning of period
8,230,626 8,637,376
Cash and cash equivalents and restricted cash, end of
period $ 7,197,849 $ 8,230,626
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Operating Activities
Net cash used in operating activities was
Our net loss of
·
·
commitment shares;
·
losses;
·
·
impairments of fixed assets, ROU asset and capitalized production costs; and
·
The above were offset by:
·
·
Our net loss of
·
·
non-cash losses;
·
·
impairments of fixed assets and capitalized production costs. The above were offset by:
·
forgiveness of PPP Loans; and
·
Investing Activities
Net cash used in investing activities for the year ended
Outflows:
·
·
acquired; and
·
Net cash used in investing activities for the year ended
Outflows:
·
·
·
Financing Activities
Net cash provided by financing activities was
22
Net cash provided by financing activities for the year ended
Inflows:
·
below;
·
·
Outflows:
·
·
Net cash provided by financing activities for the year ended
Inflows:
·
Outflows:
·
·
·
Debt and Financing Arrangements
As described below in further detail, we have taken measures to position the
Company with a stronger balance sheet position, extending current loans to
longer term maturities and reducing our overall debt position. Total debt
amounted to
Our debt obligations in the next twelve months from
2022 Lincoln Park Transaction
On
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
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Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, the Company issued 57,313 shares of common stock to Lincoln Park as consideration for its commitment ("LP 2022 commitment shares") to purchase shares of our common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period expense and included within selling, general and administrative expenses in the consolidated statements of operations.
Under applicable rules of the NASDAQ Capital Market, we could not issue or sell
more than 19.99% of the shares of our common stock outstanding immediately prior
to the execution of the LP 2022 Purchase Agreement to Lincoln Park under the LP
2022 Purchase Agreement without stockholder approval. At a meeting held on
During the year ended
The Company evaluated the contract that includes the right to require Lincoln
Park to purchase shares of common stock in the future ("put right") considering
the guidance in ASC 815-40, "Derivatives and Hedging - Contracts on an Entity's
Own Equity" ("ASC 815-40") and concluded that it is an equity-linked contract
that does not qualify for equity classification, and therefore requires fair
value accounting. The Company has analyzed the terms of the freestanding put
right and has concluded that it has an insignificant value as of
2021 Lincoln Park Transaction
On
Pursuant to the terms of the LP 2021 Purchase Agreement, at the time we signed
the LP 2021 Purchase Agreement and the LP 2021 Registration Rights Agreement, we
issued 51,827 shares of common stock to Lincoln Park as consideration for its
commitment ("commitment shares") to purchase shares of our common stock under
the LP 2021 Purchase Agreement. Pursuant to the LP 2021 Purchase Agreement, we
issued an additional 37,019 commitment shares on
During the year ended
During the year ended
Convertible Notes Payable
During the year ended
During the year ended
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As of
It is our experience that convertible notes, including their accrued interest are converted into shares of the Company's common stock and not settled through payment of cash. Although we are unable to predict the noteholder's intentions, we do not expect any change from our past experience.
Subsequent to
Convertible Notes Payable at Fair Value
As of
Similar to the Convertible notes discussed above, our historical experience has been that these convertible notes are converted into shares of the Company's common stock prior to their maturity date and not settled through payment of cash.
Nonconvertible Promissory Notes
As of
Subsequent to
Nonconvertible Promissory Notes - Socialyte
As discussed in Note 5 and Note 15 to our consolidated financial statements, as
part of the acquisition of Socialyte, we entered into an unsecured promissory
note amounting to
IMAX Agreement
As discussed in Note 26 to our consolidated financial statements, on
Convertible Notes Receivable
As of
As of
25
In addition, during the year ended
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements.
We consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management. Further details on each item are discussed below. See Note 17 - Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.
Goodwill
For purposes of the annual assessment, management initially performs a qualitative assessment, which includes consideration of the economic, industry and market conditions in addition to our overall financial performance and the performance of these assets. If our qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, we perform a quantitative analysis. In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections. Assumptions used in our impairment testing are consistent with our internal forecasts and operating plans. If the fair value of the reporting unit exceeds its carrying amount, there is no impairment. If not, we recognize an impairment equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of goodwill.
During the fourth quarter of 2022, we bypassed the optional qualitative
assessment and performed a quantitative assessment. We concluded that, except as
it relates to Viewpoint, it is more likely than not that the fair value of the
reporting unit was not less than its carrying amount. For the goodwill value
assigned to Viewpoint, we concluded the fair value of that reporting unit's
goodwill was below its carrying amount. As a result, an impairment charge of
Intangible assets
In connection with the acquisitions of 42West, The Door, Viewpoint,
26
Intangible assets are initially recorded at fair value and are amortized using
the straight-line method over their respective estimated useful lives and
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If a triggering
event has occurred, an impairment analysis is required. The impairment test
first requires a comparison of undiscounted future cash flows expected to be
generated over the useful life of an asset to the carrying value of the asset.
If the carrying value of the asset exceeds the undiscounted cash flows, the
asset would not be deemed recoverable. Impairment would then be measured as the
excess of the asset's carrying value over its fair value. See Note 6 to the
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for further discussion. Events or circumstances that might require
impairment testing include the loss of a significant client or clients, the
identification of other impaired assets within a reporting unit, loss of key
personnel, the disposition of a significant portion of a reporting unit,
significant decline in stock price or a significant adverse change in business
climate or regulations. During the year ended
Business Combinations and Contingent Consideration
The determination of the fair value of net assets acquired in a business combination and specifically the estimates of acquisition-related contingent consideration (sometimes referred to as "earn-out liabilities") requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques. Fair values of earn-out liabilities are estimated using income approaches such as discounted cash flows or option pricing models.
Due to the time required to gather and analyze the necessary data for each
acquisition,
Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an acquired business, could materially affect our operating results in the period such changes are recognized.
Convertible debt
The terms of our convertible debt agreements are evaluated to determine whether the convertible debt instruments contain both liability and equity components, in which case the instrument is a compound financial instrument. Convertible debt agreements are also evaluated to determine whether they contain embedded derivatives, in which case the instrument is a hybrid financial instrument. Judgement is required to determine the classification of such financial instruments based on the terms and conditions of the convertible debt agreements.
Estimation methods are used to determine the fair values of the liability and equity components of compound financial instruments and to determine the fair value of embedded derivatives included in hybrid financial instruments. Fair values of convertible debt are estimated using pricing models such as the Monte Carlo Simulation. Evaluating the reasonableness of these estimations and the assumptions and inputs used in the valuation methods requires a significant amount of judgement and is therefore subject to an inherent risk of error. See Notes 14 - Convertible Notes Payable At Fair Valueand 17 - Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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