# Dolphin Entertainment, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Dolphin Entertainment, Inc.](/companies/dlpn.md) (CIK 1282224)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 17:00 ET
- Period: 2023-09-30
- Accession: 0001079973-23-001609
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1282224/000107997323001609/dlpn_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1282224/000107997323001609/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $10.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $31.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $2.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $6.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$2.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$12.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $604.7k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $1.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $31.1k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $91.2k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$3.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$14.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.27 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.27 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 14,121,275 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 13,328,138 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$4.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $21.9k | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2023-09-30 | $6.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $25.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $65.7m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $23.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $42.8m | us-gaap:Liabilities |
| Current portion of debt | at 2023-09-30 | $960.5k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $22.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,041 characters.

### OVERVIEW

We are a leading independent entertainment marketing and premium content production company. Through our subsidiaries, 42West, The Door, Shore Fire and Viewpoint, we provide expert strategic marketing and publicity services to many of the top brands, both individual and corporate, in the entertainment, hospitality and music industries. 42West (film and television), The Door (culinary, hospitality and consumer products), and Shore Fire (music) are each recognized global leaders in the PR services for the industries they serve. The Digital Department was formed from the combination of two of our subsidiaries, Be Social and Socialyte, and provides best-in-class influencer marketing capabilities. Special Projects is one of the entertainment industry’s leading talent booking and celebrity live event company. Viewpoint adds full-service creative branding and production capabilities to our marketing group. 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. Our common stock trades on The Nasdaq Capital Market under the symbol “DLPN.”

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 can create synergistic opportunities and bolster profits and cash flow.

We have also established an investment strategy, “Dolphin Ventures,” (formerly known as 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 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.

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, The Digital Department, Special Projects and Viewpoint and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, social media marketing, talent booking, 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. The activities of our Content Production segment also include all corporate overhead activities.

### Dolphin Ventures

We believe our ability to engage a broad consumer base through our best-in-class pop culture marketing assets provides us an opportunity to make investments in products or companies which would benefit from our collective marketing power. We call these investments “Dolphin Ventures”. Simply put, we seek to own an interest in some of the assets we are marketing. Specifically, we want to own an interest in assets where our experience, industry relationships and marketing power will most influence the likelihood of success. This leads us to seek investments in the following categories of assets: 1) Content; 2) Live Events; and 3) Consumer Products.

Our most significant Dolphin Ventures investment was made in October, 2021, when we acquired an ownership interest in Midnight Theatre, a state-of-the-art contemporary variety theater and restaurant in the heart of Manhattan. An anchor of Brookfield Properties’ recently opened $4.5 billion Manhattan West development, the Midnight Theatre opened on September 21, 2022. The restaurant, Hidden Leaf, opened on July 6, 2022.

We have also made our first content investment under Dolphin Ventures. See Note 17 above for details regarding our Collaborative Arrangement with IMAX for production and distribution of the documentary feature “The Blue Angels.”

### Revenues

For the three and nine months ended September 30, 2023 and 2022, we derived all of our revenues from our entertainment publicity and marketing segment. The entertainment publicity and marketing segment derives its revenues from providing public relations services for celebrities and musicians, as well as for entertainment and targeted content marketing for film and television series, strategic communications services for corporations and public relations, marketing services and brand strategies for hotels and restaurants and digital marketing through its roster of social media influencers. We expect to generate income in our content production segment over the next eighteen months with the release of “The Blue Angels” documentary motion picture, discussed in the “Project Development and Related Services.”

### Entertainment Publicity and Marketing

Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and we have continued to grow organically through referrals and by actively soliciting new business. We earn revenues primarily from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers and (viii) content production of marketing materials on a project contract basis. For these revenue streams, we collect fees through either fixed fee monthly retainer agreements, fees based on a percentage of contracts or project-based fees.

We earn entertainment publicity and marketing revenues primarily through the following:

- Talent – We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs and Grammy winning recording artists. Our services in this area include ongoing strategic counsel, media relations, studio and/or network liaison work, and event and tour support. We believe that the proliferation of content, both traditional and on social media, will lead to an increasing number of individuals seeking such services, which will drive growth and revenue in our Talent departments for several years to come.
- Entertainment Marketing and Brand Strategy – We earn fees from providing marketing direction, public relations counsel and media strategy for entertainment content (including theatrical films, television programs, DVD and VOD releases, and online series) from virtually all the major studios and streaming services, as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. In addition, we provide entertainment marketing services in connection with film festivals, food and wine festivals, awards campaigns, event publicity and red-carpet management. As part of our services, we offer marketing and publicity services tailored to reach diverse audiences. We also provide marketing direction targeted to the ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups. We expect that increased digital streaming marketing budgets at several large key clients will drive growth of revenue and profit in 42West’s Entertainment Marketing division over the next several years.
- Strategic Communications – We earn fees by advising companies looking to create, raise or reposition their public profiles, primarily in the entertainment industry. We also help studios and filmmakers deal with controversial movies, as well as high-profile individuals address sensitive situations. We believe that growth in the Strategic Communications division will be driven by increasing demand for these varied services by traditional and non-traditional media clients who are expanding their activities in the content production, branding, and consumer products PR sectors.
- Creative Branding and Production – We offer clients creative branding and production services from concept creation to final delivery. Our services include brand strategy, concept and creative development, design and art direction, script and copyrighting, live action production and photography, digital development, video editing and composite, animation, audio mixing and engineering, project management and technical support. We expect that our ability to offer these services to our existing clients in the entertainment and consumer products industries will be accretive to our revenue.
- Digital Media Influencer Marketing Campaigns – We arrange strategic marketing agreements between brands and social media influencers, for both organic and paid campaigns. We also offer services for social media activations at events. Our services extend beyond our own captive influencer network, and we manage custom campaigns targeting specific demographics and locations, from ideation to delivery of results reports. We expect that our relationship with social media influencers will provide us the ability to offer these services to our existing clients in the entertainment and consumer products industries and will be accretive to our revenue.

### Content Production

### 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 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. IMAX and Dolphin each funded 50% of the production budget, which is estimated at approximately $4.5 million. In April of 2023, IMAX entered into an agreement with Amazon Content Services LLC for the distribution rights of the Blue Angels. We estimate that we will derive approximately $3.5 million from the acquisition agreement and expect that the documentary motion picture will be released in early 2024.

### 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) Depreciation and amortization – includes the depreciation of our property and equipment and amortization of intangible assets and leasehold improvements.

(5) Impairment of goodwill – includes an impairment charge as a result of triggering events identified during the second quarter of 2023.

(6) Impairment of intangible assets – includes an impairment charge as a result of a rebranding of two of our subsidiaries during the third quarter of 2023.

(7) Change in fair value of contingent consideration – includes changes in the fair value of the contingent earn-out payment obligations for the Company’s acquisitions. The fair value of the related contingent consideration is measured at every balance sheet date and any changes recorded on our consolidated statements of operations.

(8) Legal and professional fees – includes fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants.

### Other Income and Expenses

For the three and nine months ended September 30, 2023 and 2022, other income and expenses consisted primarily of: (1) changes in fair value of convertible notes; (2) changes in fair value of warrants; (3) interest income; and (4) interest expense.

### RESULTS OF OPERATIONS

### Three and nine months ended September 30, 2023 as compared to three and nine months ended September 30, 2022

### Revenues

For the three and nine months ended September 30, 2023 and 2022 revenues were as follows:

| Revenues: | For the three months ended September 30, 2023 | 2022 | For the nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Entertainment publicity and marketing | $10,184,511 | $9,899,013 | $31,100,867 | $29,366,748 |
| Content production | — | — | — | — |
| Total revenue | $10,184,511 | $9,899,013 | $31,100,867 | $29,366,748 |

Revenues from entertainment publicity and marketing increased by approximately $0.3 million and $1.7 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year. The increase is primarily driven by inclusion of Socialyte revenues for 2023, which were not present in 2022, partially offset by a decrease in revenues from other subsidiaries.

We did not derive any revenues from the content production segment as we have not produced and distributed any of the projects discussed above and the projects that were produced and distributed in 2013 and 2016 have mostly completed their normal revenue cycles. We expect to begin generating income in our content production segment in early 2024 with the release of the Blue Angels documentary film.

### Expenses

For the three and nine months ended September 30, 2023 and 2022, our expenses were as follows:

| Expenses: | For the three months ended September 30, 2023 | 2022 | For the nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Direct costs | $185,308 | $837,429 | $621,449 | $2,941,044 |
| Payroll and benefits | 8,382,659 | 7,030,814 | 26,114,881 | 20,947,531 |
| Selling, general and administrative | 2,150,889 | 1,663,288 | 6,023,954 | 4,644,264 |
| Acquisition costs | 4,666 | 315,800 | 8,823 | 315,800 |
| Depreciation and amortization | 535,740 | 415,836 | 1,612,776 | 1,248,621 |
| Impairment of goodwill | — | — | 6,517,400 | — |
| Impairment of intangible assets | 341,417 | — | 341,417 | — |
| Change in fair value of contingent consideration | — | (5,000) | 33,226 | (81,106) |
| Legal and professional | 695,188 | 774,613 | 1,955,037 | 2,317,800 |
| Total expenses | $12,295,867 | $11,032,780 | $43,228,963 | $32,333,954 |

25

Direct costs decreased by approximately $0.7 million for the three months ended September 30, 2023 and $2.3 million for the nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022. The decrease in direct costs is partially driven by $0.2 million and $0.9 million of NFT production and marketing costs for the three and nine months ended September 30, 2022, respectively, that were not present in the same period in 2023. The decrease in direct costs is also partially attributable to the decrease in certain subsidiaries’ revenues as compared with the same periods in the prior year.

Payroll and benefits expenses increased by approximately $1.4 million and $5.2 million, respectively, for the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022, primarily due to the following:

- Inclusion of $1.1 million and $3.5 million for the three and nine months ended September 30, 2023, respectively, of Socialyte payroll expenses;
- The remaining increases are related to salary increases throughout the Company and the hiring of a Chief Marketing Officer.

Depreciation and amortization increased by $0.1 million and $0.4 million for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022, related primarily to the amortization of Socialyte intangible assets in 2023.

Selling, general and administrative expenses increased by approximately $0.5 million and $1.4 million for the three and nine months ended September 30, 2023, respectively, as compared to the three and nine months ended September 30, 2022, mainly due to costs incurred by our Los Angeles office that was opened in July of 2022 of $0.1 million and $0.7 million for the three and nine months ended September 30, 2023, respectively, an increase of bad debt of $0.3 for both the three and nine months ended September 30, 2023, and the inclusion of $0.1 million and $0.4 million of Socialyte selling, general and administrative expenses for the three and nine months ended September 30, 2023, respectively.

Impairment of goodwill was $6.5 million for the nine months ended September 30, 2023. As discussed in Note 3 – Goodwill and Intangibles Assets in the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, in the second quarter of 2023, we performed a quantitative assessment driven by triggering events related to declines in our market capitalization combined with the lack of positive response from the market to positive information related to future projects. The quantitative assessment resulted in the impairment of goodwill in the amount of $6.5 million of one of our reporting units. No such charges were recorded in the three and nine months ended September 30, 2022.

Impairment of intangible assets was $0.3 million for the three and nine months ended September 30, 2023. As discussed in Note 3 – Goodwill and Intangibles Assets in the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, during the three and nine months ended September 30, 2023, the Company recognized an impairment of the trademarks and trade names of Socialyte and Be Social in connection with the rebranding of both subsidiaries as the new “The Digital Dept.” of the Company.

Change in fair value of the contingent consideration was a loss of $33.2 thousand for the nine months ended September 30, 2023, compared to the change in fair value of the contingent consideration of gains $5.0 thousand and $(81.1) thousand for the three and nine months ended September 30, 2022. As all contingent consideration was settled by June 2023, there were no changes in fair value of contingent consideration for the three months ended September 30, 2023. The main components of the change in fair value of contingent consideration were the following:

- B/HI: this contingent consideration was settled in June 2022; therefore, no changes were recorded in the three and nine months ended September 30, 2023, nor in the three months ended September 30, 2022. The Company recorded a gain $76.1 thousand for the nine months ended September 30, 2022, up through the date of settlement.
- Be Social: losses of $17.7 thousand and $33.2 thousand for the three and nine months ended September 30, 2023, respectively, compared to a gain of $5.0 thousand for both the three and nine months ended September 30, 2022. The Company settled this contingent consideration on April 25, 2023 through a combination of $500,000 in cash and 148,687 shares of the Company’s stock, with a value of $272,047.

Legal and professional fees decreased by approximately $0.1 million and $0.4 million for the three and nine months ended September 30, 2023, respectively, as compared to the three and nine months ended September 30, 2022 due to legal, consulting and audit fees incurred during the first quarter of 2022 related to our restatement of the financial statements as of, and for the three nine months ended September 30, 2021 included in Form 10-Q for that period, and revisions of the financial statements as of and for the three months ended March 31, 2021 and as of and for the three and six months ended June 30, 2021, respectively, which were included in our Forms 10-Q for March 31, 2021 and June 30, 2021 included our Form 10-K filed on May 26, 2022.

### Other Income and Expenses

| Other Income and expenses: | For the three months ended September 30, 2023 | 2022 | For the nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Change in fair value of convertible notes | $— | $45,642 | $(6,444) | $577,522 |
| Change in fair value of warrants | — | 10,000 | 5,000 | 105,000 |
| Interest income | 104,303 | 91,722 | 309,424 | 204,943 |
| Interest expense | (604,669) | (217,869) | (1,413,177) | (605,827) |
| Total other (expenses) income, net | $(500,366) | $(70,505) | $(1,105,197) | $281,638 |

*Change in fair value of Convertible Notes at Fair Value –* We elected the fair value option for one convertible note issued in 2020. The fair value of this convertible note is remeasured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. For the three months ended September 30, 2023, there was no change in fair value. For the three months ended September 30, 2022, we recorded a $45.6 thousand gain in the fair value of the convertible notes issued in 2020. For the nine months ended September 30, 2023 and 2022, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a $6.0 thousand loss and a $0.6 million gain, respectively. None of the decrease in the value of the convertible notes was attributable to instrument specific credit risk and as such, all of the gain in the change in fair value was recorded within net loss.

*Change in fair value of warrants –* Warrants issued with convertible notes payable issued in 2020 were initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant liability recognized as other income or expense. The fair value of the 2020 warrants that were not exercised did not have a change in fair value for the three months ended September 30, 2023 and decreased by approximately $5.0 thousand during the nine months ended September 30, 2023; therefore, we recorded a change in the fair value of the warrants for the nine months ended September 30, 2023 for that amount on our condensed consolidated statement of operations. For the three and nine months ended September 30, 2022, the fair value of the 2020 warrants that were not exercised decreased by approximately $10.0 thousand and $0.1 million; therefore, we recorded a gain in the change in fair value of the warrants for the three and nine months ended September 30, 2022 for those amounts, respectively, on our condensed consolidated statement of operations.

*Interest income –* Interest income increased by $12.6 thousand and $0.1 million for the three and nine months ended September 30, 2023 as compared to the same periods in the prior year, primarily due to increased notes receivable outstanding during 2023 as compared to the same periods in the prior year.

*Interest expense –* Interest expense increased by $0.4 million and $0.8 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year. The increases were primarily due to increased convertible and nonconvertible notes, the BankProv term loan in connection with the Socialyte Purchase, as well as the Socialyte Promissory Note, which were all outstanding during 2023 for a longer period as compared to the prior year. In addition, interest expense for both the three and nine months ended September 30, 2023 includes the $79,286 prepayment penalty and $91,859 write-off of unamortized debt issue costs in connection with the Refinancing Transaction.

### Income Taxes

We recorded an income tax expense of approximately $31.1 thousand and $91.2 thousand for the three and nine months ended September 30, 2023, respectively, and approximately $7.2 thousand and $21.7 thousand for the three and nine months ended September 30, 2022, 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.

For the three and nine months ended September 30, 2023, we recorded losses of $51.0 thousand and $0.2 million, respectively, from our equity investment in Midnight Theatre. Midnight Theatre commenced operations at the end of the second quarter of 2022; we recorded a loss of $60.8 thousand for both the three and nine months ended September 30, 2022. No equity gains or losses have been recorded prior to the third quarter of 2022.

For the nine months ended September 30, 2023, we recorded losses of $88.0 thousand from our equity investment in Crafthouse Cocktails, compared to losses of $39.4 thousand and $82.8 thousand for the three and nine months ended September 30, 2022, respectively.

During the three months ended September 30, 2023, the Company determined their investment in Crafthouse Cocktails was deemed to be impaired and therefore recorded an impairment for the entire balance of its investment as of September 30, 2023. As a result, no equity gain or loss was recorded during the three months ended September 30, 2023. This determination was made after Crafthouse Cocktails was unable to secure their latest round of funding. The Company concluded the resulting decline in the carrying value of this investment was not temporary in nature. The impairment amounted to $1,169,587 and is recorded within equity in losses of unconsolidated affiliates in the condensed consolidated statements of operations.

### Net (Loss) Income

Net loss was approximately $3.9 million or $0.27 per share based on 14,121,275 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the three months ended September 30, 2023. Net loss was approximately $1.3 million or $0.14 per share based on 9,664,681 weighted average shares outstanding for basic loss per share and $0.14 per share based on 9,793,715 weighted average shares on a fully diluted basis earnings per share for the three months ended September 30, 2022. The change in net loss for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, is related to the factors discussed above.

Net loss was approximately $14.8 million or $1.11 per share based on 13,328,128 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the nine months ended September 30, 2023. Net loss was approximately $2.9 million or $0.31 per share based on 9,307,830 weighted average shares outstanding for basic loss per share and $0.37 per share based on 9,437,807 weighted average shares on a fully diluted basis earnings per share for the nine months ended September 30, 2022. The change in net income for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, is related to the factors discussed above.

### LIQUIDITY AND CAPITAL RESOURCES

### Cash Flows

| Statement of Cash Flows Data: | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(4,492,645) | $(3,634,388) |
| Net cash used in investing activities | (21,893) | (3,172,544) |
| Net cash provided by financing activities | 7,447,203 | 4,169,351 |
| Net increase (decrease) in cash and cash equivalents and restricted cash | 2,932,665 | (2,637,581) |
| Cash and cash equivalents and restricted cash, beginning of period | 7,197,849 | 8,230,626 |
| Cash and cash equivalents and restricted cash, end of period | $10,130,514 | $5,593,045 |

### Operating Activities

Cash used in operating activities was $4.5 million for the nine months ended September 30, 2023, a change of $0.9 million from cash used in operating activities of $3.6 million for the nine months ended September 30, 2022. The increase in net cash used in operations was primarily as a result of $11.9 million of increased net loss for the period, offset by a $9.5 million increase in non-cash items such as depreciation and amortization, bad debt expense, share-based compensation, impairment of capitalized production costs, impairment of goodwill and intangible asset and other non-cash losses and a $1.5 million net change in working capital.

### Investing Activities

There were no significant cash flows used in investing activities for the nine months ended September 30, 2023. Net cash flows used in investing activities for the nine months ended September 30, 2022 were $3.2 million related primarily to the issuance of notes receivable.

### Financing Activities

Cash flows provided by financing activities for the nine months ended September 30, 2023 were $7.4 million, which mainly related to:

Inflows:

- $5.8 million of proceeds from new term loan.
- $2.6 million of proceeds from notes payable.
- $2.2 million of proceeds from the Lincoln Park equity line of credit.
- $1.0 million of proceeds from convertible notes payable.

Outflows:

- $3.0 million of repayment of existing term loan.
- $0.5 million of settlement of cash portion of contingent consideration for Be Social.
- $0.4 million of payment of interest to related party.
- $0.1 million of repayment of notes payable.
- $0.1 million of payment of debt origination costs.
- $0.1 million of payment early payment penalty of term loan

Cash flows provided by financing activities for the nine months ended September 30, 2022 were $4.2 million, which mainly related to:

Inflows:

- $5.1 million of proceeds from the Lincoln Park equity line of credit described below.

Outflows:

- $0.6 million of settlement of cash portion of contingent consideration for B/HI.
- $0.3 million of repayment of notes payable.

28

### Debt and Financing Arrangements

Total debt amounted to $19.2 million as of September 30, 2023 compared to $13.7 million as of December 31, 2022, an increase of $5.5 million.

Our debt obligations in the next twelve months from September 30, 2023 increased by $63.7 thousand from December 31, 2022. We expect our current cash position, cash expected to be generated from our operations and other availability of funds, as detailed below, to be sufficient to meet our debt requirements.

### 2022 Lincoln Park Transaction

On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) and a registration rights agreement (the “LP 2022 Registration Rights Agreement”) with Lincoln Park, pursuant to which the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of the Company’s common stock from time to time over a 36-month period.

The Company may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of its common stock on any business day (a “Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances up to 75,000 shares if the closing price is not below $7.50 and up to 100,000 shares if the closing price is not below $10.00, provided that Lincoln Park’s committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the event we purchase the full amount allowed for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as accelerated and additional accelerated purchases. The purchase price of shares of the Company’s common stock related to the future funding will be based on the then prevailing market prices of such shares at the time of sales as described in the LP 2022 Purchase Agreement.

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 its common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of its 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.

During the three and nine months ended September 30, 2023, the Company sold 300,000 and 1,150,000 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 $550,850 and $2,162,150, 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 September 30, 2023.

### Convertible Notes Payable

During the nine months ended September 30, 2023, the Company issued three convertible notes payable in the aggregate amount of $1,000,000. As of September 30, 2023, the Company had 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. Five of the convertible notes payable may not be converted at a price less than $2.50 per share and five of the convertible notes payable may not be converted at a price less than $2.00 per share.

The Company recorded interest expense related to these convertible notes payable of $128,750 and $80,278 during the three months ended September 30, 2023 and 2022, respectively, and $414,880 and $215,278 during the nine months ended September 30, 2023 and 2022, respectively. In addition, the Company made cash interest payments amounting to $413,764 and $199,445 during the nine months ended September 30, 2023 and 2022, respectively, related to the convertible notes payable.

On June 8, 2023, the holder of two convertible notes converted the aggregate principal balance of $900,000 into 450,000 shares of common stock at a conversion price of $2.00 per share. At the moment of conversion, accrued interest related to these convertible notes payable amounted to $9,500 and was paid in cash.

As of September 30, 2023, the principal balance of the convertible promissory notes of $5,150,000 was recorded in noncurrent liabilities under the caption “Convertible Notes Payable” on the Company’s condensed consolidated balance sheets.

### Convertible Note Payable at Fair Value

The Company had one convertible promissory note outstanding with aggregate principal amount of $500,000 as of September 30, 2023 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 $350,000 and $343,556 in noncurrent liabilities as of September 30, 2023 and December 31, 2022, respectively, on its condensed consolidated balance sheets related to the convertible note payable measured at fair value.

There was no change in the fair value for the three months ended September 30, 2023. The Company recorded a gain in fair value of $45,642 for the three months ended September 30, 2022, and a loss in fair value of $6,444 and a gain in fair value of $577,522 for the nine months ended September 30, 2023 and 2022, respectively, on its condensed consolidated statements of operations related to this convertible promissory note at fair value.

The Company recorded interest expense related to these convertible notes payable at fair value of $9,863 for both the three months ended September 30, 2023 and 2022, and $29,589 for both the nine months ended September 30, 2023 and 2022, respectively. In addition, the Company made cash interest payments amounting to $29,589 for both the nine months ended September 30, 2023 and 2022, related to the convertible promissory notes at fair value.

### Nonconvertible Promissory Notes

On February 22, 2023, the Company issued an unsecured nonconvertible promissory note in the amount of $2,215,000 and received proceeds of $2,215,000. On August 1, 2023, the Company issued an unsecured nonconvertible promissory note in the amount of $415,000 and received proceeds of $415,000. As of September 30, 2023, the Company has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $3,910,859, which bear interest at a rate of 10% per annum and mature between November 2023 and March 2029.

As of September 30, 2023 and December 31, 2022, the Company had a balance of $380,859 and $868,960, respectively, net of debt discounts recorded as current liabilities and $3,530,000 and $500,000 respectively, in noncurrent liabilities on its condensed consolidated balance sheets related to these unsecured nonconvertible promissory notes.

During the nine months ended September 30, 2023, one unsecured nonconvertible promissory note amounting to $400,000 matured and was extended for an additional period of two years, now maturing on June 14, 2025.

The Company recorded interest expense related to these nonconvertible promissory notes of $93,142 and $22,719 for the three months ended September 30, 2023 and 2022, respectively, and $238,195 and $70,996 for the nine months ended September 30, 2023 and 2022, respectively. The Company made interest payments of $215,111 and $73,217 during the nine months ended September 30, 2023 and 2022, respectively, related to the nonconvertible promissory notes.

### Nonconvertible promissory note - Socialyte Promissory Note

As discussed in Note 4, as part of the Socialyte Purchase, the Company entered into the Socialyte Promissory Note amounting to $3,000,000. The Socialyte Promissory Note matured on September 30, 2023 and was payable in two payments: $1,500,000 on June 30, 2023 and $1,500,000 on September 30, 2023. The Socialyte Promissory Note carries an interest of 4% per annum, which accrues monthly, and all accrued interest was to be due and payable on September 30, 2023.

The Socialyte Purchase Agreement allows the Company to offset a working capital deficit against the Socialyte Promissory Note. As such, on June 30, 2023, the Company deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the Socialyte Seller.

The Company recorded interest expense related to the Socialyte Promissory Note of $30,000 for the three months ended September 30, 2023, and $95,000 for the nine months ended September 30, 2023.

### Credit and Security Agreement

In connection with the Socialyte Purchase discussed in Note 4, Socialyte, with MidCo entered into a Credit and Security Agreement with BankProv (“Credit Agreement”), which included a $3,000,000 secured term note (“Term Loan”) and $500,000 of a secured revolving line of credit (“Revolver”). The Credit Agreement carried an annual facility fee of $5,000 payable on the first anniversary of the Credit Agreement’s Closing Date and of $875 on each one-year anniversary thereafter.

The Credit Agreement contained financial covenants that require Socialyte to maintain: (1) a quarterly minimum debt service ratio of 1.25:1.00; (2) a quarterly senior funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 3.00:1.00 and (3) quarterly total funded debt to EBITDA (as defined in the Credit Agreement) not to exceed 5.00:1.00, as well as the Company to maintain a minimum liquidity of $1,500,000. The Credit Agreement also contained covenants that limited Socialyte’s and MidCo’s ability to, among other things, grant liens, incur additional indebtedness, make acquisitions or investments, dispose of certain assets, change the nature of their businesses, enter into certain transactions with affiliates or amend the terms of material indebtedness.

#### Term Loan

The Term Loan had a term of five years, with a maturity date of November 14, 2027. The Company was to repay the Term Loan through 60 consecutive monthly payments of principal, based upon a straight-line amortization period of 84 months, based on the principal amount outstanding, plus interest at an annual rate of 7.37%, commencing on December 14, 2022, and continuing on the corresponding day of each month thereafter until it was paid in full. Any remaining unpaid principal balance, including accrued and unpaid interest and fees, if any was to be due and payable in full on November 14, 2027, its maturity date.

Interest on the Term Loan was to be payable on a monthly basis. Interest was computed on the basis of a three hundred sixty (360) day year, for the actual number of days elapsed. Default interest was to be charged in accordance with the terms of the Term Loan. During the nine months ended September 30, 2023, the Company made a payment of $479,745, inclusive of $158,316 of interest. The Term Loan was repaid on September 29, 2023 as part of the Refinancing Transaction discussed below, therefore as of September 30, 2023, there were no amounts outstanding under the Term Loan.

#### Revolver

During both the three and nine months ended September 30, 2023, the Company drew $400,000 from the Revolver, which was repaid on September 29, 2023 as part of the Refinancing Transaction discussed below, therefore, as of September 30, 2023, there were no amounts outstanding under the Revolver. When drawn, the outstanding principal balance of the revolver accrued interest from the date of the draw of the greater of (i) 5.50% per annum, or (ii) the Prime Rate (as defined in the Revolver) plus 0.75% per annum.

#### Refinancing Transaction

On September 29, 2023, the Company entered into a loan agreement with BankUnited (“BankUnited Loan Agreement”) in which the existing Credit Agreement with BankProv was repaid (the “Refinancing Transaction”). The BankUnited Loan Agreement includes: (i) $5,800,000 secured term loan (“BKU Term Loan”), (ii) and $750,000 of a secured revolving line of credit (“BKU Line of Credit”) and (iii) $400,000 Commercial Card (“BKU Commercial Card”). The BKU Term Loan carries a 1.0% origination fee and matures in September 2028, the BKU Line of Credit carries an initial origination fee of 0.5% and an 0.25% fee on each annual anniversary and matures in September 2026; the BKU Commercial Card does not have any initial or annual fee and matures in September 2026. The BKU Term Loan has a declining prepayment penalty equal to 5% in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five of the outstanding balance. The BKU Line of Credit and BKU Commercial Card can be repaid without any prepayment penalty.

Interest on the BKU Term Loan accrues at 8.10% fixed rate per annum. Principal and interest on the BKU Term Loan shall be payable on a monthly basis based on a 5-year amortization. Interest on the BKU Line of credit is payable on a monthly basis, with all principal due at maturity. The BKU Commercial Card payment is due in full at the end of each bi-weekly billing cycle.

The BankUnited Credit Facility contains financial covenants tested semi-annually on a trailing twelve-month basis that require the Company to maintain a minimum debt service coverage ratio of 1.25:1.00 and a maximum funded debt/EBITDA ratio of 3.00:1.00. In addition, the BankUnited Credit Facility contains a liquidity covenant that requires the Company to hold a cash balance at BankUnited with a daily minimum deposit balance of $1,500,000.

The Refinancing Transaction was accounted for as an extinguishment of debt. In connection with this extinguishment, the Company incurred a prepayment penalty of $79,286 and wrote-off of unamortized debt origination costs of $91,859 related to the Term Loan, which were both recognized as interest expense in the condensed consolidated statement of operations in this third quarter of 2023.

### IMAX Agreement

As discussed in Note 17, on June 24, 2022, we entered into the Blue Angels Agreement with IMAX. Under the terms of this agreement, as of December 31, 2022, we had paid $1,500,000 pursuant to the Blue Angels Agreement, which was recorded as capitalized production costs. On April 26, 2023, we paid the remaining $500,000 pursuant to the Blue Angels Agreement. On November 7, 2023, the Company agreed to pay 50% of additional production costs to complete the documentary in the amount of $250,000.

On April 25, 2023, IMAX entered into an acquisition agreement with Amazon Content Services, LLC for the distribution rights of Blue Angels. We estimate that we will derive approximately $3.5 million from the acquisition agreement and we expect that the documentary motion picture will be released in early 2024.

### Convertible Notes Receivable

As of September 30, 2023, we hold convertible notes receivable from JDDC Elemental LLC, which operates Midnight Theatre. These convertible notes receivable are recorded at their principal face amount plus accrued interest. Due to their short-term maturity and conversion terms (described below), these have been recorded at the face value of the note and an allowance for credit losses has not been established.

As of September 30, 2023, the Midnight Theatre notes amount to $4.6 million, inclusive accrued interest receivable of $0.5 million, and are convertible at the option of the Company into Class A and B Units of Midnight Theatre. During both the three and nine months ended September 30, 2023, Midnight Theatre made an interest payment of $125,000 related to the Notes Receivable. Subsequent to September 30, 2023, Midnight Theatre made interest payments of $12,500 related to the Notes Receivable.

### 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, 2022.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements.

We consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management.

### Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

### 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, 2022, as updated by our subsequently filed Quarterly Reports on Forms 10-Q and Current Reports on Forms 8-K.

## Controls and procedures

As filed, 3,332 characters.

### 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 September 30, 2023. 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, 2022, filed with the SEC on March 31, 2023, which have not been remediated as of the date of the filing of this report.

### Remediation of Material Weaknesses in Internal Control over Financial Reporting

We have begun the process of designing and implementing effective internal controls measures to improve our internal control over financial reporting and remediate the material weaknesses. Our internal control remediation efforts include the following:

- Developing formal policies and procedures over the Company’s fraud risk assessment and risk management function;
- Developing policies and procedures to enhance the precision of management review of financial statement information and control impact of changes in the external environment;
- We have entered into an agreement with a third-party consultant that assists us in analyzing complex transactions and the appropriate accounting treatment;
- We are enhancing our policies, procedures and documentation of period end closing procedures;
- Implementing policies and procedures to enhance independent review and documentation of journal entries, including segregation of duties; and
- Reevaluating our monitoring activities for relevant controls.

Management is beginning the process of implementing and monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Management believes our planned remedial efforts will effectively remediate the identified material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address control deficiencies or determine it necessary to modify the remediation plan described above.

### Changes in Internal Control over Financial Reporting

During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting for the fiscal quarter covered by this report.

## Risk factors

As filed, 209 characters.

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, 2022 filed with the SEC on March 31, 2023.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001079973-23-001609. Last ingested by Listed: Nov 5, 2026, 19:55 ET. No prices; not investment advice.