Dolphin Entertainment, Inc.: Form 10-Q for the period ended Sep 30, 2024

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, The Door and Elle, 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), The Door (Culinary, Hospitality, Lifestyle) and Elle (Impact, Philanthropy, Non-Profit) 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. Our newly launched talent management firm, Always Alpha, is the first management firm of its kind, fully focused on women’s sports. 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 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: (i) our entertainment publicity and marketing segment and (ii) our content production segment. The entertainment publicity and marketing segment is composed of 42West, The Door, Shore Fire, The Digital Dept. Special Projects, Always Alpha and Elle, and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, influencer marketing, talent management, celebrity booking and live event production. The content production segment is composed of Dolphin Films, Inc. (“Dolphin Films”) and Dolphin Digital Studios, which produce and distribute feature films and digital content.

Entertainment Publicity and Marketing

Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and we have continued to grow organically through referrals and by actively soliciting new business. We earn revenues primarily from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers, athletes, broadcasters or celebrities and (viii) curating and booking celebrities for live events 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 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.
• Digital Media Influencer Marketing Campaigns – We arrange strategic marketing agreements between brands and social media influencers, athletes, broadcasters and coaches, for both organic and paid campaigns. We also offer services for social media activations at events. Our services extend beyond our own captive influencer network, and we manage custom campaigns targeting specific demographics and locations, from ideation to delivery of results reports. We expect that our relationship with social media influencers will provide us the ability to offer these services to our existing clients in the entertainment and consumer products industries and will be accretive to our revenue.
• Celebrity Booking and Live Event Programming – We arrange for brands and events to book celebrity and influencer talent. Our services include the creation of the strategy to elevate the brand or event through celebrity and/or influencer inclusion, to the booking of celebrities and influencers for commercial endorsements or appearances, to the curation of event lists and securing attendance, to the coordination and production of live events. We believe the expansion of brands seeking celebrity and/or influencer endorsements, as well as celebrity and/or influencers to attend brand-sponsored live events, will drive growth and revenue for the next several years.

Content Production

Project Development and Related Services

We have a team that dedicates a portion of its time to identifying scripts, story treatments and novels for acquisition, development and production. The scripts can be for either digital, television or motion picture productions. We have acquired the rights to certain scripts that we intend to produce and release in the future, subject to obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical distribution.

We have completed development of several feature films, which means that we have completed the script and can begin pre-production once financing is obtained. We are planning to fund these projects through third-party financing arrangements, domestic distribution advances, pre-sales, and location-based tax credits, and if necessary, sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there is no assurance that we will be able to obtain the financing necessary to produce any of these feature films.

In June 2022, we entered into an agreement with IMAX Corporation (“IMAX”) to co-produce and co-finance a documentary motion picture on the flight demonstration squadron of the United States Navy called The Blue Angels. As of September 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 nine months ended September 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 nine months ended September 30, 2024 and 2023, we derived a majority of our revenues from our entertainment publicity and marketing segment. During the nine months ended September 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 nine months ended September 30, 2024 and 2023:

Expenses

Our expenses consist primarily of:

(1) Direct costs – includes the amortization of film production costs related to The Blue Angels, using the individual film-forecast-computation method which amortizes film production costs in the same ratio as the current period actual revenue bears to estimated remaining unrecognized ultimate revenue. Direct costs also include certain costs of services, as well as certain production costs, related to our entertainment publicity and marketing business.

(2) Payroll and benefits expenses – includes wages, stock-based compensation, payroll taxes and employee benefits.

(3) Selling, general and administrative expenses – includes all overhead costs except for payroll, depreciation and amortization and legal and professional fees that are reported as a separate expense item.

(4) Acquisition costs – includes legal, consulting, and audit related fees related to our acquisition.

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

(6) Impairment of goodwill – includes an impairment charge related to ceasing operations of Viewpoint and triggering event identified during the third quarter of 2024.

(7) 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.

(8) Impairment of notes receivable – includes the write-off of the notes receivable from Midnight Theatre. Refer to Note 5 to the condensed consolidated financial statements for additional information.

(9) 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 condensed consolidated statements of operations.

(10) 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, 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 nine months ended September 30, 2024 as compared to three and nine months ended September 30, 2023

Revenues

For the three and nine months ended September 30, 2024 and 2023 revenues were as follows:

Revenues from entertainment publicity and marketing increased by approximately $2.5 million and $4.8 million for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in the prior year. The increase for the nine months ended September 30, 2024 is primarily driven by increases across substantially all subsidiaries, especially 42West as a result of the 2023 Writers Guild of America and the Screen Actors Guild-American Federation of Television and Radio Arts (“SAG-AFTRA”) strikes that ended in September 2023 and November 2023, respectively. The remaining increase is due to the inclusion of $3.2 million of Special Projects and Elle revenues that were not present in 2023. For the three months ended September 30, 2024, the increase is primarily driven increases in revenues of 42West of $1.1 million, and the inclusion of $1.7 million in revenues of Special Projects and Elle 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 nine months ended September 30, 2024.

Revenues from content production increased by approximately $3.4 million during the nine months ended September 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.

Expenses

For the three and nine months ended September 30, 2024 and 2023, our expenses were as follows:

Direct costs increased $69.0 thousand for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, and increased $2.2 million for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. The increase in direct costs for the three months ended September 30, 2023 is attributed to increase in subsidiaries’ revenues compared to the same period in the prior year. The increase in direct costs for the nine months ended September 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 period in the prior year.

Payroll and benefits expenses increased by approximately $1.2 million and $2.2 million, respectively, for the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023, primarily due to the inclusion of the Special Projects and Elle payroll expenses in the three and nine months ended September 30, 2024.

Selling, general and administrative expenses decreased by approximately $0.3 million and $0.4 million, respectively, for the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 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 and a reduction of bad debt expense due to improvements in collections of our accounts receivable.

Acquisition costs for the three and nine months ended September 30, 2024 were $0.1 million and $0.2 million, respectively, related to our acquisition of Elle on July 15, 2024. Acquisition costs for the three and nine months ended September 30, 2023 were inconsequential.

Depreciation and amortization increased by $0.1 million for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023. The increase in depreciation and amortization expense are related primarily to the amortization of Special Projects and Elle’s intangibles assets, such as the trade name and customers list, during the three and nine months ended September 30, 2024, which were not present in the same period of the prior year.

Impairment of goodwill was $6.5 million and $6.7 million for the three and nine months ended September 30, 2024, respectively. 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 third quarter of 2024, 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 a few of our reporting units, and $0.2 million impairment of goodwill as a result of the closure of one of our reporting units. During the nine months ended September 30, 2023, the Company impaired $6.5 million relating to the goodwill allocated to several of our reporting units.

Impairment of intangible assets was $0.3 million for both 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 above, 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 “The Digital Dept.”. No such impairments were recorded in the three and nine months ended September 30, 2024.

Impairment of notes receivables was $1.3 million for the three and nine months ended September 30, 2024. As discussed in Note 5 to our condensed consolidated financial statements included above, during the three and nine months ended September 30, 2024, the Company determined the Midnight Theatre Notes had been impaired, resulting from a review of Midnight Theatre’s operating results and projections. As a result, as of September 30, 2024 the Company impaired all outstanding Midnight Theatre Notes. No such impairments were recorded during the three and nine months ended September 30, 2023.

Change in fair value of the contingent consideration was $33.2 thousand for the nine months ended September 30, 2023 and all related to the settlement of the contingent consideration for the acquisition of Be Social. There were no changes in fair value of contingent consideration for the three and nine months ended September 30, 2024, and the three months ended September 30, 2023.

Legal and professional fees remained consistent for the three months ended September 30, 2024 as compared to same period of the prior year. Legal and professional fees decreased by $0.1 million for the nine months ended September 30, 2024 as compared to the same period in the prior year, and related to the Company obtaining a consent from the predecessor auditor for the 2021 audited financial statements that were included by reference in the S-3 registration statement.

Other Income and Expenses

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 September 30, 2024, we recorded a loss in the change in fair value of the convertible note issued in 2020 in the amount of $10.0 thousand. For the three months ended September 30, 2023, there was no change in fair value. For the nine months ended September 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 $55.0 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 or loss in the change in fair value was recorded within net loss.

Change in fair value of warrant – The warrant issued with the convertible note payable at fair value issued in 2020 was 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 the warrant liability recognized as other income or expense. The change in fair value of the 2020 warrant that was not exercised decreased minimally for the three and nine months ended September 30, 2024 and 2023.

Interest income – Interest income decreased by $0.1 million and $0.3 million for the three and nine months ended September 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 decreased by $71.2 thousand and increased by $0.1 million for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in the prior year. The increases were primarily due to increased related party nonconvertible notes and the term loan outstanding during 2024 as compared to the same period in the prior year.

Income Taxes

We recorded an income tax benefit of approximately $2.0 thousand and an income tax expense of $44.7 thousand for the three and nine months ended September 30, 2024, respectively, and approximately $31.1 thousand and $91.2 thousand for the three and nine months ended September 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 nine months ended September 30, 2024.

Net Loss

Net loss was approximately $8.7 million or ($0.80) per share based on 10,930,286 weighted average shares outstanding for both basic loss per share and fully diluted loss per share, for the three months ended September 30, 2024. Net loss was approximately $3.9 million or ($0.55) per share based on 7,060,638 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the three months ended September 30, 2023. The change in net loss for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, is related to the factors discussed above.

Net loss was approximately $10.6 million or ($1.07) per share based on 9,964,607 weighted average shares outstanding for both basic loss per share and fully diluted loss per share, for the nine months ended September 30, 2024. Net loss was approximately $14.8 million or ($2.22) per share based on 6,664,069 weighted average shares outstanding for both basic loss per share and fully diluted loss per share for the nine months ended September 30, 2023. The change in net loss for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, is related to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Operating Activities

Cash used in operating activities was $1.0 million for the nine months ended September 30, 2024, a change of $3.9 million from cash used in operating activities of $4.9 million for nine months ended September 30, 2023. The increase in cash flows from operations was primarily as a result a $4.1 million of decreased net loss for the period, an increase of $1.0 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, which was offset by $1.3 million net change in working capital.

Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2024 were $2.5 million, mainly related to the net issuance of $1.3 million of notes receivable to Midnight Theatre, and $1.2 million payment related to the acquisition of Elle, net of cash acquired. There were no significant cash flows used in investing activities for the nine months ended September 30, 2023.

Financing Activities

Cash flows provided by financing activities for the nine months ended September 30, 2024 were $2.5 million, which mainly related to:

Inflows:

• $2.1 million of proceeds from related party loan.
• $1.2 million of proceeds from the Lincoln Park equity line of credit (discussed below).

Outflows:

• $0.7 million of repayment of existing term loan.

Cash flows provided by financing activities for the nine months ended September 30, 2023 were $7.8 million, which mainly related to:

Inflows:

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

Outflows:

• $3.0 million of repayment of existing term loan.
• $0.5 million of repayment of settlement of cash portion of contingent consideration for Be Social.
• $0.1 million of repayment of notes payable.
• $0.1 million of payment of debt origination costs.
• $0.1 million of early payment penalty of the term loan.

Debt and Financing Arrangements

Total debt amounted to $20.7 million as of September 30, 2024, compared to $19.3 million as of December 31, 2023, an increase of $1.4 million, primarily related to an increase in related party nonconvertible promissory notes, offset by the repayment of the term loan.

Our debt obligations in the next twelve months from September 30, 2024 and December 31, 2023, were approximately $4.9 million. 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 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 months ended September 30, 2024, the Company did not sell shares of common stock. During the nine months ended September 30, 2024, the Company sold 475,000 shares of its common stock, at prices ranging between $2.14 and $3.06 and received proceeds of $1,185,300.

During the three and nine months ended September 30, 2023, the Company sold 150,000 and 575,000 shares of its common stock, respectively, at prices ranging between $3.31 and $4.54 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, 2024.

Convertible Notes Payable

As of September 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 $5.00 per share, four of the convertible notes payable may not be converted at a price less than $4.00 per share, and three 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 $127,500 and $128,750 during the three months ended September 30, 2024, and 2023, respectively, and $382,750 and $414,880 during the nine months ended September 30, 2024, and 2023, respectively. In addition, the Company made cash interest payments amounting to $382,750 and $413,764 during the nine months ended September 30, 2024 and 2023, respectively, related to the convertible notes payable.

As of both September 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.

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, 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 $300,000 and $355,000 in noncurrent liabilities as of September 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 a loss in fair value of $10,000 for the three months ended September 30, 2024. There was no change in fair value for the three months September 30, 2023. A gain in fair value of $55,000 and a loss in fair value of $6,444 for the nine months ended September 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 September 30, 2024 and 2023, and $29,589 for both the nine months ended September 30, 2024 and 2023. In addition, the Company made cash interest payments amounting to $29,589 for both the nine months ended September 30, 2024 and 2023, related to the convertible note payable at fair value.

Nonconvertible Promissory Notes

As of September 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 September 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 $93,142 for the three months ended September 30, 2024 and 2023, respectively, and $291,000 and $238,195 for the nine months ended September 30, 2024 and 2023, respectively. The Company made interest payments of $291,000 and $215,111 during the nine months ended September 30, 2024 and 2023, respectively, related to the nonconvertible promissory notes.

Nonconvertible Unsecured Promissory Note - Socialyte Promissory Note

In connection with the purchase agreement for the acquisition of Socialyte (“Socialyte Purchase Agreement”), the Company entered into a promissory note with the sellers of 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 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The Company recorded interest expense related to this Socialyte Promissory Note of $30,000 and $90,000 for the three and nine months ended September 30, 2024, respectively and $30,000 and $95,000 for the three and nine months ended September 30, 2023, respectively. No interest payments were made during the three and nine months ended September 30, 2024 and 2023, related to the Socialyte Promissory Note.

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.

As of September 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 $207,235 and $277,423, respectively, related to the DE LLC Notes. For both the nine months ended September 30, 2024 and 2023, the Company did not repay any principal balance on the DE LLC Notes. During the nine months ended September 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, 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 September 30, 2024, the Company had a principal balance of $975,000, and accrued interest of $66,042. The Company did not make cash payments during the nine months ended September 30, 2024 related to this loan from related party.

The Company recorded interest expense of $80,972 and $27,621 for the three months ended September 30, 2024 and 2023, respectively, and $195,853 and $82,863 for the nine months ended September 30, 2024 and 2023, respectively, related to the DE LLC Notes and Mock Notes.

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. During the three months ended September 30, 2024, the Company repaid $400,000 of the line of credit for a period of 30-days in compliance with the covenants of the line of credit. Once the 30-day period was done, on August 27, 2024, the Company drew $400,000 from the line of credit.

As of September 30, 2024 and December 31, 2023, the Company had a balance of $4,755,384 and $5,482,614 of principal outstanding under the BKU Term Loan, respectively, net of debt issuance costs of $67,290 and $79,907, respectively. As of September 30, 2024 and December 31, 2023, the Company had a balance of $400,000 of principal outstanding under the BKU Line of Credit.

Amortization of debt origination costs under the BKU Credit Facility is included as a component of interest expense in the condensed consolidated statements of operations and amounted to approximately $4,206 and $12,617 for the three and nine months ended September 30, 2024, respectively.

During the three and nine months ended September 30, 2024, the Company did not use the BKU Commercial Card.

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are discussed in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2023.

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

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

Recent Accounting Pronouncements

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

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.

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, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 1, 2024, which have not been remediated as of the date of the filing of this report.

Remediation of Material Weaknesses in Internal Control over Financial Reporting

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

• Developing formal policies and procedures over the Company’s fraud risk assessment and risk management function;
• Developing policies and procedures to enhance the precision of management review of financial statement information and control impact of changes in the external environment;
• Entering into an agreement with a third-party consultant that assists us in analyzing complex transactions and the appropriate accounting treatment;
• 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.