Dolphin Entertainment, Inc.: Form 10-K for the period ended Dec 31, 2022

Overview

We are a leading independent entertainment marketing and premium content development company. Through our subsidiaries, 42West LLC (“42West”), The Door Marketing Group LLC (“The Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation, Inc. (“Viewpoint”), Be Social Public Relations, LLC (“Be Social”), B/HI Communications, Inc. (“B/HI”) and Socialyte LLC (“Socialyte”) we provide expert strategic marketing and publicity services to many of the top brands, both individual and corporate, in the motion picture, television, music, gaming, culinary, hospitality and lifestyle industries. 42West (Film and Television, Gaming), Shore Fire (Music), and The Door (Culinary, Hospitality, Lifestyle) are each recognized global PR and marketing leaders for the industries they serve. (B/HI is considered a division of 42West throughout the rest of our discussion.) Viewpoint adds full-service creative branding and production capabilities to our marketing group and Be Social and Socialyte provide influencer marketing capabilities through their roster of highly engaged social media influencers. 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 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”.

We currently 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, Shore Fire, The Door, Viewpoint, Be Social and Socialyte and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, social media and influencer marketing, creative branding, and the production of promotional video content. The content production segment is composed of Dolphin Films, Inc. (“Dolphin Films”) and a department within Dolphin, which produce and distribute feature films and digital content.

With respect to our entertainment publicity and marketing segment, we currently see a favorable environment for organic growth. The original content budgets of many large studios and streaming services have grown considerably the past few years and are expected to continue to do so for the foreseeable future. Furthermore, we have seen the entrance of large streaming services such as Disney+, Apple TV, Peacock (from NBCUniversal), HBO Max, Paramount+ and Discovery, all to compete with Netflix, Amazon and Hulu. We believe that the foremost differentiating factor for all of these platforms will be original programming and, consequently, it is anticipated that there will be an increase of tens of billions of dollars in programming spent across the market. We also believe that each of these original shows will need substantial public relations and marketing campaigns to drive consumer awareness of both the shows themselves and the respective platforms on which to find them.

Additionally, we have endeavored to create a “marketing super group,” combining marketing, public relations, branding, and digital production, that will serve as a platform for organic growth via the cross-selling of services among our subsidiaries. By way of example, our initial public relations companies (42West, Shore Fire, and The Door) have identified the capability to run influencer marketing campaigns for clients as a “must have” in today’s environment, which requires the ability to drive social media awareness and engagement. Thus, we believe that our subsidiaries, Be Social and Socialyte provide a critical competitive advantage in the acquisition of new clients in the entertainment and lifestyle marketing space and will continue to fuel topline revenue growth as the average revenue per client increases with the cross-selling of influencer marketing services. Furthermore, influencer marketing campaigns are also considered essential to so many consumer products earned media campaigns in today’s online marketplace, creating large cross-selling opportunities between our PR agencies and Be Social’s and Socialyte’s expertise and services.

We believe that our expanding portfolio of public relations and marketing companies will continue to attract future acquisitions. We believe that our “marketing super group” is unique in the industry, as a collection of best-in-class service providers across a variety of entertainment and lifestyle verticals. We further believe that with each new acquisition in this space, our portfolio will increase its breadth and depth of services and, therefore, be able to offer an even more compelling opportunity for other industry leaders to join and enjoy the benefits of cross-selling to a wide variety of existing and potential clients. Thus, we believe we can continue to grow both revenues and profits through future acquisitions into our entertainment publicity and marketing segment.

Finally, we believe our ability to engage a broad consumer base through our best-in-class pop culture 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 2.0” (with “Dolphin 1.0” being the underlying businesses of each of our subsidiaries).

Simply put, we seek to own some of the assets we are marketing. Specifically, we want to own 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.

The first of our 2.0 investments was in the new world of NFTs (Non-Fungible Tokens). Initially, we had seen a large opportunity in this sector. Even without broad consumer adoption, the NFT market grew dramatically in 2021, from an estimated $250 million in 2020 to over $40 billion in 2021, according to Bloomberg. We had believed the NFT market would continue to grow at a rapid pace for years to come, driven by the combination of 1) the ability of consumers to purchase using a credit card (and not just with cryptocurrencies); 2) consumer-friendly pricing options (previously not readily available due to large “gas fees” charged by both sellers and buyers of NFTs to offset the energy consumption required to “mint” the NFT for sale); and 3) popular entertainment and pop culture collectibles being offered.

In March 2021, we announced our intentions to enter into the production and marketing of NFTs. In August, 2021, we announced we would develop and launch NFT collections across all major entertainment industry verticals (film, television, music, gaming, etc.). In October, 2021, we announced the hiring of Anthony Francisco, former Senior Visual Development Artist at Marvel Studios, and designer of many iconic characters in the Marvel Cinematic Universe, to be Creative Director of our NFT studios. And in December, 2021, we unveiled our first collection, entitled “Creature Chronicles: Exiled Aliens,” a generative art collection of 10,000 unique avatars created by Mr. Francisco. On October 2, 2022, the Company minted and offered for sale a collection of 7,777 Creature Chronicles: Exiled Aliens NFTs. The collection generated approximately 13,175 Solana (“SOL”) equivalent to approximately $429,000 on the date of the sale, of which we netted approximately $300,000.

Despite the success of a “sold out” collection (in approximately 90 minutes on a Sunday afternoon), we no longer have immediate plans to design and sell additional NFT collections, due to the tremendously uncertain macro environment surrounding cryptocurrencies in general (still the primary payment form for NFTs), and NFTs in particular.

Our second Dolphin 2.0 investment was made in October, 2021, when we acquired an ownership stake 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 held its soft opening in September 2022 and is expected to be fully operating by fourth quarter of 2023. The Midnight Theatre will feature three distinct experiences for guests: the theatre itself; a separate pan-Asian restaurant, Hidden Leaf; and a ground-level café. We manage all aspects of publicity and marketing for the venue (both theatre and restaurant), as well as facilitate talent and commercial relationships within the entertainment and culinary industries.

The Midnight Theatre will have a weekly schedule of performances and immersive experiences across music, comedy, Broadway, and narrative magic shows programmed at the 160-seat venue. The contemporary variety theatre integrates state-of-the-art 270 degree projection mapped visuals into live performances, allowing for unprecedented intimacy between performers and guests. The Midnight Theatre also has built in live-stream capabilities, allowing for events inside the theatre to expand beyond into other theaters, people’s homes and corporate offices. The theatre will be available to host live streamed podcasts, comedy specials, music events, Broadway cabarets, corporate keynote events and more.

Hidden Leaf, the modern pan-Asian restaurant concept on the second floor of The Midnight Theatre space, led by acclaimed restauranteur Josh Cohen, commenced operations on July 2022. The restaurant features a 75-seat dining room, 20-seat private dining room and a 40-seat lounge/bar area. Hidden Leaf will be open for both lunch and dinner and will incorporate world-class food with interactive elements such as table-side prep, wine consignments, and memberships.

Our third Dolphin 2.0 investment was made in December, 2021, when we acquired an ownership stake in Crafthouse Cocktails, a pioneering brand of ready-to-drink, all-natural classic cocktails created by world renowned mixologist, Charles Joly and esteemed restaurateur, Matt Lindner. Founded in 2013, Crafthouse Cocktails is an award-winning pioneer in the premium ready-to-drink cocktail category, with eight different, made-from-scratch cocktails, using all-natural ingredients and premium craft spirits, available in more than 2,000 retail locations nationally. We will manage all aspects of publicity and marketing for the brand through our network of agencies and will facilitate talent and commercial relationships within the entertainment and culinary industries.

Lastly our fourth Dolphin 2.0 investment was made in June, 2022, when we entered into a multi-year deal with IMAX to jointly finance the development and production of a slate of feature-length documentaries for the global market. The first project under this deal is for “The Blue Angels,” co-produced by legendary Hollywood filmmaker J.J. Abrams and his Bad Robot Productions. “The Blue Angels” follows the newest class of the storied Navy and Marine Corps flight squadron through intense training and into their first season of heart-stopping aerial artistry, while also sharing the emotional stories of the veterans on the team who, this year, will take their final flights. It will mark the first time the iconic blue and yellow F/A-18 Super Hornets will be featured in IMAX. The film is expected to be released in IMAX theaters in the second half of 2023.

Growth Opportunities and Strategies

For Dolphin 1.0, we are focused on driving growth through the following efforts:

Expand and grow 42West to serve more clients with a broad array of interrelated services. We believe that the launch and growth of a large number of streaming services over the last three years represents tremendous organic growth opportunities for 42West, due to the increase in potential new clients and a larger number of individual projects to promote.

Enhanced by Dolphin’s acquisitions of Be Social, Socialyte and Viewpoint, 42West has the ability to both structure influencer marketing campaigns and create promotional and marketing content for clients, which are critical services for entertainment content marketers in today’s digital world.

Through our acquisition of B/HI in January, 2021 (considered a division of 42West), 42West has entered into the “sister” entertainment verticals of video gaming and e-sports. We believe these industries represent a tremendous growth opportunity for 42West.

Furthermore, the growing involvement in non-entertainment businesses by many of our existing entertainment clients has allowed 42West to establish a presence and develop expertise outside its traditional footprint. Using this as a foundation, we are now working to expand our involvement in these new areas, including consumer products “fronted” by recognizable celebrities or “branded” with recognizable intellectual property.

Expand and grow Shore Fire Media to serve more clients in more genres of music and in more markets. For over 30 years, Shore Fire has been a leader in providing public relations and marketing services to a broad array of songwriters, recording artists, publishers and others within the music industry, all from its headquarters in Brooklyn. We plan to significantly expand Shore Fire’s presence in other major music markets, including Los Angeles, Nashville and Miami, which we believe will provide access to potential clients across a wide array of popular musical genres, including pop, country and Latin.

Expand and grow The Door through the expansion of its Consumer Products PR business. The Door’s market-leading position in both the food and hospitality verticals, with many clients that have consumer-facing products and the need for attendant marketing campaigns, has provided the Company with the requisite experience for a successful entry into the high-margin consumer products PR business with potential clients both inside and outside of the food and hospitality verticals. We plan to significantly increase the number of consumer products PR accounts at The Door. Such accounts often generate higher monthly fees and longer-term engagements than any other of our customer verticals.

Diversify Viewpoint’s Client Base. Viewpoint is a leading creative branding agency and promotional video content producer for the television industry, with long-term clients such as HBO, Discovery Networks, Showtime and AMC. Through 42West, The Door and Shore Fire, Viewpoint can offer its best-in-class services to several new verticals, including motion picture production and distribution companies, video game publishers, musical artists, restaurant groups, the hospitality and travel industry and the marketers of consumer products. The ability for Viewpoint to reach clients of 42West, The Door and Shore Fire provides Viewpoint with the opportunity to diversify its client base, while allowing 42West, The Door and Shore Fire to increase their service offerings to, existing and future clients, potentially driving increased revenues.

Diversify Be Social’s and Socialyte’s Client Bases. Be Social and Socialyte are leading influencer marketing agencies, with a specialization in the beauty, fashion and wellness industries. Through 42West, The Door and Shore Fire, Be Social and Socialyte can offer their services to several new verticals, including motion picture and television content, podcasts, musical artists and labels, restaurant groups, hotels and resorts, the travel industry, the gaming and e-sports industry, and the marketers of broader consumer products. The ability for Be Social and Socialyte to reach clients of 42West, The Door and Shore Fire provides Be Social and Socialyte with the opportunity to diversify their client bases, while allowing 42West, The Door and Shore Fire to increase their service offerings to, existing and future clients, potentially driving increased revenues.

Cross-Sell Be Social’s and Socialyte’s Expertise Across Both Paid and Organic Influencer Campaigns. Be Social has a well-regarded brand marketing division specializing in organic influencer campaigns (i.e. wherein brands supply free product to influencers to sample, but do not pay the influencers for guaranteed posts). Socialyte has a well-regarded brand marketing division specializing in paid influencer campaigns (i.e. wherein brands pay influencers to promote their products, whether or not free products are distributed to the influencer). Brands often run both types of campaigns, organic and paid, during the same campaign cycle. By being able to offer both services to brands, we anticipate a strong “cross-selling” business between the brand divisions of Be Social and Socialyte, increasing the “wallet share” from each of the brand clients of the respective companies.

Opportunistically grow through complementary acquisitions. We plan to selectively pursue acquisitions to further enhance our competitive advantages, scale our revenues, and increase our profitability. Our acquisition strategy is based on identifying and acquiring companies that complement our existing entertainment publicity services businesses. We believe that complementary businesses, such as live event production companies and PR firms in other entertainment verticals, can create synergistic opportunities that may increase profits and operating cash flow.

For Dolphin 2.0, we are focused on driving growth through the following efforts:

Build a portfolio of premium film, television and digital content. We intend to grow and diversify our portfolio of film, television and digital content by capitalizing on demand for high quality digital media and film content throughout the world marketplace. We plan to balance our financial risks against the probability of commercial success for each project. We believe that our strategic focus on content and creation of innovative content distribution strategies will enhance our competitive position in the industry, ensure optimal use of our capital, build a diversified foundation for future growth and generate long-term value for our shareholders. Finally, we believe that marketing strategies that will be developed by our best-in-class entertainment PR and marketing companies will drive our creative content, thus creating greater potential for profitability.

Promotion of Midnight Theatre. As noted above, Midnight Theatre is currently scheduled to fully open with seven days a week of programming, by the end of the fourth quarter of this year. All Dolphin PR and Marketing subsidiaries will support the promotional campaigns for the opening of Midnight Theatre. We will also seek to support the programming slate of the theatre itself, through our relationships across music, Broadway and other forms of entertainment.

Assist Crafthouse Cocktails on its expansion. We believe Crafthouse Cocktails is a fantastic product, poised for growth. We will seek to create and execute PR and marketing campaigns to assist Crafthouse in growing its retail presence, both in states where the brand currently is available, as well as new states across the country.

Entertainment Publicity and Marketing

42West

Through 42West, an entertainment public relations agency, we offer talent publicity, entertainment (motion picture and television) marketing, video game and eSports marketing, and strategic communications services. Prior to its acquisition, 42West grew to become one of the largest independently-owned public relations firms in the entertainment industry, and in March 2022 (the most recent year of such rankings), 42West was ranked #2 in the annual rankings of the nation’s Power 50 PR firms by the New York Observer, the highest position held by an entertainment PR firm. As such, we believe that 42West has served, and will continue to serve, as an “acquisition magnet” for us to acquire new members of our marketing “super group,” which has the ability to provide synergistic new members with the opportunity to grow revenues and profits through 42West’s access, relationships and experience in the entertainment industry.

Marketing professionals at 42West develop and execute marketing and publicity strategies for dozens of movies and television shows annually, as well as for individual actors, filmmakers, recording artists, video game publishers, and authors. Through 42West, we provide services in the following areas:

Entertainment Marketing

We provide marketing direction, public relations counsel and media strategy for productions (including theatrical films, DVD and VOD releases, television programs, and online series) as well as content producers, ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. Our capabilities include worldwide studio releases, independent films, television programming and web productions. We provide entertainment marketing services in connection with film festivals, awards campaigns, event publicity and red-carpet management.

Talent Publicity

We focus on creating and implementing strategic communication campaigns for performers and entertainers, including film, television and Broadway stars. Our talent roster includes multiple Oscar-, Emmy- and Tony-winning actors. Our services in this area include ongoing strategic counsel, media relations, studio, network, charity, corporate liaison and event support.

Video Game and eSports Publicity

We provide marketing direction, public relations counsel and media strategy for video game publishers as well as eSports leagues, and other entities in the gaming industry. Our capabilities include global game releases (web, console and mobile), independent releases, eSports tournament and league publicity, and various gaming events.

Strategic Communications

Our strategic communications team advises brands and non-profits seeking to utilize entertainment and pop culture in their marketing campaigns. We also help companies define objectives, develop messaging, create brand identities, and construct long-term strategies to achieve specific goals, as well as manage functions such as media relations or internal communications on a day-to-day basis. Our clients include major studios and production companies, record labels, media conglomerates, technology companies, philanthropic organizations, talent guilds, and trade associations, as well as a wide variety of high-profile individuals, ranging from major movie and pop stars to top executives and entrepreneurs.

Shore Fire

Through Shore Fire, we represent musical artists and culture makers at the top of their fields. Shore Fire’s dedicated teams in New York, Los Angeles, and Nashville wield extensive, varied expertise to strategically amplify narratives and shape reputations for career-advancing effect. We believe Shore Fire is the largest public relations agency in the music business, representing top recording artists in multiple genres, songwriters, music producers, record labels, music industry businesses, venues, trade organizations, authors, comedians, social media personalities and cultural institutions.

The Door

Through The Door, a hospitality, lifestyle and consumer products public relations agency, we offer traditional public relations services, as well as social media marketing, creative branding, and strategic counsel. Prior to its acquisition, The Door was widely considered the leading independent public relations firm in the hospitality and lifestyle industries. Among other benefits, The Door acquisition has expanded our entertainment verticals through the addition of celebrity chefs and their restaurants, as well as with live events, such as some of the most prestigious and well-attended food and wine festivals in the United States. Our public relations and marketing professionals at The Door develop and execute marketing and publicity strategies for dozens of restaurant and hotel groups annually, as well as for individual chefs, live events, and consumer-facing corporations.

Be Social and Socialyte

Through Be Social and Socialyte, our influencer marketing agencies, we offer brand marketing services ( both paid and organic influencer marketing campaigns) and management for individual influencers. Be Social is a recognized leader in its field, especially within the beauty, fitness and wellness industries. Socialyte is an influencer marketing powerhouse, with teams in New York, Los Angeles, Miami and Nashville representing some of the most sought-after creators, from digital-only to celebrity-level talent. Combined, Be Social and Socialyte have a client roster of more than 200 market-leading influencers. Lytehouse, Socialyte’s sister agency, represents some of the world's most iconic brands, providing a full suite of services for paid influencer campaigns, from strategy and casting, through execution and delivery, with in-depth analytics and reporting.

Viewpoint

Viewpoint is a full-service, boutique creative branding and production agency that has earned a reputation as one of the top producers of promotional brand-support videos for a wide variety of leading cable networks in the television industry. Viewpoint’s capabilities run the full range of creative branding and production, from concept creation to final delivery, and include: brand strategy, concept and creative development, design & art direction, script & copywriting, live action production & photography, digital development, video editing & composite, animation, audio mixing & engineering, project management and technical support.

Content Production

Dolphin Films and Dolphin Digital Studios

Dolphin Films is a content producer of motion pictures. We own the rights to several scripts that we intend to produce at a future date. Dolphin Digital Studios creates original content to premiere online. We own several concepts and scripts that we intend to further develop and produce at a future date.

In June, 2022, we entered into a multi-year deal with IMAX Corporation to jointly finance the development and production of a slate of feature-length documentaries for the global market. The first project under this deal is for “The Blue Angels,” co-produced by legendary Hollywood filmmaker J.J. Abrams and his Bad Robot Productions. We agreed to finance up to $2 million of the production budget, and as of December 31, 2022, we have invested approximately $1.5 million, of The Blue Angels that is expected to be released in the second half of 2023.

Competition

The businesses in which we engage are highly competitive. Through 42West, Shore Fire and The Door, we compete against other public relations and marketing communications companies, as well as independent and niche agencies to win new clients and maintain existing client relationships. Through Viewpoint, Be Social and Socialyte, we compete against other creative branding and influencer marketing agencies as well as in-house teams at many of our clients. Our content production business faces competition from companies within the entertainment business and from alternative forms of leisure entertainment, such as travel, sporting events, video games and computer-related activities. We are subject to competition from other digital media and motion production companies, as well as from large, well-established companies within the entertainment industry that have significantly greater development, production, distribution and capital resources than us. We compete for the acquisition of literary properties and for the services of producers, directors, actors and other artists as well as creative and technical personnel and production financing, all of which are essential to the success of our business. In addition, our productions compete for audience acceptance and advertising dollars.

We believe that we compete on the basis of the following competitive strengths:

• Market Reputations of 42West, Shore Fire and The Door — 42West, Shore Fire and The Door consistently rank among the most prestigious and powerful public relations firms in the United States (each ranking in the Top 50 Most Powerful PR Firms in recent rankings, as published by the New York Observer), which is a significant competitive advantage given the nature of the entertainment marketing and public relations industry, in which “perception is power;”
• *An Exceptional Management Team—*our CEO, Mr. O’Dowd, has a 25-year history of producing and delivering high-quality family entertainment. In addition, 42West’s CEO, Amanda Lundberg, The Door’s CEO, Charlie Dougiello, and President, Lois O’Neill, and Shore Fire’s President Marilyn Laverty are all longtime PR practitioners, with decades of experience, and are widely recognized as among the top communications strategists in the entertainment, hospitality and music industries, as evidenced by the market reputation of their companies; and
• *Our Ability to Offer Interrelated Services—*we believe that our ability to offer influencer marketing expertise and creative branding opportunities for our 42West, The Door and Shore Fire clients, primarily through the services of Be Social, Socialyte and Viewpoint, will allow us to expand and grow our relationships with existing clients and also attract new ones.
• Our Ability to Offer Services Across Multiple Verticals of Entertainment – we believe that our ability to offer relationship access and marketing reach across all of the film, television, podcast, music, celebrity chef, hospitality, gaming and e-sports industries will be attractive to marketers of consumer products who desire a broad campaign across pop culture, which will allow us to expand our client base and grow the size of our campaigns.

Human Capital Management

Our People and Culture

Because our business is predominantly service-based, the quality of the personnel we employ is crucial to our success and growth. Our employees and contractors are our most valuable assets. We believe our relationship with our employees is great, and we also utilize consultants in the ordinary course of our business and hire additional employees on a project-by-project basis in connection with the production of digital media projects or motion pictures. We conduct training and development in our subsidiaries to ensure our employees maintain the quality for which we are known.

As of March 10, 2023, we had 244 full-time employees, all of which are located within the United States.

Diversity and Inclusion

Dolphin and our subsidiaries are committed to diversity and inclusion, and our culture reinforce these values on a day-to-day basis, beginning with our leadership team. Our leadership team, which includes our Chief Executive Officer, Chief Financial and Operating Officer and the leaders of our subsidiaries, is composed 70% of women. Likewise, the Board of Directors is composed 29% of women.

Other Compensation and Benefits

The Company offers competitive compensation and benefits packages that meet the needs of its employees, including equity incentive awards, retirement plans, health, dental, and vision benefits, basic life insurance and short and long-term disability coverage, among other benefits. The Company analyzes market trends and monitors its own compensation practices to attract, retain, and promote employees and reduce turnover and associated costs.

Regulatory Matters

We are subject to state and federal work and safety laws and disclosure obligations, under the jurisdiction of the U.S. Occupational Safety and Health Administration and similar state organizations.

As a public company, we are subject to the reporting requirements under Section 13(a) and Section 15(d) of the Exchange Act.

Corporate Offices

Our corporate headquarters is located at 150 Alhambra Circle, Suite 1200, Coral Gables, Florida 33134. Our telephone number is (305) 774-0407. We also have offices located at:

• 600 3rd Avenue, 23rd Floor, New York, New York 10016,
• 37 West 17th Street, 5th Floor, New York, New York, 10011;
• 1840 Century Park East, Suite 200, Los Angeles, California 90067; and
• 12 Court Street, Suite 1800, Brooklyn, New York 11201;

Available Information

The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” section of the Company’s website, www.dolphinentertainment.com (http://www.dolphinentertainment.com), as soon as reasonably practical after they are filed with the Securities and Exchange Commission (“SEC”). The SEC maintains a website, www.sec.gov (http://www.sec.gov), which contains reports, proxy and information statements, and other information filed electronically with the SEC by the Company. In addition, you may automatically receive email alerts and other information when you enroll your email address by visiting the “Investor Relations” section of our website. The content of any website referred to in this document is not incorporated by reference into this document.

Risks Related to our Business and Financial Condition

Our results of operations are highly susceptible to unfavorable economic conditions.

We are exposed to risks associated with weak or uncertain regional economic conditions and disruptions in the financial markets. Following the severe downturn in most markets following the outbreak of the COVID-19 pandemic, the global economy continues to be challenging. Economic downturns or uncertainty about the strength of the global economy in general, or economic conditions in certain regions or market sectors, and caution on the part of marketers, can have an effect on the demand for advertising and marketing communication services. In addition, market conditions can be and have been adversely affected by natural and human disruptions, such as natural disasters, public health crises, severe weather events, military conflict or civil unrest. Our industry can be affected more severely than other sectors by an economic downturn and can recover more slowly than the economy in general. In the past, including in connection with the outbreak of the COVID-19 pandemic, some clients have responded to weak economic and financial conditions by reducing their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses. This pattern may recur in the future. Furthermore, unexpected revenue shortfalls can result in misalignments of costs and revenues, resulting in a negative impact to our operating margins. If our business is significantly adversely affected by unfavorable economic conditions or other market disruptions that adversely affect client spending, the negative impact on our revenue could pose a challenge to our operating income and cash generation from operations.

We have a history of net losses and may continue to incur net losses.

We have a history of net losses and may be unable to generate sufficient revenue to achieve profitability in the future. For the fiscal years ended December 31, 2022 and 2021, respectively, our net loss was $4,780,135 and $6,462,303. Our accumulated deficit was $109,214,479 and $104,434,344 at December 31, 2022 and 2021, respectively. Our ability to generate net profit in the future will depend on our ability to realize the financial benefits from the operations of 42West, The Door, Shore Fire, Viewpoint, Be Social and Socialyte and the success of our Dolphin 2.0 initiatives, as no single project is likely to generate sufficient revenue to cover our operating expenses. If we are unable to generate net profit at some point, we will not be able to meet our debt service or working capital requirements. As a result, we may need to (i) issue additional equity, which could substantially dilute the value of your share holdings, (ii) sell a portion or all of our assets, including any project rights which might have otherwise generated revenue, or (iii) cease operations.

We currently have substantial indebtedness which may adversely affect our cash flow and business operations and may affect our ability to continue to operate as a going concern.

The table below sets forth our total principal amount of debt as of December 31, 2022 and 2021.

Our indebtedness could have important negative consequences, including:

• our ability to obtain additional financing for working capital, capital expenditures, future productions or other purposes may be impaired or such financing may not be available on favorable terms or at all;
• we may have to pay higher interest rates upon obtaining future financing, thereby reducing our cash flows; and
• we may need a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, reducing the funds that would otherwise be available for operations and future business opportunities.

Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance and our ability to obtain additional financing, which will be affected by prevailing economic conditions, the profitability of our content production and entertainment publicity and marketing businesses and other factors contained in these Risk Factors, some of which are beyond our control.

If we are not able to generate sufficient cash to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying digital or film productions, delaying or abandoning potential acquisitions, delaying Dolphin 2.0 initiatives, selling assets, restructuring or refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms or at all and our indebtedness may affect our ability to continue to operate as a going concern.

Our stock price has recently been volatile and may be volatile in the future, and as a result, investors in our common stock could incur substantial losses.

Our stock price has recently been volatile and may be volatile in the future. We may incur rapid and substantial increases or decreases in our stock price in the foreseeable future that may or may not coincide in timing with the disclosure of news or developments by us. The stock market in general, and the market for entertainment companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may experience losses on their investment in our common stock. The market price for our common stock may be influenced by many factors, including the following:

• announcements of state-of-the-art means of content production and entertainment publicity and marketing, or those of companies that are perceived to be similar to us;
• announcements related to any delays in production or rollout of entertainment content;
• our ability to meet or exceed the rapidly-changing expectations of our clients;
• news that audience acceptance of and interest in our digital media productions, and therefore the commercial success of our content production business, is lower or higher than we expected;
• our ability to adapt to rapid change in technology, forms of delivery, storage, and consumer preferences related to digital content;
• announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our strategic collaboration partners or our competitors;
• variations in our financial results or those of companies that are perceived to be similar to us;
• trading volume of our common stock;
• developments concerning our collaborations or partners;
• the impact of any local or global pandemic and its effect on us;
• the perception of the entertainment publicity and marketing or digital content production by the public, legislatures, regulators and the investment community;
• developments or disputes concerning intellectual property rights;
• significant lawsuits, including patent or stockholder litigation;
• our ability or inability to raise additional capital and the terms on which we raise it;
• sales of our common stock by us or our stockholders;
• declines in the market prices of stocks generally or of companies that are perceived to be similar to us; and
• general economic, industry and market conditions.

Our management has determined that our disclosure controls and procedures and our internal controls over financial reporting are not effective as we have identified material weaknesses in our internal controls.

As disclosed in Part II, Item 9A. Controls and Procedures of this Annual Report on Form 10-K, management concluded that for the years ended December 31, 2022 and 2021, our internal control over financial reporting was not effective and we identified several material weaknesses. Our management concluded that our disclosure controls and procedures were not effective due to material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We have commenced our remediation efforts as discussed in Part II, 9A. Controls and Procedures of this Annual Report on Form 10-K to address the material weaknesses in internal control over financial reporting and ineffective disclosure controls and procedures. If our remedial measures are insufficient, or if additional material weaknesses or significant deficiencies in our internal controls occur in the future, we could be required to restate our financial results, which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the weakness or deficiencies, harm our reputation and otherwise cause a decline in investor confidence. In addition, we could be subject to, among other things, regulatory or enforcement actions by the Securities and Exchange Commission, (the “SEC” or the “Commission”).

We rely on information technology systems that are susceptible to cybersecurity risks. In the event of a cybersecurity incident, we could experience operational interruptions, incur substantial additional costs, become subject to legal or regulatory proceedings or suffer damage to our reputation.

We rely on information technologies and infrastructure to manage our businesses, including digital storage of marketing strategies and client information, films and digital programming and delivery of digital marketing services for our businesses. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. The incidence of malicious technology-related events, such as cyberattacks, computer hacking, computer viruses, worms or other destructive or disruptive software, denial of service attacks or other malicious activities is on the rise worldwide. Power outages, equipment failure, natural disasters (including extreme weather), terrorist activities or human error may also affect our systems and result in disruption of our services or loss or improper disclosure of personal data, business information or other confidential information.

Likewise, data privacy breaches, as well as improper use of social media, by employees and others may pose a risk that sensitive data, such as personally identifiable information, strategic plans and trade secrets, could be exposed to third parties or to the general public. We also utilize third parties, including third-party “cloud” computing services, to store, transfer or process data, and system failures or network disruptions or breaches in the systems of such third parties could adversely affect our reputation or business. Any such breaches or breakdowns could lead to business interruption, exposure of our or our clients’ proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings and other costs. Such events could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, we could be adversely affected if any of our significant customers or suppliers experience any similar events that disrupt their business operations or damage their reputation. Efforts to develop, implement and maintain security measures are costly, may not be successful in preventing these events from occurring and require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Although we maintain monitoring practices and protections of our information technology to reduce these risks, there can be no assurance that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.

We will require additional financing, and we may not be able to raise funds on favorable terms or at all.

We had negative working capital of $1,423,825 as of December 31, 2022. With our current cash on hand, expected revenues, and based on our current average monthly expenses, we anticipate we will need additional funding in order to continue our operations at their current levels, and to pay the costs associated with being a public company, for the next 12 months. To the extent we acquire additional businesses, we will also require additional funding in the future to support our operations.

The most likely source of future funds presently available to us will be through the sale of equity capital. Any sale of share capital will result in dilution to existing stockholders. Furthermore, we may incur debt in the future, and may not have sufficient funds to repay our future indebtedness or may default on our future debts, jeopardizing our business viability.

The profitability of our investments is uncertain.

During 2021, we acquired an ownership stake in Midnight Theatre, a contemporary variety theater and restaurant in Manhattan and in Crafthouse Cocktails, a brand of ready-to-drink, all-natural classic cocktails. During the year ended December 31, 2022, we incurred losses related to our investment in Midnight Theatre and Crafthouse Cocktails in the amount of $246,789. We also started an NFT studio to produce and market NFTs. On October 2, 2022, the Company minted and offered for sale a collection of 7,777 NFTs, titled Creature Chronicles: Exiled Aliens. The collection generated approximately 13,175 Solana (“SOL”) equivalent to approximately $429,000 on the date of the sale. Investments in these new ventures entail risks those businesses will fail to perform in accordance with expectations. In undertaking these investments, we will incur certain risks, including the expenditure of funds on, and the devotion of management’s time to, synergies that may not come to fruition. Additional risks inherent in these investments include risks that the ventures will not achieve anticipated success and that estimates of the costs of bringing these ventures to profitability may prove inaccurate. Expenses may also be greater than anticipated.

Risks Related to Our Entertainment Publicity and Marketing Business

Our business could be adversely affected if we fail to retain the principal sellers, and other key employees of 42West, The Door, Viewpoint, Shore Fire, Be Social and Socialyte and the clients they serve.

The success of our entertainment publicity and marketing business operated by 42West, The Door, Viewpoint, Shore Fire, Be Social and Socialyte, our marketing subsidiaries, substantially depends on our ability to retain the services of their former owners and certain key employees. If we lose the services of one or more of these individuals, our ability to successfully implement our business plan with respect to our entertainment publicity and marketing business and the value of our common stock could be materially adversely affected. Although we entered into employment agreements with each of the principal sellers, there can be no assurance that they will serve the terms of their respective employment agreements or choose to remain with us following the expiration of such terms. In addition, the employees of our marketing subsidiaries, and their skills and relationships with clients, are among our most valuable assets. An important aspect of the business’ competitiveness is its ability to retain such key employees. If our marketing subsidiaries fail to hire and retain a sufficient number of these key employees, it may have a material adverse effect on our overall business and results of operations.

Our marketing subsidiaries’ talent rosters currently include some of the best known and most highly respected members of the entertainment, hospitality, and musical communities. These include major studios and networks, corporations, well-known consumer brands, celebrity chefs, leading restaurant and hotel brands, recording artists and social media influencers. These clients often form highly loyal relationships with certain public relations and marketing professionals rather than with a particular firm. The employment agreements with the principal sellers currently contain non-competition provisions that prohibit the principal sellers from continuing to provide services to such clients should they leave our company, however, clients are free to engage other public relations and marketing professionals and there can be no assurance that they will choose to remain with our company. The success of our marketing subsidiaries, therefore, depend on our ability to continue to successfully maintain such client relationships should the principal sellers or other key employees leave our company. If we are unable to retain the current marketing subsidiaries’ current clients or attract new clients, then we could suffer a material adverse effect on our business and results of operations.

We operate in a highly competitive industry.

The entertainment publicity and marketing business is highly competitive. Through our marketing subsidiaries, we must compete with other agencies, and with other providers of marketing and publicity services, in order to maintain existing client relationships and to win new clients. Through Viewpoint, we compete against other creative branding agencies, as well as in-house creative teams at many of our clients. The client’s perception of the quality of an agency’s creative work and the agency’s reputation are critical factors in determining its competitive position.

The success of our entertainment publicity and marketing business depends on its ability to consistently and effectively deliver marketing and public relations services to its clients.

Our marketing subsidiaries’ success depends on its ability to effectively and consistently staff and execute client engagements to achieve the clients’ unique personal or professional goals. Our marketing subsidiaries work to design customized communications or publicity campaigns tailored to the particular needs and objectives of particular projects. In some of their engagements, our marketing subsidiaries rely on other third parties to provide some of the services to its clients, and we cannot guarantee that these third parties will effectively deliver their services or that we will have adequate recourse against these third parties in the event they fail to effectively deliver their services. Other contingencies and events outside of our control may also impact our marketing subsidiaries’ ability to provide its services. Our marketing subsidiaries’ failure to effectively and timely staff, coordinate and execute its client engagements may adversely impact existing client relationships, the amount or timing of payments from clients, its reputation in the marketplace and ability to secure additional business and our resulting financial performance. In addition, our contractual arrangements with our clients may not provide us with sufficient protections against claims for lost profits or other claims for damages.

If we are unable to adapt to changing client demands, social and cultural trends or emerging technologies, we may not remain competitive and our business, revenues and operating results could suffer.

We operate in an industry characterized by rapidly changing client expectations, marketing technologies, and social mores and cultural trends that impact our target audiences. The entertainment industry continues to undergo significant developments as advances in technologies and new methods of message delivery and consumption emerge. These developments drive changes in our target audiences’ behavior to which we must adapt in order to reach our target audiences. In addition, our success depends on our ability to anticipate and respond to changing social mores and cultural trends that impact the entertainment industry and our target audiences. We must adapt our business to these trends, as well as shifting patterns of content consumption and changing behaviors and preferences of our target audiences, through the adoption and exploitation of new technologies. If we cannot successfully exploit emerging technologies or if the marketing strategies we choose misinterpret cultural or social trends and prove to be incorrect or ineffective, any of these could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.

A significant labor dispute in our clients’ industries could have a material adverse effect on our business.

An industry-wide strike or other job action by or affecting the Writers Guild, Screen Actors Guild or other major entertainment industry union could reduce the supply of original entertainment content, which would in turn reduce the demand for our talent and entertainment marketing services. An extensive work stoppage would affect feature film production as well as television and commercial production and could have a material adverse effect on our clients and the motion picture production industry in general. Contracts between entertainment industry unions and the Alliance of Motion Picture and Television Producers, which we refer to as AMPTP, expire from time to time. The failure to finalize and ratify a new agreement with the AMPTP or the failure to enter into new commercial contracts upon expiration of the current contracts could lead to a strike or other job action. Any such severe or prolonged work stoppage could have an adverse effect on the television and/or motion picture production industries and could severely impair our clients’ prospects. Any resulting decrease in demand for our talent and entertainment marketing and other public relations services would have a material adverse effect on our cash flows and results of operations.

Clients may terminate or reduce their relationships with us on short notice.

As is customary in the industry, our marketing subsidiaries’ agreements with their respective clients generally provide for termination by either party on relatively short notice, usually 30 days. Consequently, these clients may choose to reduce or terminate their relationships with us, on a relatively short time frame and for any reason. If a significant number of the marketing subsidiaries’ clients were to reduce the volume of business they conduct with us or terminate their relationships with us completely, this could have a material adverse effect upon our business and results of operations. Viewpoint’s revenue is derived on a project-by-project basis. Clients may decide to use other creative branding and production companies for their projects which would have an adverse effect upon our business and results of operations.

Revenues from our Entertainment Publicity and Marketing segment are susceptible to declines as a result of unfavorable economic conditions.

Economic downturns often severely affect the marketing services industry. Some of our corporate clients may respond to weak economic performance by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in the short-term than other expenses related to operations. In addition, economic downturns could lead to reduced public demand for varying forms of entertainment for which we are engaged to provide public relations and media strategy and promotional services. Such reduced demand for our services could have a material adverse effect on our revenues and results of operations.

If our clients experience financial distress, or seek to change or delay payment terms, it could negatively affect our own financial position and results.

We have a large and diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business. Unfavorable economic and financial conditions, such as the events surrounding the COVID-19 global outbreak, could result in an increase in client financial difficulties that affect us. The direct impact on us included reduced revenues, write-offs of accounts receivable and expenditures billable to clients, and negatively impacted our operating cash flow.

Risks Related to Acquisitions

We are subject to risks associated with acquisitions and we may not realize the anticipated benefits of such acquisitions.

We regularly undertake acquisitions that we believe will enhance our service offering to our clients. These transactions can involve significant challenges and risks, including that the transaction does not advance our business strategy or fails to produce a satisfactory return on our investment. Our customary business, legal and financial due diligence with the goal of identifying and evaluating the material risks involved may be unsuccessful in ascertaining or evaluating all such risks. Though we typically structure our acquisitions to provide for future contingent purchase payments that are based on the future performance of the acquired entity, our forecasts of the investment’s future performance also factor into the initial consideration. When actual financial results differ, our returns on the investment could be adversely affected. Identifying suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis or at all.

Even if we complete an acquisition, we may not realize the anticipated benefits of such transaction. Our recent acquisitions have required, and any similar future transactions may also require, significant efforts and expenditures, including with respect to integrating the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection with acquisition activities and integration efforts, including, without limitation:

• diversion of management attention from managing our historical core business;
• potential disruption of our historical core business or of the acquired business;
• the strain on, and need to continue to expand, our existing operational, technical, financial and administrative infrastructure;
• inability to achieve synergies as planned;
• challenges in controlling additional costs and expenses in connection with and as a result of the acquisition;
• dilution to existing shareholders from the issuance of equity securities;
• becoming subject to adverse tax consequences or substantial depreciation;
• difficulties in assimilating employees and corporate cultures or in integrating systems and controls;
• difficulties in anticipating and responding to actions that may be taken by competitors;
• difficulties in realizing the anticipated benefits of the transaction;
• inability to generate sufficient revenue from acquisitions to offset the associated acquisition costs;
• potential loss of key employees, key clients or other partners of the acquired business as a result of the change of ownership; and
• the assumption of and exposure to unknown or contingent liabilities of the acquired businesses.

If any of our acquisitions do not perform as anticipated for any of the reasons noted above or otherwise, there could be a negative impact on our results of operations and financial condition.

Losses incurred by us subsequent to completion of an acquisition may not be indemnifiable by the seller or may exceed the seller’s indemnification obligations.

As discussed above, there may be liabilities assumed in any acquisition that we did not discover or that we underestimated in the course of performing our due diligence. Although a seller generally will have indemnification obligations to us under an acquisition agreement, these obligations are usually subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations. We cannot assure you that our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any losses that we incur with respect to a particular acquisition. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and operating results.

Risks Related to our Common Stock and Preferred Stock

We have recently issued, and may in the future issue, a significant amount of equity securities and, as a result, your ownership interest in our company has been, and may in the future be, substantially diluted and your investment in our common stock could suffer a material decline in value.

From January 1, 2021 to December 31, 2022, the number of shares of our common stock issued and outstanding has increased from 6,690,579 to 12,340,664 shares. During this period, we issued approximately (i) 2.7 million aggregate shares of our common stock as consideration or earnout consideration for 42West, The Door, Shore Fire, Viewpoint, Be Social, B/HI and Socialyte acquisitions; (ii) 1.2 million to certain holders of convertible notes and warrants that exercised their right to convert all or a portion of their convertible notes or warrants; (iii) 1.7 million to Lincoln Park Capital Fund LLC related to our purchase agreement with them and (iv) 43,000 as stock compensation to certain employees. As of December 31, 2022, we had outstanding convertible notes payable that as of the date of this report are still outstanding in the aggregate principal amount of $5.1 million, which are convertible using a 90-day trading average stock price. As a result of these past issuances and potential future issuances, your ownership interest in the Company has been, and may in the future be, substantially diluted.

The market price for our common stock has been volatile, and these issuances could cause the price of our common stock to continue to fluctuate substantially. Once restricted stock issued in either private placements or to the sellers of the companies we acquired becomes freely tradable, these shareholders may decide to sell their shares of common stock and, if our stock is thinly traded, this could have a material adverse effect on its market price.

We may need to raise additional capital and may seek to do so by conducting one or more private placements of equity securities, securities convertible into equity securities or debt securities, or through a combination of one or more of such financing alternatives. Such issuances of additional securities would further dilute the equity interests of our existing shareholders, perhaps substantially, and may further exacerbate any or all of the above risks.

The Series C Convertible Preferred Stock has super voting rights that may adversely affect our shareholders.

The Series C Convertible Preferred Stock is held by Dolphin Entertainment LLC, an entity owned by Mr. O’Dowd. Except as required by law, holders of Series C Convertible Preferred Stock will only have voting rights once the independent directors of the Board determine that an optional conversion threshold (as defined in the Series C Certificate of Designation) has occurred. On November 12, 2020, such determination by the Board was made, and the holder of Series C Convertible Preferred Stock (indirectly Mr. O’Dowd) is entitled to super voting rights of three votes for each share of common stock into which such holder’s shares of Series C Convertible Preferred Stock could then be converted. As of December 31, 2022 and 2021, the Series C Preferred Stock could be converted into 4,738,940 shares of our common stock and the holder was entitled to 14,216,819 votes, which is approximately 55% of our voting securities. The holder of Series C Convertible Preferred Stock is entitled to vote together as a single class on all matters upon which common stockholders are entitled to vote. Your voting rights will be diluted as a result of these super voting rights. On November 12, 2020, we entered into a stock restriction agreement with Mr. O’Dowd that prohibits the conversion of Series C Convertible Preferred Stock into common stock unless the majority of the independent directors of the board of directors vote to remove the restriction. The stock restriction agreement will be immediately terminated upon a change of control as defined in the agreement.

If we are unable to maintain compliance with Nasdaq listing requirements, our stock could be delisted, and the trading price, volume and marketability of our stock could be adversely affected.

Our common stock is listed on the Nasdaq Capital Market. We cannot assure you, that we will be able to maintain compliance with Nasdaq’s current listing standards, or that Nasdaq will not implement additional listing standards with which we will be unable to comply. During 2022, we received deficiency notices from Nasdaq informing us that because we had not filed our Form 10-K for the year ended December 31, 2021 and our Form 10-Q for the quarter ended March 31, 2022, we were no longer compliant with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the Securities and Exchange Committee. On July 19, 2022, after filing both the Form 10-K for the year ended December 31, 2021 and the Form 10-Q for the quarter ended March 31, 2022, Nasdaq notified us that we were in compliance with the Nasdaq listing requirements.

Failure to maintain compliance with Nasdaq listing requirements could result in the delisting of our shares from Nasdaq, which could have a material adverse effect on the trading price, volume and marketability of our common stock. Furthermore, a delisting could adversely affect our ability to issue additional securities and obtain additional financing in the future or result in a loss of confidence by investors or employees.

The sale or issuance of our common stock to Lincoln Park may cause dilution and the sale of the shares of common stock acquired by Lincoln Park, or the perception that such sales may occur, could cause the price of our common stock to fall.

On August 10, 2022, the Company entered into a new purchase agreement (the “LP 2022 Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $25 million of our common stock. Concurrently with the execution of the LP 2022 Purchase Agreement, we issued 57,313 shares of common stock to Lincoln Park as a commitment fee.

The purchase shares sold pursuant to the Purchase Agreement may be sold by us to Lincoln Park at our discretion from time to time over a 36-month period. The purchase price for shares that we may sell to Lincoln Park under the Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our common stock to fall.

We have the right to control the timing and amount of any sales of our shares to Lincoln Park in our sole discretion, subject to certain limits on the number of shares that can be sold on a given date. Sales of shares of our common stock, if any, to Lincoln Park will depend upon market conditions and other factors to be determined by us. Therefore, Lincoln Park may ultimately purchase all, some or none of the shares of our common stock that may be sold pursuant to the Purchase Agreement and, after it has acquired shares, Lincoln Park may sell all, some or none of those shares. Sales to Lincoln Park by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock to Lincoln Park, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales, which could have a materially adverse effect on our business and operations.

As of the date of this report, we do not own any real property. For our headquarters and content production business, we lease 3,024 square feet of office space in Coral Gables, Florida. For our entertainment publicity and marketing business, we lease three office spaces in New York City, New York and one office space in Los Angeles, California.

We believe that our properties are sufficient to meet our current and projected business needs. We periodically review our facility requirements and may acquire new facilities, or modify, update, consolidate, dispose of or sublet existing facilities, based on evolving business needs.

We currently do not have any material legal proceedings, including those relating to claims arising in the ordinary course of business.

The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations are to provide users of our consolidated financial statements with a narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Annual Report on Form 10-K. See “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements and see “Risk Factors” included in Item 1A of this Annual Report on Form 10-K. Our past operating results are not necessarily indicative of operating results in any future periods.

Overview

We are a leading independent entertainment marketing and premium content development 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.”

On November 14, 2022 (the “Closing Date”), we acquired all of the issued and outstanding membership interest of Socialyte LLC, a NY and Los Angeles-based creative agency specializing in social media influencer marketing campaigns for brands. The fair value of the total consideration on the acquisition date, amounted to $14.3 million, plus the potential to earn up to an additional $5.0 million upon meeting certain financial targets in 2022. As of December 31, 2022, such financial targets were not met. On the Closing Date, we paid $5.0 million cash, issued NSL Ventures, LLC (the “Seller”) 1,346,257 shares of our common stock and a $3.0 million unsecured promissory note, which is to be repaid in two equal installments on June 30, 2023 and September 30, 2023. In addition, we issued the Seller 685,234 shares of our common stock in satisfaction of the Closing Date working capital adjustment. We partially financed the cash portion of the consideration with a $3.0 million five-year secured loan from Bank Prov with Socialyte as co-borrowers, which carries a fixed rate of 7.37% and a five-year term.

Through our subsidiaries 42West, Shore Fire and The Door, we provide expert strategic marketing and publicity services to many of the top brands, both individual and corporate, in the entertainment and hospitality industries. 42West, Shore Fire and The Door are each recognized global leaders in PR services for the respective industries they serve. Viewpoint adds full-service creative branding and production capabilities to our marketing group and Be Social and Socialyte provide influencer marketing capabilities through its roster of highly engaged social media influencers. Dolphin’s legacy content production business, founded by 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 live event production, can create synergistic opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion with such targets. We completed the Socialyte acquisition during 2022 and intend to complete at least one acquisition during 2023, but there is no assurance that we will be successful in doing so, whether in 2023 or at all.

We have also established an investment strategy, “Dolphin 2.0,” based upon identifying opportunities to develop internally owned assets, or acquire ownership stakes in others’ assets, in the categories of entertainment content, live events and consumer products. We believe these categories represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various stages of internal development and outside conversations on a wide range of opportunities within Dolphin 2.0. We intend to enter into additional investments during 2023, but there is no assurance that we will be successful in doing so, whether in 2023 or at all.

Socialyte Acquisition

On November 14, 2022, (the “Closing Date”), we acquired all of the issued and outstanding membership interest of Socialyte for a total fair value of consideration amounting to $14.3 million. This includes: (1) a working capital adjustment of $2.1 million that was settled by issuing 685,234 shares of our common stock; (2) $5.1 million cash; (3) issued the Seller 1,346,257 shares of our Common Stock with a fair value of $4.1 million; and (4) issued the Seller the Socialyte Promissory Note in the amount of $3 million, which is to be repaid in two equal installments on June 30, 2023 and September 30, 2023. The Socialyte purchase agreement also included the potential to earn up to an additional $5.0 million upon meeting certain financial targets in 2022, that were not met.

We partially financed the cash portion of the consideration with a secured loan from BankProv with Socialyte and Social Midco as co-borrowers, which we guaranteed. This loan amounted to $3.0 million, carries a fixed rate of 7.37% and has a five year term.

For more information on the Socialyte Acquisition, refer to Note 5 to our consolidated financial statements.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, direct costs, payroll and benefits, selling, general and administrative expenses, legal and professional expenses, other income/expense and net income. Other income/expense consists mainly of interest expense, non-cash changes in fair value of liabilities, costs directly relating to our acquisitions, and gains or losses on extinguishment of debt and disposal of fixed assets.

We operate in two reportable segments: our entertainment publicity and marketing segment and our content production segment. The entertainment publicity and marketing segment is composed of 42West, The Door, Shore Fire, Viewpoint, Be Social, B/HI and Socialyte and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, social media marketing, 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.

Revenues

For the years ended December 31, 2022 and 2021, we derived substantially 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. Additionally, for the year ended December 31, 2021, we derived revenues from the content production segment from the domestic distribution of our feature film Believe. We expect to generate income in our content production segment in the second half of 2023 with the release of “The Blue Angels” documentary motion picture, discussed in the “Project Development and Related Services”.

The table below sets forth the percentage of total revenue derived from our two segments for the years ended December 31, 2022 and 2021:

16

Entertainment Publicity and Marketing (“EPM”)

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

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

• Talent – We earn fees from creating and implementing strategic communication campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs 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 (“CPD”)

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 October 2022, we minted and offered for sale a collection of 7,777 non-fungible tokens (“NFT’s) titled Creature Chronicles: Exiled Aliens. The collection generated gross sales of approximately $429,000. We entered into an agreement with a third party to market the collection and mint the NFT’s for a fixed fee of $50,000 and 30% of the value of the sale of the NFT collection.

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 have each agreed to fund 50% of the production budget which is estimated at approximately $4 million.

Expenses

Our expenses consist primarily of:

(1) Direct costs – includes certain costs of services, as well as certain production costs, related to our entertainment publicity and marketing business. Included within direct costs are immaterial impairments for any of our content production projects.

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

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

(4) Acquisition costs include professional fees incurred as part of the acquisition of our subsidiaries.

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

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

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

Other Income and Expenses

For the years ended December 31, 2022 and 2021, other income and expenses consisted primarily of: (1) gain on extinguishment of debt; (2) changes in the fair values of (i) put rights, (ii) warrants, and (iii) convertible notes; (3) acquisition costs; and (4) interest expense.

RESULTS OF OPERATIONS

Year ended December 31, 2022 as compared to year ended December 31, 2021

Revenues

For the years ended December 31, 2022 and 2021, our revenues were as follows:

18

Revenues from entertainment publicity and marketing increased by approximately $4.4 million, or 12%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase is primarily driven by increased revenues across most of our subsidiaries, as cross-selling across our subsidiaries has provided additional customers as well as increased demand for the services our subsidiaries provide.

For the year ended December 31, 2022, the content production segment revenue was derived was from the sale of the our NFT collection and from the domestic distribution of Believe, a feature film that was released in 2013, as we have not distributed any other projects. During the year ended December 31, 2021, the revenues in the content production segment were from the domestic distribution of Believe. We expect to begin generating income in our content production segment in the fourth quarter of 2023 with the release of the Blue Angels documentary film.

Expenses

For the years ended December 31, 2022 and 2021, our operating expenses were as follows:

Direct costs are mainly attributable to the EPM segment and decreased by approximately $0.3 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The decrease in direct costs is mainly driven by an increase of $0.5 million related to NFT production and marketing costs for the year ended December 31, 2022, that were not present in the same period in 2021, offset by approximately $1.0 million decrease in direct costs primarily attributable to a decrease in Viewpoint’s revenue as compared to the year ended December 31, 2021.

Payroll and benefits expenses increased by approximately $5.0 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to additional headcount in 2022 to support the growth of our business, salary increases to our employees, stock compensation issued to our employees under the 2017 Plan in the amount of approximately $0.2 million and inclusion of Socialyte payroll for the period between November 14, 2022 and December 31, 2022 in the amount of approximately $0.6 million, which were not present in the year ended December 31, 2021.

Selling, general and administrative expenses increased by approximately $0.7 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

The increase is primarily related to:

• $0.5 million increases in travel, meals and entertainment expense;
• $0.1 million of additional computer expenses;
• $0.2 million fair value of the commitment shares issued as consideration for the Lincoln Park agreement; and
• $0.1 million impairment of an ROU asset.

These increases were partially offset by:

• $0.2 million reduction in rent expense primarily due to subleasing several of our offices and leases that expired.

Acquisition costs for the year ended December 31, 2022 were $0.5 million, primarily related to our acquisition of the membership interest of Socialyte LLC on November 14, 2022. Acquisition costs for the year ended December 31, 2021 were not significant, as the Company did not have any significant acquisition activity during 2021.

During the fourth quarter of 2022, we bypassed the optional qualitative assessment and performed a quantitative assessment of goodwill. We concluded that, except as it relates to Viewpoint, it is more likely than not that the fair value of the reporting unit was not less than its carrying amount. For the goodwill value assigned to Viewpoint, we concluded the fair value of that reporting unit’s goodwill was below its carrying amount. As a result, an impairment charge of $0.9 million was recorded during the year ended December 31, 2022. No impairment charges were recorded during the year ended December 31, 2021.

Change in fair value of the contingent consideration was approximately a $47,000 gain for the years ended December 31, 2022, compared a $3.7 million loss for the years ended December 31, 2021. The main components of the change in fair value of contingent consideration were the following:

• The Door: this contingent consideration was settled during 2022. The Company did not record any changes in the fair value of contingent consideration pertaining to The Door as it determined the fixed number of shares needed to settle the contingent consideration and reclassified the liability to equity. During the year ended December 31, 2021, a $2.0 million loss was recorded related to The Door’s contingent consideration.
• B/HI: this contingent consideration was settled in June 2022. The Company recorded a $76,100 gain and $1.2 million loss for the year ended December 31, 2022 and 2021, respectively.
• Be Social: The Company recorded a $28,200 and $0.6 million loss for the year ended December 31, 2022 and 2021, respectively.

Depreciation and amortization had a small decrease of $0.1 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021 primarily due to certain of the intangible assets from our acquisitions that became fully amortized.

Legal and professional fees increased by approximately $0.9 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily to due primarily to: (1) entering into the 2022 Lincoln Park agreement and related filing of the Registration Statement on Form S-1 during the third quarter of 2022 and (2) legal, consulting and audit fees related to our restatement of the September 30, 2021 Form 10-Q, revisions of the Forms 10-Q for March 31, 2021 and June 30, 2021 included in our Form 10-K filed on May 26, 2022, and fees associated with our change of auditors.

Other Income and (Expenses)

We did not record any gain or loss on extinguishment of debt for the year ended December 31, 2022. During the year ended December 31, 2021, we recorded a gain on extinguishment of debt of approximately $3.0 million in connection with forgiveness of the PPP Loans of 42West, Dolphin, Viewpoint, Shore Fire and The Door. The year ended December 31, 2021 was offset by a loss on extinguishment of debt of $57,400 related to the exchange of certain put rights for shares of our common stock.

We elected the fair value option for certain convertible notes issued in 2020. The embedded conversion feature of a convertible note issued in 2019 met the criteria for a derivative. The fair value of these convertible notes and embedded conversion feature are remeasured at every balance sheet date and any changes are recorded on our consolidated statements of operations. For the year ended December 31, 2022 we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a gain of $0.7 million. For the year ended December 31, 2021 we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a loss of $0.7 million. None of the decrease in the value of the convertible notes was attributable to instrument specific credit risk.

Warrants issued with convertible notes payable issued in 2020, were initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant liability recognized as other income or expense. During the year ended December 31, 2022, the fair value of the 2020 warrants that were not exercised decreased by approximately $0.1 million; therefore, we recorded a gain in the change in the fair value of the warrants for the year ended December 31, 2022 for those amounts, on our consolidated statements of operations. In March 2021, one of the warrant holders exercised 146,027 warrants via a cashless exercise formula. The price of our common stock on the exercise date was $19.16 per share and we recorded a change in fair value of the exercised warrants of approximately $2.5 million on our consolidated statement of operations.

The fair value of put rights related to the 42West acquisition were recorded on our consolidated balance sheet on the date of the acquisition. The fair value of the put rights are measured at every balance sheet date and any changes are recorded on our consolidated statements of operations. The fair value of the put rights increased by approximately $71,100 for the year ended December 31, 2021. The final put rights were settled in March of 2021; as a result, we did not have a liability related to the put rights as of December 31, 2021 and did not record any fair value of put rights during the year ended December 31, 2022.

Interest expense decreased by $0.2 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to lower principal amount of convertible and nonconvertible notes outstanding during most of 2022, as compared to the year ended December 31, 2021.

Equity in losses of unconsolidated affiliates

Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investees.

For the year ended December 31, 2022, we recorded losses of $0.2 million, $0.1 million from each of our equity investments in Midnight Theater and Crafthouse Cocktails, respectively. No equity gains or losses have been recorded for the year ended December 31, 2021.

Income Tax Benefit

We had an income tax expense of $0.2 million for the year ended December 31, 2022, compared to an expense of $37.4 thousand for year ended December 31, 2021. The income tax expense for years ended December 31, 2022 reflect 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”).

As of December 31, 2022, we have approximately $49.1 million of pre-tax net operating loss carryforwards for U.S. federal income tax purposes that begin to expire in 2028; federal net operating losses generated after December 31, 2017 have an indefinite life and do not expire. Additionally, we have state net operating loss carryforwards amounting to $52.9 million that begin to expire in 2029. A portion of the carryforwards may expire before being applied to reduce future income tax liabilities.

In assessing the ability to realize the deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. We believe it is more likely than not that the deferred tax asset will not be realized and we have accordingly recorded a full valuation allowance as of both December 31, 2022 and 2021.

Net Loss

Net loss was approximately $4.8 million or $0.49 per share based on 9,799,021 weighted average shares outstanding for basic loss per share and $0.56 per share based on 9,926,926 weighted average shares outstanding on a fully diluted basis for the year ended December 31, 2022.

Net loss was approximately $6.5 million or $0.85 per share based on 7,614,774 weighted average shares outstanding on a basic and on a fully diluted basis for the year ended December 31, 2021.

Net loss for the years ended December 31, 2022 and 2021, respectively, were related to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

21

Operating Activities

Net cash used in operating activities was $4.0 million for the year ended December 31, 2022, an increase of $2.7 million from cash used in operating activities of $1.3 million for the year ended December 31, 2021.

Our net loss of $4.8 million for the year ended December 31, 2022 was adjusted for the following items to arrive at cash used in operating activities:

• $0.9 million of goodwill impairment;
• $0.5 million of share-based payments for compensation and Lincoln Park Capital commitment shares;
• $0.4 million of non-cash items such as bad debt expense and other non-cash losses;
• $0.1 million of non-cash lease expense;
• $1.9 million of depreciation and amortization and other items such as impairments of fixed assets, ROU asset and capitalized production costs; and
• $0.2 million of equity in losses on unconsolidated affiliates.

The above were offset by:

• $0.8 million of non-cash changes in the fair value of liabilities;
• $2.6 million of changes in operating assets and liabilities.

Our net loss of $6.5 million for the year ended December 31, 2021 was adjusted for the following items to arrive at cash provided by operating activities:

• $6.9 million of non-cash changes in the fair value of liabilities;
• $0.5 million of non-cash items such as impairments, bad debt expense and other non-cash losses;
• $2.0 million of non-cash lease expense; and
• $2.2 million of depreciation and amortization and other items such as impairments of fixed assets and capitalized production costs.

The above were offset by:

• $3.1 million of a gain on extinguishment of debt, primarily related to the forgiveness of PPP Loans; and
• $3.3 million of changes in operating assets and liabilities.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was $7.9 million, which related primarily to:

Outflows:

• $3.1 million of issuance of notes receivable;
• $4.7 million payment related to the acquisition of Socialyte, net of cash acquired; and
• $72,200 purchases of fixed assets.

Net cash used in investing activities for the year ended December 31, 2021 was $3.0 million, which related to:

Outflows:

• $1.5 million issuance of convertible notes receivables;
• $1.0 million investment in Midnight Theatre; and
• $0.5 million payment related to the acquisition of B/HI, net of cash acquired.

Financing Activities

Net cash provided by financing activities was $10.9 million for the year ended December 31, 2022, an increase of $7.0 million from net cash provided by financing activities of $3.9 million for the year ended December 31, 2021.

Net cash provided by financing activities for the year ended December 31, 2022 mainly related to:

Inflows:

• $5.8 million of proceeds from the Lincoln Park equity line of credit described below;
• $3.1 million proceeds from convertible and non-convertible notes payable and
• $2.9 million proceeds from the term loan related to the Socialyte acquisition;

Outflows:

• $0.3 of repayment of notes payable; and
• $0.6 payment of B/HI contingent consideration;

Net cash provided by financing activities for the year ended December 31, 2021 mainly related to:

Inflows:

• $6.0 million of proceeds from convertible notes payable

Outflows:

• $1.0 million from the exercise of put rights;
• $0.9 million of repayment of the term loan; and
• $0.1 million of repayment of notes payable.

Debt and Financing Arrangements

As described below in further detail, we have taken measures to position the Company with a stronger balance sheet position, extending current loans to longer term maturities and reducing our overall debt position. Total debt amounted to $13.7 million as of December 31, 2022 compared to $6.2 million as of December 31, 2021, an increase of $7.5 million or 220.9%. The increase related primarily to $3.0 million and $2.9 million of a promissory note and term loan, respectively, both in connection with the acquisition of Socialyte.

Our debt obligations in the next twelve months from December 31, 2022 increased from the obligations as of December 31, 2021. The current portion of the debt increased to $4.3 million from $0.3 million, mainly driven by $3.0 million of promissory notes and $0.4 million of current portion of term loan, both related to the Socialyte acquisition. 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 Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of its shares of common stock from time to time over a 36-month period. Pursuant to the terms of the LP 2022 Registration Rights Agreement, the issuance of shares pursuant to the LP 2022 Purchase Agreement have been registered pursuant to our effective registration statement on Form S-1, and the related prospectus dated September 15, 2022.

The Company may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of common stock on any business day (a “Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances up to 75,000 shares if the closing price is not below $7.50 and up to 100,000 shares if the closing price is not below $10.00, provided that Lincoln Park’s committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. The purchase price for Regular Purchases (the “Purchase Price”) shall be equal to 98.75% of the lesser of: (i) the lowest sale price of the Common Stock during the Purchase Date, or (ii) the average of the three (3) lowest closing sale prices of the Common Stock during the ten (10) business days prior to the Purchase Date. 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 for the accelerated and additional accelerated purchases shall be equal to the lesser of 96% of (i) the closing sale price on the accelerated purchase date, or (ii) such date’s volume weighted average price.

Pursuant to the terms of the LP 2022 Purchase Agreement, at the time the Company signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, the Company issued 57,313 shares of common stock to Lincoln Park as consideration for its commitment (“LP 2022 commitment shares”) to purchase shares of our common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period expense and included within selling, general and administrative expenses in the consolidated statements of operations.

Under applicable rules of the NASDAQ Capital Market, we could not issue or sell more than 19.99% of the shares of our common stock outstanding immediately prior to the execution of the LP 2022 Purchase Agreement to Lincoln Park under the LP 2022 Purchase Agreement without stockholder approval. At a meeting held on September 27, 2022, our stockholders approved the issuance of up to $25 million of shares of our common stock pursuant to the LP 2022 Purchase Agreement.

During the year ended December 31, 2022, excluding the additional commitment shares disclosed above, the Company sold 548,000 shares of common stock at prices ranging between $1.92 and $3.72 pursuant to the LP 2022 Purchase Agreement and received proceeds of $1,436,259. Subsequent to December 31, 2022, the Company sold 250,000 shares of common stock at prices ranging between $1.88 and $2.27 pursuant to the LP 2022 Purchase Agreement and received proceeds of $529,450.

The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of common stock in the future (“put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it has an insignificant value as of December 31, 2022.

2021 Lincoln Park Transaction

On December 29, 2021, we entered into a purchase agreement (the “LP 2021 Purchase Agreement”) and a registration rights agreement (the “LP 2021 Registration Rights Agreement”) with Lincoln Park. Pursuant to the terms of the LP 2021 Purchase Agreement, Lincoln Park has agreed to purchase from us up to $25,000,000 of our common stock (subject to certain limitations) from time to time during the term of the LP 2021 Purchase Agreement. The purchase price for the shares was the lowest of (1) lowest sale price on the date of the purchase or (2) the average of the lowest three closing prices on the last 10 business days, with a floor of $1.00. Pursuant to the terms of the LP 2021 Registration Rights Agreement, the issuance of shares pursuant to the LP 2021 Purchase Agreement were registered pursuant to our effective shelf registration statement on Form S-3, and the related base prospectus included in the registration statement, as supplemented by a prospectus supplement filed on January 21, 2022.

Pursuant to the terms of the LP 2021 Purchase Agreement, at the time we signed the LP 2021 Purchase Agreement and the LP 2021 Registration Rights Agreement, we issued 51,827 shares of common stock to Lincoln Park as consideration for its commitment (“commitment shares”) to purchase shares of our common stock under the LP 2021 Purchase Agreement. Pursuant to the LP 2021 Purchase Agreement, we issued an additional 37,019 commitment shares on March 7, 2022.

During the year ended December 31, 2022, excluding the additional commitment shares disclosed above, we sold 1,035,000 shares of common stock at prices ranging between $3.47 and $5.15, pursuant to the LP 2021 Purchase Agreement and received proceeds of $4,367,640. The LP 2021 Purchase Agreement was terminated effective August 12, 2022 and the Company did not sell any shares pursuant to this agreement subsequent to that date.

During the year ended December 31, 2021, excluding the commitment shares mentioned above, the Company did not sell any shares of common stock under the LP 2021 Purchase Agreement.

Convertible Notes Payable

During the year ended December 31, 2022, the Company issued seven convertible promissory notes to four noteholders in the aggregate amount of $2.7 million. The convertible promissory notes bear interest at a rate of 10% per annum. Five of the convertible promissory notes mature on the second anniversary of their respective issuances and two of the convertible promissory notes mature on the fourth anniversary of their respective issuances. The balance of each convertible promissory note and any accrued interest may be converted at the noteholder’s option at any time at a conversion price based on a 90-day average closing market price per share of the common stock. Three of the convertible notes may not be converted at a price less than $2.50 per share and four of the convertible notes may not be converted at a price less than $2.00 per share.

During the year ended December 31, 2022, the holder of one convertible note issued during 2021 converted the principal balance of $0.5 million into 125,604 shares of common stock at a conversion price of $3.98 per share. At the moment of conversion, accrued interest related to this note amounted to $5.3 thousand and was paid in cash.

As of December 31, 2022, the aggregate principal balance of the convertible promissory notes of $5.1 million was recorded in noncurrent liabilities under the caption convertible promissory notes on the Company’s consolidated balance sheets.

It is our experience that convertible notes, including their accrued interest are converted into shares of the Company’s common stock and not settled through payment of cash. Although we are unable to predict the noteholder’s intentions, we do not expect any change from our past experience.

Subsequent to December 31, 2022, on January 9, 2023 and January 13, 2023, the Company issued two convertible promissory notes in the aggregate amount of $0.8 million. The convertible promissory notes bear interest at 10% per annum, mature on the second anniversary of their issuance and can be converted into shares of common stock, at the noteholder’s option at any time, at a purchase price based on a 90-day average closing market price per share of the common stock. The convertible notes may not be converted at a price less than $2.00 per share.

Convertible Notes Payable at Fair Value

As of December 31, 2022, we have convertible promissory notes outstanding with aggregate principal amounts of $0.5 million for which we 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, we record the fair value of the convertible promissory note with any changes in the fair value recorded in the consolidated statements of operations. The convertible promissory note at fair value matures on March 4, 2030 and as of December 31, 2022, we had a balance of $0.3 million in noncurrent liabilities related to this convertible promissory note measured at fair value.

Similar to the Convertible notes discussed above, our historical experience has been that these convertible notes are converted into shares of the Company’s common stock prior to their maturity date and not settled through payment of cash.

Nonconvertible Promissory Notes

As of December 30, 2022, we have outstanding unsecured nonconvertible promissory notes in the aggregate amount of $1.4 million which bear interest at a rate of 10% per annum and mature between June 2023 and November 2024. For these nonconvertible promissory notes, $0.9 million was recorded as current liabilities and $0.5 million was recorded as noncurrent liabilities as of December 31, 2022.

Subsequent to December 31, 2022, on February 22, 2023, we entered into a nonconvertible promissory note in the amount of $2.2 million. The note bears interest at a rate of 10% per annum and matures on March 31, 2028.

Nonconvertible Promissory Notes – Socialyte

As discussed in Note 5 and Note 15 to our consolidated financial statements, as part of the acquisition of Socialyte, we entered into an unsecured promissory note amounting to $3.0 million (“Socialyte Promissory Note”). The Socialyte Promissory Note matures on September 30, 2023 and will be payable in two payments: $1.5 million on June 30, 2023 and $1.5 million on September 30, 2023, its maturity date. The Socialyte Promissory Note bears interest at a rate of 4% per annum, which accrues monthly and all accrued interest shall be due and payable on September 30, 2023, its maturity date.

IMAX Agreement

As discussed in Note 26 to our consolidated financial statements, on June 24, 2022, we entered into the Blue Angels Agreement with IMAX. Under the terms of this agreement, we have funded $1.5 million through December 31, 2022 and we have committed to funding up to an additional $0.5 million of the production budget, which is expected to be disbursed in the second quarter of 2023.

Convertible Notes Receivable

As of December 31, 2022, 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 December 31, 2022, the Midnight Theatre notes amount to $4.4 million, including accrued interest receivable of $0.3 million, and are convertible at the option of the Company into Class A and B Units of Midnight Theatre. During the year ended December 31, 2022, Midnight Theatre issued the Company 16 notes amounting to $3.1 million in the aggregate on the same terms as the previous notes.

In addition, during the year ended December 31, 2022, we held a convertible note receivable from Stanton South LLC, which operates Crafthouse Cocktails. This note amounted to $500,000 and was mandatorily redeemable by February 1, 2022; on that date the Crafthouse Cocktails note was converted and we were issued Series 2 membership interests of Stanton South LLC. As of December 31, 2022, the Company does not have an outstanding note receivable from Stanton South LLC.

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 Part II, Item 8, Financial Statements and Supplementary Data, Note 2, “Summary of Significant Accounting Policies.”

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

We consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management. Further details on each item are discussed below. See Note 17 – Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.

Goodwill

Goodwill results from business combination acquisitions. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets and other intangible assets acquired. As of December 31, 2022, in connection with its acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte we have a balance of $29.3 million of goodwill on our consolidated balance sheets which management has assigned to the entertainment publicity and marketing segment. We account for goodwill in accordance with FASB ASC No. 350, Intangibles—Goodwill and Other (“ASC 350”). Goodwill is not amortized; however, it is assessed for impairment at least annually, or more frequently if triggering events occur. The Company’s annual assessment is performed in the fourth quarter.

For purposes of the annual assessment, management initially performs a qualitative assessment, which includes consideration of the economic, industry and market conditions in addition to our overall financial performance and the performance of these assets. If our qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, we perform a quantitative analysis. In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections. Assumptions used in our impairment testing are consistent with our internal forecasts and operating plans. If the fair value of the reporting unit exceeds its carrying amount, there is no impairment. If not, we recognize an impairment equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of goodwill.

During the fourth quarter of 2022, we bypassed the optional qualitative assessment and performed a quantitative assessment. We concluded that, except as it relates to Viewpoint, it is more likely than not that the fair value of the reporting unit was not less than its carrying amount. For the goodwill value assigned to Viewpoint, we concluded the fair value of that reporting unit’s goodwill was below its carrying amount. As a result, an impairment charge of $0.9 million was recorded during the year ended December 31, 2022. No impairment charges were recorded during the year ended December 31, 2021.

Intangible assets

In connection with the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, B/HI and Socialyte, the Company acquired in aggregate an estimated $18.7 million of intangible assets with finite useful lives initially estimated to range from 2 to 13 years. The intangible assets consist primarily of customer relationships, trade names and non-compete agreements.

Intangible assets are initially recorded at fair value and are amortized using the straight-line method over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If a triggering event has occurred, an impairment analysis is required. The impairment test first requires a comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, the asset would not be deemed recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value. See Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion. Events or circumstances that might require impairment testing include the loss of a significant client or clients, the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, significant decline in stock price or a significant adverse change in business climate or regulations. During the year ended December 31, 2022, we amortized $1.5 million that was recorded in our consolidated statement of operations related to our intangible assets.

Business Combinations and Contingent Consideration

The determination of the fair value of net assets acquired in a business combination and specifically the estimates of acquisition-related contingent consideration (sometimes referred to as “earn-out liabilities”) requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques. Fair values of earn-out liabilities are estimated using income approaches such as discounted cash flows or option pricing models.

Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition of, or an adjustment to the fair values of, acquisition-related assets and liabilities and/or consideration paid, and are referred to as “measurement period” adjustments. Measurement period adjustments are recorded to goodwill. Other revisions to fair value estimates for acquisitions are reflected as income or expense, as appropriate. See Note 5 – Acquisitions in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.

Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an acquired business, could materially affect our operating results in the period such changes are recognized.

Convertible debt

The terms of our convertible debt agreements are evaluated to determine whether the convertible debt instruments contain both liability and equity components, in which case the instrument is a compound financial instrument. Convertible debt agreements are also evaluated to determine whether they contain embedded derivatives, in which case the instrument is a hybrid financial instrument. Judgement is required to determine the classification of such financial instruments based on the terms and conditions of the convertible debt agreements.

Estimation methods are used to determine the fair values of the liability and equity components of compound financial instruments and to determine the fair value of embedded derivatives included in hybrid financial instruments. Fair values of convertible debt are estimated using pricing models such as the Monte Carlo Simulation. Evaluating the reasonableness of these estimations and the assumptions and inputs used in the valuation methods requires a significant amount of judgement and is therefore subject to an inherent risk of error. See Notes 14 – Convertible Notes Payable At Fair Value and 17 – Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Evaluation 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 and Chief Financial 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 December 31, 2022. 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 identified in our internal control over financial reporting described below.

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Exchange Act Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2022, as required by Exchange Act Rule 13a-15(c). The framework on which such evaluation was based is contained in the report entitled “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the “COSO Report”). We concluded that based on our evaluation, our internal control over financial reporting was not effective as of December 31, 2022, due to the following material weaknesses:

Control Environment, Risk Assessment, and Monitoring

As previously reported, we did not maintain appropriately designed entity-level controls impacting the control environment, risk assessment procedures, and monitoring activities to prevent or detect material misstatements in the consolidated financial statements. These deficiencies were attributed to: (i) lack of structure and responsibility, insufficient number of qualified resources and inadequate oversight and accountability over the performance of controls, (ii) ineffective identification and assessment of risks impacting internal control over financial reporting, including fraud risks, and (iii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.

Control Activities and Information and Communication

These material weaknesses contributed to the following additional material weaknesses within certain business processes and the information technology environment:

• We did not fully design, implement and monitor general information technology controls in the areas of user access, and segregation of duties for systems supporting substantially all of the Company’s internal control processes.
• We did not design and implement, and retain appropriate documentation of formal accounting policies, procedures and controls across substantially all of the Company’s business processes to achieve timely, complete and accurate financial accounting, reporting, and disclosures. Additionally, we did not design and implement adequate controls pertaining to the period-end financial reporting, classification of contingent consideration, journal entries, completeness and accuracy of underlying data used in the performance of controls and account reconciliations.
• We did not appropriately design and implement management review controls at a sufficient level of precision to detect a material misstatement over complex accounting areas and disclosures including business combinations, complex transactions, revenue recognition, income tax, and lease accounting.

We are neither an accelerated filer nor a large accelerated filer, as defined in Rule 12b-2 under the Exchange Act, and are not otherwise including in this 2022 Form 10-K an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not required to be attested to by our registered public accounting firm pursuant to Item 308(b) of Regulation S-K.

Management’s Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting

The Company and its Board are committed to maintaining a strong internal control environment. 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 have implemented a new enterprise resource planning systems that will allow us to setup proper review and approval of transactions;
• 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

Limitations on Effectiveness of Controls and Procedures

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. We do not expect that our disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls

During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.