Dolphin Entertainment(DLPN) - 2022 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents Dolphin Entertainment's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity, with detailed accounting notes Condensed Consolidated Balance Sheets The condensed consolidated balance sheets detail the company's financial position, showing reduced liabilities and increased stockholders' equity Balance Sheet Data | Metric | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Total Assets | $52,536,655 | $52,791,451 | | Total Liabilities | $23,761,092 | $29,856,561 | | Total Stockholders' Equity | $28,775,563 | $22,934,890 | - Total liabilities decreased by approximately $6.1 million, or 20.4%, from December 31, 2021, to June 30, 2022, primarily due to reductions in contingent consideration and convertible notes payable at fair value[14] - Total stockholders' equity increased by approximately $5.8 million, or 25.5%, from December 31, 2021, to June 30, 2022[14] Condensed Consolidated Statements of Operations The condensed consolidated statements of operations show increased revenue, net income for the three months, and a narrowed net loss for the six months Statements of Operations Data | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---|\ | Revenues | $10,290,626 | $8,643,244 | $19,467,735 | $15,820,361 | | Total Expenses | $9,801,668 | $8,421,951 | $19,942,503 | $17,159,008 | | Income (loss) from operations | $488,958 | $221,293 | $(474,768) | $(1,338,647) | | Net income (loss) | $612,008 | $1,349,942 | $(180,473) | $(3,922,043) | | Basic EPS | $0.06 | $0.17 | $(0.02) | $(0.53) | | Diluted EPS | $0.04 | $0.13 | $(0.09) | $(0.53) | - Revenues increased by 19.1% for the three months and 23.1% for the six months ended June 30, 2022, compared to the same periods in 2021[19] - Net income decreased for the three-month period (from $1.35 million to $0.61 million) but the net loss significantly narrowed for the six-month period (from $(3.92) million to $(0.18) million) year-over-year[19] Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows show a shift to cash used in operations, consistent investing outflows, and substantial financing inflows Cash Flow Data | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|\ | Net cash (used in) provided by operating activities | $(1,719,551) | $30,060 | | Net cash used in investing activities | $(2,298,702) | $(525,856) | | Net cash provided by financing activities | $3,515,138 | $1,788,002 | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(503,115) | $1,292,206 | | Cash and cash equivalents and restricted cash, end of period | $7,727,511 | $9,929,582 | - Operating activities used $1.72 million in cash for the six months ended June 30, 2022, a significant change from the $30.1 thousand provided in the prior year, mainly due to non-cash changes in fair value of liabilities and contingent consideration[21][200] - Financing activities provided $3.52 million in cash for the six months ended June 30, 2022, primarily from proceeds of $4.37 million from an equity line of credit agreement[21][203] Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased, driven by net income, share issuance to Lincoln Park Capital, and share-based compensation Stockholders' Equity Data | Metric | December 31, 2021 | June 30, 2022 | |:---|:---|:---|\ | Total Stockholders' Equity | $22,934,890 | $28,775,563 | | Common Stock Shares Outstanding | 8,020,381 | 9,551,958 | | Additional Paid-in Capital | $127,247,928 | $133,246,100 | | Accumulated Deficit | $(104,434,344) | $(104,614,817) | - Issuance of shares to Lincoln Park Capital LLC contributed $4,367,640 to additional paid-in capital during the six months ended June 30, 2022[26][106] - The company issued 163,369 shares of common stock for earnout consideration related to the B/HI Communications, Inc. acquisition and 279,562 shares for The Door Marketing Group LLC earnout consideration during the six months ended June 30, 2022[26] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed disclosures for the financial statements, covering business, accounting policies, revenue, assets, debt, equity, and segments NOTE 1 – GENERAL This note provides an overview of Dolphin Entertainment, its business, COVID-19 impact, accounting estimates, and recent pronouncements - Dolphin Entertainment, Inc. is a leading independent entertainment marketing and premium content development company, operating through subsidiaries like 42West, The Door, Shore Fire, Viewpoint, Be Social, and B/HI[30] - The COVID-19 pandemic has significantly impacted economic conditions, negatively affecting the food and hospitality sector and talent representation, though increased television and streaming consumption partially offset revenue decreases[31][32][33] - The company updated its revenue recognition accounting policy in June 2022 to include collaborative arrangements, specifically for the IMAX co-production agreement[39][40][41] - New accounting guidance on business combinations (ASU 2021-08) and credit losses (ASU 2016-13) will be effective for the company on January 1, 2023, with ongoing evaluation of their impact[42][43] NOTE 2 – REVENUE This note disaggregates revenue by segment, primarily EPM, detailing contract balances and remaining performance obligations Revenue by Segment | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---|\ | Entertainment publicity and marketing | $10,290,626 | $8,643,244 | $19,467,735 | $15,820,361 | | Content production | — | — | — | — | | Total revenues | $10,290,626 | $8,643,244 | $19,467,735 | $15,820,361 | - All revenues for the reported periods were generated from the Entertainment Publicity and Marketing (EPM) segment[51] Contract Balances | Contract Balance | December 31, 2021 | June 30, 2022 | Change | |:---|:---|:---|:---|\ | Contract Assets | $62,500 | — | $(62,500) | | Contract Liabilities (Deferred Revenue) | $406,373 | $1,189,442 | $783,069 | - As of June 30, 2022, the company had approximately $1,189,442 of unsatisfied performance obligations, with $1,001,943 expected to be recognized within the next twelve months[54] NOTE 3 – GOODWILL AND INTANGIBLE ASSETS This note details goodwill and finite-lived intangible assets for the EPM segment, noting unchanged goodwill and decreased intangible assets - Goodwill balance remained at $20,021,357 as of June 30, 2022, with no changes during the three and six months ended June 30, 2022[55] Intangible Assets Breakdown | Intangible Asset Type | Gross Carrying Amount (June 30, 2022) | Accumulated Amortization (June 30, 2022) | Net Carrying Amount (June 30, 2022) | Net Carrying Amount (December 31, 2021) | |:---|:---|:---|:---|:---|\ | Customer relationships | $8,290,000 | $5,314,182 | $2,975,818 | $3,409,984 | | Trademarks and trade names | $4,490,000 | $2,037,417 | $2,452,583 | $2,692,083 | | Non-compete agreements | $690,000 | $660,000 | $30,000 | $40,000 | | Total | $13,470,000 | $8,011,599 | $5,458,401 | $6,142,067 | - Amortization expense for intangible assets was $341,833 for the three months and $683,666 for the six months ended June 30, 2022[57] NOTE 4 – ACQUISITIONS This note details the acquisition of B/HI Communications, Inc. in January 2021, including the consideration paid and the financial performance targets achieved by the seller - The company acquired B/HI Communications, Inc. on January 1, 2021, for $0.8 million in common stock, adjusted for working capital and indebtedness[60][61] - The B/HI seller earned an additional $1.1 million in 2021, paid as $0.6 million in cash and 163,369 shares of common stock in Q2 2022[61] - B/HI contributed revenues of $818,408 and $1,426,841 for the three and six months ended June 30, 2021, respectively[61] NOTE 5 – NOTES RECEIVABLE This note describes the company's unsecured convertible notes receivable, primarily from Midnight Theatre, and the conversion of a note from Crafthouse Cocktails into equity - Notes receivable from Midnight Theatre amounted to $3,362,154 as of June 30, 2022, including $123,354 of accrued interest, convertible into Class A and B Units of Midnight Theatre[63] - Midnight Theatre issued $2,238,800 in unsecured convertible promissory notes to the company during the six months ended June 30, 2022, with a 10% annual simple coupon rate and six-month maturity[63] - A $500,000 convertible promissory note from Crafthouse Cocktails was converted into membership interests on February 1, 2022, with no outstanding notes receivable from Crafthouse as of June 30, 2022[65][66] NOTE 6 – EQUITY METHOD INVESTMENTS This note outlines the company's equity method investments in Midnight Theatre and Crafthouse Cocktails, including initial investment amounts and recorded losses from Crafthouse - Equity method investments totaled $1,000,000 in Midnight Theatre and $1,456,600 in Crafthouse Cocktails as of June 30, 2022[68] - The company recorded losses of $23,400 and $43,400 for the three and six months ended June 30, 2022, respectively, from its equity investment in Crafthouse Cocktails[70] - Midnight Theatre commenced operations in late June 2022, with negligible equity in earnings or losses recorded for the period[69] NOTE 7 – OTHER CURRENT LIABILITIES This note breaks down other current liabilities, which decreased due to reductions in talent liability and accumulated customer deposits Other Current Liabilities Breakdown | Liability Type | June 30, 2022 | December 31, 2021 | |:---|:---|:---|\ | Accrued funding under Max Steel production agreement | $620,000 | $620,000 | | Accrued audit, legal and other professional fees | $425,925 | $429,299 | | Accrued commissions | $458,003 | $457,269 | | Accrued bonuses | $205,817 | $360,817 | | Due to seller of Be Social | — | $304,169 | | Talent liability | $2,196,931 | $2,908,357 | | Accumulated customer deposits | $962,855 | $1,206,864 | | Other | $461,305 | $563,809 | | Total Other Current Liabilities | $5,330,836 | $6,850,584 | - Total other current liabilities decreased by approximately $1.52 million from December 31, 2021, to June 30, 2022[71] NOTE 8 – DEBT This note details the company's total debt, including convertible and nonconvertible notes, and related party loans, with maturity and interest Debt Breakdown | Debt Type | June 30, 2022 | December 31, 2021 | |:---|:---|:---|\ | Convertible notes payable | $2,900,000 | $2,900,000 | | Convertible notes payable - fair value option | $466,255 | $998,135 | | Non-convertible promissory notes | $924,142 | $1,176,644 | | Loans from related party | $1,107,873 | $1,107,873 | | Total debt | $5,398,270 | $6,182,652 | | Less current portion of debt | $(513,183) | $(307,685) | | Noncurrent portion of debt | $4,885,087 | $5,874,967 | - Total debt decreased by approximately $0.78 million from December 31, 2021, to June 30, 2022[72] - Convertible notes payable (non-FVO) totaled $2.9 million, bearing 10% interest and maturing in August-September 2023, with $500,000 converted into common stock subsequent to June 30, 2022[75][77] - Nonconvertible promissory notes aggregated $0.92 million, bearing 10% interest and maturing between June and December 2023[83] NOTE 9 – LOANS FROM RELATED PARTY This note details a promissory note from Dolphin Entertainment, LLC (CEO-owned), including its principal balance, accrued interest, and interest expense - The company has a promissory note with DE LLC (wholly owned by the CEO) with a principal balance of $1,107,873 as of June 30, 2022, maturing on July 31, 2023[86][87] - Accrued interest on the DE LLC Note amounted to $110,787 as of June 30, 2022[87] - Interest expense related to this loan was $27,621 for both the three months and $54,938 for both the six months ended June 30, 2022 and 2021[88] NOTE 10 – FAIR VALUE MEASUREMENTS This note discloses fair value measurements for financial instruments, including convertible notes, warrants, and contingent consideration Fair Value Measurements | Financial Instrument | Fair Value Hierarchy Level | Carrying Amount (June 30, 2022) | Fair Value (June 30, 2022) | Carrying Amount (December 31, 2021) | Fair Value (December 31, 2021) | |:---|:---|:---|:---|:---|:---|\ | Cash and cash equivalents | 1 | $7,185,628 | $7,185,628 | $7,688,743 | $7,688,743 | | Restricted cash | 1 | $541,883 | $541,883 | $541,883 | $541,883 | | Convertible notes payable | 3 | $2,900,000 | $2,755,000 | $2,900,000 | $2,900,000 | | Convertible notes payable at fair value | 3 | $466,255 | $466,255 | $998,135 | $998,135 | | Warrant liability | 3 | $40,000 | $40,000 | $135,000 | $135,000 | | Contingent consideration | 3 | $710,000 | $710,000 | $4,284,221 | $4,284,221 | - The fair value of convertible notes payable (non-FVO) was estimated at $2,755,000 as of June 30, 2022, using a Monte Carlo Simulation[94] - A gain in fair value of $244,022 and $531,880 was recorded for the three and six months ended June 30, 2022, respectively, for convertible notes payable at fair value[80] - Contingent consideration liability decreased significantly from $4,284,221 at December 31, 2021, to $710,000 at June 30, 2022, primarily due to settlements for B/HI and The Door acquisitions[91][102] NOTE 11 – STOCKHOLDERS' EQUITY This note details transactions affecting stockholders' equity, specifically Lincoln Park Capital LLC purchase agreements for common stock - Under the 2021 LP Purchase Agreement, the company sold 1,035,000 shares of common stock for $4,367,640 during the six months ended June 30, 2022[106] - The 2021 LP Purchase Agreement was terminated effective August 12, 2022, due to the lack of an effective shelf registration statement[107][214] - A new 2022 LP Purchase Agreement was entered into on August 10, 2022, allowing the company to sell up to $25,000,000 in common stock over 36 months, with an initial issuance of 57,313 commitment shares[109][215][251] NOTE 12 – SHARE-BASED COMPENSATION This note describes the company's 2017 Equity Incentive Plan, under which Restricted Stock Units (RSUs) were granted to employees, and the associated compensation expense recognized - The company granted 36,336 RSUs under the 2017 Plan during the six months ended June 30, 2022[113] - Compensation expense for RSUs was $54,757 for the three months and $114,062 for the six months ended June 30, 2022[112] - As of June 30, 2022, unrecognized compensation expense related to RSUs was $109,252, expected to be recognized over a weighted-average period of 0.46 years[112] NOTE 13 – EARNINGS (LOSS) PER SHARE This note provides the computation of basic and diluted earnings (loss) per share, detailing adjustments for participating and dilutive instruments Earnings (Loss) Per Share Data | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---|\ | Basic EPS | $0.06 | $0.17 | $(0.02) | $(0.53) | | Diluted EPS | $0.04 | $0.13 | $(0.09) | $(0.53) | | Weighted average shares outstanding (Basic) | 9,498,266 | 7,664,000 | 9,113,252 | 7,456,360 | | Weighted average shares outstanding (Diluted) | 9,626,143 | 7,913,396 | 9,890,621 | 7,456,360 | - The company uses the two-class method for EPS calculation due to participating securities, attributing $12,490 and $8,750 of net income to these securities for the three months ended June 30, 2022 and 2021, respectively[117] - Convertible promissory notes were anti-dilutive for the three and six months ended June 30, 2022, and warrants were anti-dilutive for the three months ended June 30, 2022[118] NOTE 14 – RELATED PARTY TRANSACTIONS This note discloses related party transactions, primarily accrued compensation and interest owed to the CEO, and a loan from a CEO-owned entity - Accrued compensation to the CEO totaled $2,625,000 as of June 30, 2022, with accrued interest of $1,445,764[121] - Interest expense related to the CEO's accrued compensation was $65,445 for both the three months and $130,171 for the six months ended June 30, 2022 and 2021[121] - The company paid $250,000 to its CEO for interest owed on accrued compensation on June 15, 2022[121] NOTE 15 – SEGMENT INFORMATION This note provides financial information for the EPM and CPD segments, detailing revenues, operating income (loss), and total assets - The EPM segment generated all of the company's revenues: $10,290,626 for the three months and $19,467,735 for the six months ended June 30, 2022[129] Segment Operating Results and Assets | Segment | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | Total Assets (June 30, 2022) | |:---|:---|:---|:---|\ | EPM Operating Income (Loss) | $2,217,043 | $2,731,850 | $49,395,251 | | CPD Operating Income (Loss) | $(1,728,085) | $(3,206,618) | $3,141,404 | | Total Operating Income (Loss) | $488,958 | $(474,768) | $52,536,655 | - Goodwill of $20,021,357 and net intangible assets of $5,458,401 are assigned to the EPM segment[128] NOTE 16 – LEASES This note provides information on the company's operating leases, including lease costs, sublease income, ROU asset impairment, and future lease payment maturities Lease Costs | Lease Cost Type | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---|\ | Operating lease costs | $590,072 | $1,166,611 | | Sublease income | $(76,568) | $(121,983) | | Net lease costs | $513,504 | $1,044,628 | - The company recorded an impairment of its Right-of-Use (ROU) asset amounting to $98,857 during the three and six months ended June 30, 2022, related to a sublease[132] Future Lease Payment Maturities | Year | Future Lease Payments | |:---|:---|\ | 2022 (remainder) | $1,009,668 | | 2023 | $1,954,903 | | 2024 | $1,824,908 | | 2025 | $1,232,060 | | 2026 | $940,982 | | Total lease payments | $6,962,521 | - As of June 30, 2022, the weighted average remaining lease term is 3.28 years, and the weighted average discount rate is 7.64%[136] NOTE 17 – COLLABORATIVE ARRANGEMENT This note describes a collaborative arrangement with IMAX to co-produce and co-finance 'The Blue Angels' documentary, including initial funding - On June 24, 2022, the company entered into an agreement with IMAX to co-produce and co-finance 'The Blue Angels' documentary, with each party funding 50% of the production budget[138] - An initial payment of $500,000 was made on June 29, 2022, recorded as capitalized production costs[138] - No income or expense has been recorded from this arrangement as production is in early stages[140] NOTE 18 – COMMITMENTS AND CONTINGENCIES This note addresses potential legal proceedings and outlines the company's financial commitments under the IMAX co-production agreement - The company is not aware of any pending litigation expected to have a material effect on its financial position, results of operations, or cash flows[141][245] - Under the IMAX co-production agreement, the company has committed to fund an additional $1,500,000 of the production budget, expected to be disbursed between the remainder of 2022 and 2023[142][225] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on financial performance, discussing revenue, expenses, liquidity, capital, and critical accounting policies OVERVIEW This overview describes Dolphin Entertainment, its 'Dolphin 2.0' investment strategy in content and live events, and the impact of COVID-19 - Dolphin Entertainment operates in two segments: Entertainment Publicity and Marketing (EPM) and Content Production (CPD)[146] - The 'Dolphin 2.0' strategy focuses on investments in entertainment content, live events, and consumer products where the company's marketing expertise can influence success[145][147] - Key Dolphin 2.0 investments include Non-Fungible Tokens (NFTs), Midnight Theatre (a variety theater and restaurant), Crafthouse Cocktails (ready-to-drink cocktails), and a co-production with IMAX for 'The Blue Angels' documentary[148][149][150][152] - The COVID-19 pandemic continues to cause uncertainties and has adversely affected demand for certain services, though the extent of future impact is difficult to predict[153][154] Revenues This section details revenue sources, primarily from the EPM segment, including celebrity talent services, entertainment marketing, and digital media campaigns - All revenues for the three and six months ended June 30, 2022 and 2021, were derived from the Entertainment Publicity and Marketing segment[155] - Revenue sources include celebrity talent services, content marketing services, strategic communications, marketing for special events and brands, digital media influencer marketing, and content production of marketing materials[156][157][158][160][161][162] - The Content Production segment did not generate revenues as projects have either not been produced/distributed or have completed their normal revenue cycles[175] Expenses This section outlines primary expense categories: direct costs, payroll, SG&A, depreciation, fair value changes, and legal fees - Expenses primarily consist of direct costs, payroll and benefits, selling, general and administrative, depreciation and amortization, changes in fair value of contingent consideration, and legal and professional fees[166] - Direct costs include cost of services and production costs for entertainment publicity and marketing, with immaterial impairments for content production projects[167] - Changes in fair value of contingent consideration reflect adjustments to earn-out payment obligations for acquisitions, measured at each balance sheet date[170] Other Income and Expenses This section identifies components of other income and expenses, including debt extinguishment, fair value changes of notes and warrants, and interest - Other income and expenses primarily include gain on extinguishment of debt, changes in fair value of convertible notes and derivative liabilities, changes in fair value of warrants, changes in fair value of put rights, acquisition costs, and interest expense[172] RESULTS OF OPERATIONS This section compares financial results for the three and six months ended June 30, 2022, highlighting changes in revenues, expenses, other income, and net income/loss Revenues Revenues from entertainment publicity and marketing increased significantly for both periods, driven by increased demand and cross-selling across subsidiaries Revenue by Segment | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---|\ | Entertainment publicity and marketing revenues | $10,290,626 | $8,643,244 | $19,467,735 | $15,820,361 | | YoY Change (3 months) | +$1.6 million | N/A | N/A | N/A | | YoY Change (6 months) | N/A | N/A | +$3.6 million | N/A | - The increase in revenues was primarily driven by increased demand and cross-selling across most subsidiaries[174] Expenses Total expenses increased due to higher payroll, benefits, and NFT production costs, partially offset by a gain in fair value of contingent consideration Expense Breakdown | Expense Type | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---|\ | Direct costs | $939,389 | $833,511 | $2,022,279 | $1,583,931 | | Payroll and benefits | $6,983,804 | $5,622,468 | $13,930,426 | $10,892,831 | | Selling, general and administrative | $1,519,835 | $1,194,704 | $3,039,605 | $2,718,658 | | Depreciation and amortization | $415,547 | $478,270 | $832,785 | $960,982 | | Change in fair value of contingent consideration | $(670,878) | $(165,000) | $(1,434,778) | $200,000 | | Legal and professional | $613,971 | $457,998 | $1,552,186 | $802,606 | | Total expenses | $9,801,668 | $8,421,951 | $19,942,503 | $17,159,008 | - Payroll and benefits increased by $1.4 million (3 months) and $3.0 million (6 months) due to additional headcount[179] - Direct costs increased by $0.1 million (3 months) and $0.4 million (6 months), mainly due to $0.2 million and $0.7 million in NFT production and marketing costs, respectively[178] - A $0.7 million gain (3 months) and $1.4 million gain (6 months) was recorded from changes in fair value of contingent consideration in 2022, compared to a $0.2 million gain and $0.2 million loss in 2021[181] Other Income and Expenses Other income and expenses saw significant changes, including no debt extinguishment gain in 2022 and gains from fair value changes of convertible notes and warrants Other Income and Expenses Summary | Other Income/Expense | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---|\ | Gain on extinguishment of debt, net | — | $1,012,973 | — | $955,610 | | Change in fair value of convertible notes | $244,022 | $268,974 | $531,880 | $(602,475) | | Change in fair value of warrants | $35,000 | $65,000 | $95,000 | $(2,497,877) | | Interest expense | $(125,348) | $(169,837) | $(274,737) | $(335,031) | | Total other income (expenses), net | $153,674 | $1,128,649 | $352,143 | $(2,622,247) | - No gain or loss on debt extinguishment was recorded in 2022, compared to a $1.1 million gain in Q2 2021 from PPP loan forgiveness[183] - Interest expense decreased by $44.5 thousand (3 months) and $60.3 thousand (6 months) due to lower outstanding convertible and nonconvertible notes[190] Equity in losses of unconsolidated affiliates The company recorded losses from its equity investment in Crafthouse Cocktails for the three and six months ended June 30, 2022, with no comparable investment in the prior year - Losses of $23,400 (3 months) and $43,400 (6 months) were recorded from the equity investment in Crafthouse Cocktails in 2022[191] - Midnight Theatre commenced operations late in Q2 2022, resulting in no equity gains or losses for the period[192] Income Taxes The company recorded income tax expense for both periods due to a valuation allowance, contrasting with an income tax benefit in the prior year - Income tax expense was $7.2 thousand (3 months) and $14.4 thousand (6 months) for June 30, 2022, due to a valuation allowance and deferred expense for a 'naked credit'[193] - An income tax benefit of $38.9 thousand was recorded for the six months ended June 30, 2021, due to a reduction of the valuation allowance from the B/HI acquisition[194] Net Income (Loss) Net income decreased for the three-month period, but the net loss significantly narrowed for the six-month period, influenced by various factors Net Income (Loss) and EPS | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---|\ | Net income (loss) | $0.6 million | $1.3 million | $(0.2) million | $(3.9) million | | Basic EPS | $0.06 | $0.17 | $(0.02) | $(0.53) | | Diluted EPS | $0.04 | $0.13 | $(0.09) | $(0.53) | - The change in net income/loss is attributed to the combined effects of increased revenues, higher operating expenses (especially payroll), and significant fluctuations in fair value adjustments for contingent consideration, convertible notes, and warrants[195][197] LIQUIDITY AND CAPITAL RESOURCES This section analyzes liquidity and capital resources, focusing on cash flow activities, debt, financing arrangements, and the Lincoln Park equity line of credit Cash Flows Cash flows from operating activities shifted to a net use of cash in 2022, while financing activities provided substantial cash, primarily from an equity line of credit Cash Flow Summary | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|\ | Net cash (used in) provided by operating activities | $(1,719,551) | $30,060 | | Net cash used in investing activities | $(2,298,702) | $(525,856) | | Net cash provided by financing activities | $3,515,138 | $1,788,002 | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(503,115) | $1,292,206 | | Cash and cash equivalents and restricted cash, end of period | $7,727,511 | $9,929,582 | Operating Activities Cash used in operating activities was $1.7 million, a significant change from prior year, mainly due to non-cash fair value changes of liabilities and contingent consideration - Cash used in operating activities was $1.7 million for the six months ended June 30, 2022, compared to $30.1 thousand provided in the prior year[200] - Key drivers for the change include a $3.8 million decrease in non-cash fair value changes of liabilities, a $1.6 million decrease in non-cash fair value of contingent consideration, and a $0.5 million payment for the IMAX agreement[200] Investing Activities Cash used in investing activities increased significantly for the six months ended June 30, 2022, primarily due to the issuance of notes receivable - Cash used in investing activities was $2.3 million for the six months ended June 30, 2022, mainly due to the issuance of notes receivable[202] - In the prior year, $0.5 million was used for the acquisition of B/HI, net of cash acquired[202] Financing Activities Cash provided by financing activities increased, primarily from the Lincoln Park equity line of credit, partially offset by contingent consideration payments and debt repayments - Cash provided by financing activities was $3.5 million for the six months ended June 30, 2022[203] - Inflows included $4.4 million from the Lincoln Park equity line of credit[203] - Outflows included $0.6 million for contingent consideration payment to B/HI and $0.3 million for repayment of notes payable[205] Debt and Financing Arrangements The company reduced total debt and entered a new $25 million equity line of credit with Lincoln Park Capital, detailing outstanding notes and IMAX commitments - Total debt decreased by $0.8 million (12.7%) to $5.4 million as of June 30, 2022, from $6.2 million as of December 31, 2021[207] - The 2021 Lincoln Park Purchase Agreement was terminated, and a new 2022 LP Purchase Agreement was entered into on August 10, 2022, allowing the company to sell up to $25 million in common stock over 36 months[214][215][249] - As of June 30, 2022, the company had $2.9 million in outstanding convertible promissory notes (10% interest, maturing August-September 2023), with $0.5 million converted into common stock post-period[216][219] - Outstanding unsecured nonconvertible promissory notes totaled $0.9 million (10% interest, maturing June-December 2023)[222] - The company committed to fund an additional $1.5 million for the IMAX 'Blue Angels' co-production, expected to be disbursed in 2022-2023[225] Critical Accounting Policies, Judgments and Estimates This section highlights critical accounting policies, judgments, and estimates, emphasizing the updated revenue recognition policy for collaborative arrangements - The preparation of financial statements requires significant estimates and judgments, particularly for fair value of acquisitions, liability valuations, and asset impairment assessments[229] - The revenue recognition accounting policy was updated in June 2022 to include guidance for collaborative arrangements, such as the IMAX co-production[229][230] Revenue Recognition This section details the company's approach to analyzing collaboration agreements, determining their classification, and presenting revenue from such arrangements - Collaboration agreements are assessed to determine if they involve joint operating activities with shared risks/rewards or are vendor-customer relationships[230] - Revenue from collaboration participants is presented separately from revenue with contracts with customers in the condensed consolidated statement of operations[231] Recent Accounting Pronouncements This section refers to Note 1 for a discussion of recent accounting pronouncements and their potential impact on the company's financial statements - For a discussion of recent accounting pronouncements, refer to Note 1 to the unaudited condensed consolidated financial statements[232] SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This section provides a cautionary statement regarding forward-looking statements, emphasizing they are based on assumptions, subject to risks, and not updated - The report contains forward-looking statements that are not guarantees of future performance and are subject to risks and uncertainties[234][235] - Readers should not place undue reliance on these statements, which reflect views only as of the report date, and the company undertakes no obligation to update them[235] - Risks are described in the Annual Report on Form 10-K and subsequent quarterly/current reports[236] ITEM 4. CONTROLS AND PROCEDURES This section addresses the effectiveness of disclosure controls, noting material weaknesses as of June 30, 2022, and outlining remediation efforts to improve internal control Management's Report on the Effectiveness of Disclosure Controls and Procedures Management concluded that disclosure controls were not effective as of June 30, 2022, due to un-remediated material weaknesses identified previously - Disclosure controls and procedures were deemed not effective as of June 30, 2022, due to material weaknesses[238] - These material weaknesses were previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, and remain un-remediated[238] Remediation of Material Weaknesses in Internal Control over Financial Reporting Remediation efforts address material weaknesses, including developing fraud risk policies, enhancing management review, engaging consultants, and improving period-end closing procedures - Remediation efforts include developing formal policies for fraud risk assessment and risk management[239] - The company is enhancing policies for management review of financial information and improving period-end closing procedures[239] - A third-party consultant has been engaged to assist with complex transactions and accounting treatment[239] Changes in Internal Control over Financial Reporting There have been no material changes in the company's internal control over financial reporting during the most recently completed fiscal quarter - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2022[242] PART II — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is not currently aware of any pending litigation that is expected to have a material effect on its financial position, results of operations, or cash flows - The company is not aware of any pending litigation as of the report date[245] - Any liability from ordinary course legal proceedings is not expected to have a material effect on the company's financial position, results of operations, and cash flows[245] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - No material changes to risk factors were disclosed since the Annual Report on Form 10-K for fiscal year ended December 31, 2021[246] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports on company purchases of equity securities, noting a minimal repurchase of common stock during June 2022 Equity Securities Purchased | Period | Total Number of Shares Purchased | Average Price Per Share | |:---|:---|:---|\ | 4/1/2022 – 4/30/2022 | — | — | | 5/1/2022 – 5/31/2022 | — | — | | 6/1/2022 – 6/30/2022 | 30 | $3.29 | | Total | 30 | $3.29 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[247] ITEM 4. MINE SAFETY DISCLOSURES The company has no mine safety disclosures to report - There are no mine safety disclosures[248] ITEM 5. OTHER INFORMATION This section details the company's new $25 million purchase agreement with Lincoln Park Capital for common stock sales and the termination of the prior agreement Entry into a Material Definitive Agreement Dolphin Entertainment entered a new purchase agreement with Lincoln Park Capital Fund, LLC on August 10, 2022, to sell up to $25 million of common stock over 36 months - The company entered into a new 2022 LP Purchase Agreement with Lincoln Park Capital Fund, LLC on August 10, 2022[249] - Under the agreement, the company can sell up to $25,000,000 of common stock over a 36-month term[249] - The purchase price for Regular Purchases is 98.75% of the lesser of the lowest sale price or the average of the three lowest closing sale prices during the ten business days prior to the Purchase Date[251] - The aggregate number of shares sold under the agreement may not exceed 1,936,847 shares (19.99% of outstanding shares) unless shareholder approval is obtained or the average price exceeds $4.90 per share[254] Termination of Material Definitive Agreement Concurrently with the new agreement, the prior purchase agreement with Lincoln Park Capital Fund, LLC, dated December 29, 2021, was terminated effective August 10, 2022 - The prior Purchase Agreement with Lincoln Park, dated December 29, 2021, was terminated effective August 10, 2022[262] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including the new purchase and registration rights agreements with Lincoln Park Capital, and certifications - Exhibits include the Purchase Agreement and Registration Rights Agreement dated August 10, 2022, with Lincoln Park Capital Fund LLC[263] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are also filed[263] SIGNATURES The report is signed by William O'Dowd IV, Chief Executive Officer, and Mirta A Negrini, Chief Financial Officer, on behalf of Dolphin Entertainment, Inc - The report was signed by William O'Dowd IV, CEO, and Mirta A Negrini, CFO, on August 15, 2022[266][267]