Dolphin Entertainment(DLPN) - 2023 Q4 - Annual Report

PART I Business Dolphin Entertainment is an independent entertainment marketing and production company focused on owning assets it markets Growth Opportunities and Strategies The company's growth strategy involves expanding its core marketing business and developing a portfolio of owned content and live events - Dolphin 1.0 (Core Business) Growth: - Expand 42West to serve more streaming service clients and enter video gaming/e-sports - Grow Shore Fire's presence in Los Angeles, Nashville, and Miami - Expand The Door's high-margin consumer products PR business - Scale The Digital Dept.'s influencer talent roster and expand into new markets like New York and Miami - Leverage Special Projects' reputation to expand its celebrity booking clientele - Selectively pursue complementary acquisitions[28][32][38] - Dolphin 2.0 (Ventures) Growth: - Build a portfolio of premium film, television, and digital content - Develop and produce proprietary live events, leveraging in-house booking and promotion expertise - Develop consumer products in categories like liquor, cosmetics, and fashion by partnering with producers and leveraging celebrity/influencer talent[39][40][41] Entertainment Publicity and Marketing This segment comprises specialized subsidiaries offering comprehensive marketing services across entertainment, hospitality, and lifestyle industries - 42West: Offers talent publicity, entertainment marketing (film, TV, gaming), and strategic communications. Ranked 2 in the New York Observer's Power 50 PR firms in March 2022[42] - Shore Fire: Represents top musical artists, songwriters, record labels, and cultural institutions[48] - The Door: A leading PR agency for hospitality, lifestyle, and consumer products, including celebrity chefs and food festivals[49] - The Digital Dept.: Provides influencer talent management for over 200 creators, brand marketing campaigns, and event production[50] - Special Projects: A creative agency specializing in celebrity talent strategy, event activation, and brand amplification[51] - Viewpoint: A boutique creative branding and production agency known for producing promotional videos for leading cable networks[52] Content Production The Content Production segment develops and produces films and digital series, notably the co-produced "The Blue Angels" documentary with IMAX - In June 2022, the company entered an agreement with IMAX to co-produce and co-finance a documentary on the Blue Angels[54] - Dolphin and IMAX each agreed to fund 50% of the production budget. As of December 31, 2023, Dolphin had paid a total of $2,250,000 towards the project[54] - The film is expected to be released in May 2024[55] - The company operates in two reportable segments: Entertainment Publicity and Marketing (EPM) and Content Production[21] - The EPM segment is a marketing "super group" composed of subsidiaries including 42West, The Door, Shore Fire, Viewpoint, The Digital Dept., and Special Projects, providing a wide range of marketing services[19][21] - The company's "Ventures" or "Dolphin 2.0" strategy focuses on owning assets it markets, specifically in Content, Live Events, and Consumer Products[24][25] - A significant content investment is a multi-year deal with IMAX to co-finance and produce documentaries, with the first project being "The Blue Angels," co-produced with J.J. Abrams' Bad Robot Productions, set for a May 2024 release[26][27] Risk Factors The company faces significant financial risks including net losses and high debt, alongside business risks like competition and client retention - The company has a history of net losses, reporting a net loss of $24.4 million in 2023 and $4.8 million in 2022, with an accumulated deficit of $133.6 million as of December 31, 2023[64] | Debt as of December 31, | 2023 | 2022 | | :--- | :--- | :--- | | Related party debt (noncurrent) | $1,107,873 | $1,107,873 | | Notes payable (current and noncurrent) | $3,880,000 | $1,368,960 | | Convertible notes payable (current and noncurrent) | $5,100,000 | $5,050,000 | | Convertible note payable – fair value option | $355,000 | $343,556 | | Term loan (current and noncurrent) | $5,482,614 | $2,867,592 | | Line of credit | $400,000 | $— | | Non-convertible promissory note – Socialyte (current) | $3,000,000 | $3,000,000 | - Management has identified material weaknesses in internal controls over financial reporting, which could lead to misstatements in financial statements[73] - The entertainment industry strikes by the WGA and SAG-AFTRA in 2023 adversely affected the revenues of the 42West subsidiary[84] - The Series C Convertible Preferred Stock, held by an entity owned by the CEO, holds approximately 57% of the company's voting power, giving the holder significant influence over business matters[96][98] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[104] Cybersecurity The company has not experienced any material cybersecurity incidents and maintains policies overseen by the Director of Information Technology and Audit Committee - The Company is not aware of any cybersecurity threats or incidents to date that have materially affected its operations or financial condition[105] - The Audit Committee of the Board of Directors oversees the company's cybersecurity risk management and receives updates from the Director of Information Technology at least annually[109] Properties The company does not own any real property, leasing all its office spaces in Coral Gables, Manhattan, Brooklyn, and Los Angeles - The company does not own any real property and leases all its office spaces[111] - Leased office locations include Coral Gables, FL; Manhattan, NY; Brooklyn, NY; and Los Angeles, CA[64][111] Legal Proceedings The company reports that it currently has no material legal proceedings - The company currently does not have any material legal proceedings[113] Mine Safety Disclosures This section is not applicable to the company - Not applicable[114] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on The Nasdaq Capital Market under "DLPN", with approximately 305 shareholders of record as of March 25, 2024 - Common stock trades on The Nasdaq Capital Market under the symbol "DLPN"[116] - As of March 25, 2024, there were approximately 305 shareholders of record[116] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, including revenue growth, significant net losses, liquidity challenges, and critical accounting estimates Results of Operations (2023 vs. 2022) In 2023, revenues increased by 8.0% to $43.1 million due to acquisitions, but net loss widened to $24.4 million from impairments and write-offs | Financial Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $43,123,075 | $40,505,558 | +8.0% | | Entertainment Publicity & Marketing Revenue | $43,067,557 | $40,058,880 | +7.5% | | Content Production Revenue | $55,518 | $446,678 | -87.6% | | Total Expenses | $63,233,572 | $45,080,700 | +40.3% | | Impairment of Goodwill | $9,484,215 | $906,337 | +946.4% | | Write-off of Notes Receivable | $4,108,080 | $— | N/A | | Payroll and Benefits | $35,030,257 | $28,947,730 | +21.0% | | Net Loss | ($24,396,725) | ($4,780,135) | +410.4% | | Loss Per Share (Basic) | ($1.69) | ($0.49) | +244.9% | - The increase in revenue was primarily driven by $4.7 million from a full year of Socialyte and $1.0 million from the newly acquired Special Projects[139] - A goodwill impairment charge of $9.5 million was recorded in 2023, compared to $0.9 million in 2022[147] - The company wrote off $4.1 million in notes receivable from Midnight Theatre in 2023[153] - The company impaired its equity method investments in Midnight Theatre and Crafthouse Cocktails, resulting in a total impairment of $2.1 million recorded within equity in losses of unconsolidated affiliates[160][162] Liquidity and Capital Resources The company reported negative working capital and increased debt to $19.3 million in 2023, relying on financing activities for liquidity - The company had negative working capital of $6.7 million as of December 31, 2023 and expects to need additional funding for operations over the next 12 months[77] | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($4,617,167) | ($4,027,228) | | Net cash used in investing activities | ($4,537,174) | ($7,919,355) | | Net cash provided by financing activities | $9,517,183 | $10,913,806 | - Total debt increased by 40.9% to $19.3 million as of Dec 31, 2023, from $13.7 million in the prior year, primarily due to a $5.5 million term loan related to a refinancing transaction[172] - The company utilized its equity facility with Lincoln Park Capital, selling 1,150,000 shares for proceeds of $2.2 million in 2023[178] - In connection with the "The Blue Angels" documentary, the company received its first installment of $777,905 from IMAX on February 22, 2024[206][512] Critical Accounting Estimates Critical accounting estimates involve fair value assessments of goodwill and intangible assets, leading to significant impairment charges in 2023 - Critical estimates include fair value of acquisitions, goodwill, intangible assets, contingent consideration, and convertible debt[208] - Goodwill is tested for impairment annually or when triggering events occur. A quantitative test was performed in Q2 2023 due to the company's market capitalization falling below its book value, leading to a $6.5 million impairment. An additional $3.0 million was impaired during the annual review[210][211][212] - Intangible assets, primarily customer relationships and trade names, are amortized and reviewed for impairment. In 2023, a $341,417 impairment was recognized on trademarks and trade names due to the rebranding of Socialyte and Be Social into "The Digital Dept."[216] Quantitative and Qualitative Disclosures About Market Risk This section is not required for smaller reporting companies, and therefore, no information is provided - Not required for smaller reporting companies[224] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal years ended December 31, 2023 and 2022, as audited by their independent registered public accounting firm - This item includes the Report of Independent Registered Public Accounting Firm and the following audited financial statements: - Consolidated Balance Sheets - Consolidated Statements of Operations - Consolidated Statements of Cash Flows - Consolidated Statements of Changes in Stockholders' Equity - Notes to Consolidated Financial Statements[226] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[227] Controls and Procedures Management concluded that as of December 31, 2023, the company's disclosure controls and internal control over financial reporting were not effective due to material weaknesses - The CEO and CFO concluded that disclosure controls and procedures were not effective as of December 31, 2023[229] - Material weaknesses were identified in several areas: - Control Environment, Risk Assessment, and Monitoring: Lack of structure, insufficient resources, and ineffective risk identification - Control Activities and Information/Communication: Deficiencies in IT general controls (user access, segregation of duties), lack of formal accounting policies, and inadequate review controls for complex areas like business combinations and revenue recognition[234][236] - Management's remediation plan includes developing formal policies, enhancing management review, engaging a third-party consultant for complex transactions, implementing a new ERP system, and reevaluating monitoring activities[237][238] Other Information The company reports that no director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the fourth quarter - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the fourth quarter[242] PART III Directors, Executive Officers, and Corporate Governance Information for this item is incorporated by reference from the company's Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders[245] Executive Compensation Details regarding executive compensation are incorporated by reference from the company's Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders[246] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the company's Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders[247] Certain Relationships and Related Transactions, and Director Independence Disclosures on related party transactions and director independence are incorporated by reference from the company's Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders[248] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders[249] PART IV Exhibit and Financial Statement Schedules This section lists documents filed as part of the Annual Report, including financial statements and an index of exhibits - The financial statements required by Item 8 are included with the report[252] - No financial statement schedules are filed[252] - An index of exhibits filed with the report or incorporated by reference is provided[253][254] Form 10-K Summary The company has not provided a Form 10-K summary - None[258]