Dolphin Entertainment, Inc. - Quarter Report: 2021 September (Form 10-Q)

\ 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

———————

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 001-38331

DOLPHIN ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

———————

150 Alhambra Circle, Suite 1200, Coral Gables, Florida 33134

(Address of principal executive offices, including zip code)

(305) 774-0407

(Registrant's telephone number)

———————

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

The number of shares of common stock outstanding was 7,941,234 as of November 17, 2021

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(unaudited)

Reconciliation of cash, cash equivalents and restricted cash. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statements of cash flows that sum to the total of the same such amounts shown in the statements of cash flows:

The accompanying notes are an integral part of these condensed consolidated financial statements.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

(unaudited) 

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

(unaudited) 

The accompanying notes are an integral part of these condensed consolidated financial statements.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

NOTE 1 – GENERAL

Dolphin Entertainment, Inc., a Florida corporation (the “Company,” “Dolphin,” “we,” “us” or “our”), is a leading independent entertainment marketing and premium content development company. Through its acquisitions of 42West LLC (“42West”), The Door Marketing Group, LLC (“The Door”), Shore Fire Media, Ltd (“Shore Fire”), Viewpoint Computer Animation Incorporated (“Viewpoint”), Be Social Public Relations, LLC (“Be Social”) and B/HI Communications, Inc. (“B/HI”), the Company provides expert strategic marketing and publicity services to all of the major film studios and many of the leading independent and digital content providers, A-list celebrity talent, including actors, directors, producers, celebrity chefs, social media influencers and recording artists. The Company also provides strategic marketing publicity services and creative brand strategies for prime hotel and restaurant groups and consumer brands. The strategic acquisitions of 42West, The Door, Shore Fire, Viewpoint, Be Social and B/HI bring together premium marketing services, including digital and social media marketing capabilities, with premium content production, creating significant opportunities to serve respective constituents more strategically and to grow and diversify the Company’s business. Dolphin’s content production business is a long established, leading independent producer, committed to distributing premium, best-in-class film and digital entertainment. Dolphin produces original feature films and digital programming primarily aimed at family and young adult markets.

Impact of COVID-19

On March 11, 2020, the World Health Organization categorized a novel coronavirus (“COVID-19”) as a pandemic, and it has spread throughout the United States. The pandemic has had and continues to have a significant effect on economic conditions in the United States, and continues to cause significant uncertainties in the U.S. and global economies, particularly as a result of new Delta and other variants of COVID-19, which appear to be causing an increase in COVID-19 cases. Public health officials and medical professionals have warned that a resurgence of COVID-19 cases may continue, particularly if vaccination rates do not quickly increase or if additional, potent variants emerge. It is unclear how long a resurgence may last, how severe it may be, and what safety measures governments may impose in response to it.

The extent to which the COVID-19 pandemic affects our business, operations and financial results depends, and will continue to depend, on numerous evolving factors that we may not be able to accurately predict. Since the outbreak of COVID-19 began and public and private sector measures to reduce its transmission were implemented, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, the demand for certain of the services the Company offers was adversely affected resulting in decreased revenues and cash flows.

One of our subsidiaries operates in the food and hospitality sector, which was negatively impacted by the orders to either suspend or reduce operations of restaurants and hotels. Similarly, another subsidiary represents talent, such as actors, directors and producers, and revenues from these clients was negatively impacted by the suspension of content production. The television and streaming consumption around the globe has increased since the outbreak of COVID-19, as well as the demand for consumer products. Revenues from the marketing of these shows and products somewhat offset the decrease in revenue from the sectors discussed above.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

Between April 19, 2020 and April 23, 2020, the Company and its subsidiaries received five separate unsecured loans for an aggregate amount of $2.8 million (the “PPP Loans”) under the Paycheck Protection Program (the “PPP”) which was established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Through our acquisition of Be Social, the Company assumed a PPP Loan of $304,169. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments and covered utilities during the measurement period beginning on the date of first disbursement of the PPP Loans. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount can be attributable to non-payroll costs. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of the PPP Loans based on its adherence to the forgiveness criteria. Throughout 2021, the Company and its subsidiaries applied for forgiveness of all PPP Loans received. On June 28, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loans for 42West and Dolphin, which in aggregate amounted to $1.1 million. Between July 1, 2021 and August 17, 2021, the Company was notified that the SBA had approved our applications to forgive the entire amounts of the loans for Viewpoint, Shore Fire and The Door, which in aggregate amounted to $1.7 million, which were recorded as a gain on extinguishment in the condensed consolidated statements of operations. Subsequent to September 30, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loan for Be Social, which amounted to $0.3 million.

Depending on the extent and duration of the pandemic and the related economic impacts, COVID-19 may continue to impact our business and financial results, as well as significant judgments and estimates, including those related to goodwill and other asset impairments and allowances for doubtful accounts.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Dolphin, and all of its wholly owned subsidiaries, comprising Dolphin Films, Inc. (“Dolphin Films”), Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC (“Max Steel Holdings”), Dolphin JB Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The Door, Viewpoint, Shore Fire, Be Social and B/HI.

The Company enters into relationships or investments with other entities, and in certain instances, the entity in which the Company has a relationship or investment may qualify as a variable interest entity (“VIE”). A VIE is consolidated in the financial statements if the Company is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE. The Company is deemed to be the primary beneficiary and as such it has included JB Believe, LLC, formed on December 4, 2012 in the State of Florida, in its condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 as a VIE.

On September 24, 2021, the Company filed an amendment to its Amended and Restated Articles of Incorporation with the Secretary of the State of the State of Florida to increase its authorized shares of Common Stock to 200,000,000 from 40,000,000 as adopted by the shareholders of the Company on September 23, 2021.

On November 23, 2020, the Company filed an amendment to its Amended and Restated Articles of Incorporation with the Secretary of State of the State of Florida to effect a 1-for-5 reverse stock split (the “Reverse Stock Split”) of the authorized, issued and outstanding shares of the Common Stock. The Reverse Stock Split was effective as of 12:01 a.m. (Eastern Time) on November 27, 2020 (the “Effective Time”). At the Effective Time, the number of authorized shares of Common Stock was reduced from 200,000,000 shares to 40,000,000. The par value per share of Common Stock remains unchanged. As a result, each shareholder’s percentage ownership interest in the Company and proportional voting power remained unchanged. Any fractional shares resulting from the Reverse Stock Split were rounded up to the nearest whole share of Common Stock. All references to Common Stock or common stock price in these condensed consolidated financial statements have been retroactively adjusted to reflect the Reverse Stock Split.

The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2021, and its results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020. All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021. The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

Reclassifications

Reclassifications have been made to our unaudited condensed consolidated financial statements for the prior period to conform to classifications used in 2021. These reclassifications had no impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to estimates of the measurement of assets and liabilities at fair value, including amounts recognized in business combinations and items measured at fair value on a non-recurring basis, such as intangible assets, goodwill, the amount of the deferred tax, valuation allowance; and the estimate of contingent liabilities, and other allowances, such as the provisions for doubtful accounts. Management bases its estimates on historical experience and on other various assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from such estimates under different assumptions and conditions.

Additionally, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. However, management has made appropriate accounting estimates on certain accounting matters, which include the allowance for doubtful accounts, carrying value of the goodwill and other intangible assets, carrying amount of certain convertible notes payable and embedded derivatives and warrant liabilities, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in material impacts to the Company’s financial statements in future reporting periods.

Update to Significant Accounting Policies

The Company’s significant accounting policies are detailed in "Note 3: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020. Significant changes to our accounting policies as a result of adopting ASU 2020-06 during the nine months ended September 30, 2021 is discussed below. Other than the below, There were no significant changes to our accounting policies during the three and nine months ended September 30, 2021.

Convertible Notes

On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2020-06 that simplifies the accounting for convertible instruments. ASU 2020-06 (i) reduced the number of accounting models for convertible instruments, by eliminating the models that require separation of cash conversion or beneficial conversion features from the host and (ii) revised derivative scope exception and (iii) provided targeted improvements for EPS. The adoption of ASU 2020-06 did not have a material impact on the Company’s outstanding convertible debt instruments as of September 30, 2021.

Recent Accounting Pronouncements

Accounting Guidance Adopted

In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The guidance simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted this new guidance on January 1, 2021 using the modified retrospective approach without a material impact on its condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes.” to simplify the accounting for income taxes by removing certain exceptions and amending certain exceptions related to the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This ASU also clarifies and simplifies other aspects of the accounting for income taxes. This amended guidance was effective for the Company beginning January 1, 2021. The Company adopted this new guidance on January 1, 2021 without a material impact on its condensed consolidated financial statements.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

Accounting Guidance Not Yet Adopted

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The guidance is effective for annual reporting periods beginning after December 15, 2022, including interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its Condensed Consolidated Financial Statements in connection with any future business combinations.

In June 2016, the FASB issued new guidance on measurement of credit losses (ASU 2016-13, Measurement of Credit Losses on Financial Instruments) with subsequent amendments issued in November 2018 (ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the accounting for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. It is applicable to trade accounts receivable. The guidance is effective for fiscal years beginning after December 15, 2022 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company's consolidated financial statements and disclosures.

NOTE 2 — GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP and contemplate the continuation of the Company as a going concern. The Company has suffered recurring losses, including a net loss of $3,780,392 for the nine months ended September 30, 2021, and had an accumulated deficit of $101,752,433 as of September 30, 2021. Several of our subsidiaries operate in industries that have been adversely affected by the government mandated work-from-home, stay-at-home and shelter-in-place orders as a result of the COVID-19. As these industries continue to gradually reopen, we have seen signs of improvement on demand for their services. We have noted an increase in demand for our services and noted signs of improvement in the results of our operations; for the three months ended September 30, 2021 we noted increased revenues, cash flows from operations and reported net income as compared to the same period in prior year and the prior quarterly periods ending March 31, 2021 and June 30, 2021.

Since the beginning of the pandemic, the Company implemented certain measures to mitigate the effects of the pandemic on the Company, such as a freezes on hiring, salary reductions, staff reductions and cuts in non-essential spending. In addition, the Company has taken other measures to strengthen its financial position, which is evidenced by a positive working capital for two straight quarters, as of June 30, 2021 and September 30, 2021.

The Company is dependent upon funds from the issuance of debt securities, securities convertible into shares of its common stock, par value $0.015, (“Common Stock”), sales of shares of Common Stock and financial support of certain shareholders. The continued spread of COVID-19 and uncertain market conditions may limit the Company’s ability to access capital. If the Company is unable to obtain funding from these sources within the next 12 months, it could be forced to curtail its business operations or liquidate.

These factors raise substantial doubt about the ability of the Company to continue as a going concern within one year after these condensed consolidated financial statements are issued. The condensed consolidated financial statements, of which these notes form a part, do not include any adjustments that might result from the outcome of these uncertainties. The Company’s management currently plans to raise any necessary additional funds through additional issuances of its Common Stock, securities convertible into its Common Stock and/or debt securities, as well as available bank and non-bank financing, or a combination of such financing alternatives. There is no assurance that the Company will be successful in raising additional capital. Any issuance of shares of Common Stock or securities convertible into Common Stock would dilute the equity interests of our existing shareholders, perhaps substantially.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

NOTE 3 — GOODWILL AND INTANGIBLE ASSETS

As of September 30, 2021, in connection with its acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social and B/HI, the Company has a balance of $20,015,800 of goodwill on its condensed consolidated balance sheet which management has assigned to the entertainment publicity and marketing segment. The Company evaluates goodwill in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. There were no triggering events noted during the three month period ended September 30, 2021 that would require the Company to reassess goodwill for impairment outside of its regular annual impairment test.

Goodwill

All of the Company’s goodwill is related to the entertainment, publicity and marketing segment. Changes in the carrying value of goodwill were as follows:

———————

Intangible Assets

Intangible assets consisted of the following as of September 30, 2021 and December 31, 2020:

Amortization expense associated with the Company’s intangible assets was $394,998 and $423,412 for the three months ended September 30, 2021 and 2020, respectively, and $1,184,994 and $1,254,402 for the nine months ended September 30, 2021 and 2020, respectively.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

Amortization expense related to intangible assets for the next five years is as follows:

NOTE 4 — MERGERS AND ACQUISITIONS

B/HI Communications, Inc.

On January 8, 2021, but effective January 1, 2021, the Company acquired all of the issued and outstanding shares of B/HI, a California corporation, (the “B/HI Purchase”) pursuant to a share purchase agreement (the “B/HI Share Purchase Agreement”) between the Company and Dean G. Bender and Janice L. Bender, as co-trustees of the Bender Family Trust dated May 6, 2013 (collectively, the “B/HI Sellers). B/HI is an entertainment public relations agency that specializes in corporate and product communications programs for interactive gaming, esports, entertainment content and consumer product organizations.

The total consideration paid to the B/HI Seller in respect to the B/HI Purchase is $0.8 million of shares of Common Stock based on a 30-day trailing trading average closing price immediately prior to, but not including, the applicable payment date adjusted for working capital, cash targets and the B/HI indebtedness as defined in the B/HI Share Purchase Agreement. The B/HI Sellers may also earn up to an additional $1.2 million of which 50% will be paid in cash and 50% will be paid in Common Stock upon achieving certain specified financial performance targets during the years ended December 31, 2021 and 2022. The Common Stock that will be issued as part of the consideration has not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Acquisition related costs for the B/HI purchase amounted to $22,907 and are included in Acquisition costs in the condensed consolidated statement of operations.

The following table summarizes the provisional fair value of the consideration transferred:

As a condition to the B/HI Purchase, Dean Bender, one of the sellers and Shawna Lynch, a key employee of B/HI entered into employment agreements with the Company to continue as employees after the closing of the B/HI Purchase. Mr. Bender’s agreement is for a period of two years through December 31, 2022 and he will serve as Co-President of B/HI during that term. Ms. Lynch’s agreement is for a period of four years and may be renewed on the same terms for two successive two-year terms. Ms. Lynch will serve as Co-President of B/HI during the term of her agreement.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the B/HI Purchase. Amounts in the table are estimates that may change, as described below.

Unaudited Pro Forma Consolidated Statements of Operations

For the three and nine months ended September 30, 2021, the Company’s statements of operations includes revenue pertaining to B/HI amounting to $1,082,856 and $2,509,697, respectively, and net income of $263,681 and $420,751, respectively. The following represents the Company’s unaudited pro forma consolidated operations after giving effect to the Be Social and B/HI acquisitions for the three and nine months ended September 30, 2020 as if the Company had completed both acquisitions on January 1, 2020 and its results had been included in the consolidated results of the Company for the three and nine months ending September 30, 2020.

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisitions to reflect the amortization that would have been charged, assuming the intangible assets had been recorded on January 1, 2020.

The impact of the acquisition of Be Social and B/HI on the Company’s actual results for periods following the acquisition may differ significantly from that reflected in this unaudited pro forma information for a number of reasons. As a result, this unaudited pro forma information is not necessarily indicative of what the combined company’s financial condition or results of operations would have been had the acquisitions been completed on January 1, 2020, as provided in this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition and results of operations of the combined company.

Be Social

In August 2020, the Company acquired all of the issued and outstanding membership interest of Be Social. During June 2021, the Company recorded a measurement period adjustment amounting to $82,651 of working capital adjustments.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

NOTE 5 — DEBT

Total debt of the Company was as follows as of September 30, 2021 and December 31, 2020:

The table below details the maturity dates for the Company’s debt as of September 30, 2021:

Convertible Notes Payable

On March 2021, April 2021, June 2021, August 2021 and September 2021 the Company issued ten convertible promissory notes to four noteholders in the aggregate amount of $5,950,000. The convertible promissory notes bear interest at a rate of 10% per annum and mature on the second 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 purchase price based on a 90-day average closing market price per share of the Common Stock but not at a price less than $2.50 per share.

During the nine months ended September 30, 2021, the holders of nine convertible notes issued during 2020 and 2021 converted the principal balance of $2,645,000 plus accrued interest of $11,944 into 509,881 shares of Common Stock at conversion prices ranging between $3.69 and $9.46 per share.

The Company recorded interest expense related to these convertible notes payable of $88,000 and $130,482 during the three and nine months ended September 30, 2021, respectively, and made cash interest payments amounting to $109,176 during the nine months ended September 30, 2021 related to the convertible promissory notes.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

As of September 30, 2021 and December 31, 2020, the principal balance of the convertible promissory notes of $4,750,000 and $1,445,000, respectively, was recorded in noncurrent liabilities under the caption convertible promissory notes on the Company’s condensed consolidated balance sheets.

The following is a summary of the Company’s convertible notes payable as of September 30, 2021:

Subsequent to September 30, 2021, the holders of three convertible notes converted the principal balance of $1,850,000 into 172,550 shares of Common Stock at conversion prices ranging between $10.71 and $10.74 per share.

Convertible Notes Payable at Fair Value

The Company had convertible promissory notes outstanding with aggregate principal amounts of $1,600,000 as of December 31, 2020 for which it elected the fair value option. As such, the estimated fair value of each note was recorded on their respective issue dates. At each balance sheet date, the Company records the fair value of the convertible promissory notes with any changes in the fair value recorded in the condensed consolidated statements of operations.

On each of January 13, 2021 and January 27, 2021, notes with a remaining aggregate principal balance of $1,100,000 were converted into 281,554 shares of Common Stock at purchase prices ranging between $3.90 and $3.91 per share. The Company had a balance of $1,253,689 and $947,291 in noncurrent liabilities as of September 30, 2021 and December 31, 2020, respectively, and $580,000 in current liabilities as of December 31, 2020 recorded on its condensed consolidated balance sheets related to the convertible promissory notes measured at fair value. The Company recorded a loss in fair value of $223,923 and a gain of $8,730 for the three months ended September 30, 2021 and 2020, respectively, and losses in fair value of $826,398 and $540,231 for the nine months ended September 30, 2021 and 2020, respectively, on its condensed consolidated statements of operations.

The Company recorded interest expense of $9,863 and $29,589 in its condensed consolidated statements of operations during the three and nine months ended September 30, 2021, respectively, and made cash interest payments amounting to $29,589 during the nine months ended September 30, 2021 related to these convertible promissory notes.

Nonconvertible Promissory Notes

As of September 30, 2021, the Company has outstanding unsecured nonconvertible promissory notes in the aggregate amount of $1,201,933, which bear interest at a rate of 10% per annum and mature between January 15, 2022 and December 10, 2023.

As of September 30, 2021 and December 31, 2020, the Company had a balance of $305,037 and $846,749, respectively, recorded as current liabilities and $896,894 and $426,645, respectively in noncurrent liabilities on its condensed consolidated balance sheets related to these nonconvertible promissory notes. The Company recorded interest expense related to these nonconvertible promissory notes of $30,317 and $32,668 for the three months ended September 30, 2021 and 2020, respectively, and $92,765 and $99,648 for the nine months ended September 30, 2021 and 2020, respectively. The Company made interest payments of $93,186 and $100,028 during the nine months ended September 30, 2021 and 2020, respectively, related to the nonconvertible promissory notes.

Term Loan

On March 31, 2020, 42West and The Door, as co-borrowers, entered into a three-year term loan (the “Term Loan”) with Bank United, N.A, which bears interest at a rate of 0.75% points over the Lender’s Prime Rate, provides for monthly repayment of principal and interest and matures on March 15, 2023. For the three and nine months ended September 30, 2021, the Company made principal payments in the amount of $100,033 and $300,098, respectively. During the three and nine months ended September 30, 2021, the Company recorded interest expense and paid interest of $6,813 and $23,334. As of September 30, 2021, the outstanding balance on the Term Loan was $600,195.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The Term Loan contains both customary affirmative and negative covenants. The bank tests for compliance with debt covenants on an annual basis based on the financial statements of 42West and The Door as of and for the year ended December 31. Based on current economic factors and uncertainties due to COVID-19, the Company believes it is out of compliance with certain debt covenants as of and for the three and nine months ended September 30, 2021. As such, the Company classified the entire balance of the Term Loan in current liabilities on its condensed consolidated balance sheet as of September 30, 2021.

Paycheck Protection Program Loan

In April 2020, the Company and its subsidiaries received an aggregate amount of $2.8 million of PPP Loans established under the CARES Act. Through our acquisition of Be Social in August 2020, the Company assumed a PPP Loan of $304,169. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of the PPP Loans based on its adherence to the forgiveness criteria. Throughout 2021, the Company and its subsidiaries applied for forgiveness of all PPP Loans received. On June 28, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loans for 42West and Dolphin, which in aggregate amounted to $1.1 million. Between July 1, 2021 and August 17, 2021, the Company was notified that the SBA had approved our applications to forgive the entire amounts of the loans for Viewpoint, Shore Fire and The Door, which in aggregate amounted to $1.7 million. Subsequent to September 30, 2021, the Company was notified that the SBA had approved our application to forgive the entire amount of the loan for Be Social, which amounted to $0.3 million. As of the date of this Quarterly Report on Form 10-Q, all PPP Loans have been forgiven.

As of September 30, 2021, the principal balance of the loan in the amount of $304,169 was recorded in current liabilities on the Company’s condensed consolidated balance sheet.

NOTE 6 — LOANS FROM RELATED PARTY

Dolphin Entertainment, LLC (“DE LLC”), an entity wholly owned by the Company’s Chief Executive Officer, William O’Dowd (the “CEO”), previously advanced funds for working capital to Dolphin Films. In prior years, Dolphin Films entered into a promissory note with DE LLC (the “Original DE LLC Note”) in the principal amount of $1,009,624, which was payable on demand. On June 15, 2021 the Company exchanged the Original DE LLC Note for a new note maturing on July 31, 2023 (“New DE LLC Note”). Other than the change in maturity date, there were no other changes to the principal, interest or any other terms of the Original DE LLC Note.

For the three and nine months ended September 30, 2021, the Company did not repay any principal balance of the New DE LLC Note. The Company recorded interest expense related to the New DE LLC Note amounting to $27,924 for both the three months ended September 30, 2021 and 2020, and $82,863 and $83,166 for the nine months ended September 30, 2021 and 2020, respectively.

As of both September 30, 2021 and December 31, 2020, the Company had a principal balance of $1,107,873, and accrued interest amounted to $27,925 and $26,683 as of September 30, 2021 and December 31, 2020, respectively. During the nine months ended September 30, 2021, the Company made cash payments for interest amounting to $81,621 in aggregate related to the Original DE LLC Note and the New DE LLC Note.

NOTE 7 — FAIR VALUE MEASUREMENTS

Put Rights

In connection with the 42West acquisition, the Company entered into put agreements, pursuant to which it granted Put Rights to the sellers and certain 42West employees. During the nine months ended September 30, 2021, the sellers and certain employees exercised their Put Rights for an aggregate amount of 22,867 shares of Common Stock and were paid $1,015,135 for Put Rights. An additional $600,000 of put rights were converted into 115,366 shares of Common Stock during the nine months ended September 30, 2021. As of September 30, 2021, there were no amounts due to the sellers of 42West and certain 42West employees from the exercise of these Put Rights.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The following is a reconciliation of the fair value of the Put Rights from December 31, 2020 to September 30, 2021:

Contingent consideration

The Company records the fair value of the contingent consideration liability in the condensed consolidated balance sheets under the caption “Contingent Consideration” and records changes to the liability against earnings or loss under the caption “Changes in fair value of contingent consideration” in the condensed consolidated statements of operations.

The Company utilized a Monte Carlo Simulation model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the contingent consideration as of the acquisition date. The Company determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:

For the contingent consideration, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2020 to September 30, 2021:

Fair Value Option (“FVO”) Election – Convertible notes payable and freestanding warrants

2020 convertible notes payable

During 2020, the Company issued three convertible notes payable: a convertible note with a principal amount of $1.3 million (the “January 3^rd Note”), face value of $500,000 (the “March 4^th Note”) and face value of $560,000 (the “March 25^th Note”) (together “the 2020 convertible notes”), which are all accounted for under the ASC 825-10-15-4 FVO election. Under the FVO election the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The estimated fair value adjustment is presented as a single line item within other income (expense) in the accompanying condensed consolidated statements of operations under the caption “change in fair value of convertible notes and derivative liabilities”.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The 2020 convertible notes are measured at fair value categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2020 to September 30, 2021:

The estimated fair value of the January 3^rd Note and the March 25^th Note was computed using a Monte Carlo simulation, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the note reflects management’s own assumptions about the assumptions that market participants would use in valuing the note as of the acquisition date and subsequent reporting periods.

The estimated fair value of the March 4th Note as of September 30, 2021 and as of December 31, 2020, was computed using a Black-Scholes simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:

Warrants

During the nine months ended September 30, 2021, the Series E, F, G, and H Warrants were all exercised and the Company issued 146,027 shares of Common Stock via a cashless exercise formula pursuant to the warrant agreement.

The warrants are measured at fair value and categorized within Level 3 of the fair value hierarchy. The following is a reconciliation of the fair values from December 31, 2020 to September 30, 2021:

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The estimated fair value of the Series “I” Warrants was computed using a Black-Scholes valuation model, using the following assumptions:

Term Loan and PPP Loans

The estimated fair value of the Term Loan and PPP Loans approximates their carrying amount based on the arrangement of the financing of the debt and pursuant to the terms of the CARES ACT, respectively. The Company applied for the PPP Loans to be forgiven by the SBA. (See Note 5)

NOTE 8 — CONTRACT LIABILITIES

The Company receives advance payments from customers for public relations projects or as deposits for promotional or brand-support video projects, that it records as contract liabilities. Once the work is performed or the projects are delivered to the customer, the contract liabilities are deemed earned and recorded as revenue. Advance payments received are generally for short duration and are recognized once the performance obligation of the contract is met. As of September 30, 2021 and December 31, 2020, the Company had balances of $4,266,539 and $1,855,209, respectively, in contract liabilities in its condensed consolidated balance sheets.

NOTE 9 —VARIABLE INTEREST ENTITIES

VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses or the right to receive the residual returns of the entity.

The Company evaluated the entities in which it did not have a majority voting interest and determined that it had (1) the power to direct the activities of the entities that most significantly impact their economic performance and (2) had the obligation to absorb losses or the right to receive benefits from these entities. As such the financial statements of JB Believe, LLC are consolidated in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, and in the condensed consolidated statements of operations and statements of cash flows presented herein for the three and nine months ended September 30, 2021 and 2020. This entity was previously under common control and has been accounted for at historical costs for all periods presented.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The Company performs ongoing reassessments of (1) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain triggering events, and therefore would be subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding the Company’s involvement with a VIE cause the Company’s consolidation conclusion to change. The consolidation status of the VIEs with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively with assets and liabilities of a newly consolidated VIE initially recorded at fair value unless the VIE is an entity which was previously under common control, which in that case is consolidated based on historical cost. A gain or loss may be recognized upon deconsolidation of a VIE depending on the amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.

JB Believe LLC (“Believe”), an entity owned by Believe Film Partners LLC, of which the Company owns a 25% membership interest, was formed for the purpose of recording the production costs of the motion picture “Believe”. The Company was given unanimous consent by the members to enter into domestic and international distribution agreements for the licensing rights of the motion picture, Believe, until such time as the Company had been repaid $3,200,000 for the investment in the production of the film and $5,000,000 for the P&A to market and release the film in the US. The Company has not been repaid these amounts and as such is still in control of the distribution of the film. For the three and nine months ended September 30, 2021 and 2020, the Company did not record any revenues related to the distribution of Believe. The capitalized production costs related to Believe were either amortized or impaired in previous years. Believe’s primary liability is to the Company which it owes $6,301,314 and eliminates in consolidation.

NOTE 10 — STOCKHOLDERS’ EQUITY

The Company’s Amended and Restated Articles of Incorporation authorize the issuance of 10,000,000 shares of preferred stock. The Company’s Board of Directors (the “Board”) has the power to designate the rights and preferences of the preferred stock and issue the preferred stock in one or more series.

On July 6, 2017, the Company amended its Articles of Incorporation to designate 50,000 preferred shares as Series C with a $0.001 par value which may be issued only to an “Eligible Series C Preferred Stock Holder”. Pursuant to the Certificate of Designation of the Series C, each share of Series C will be convertible into one share of Common Stock, subject to adjustment for each issuance of Common Stock upon the occurrence of certain event(s) described in further detail in “Note 16: Stockholders’ Equity” within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020 At a meeting of the Board on November 12, 2020, a majority of the independent directors of the Board determined that the “optional conversion threshold” had been met. As a result, the Series C became immediately convertible and as of September 30, 2021 is convertible into 4,738,940 shares of Common Stock, subject to the restriction discussed below. Additionally, DE LLC, as the holder of the Series C is entitled to 14,216,819 votes, which are equal to approximately 65% of the voting securities of the Company.

At the meeting of the Board on November 12, 2020, the Board and Mr. O’Dowd agreed to restrict the conversion of the Series C until the Board approved its conversion. Therefore, on November 16, 2020, the Company and DE, LLC entered into a Stock Restriction Agreement pursuant to which the conversion of the Series C is prohibited until such time as a majority of the independent directors of the Board approves the removal of the prohibition. The Stock Restriction Agreement also prohibits the sale or other transfer of the Series C until such transfer is approved by a majority of the independent directors of the Board. The Stock Restriction Agreement shall terminate upon a Change of Control (as such term is defined in the Stock Restriction Agreement) of the Company.

The Certificate of Designation also provides for a liquidation value of $0.001 per share and dividend rights of the Series C on parity with the Company’s Common Stock.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The following table summarizes the movement of the common stock outstanding for the nine months ended September 30,2021:

On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). During the three and nine months ended September 30, 2021 and 2020, the Company did not issue any Awards under the 2017 Plan.

NOTE 11 — EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per share:

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

Basic earnings (loss) per share is computed by dividing income (loss) attributable to the shareholders of Common Stock (the numerator) by the weighted-average number of shares of Common Stock outstanding (the denominator) for the period. Diluted earnings (loss) per share assumes that any dilutive equity instruments, such as put rights, warrants and convertible notes payable were exercised and outstanding Common Stock adjusted accordingly.

Certain of the Company’s convertible notes payable, warrants and the Series C Preferred Stock have clauses that entitle the holder to participate if dividends are declared to the common stockholders as if the instruments had been converted into shares of Common Stock. As such, the Company uses the two-class method to compute earnings per share and attribute a portion of the Company’s net income to these participating securities. For the three months ended September 30, 2021, the Company attributed $12,271 of the Company’s net income to these participating securities and reduced the net income available to common shareholders by that amount when calculating earnings per share. For the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020, the Company had a net loss, and as such, the two-class method is not presented since the securities do not participate in losses.

In periods when the Put Rights are assumed to have been settled at the beginning of the period in calculating the denominator for diluted earnings (loss) per share, the related change in the fair value of Put Right liability recognized in the condensed consolidated statements of operations for the period, is added back or subtracted from net income (loss) during the period. The denominator for calculating diluted earnings (loss) per share for the three and nine months ended September 30, 2020 assumes the Put Rights had been settled at the beginning of the period, and therefore, the related income (loss) due to the decrease in the fair value of the Put Right liability during the three and nine months ended September 30, 2020 is subtracted from net income (loss). The number of shares added to the denominator for the Put Rights is calculated using the reverse treasury stock method that assumes the Company issues and sells sufficient shares at the average period trading price to satisfy the Put Right contracts. For the nine months ended September 30, 2021, Put Rights in the aggregate amount of 43,620 shares were not included in the calculation of diluted loss per share since inclusion would be considered antidilutive.

For the three months ended September 30, 2021, convertible promissory notes in the aggregate of 326,702 weighted average shares were not included in the calculation of diluted earnings per share and for the nine months ended September 30, 2021, convertible promissory notes and warrants in the aggregate of 273,594 weighted average shares were not included in the calculation of diluted loss per share because inclusion was considered to be anti-dilutive. For the three and nine months ended September 30, 2020, the convertible promissory notes and warrants were not included in diluted loss per share because inclusion was considered to be anti-dilutive.

NOTE 12 — WARRANTS

A summary of the warrants activity during the nine months ended September 30, 2021 is as follows:

On March 4, 2020, in connection with the March 4th Note, the Company issued Series “I” Warrant to purchase up to 20,000 shares of Common Stock at a purchase price of $3.91 per share. The warrants become exercisable on the six-month anniversary and for a period of five years thereafter. If a resale registration statement covering the shares of Common Stock underlying the warrants is not effective and available at the time of exercise, the warrants may be exercised by means of a “cashless” exercise formula. The Company determined that the Series “I” Warrant should be classified as a freestanding financial instrument that meets the criteria to be accounted for as a derivative liability and recorded a fair value at issuance of $40,000. The Company recorded losses of $55,000 and of $155,000 in its condensed consolidated statements of operations due to change in fair value for the three and nine months ending September 30, 2021, respectively. The fair value recorded on the Company’s condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 was $205,000 and $50,000, respectively.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

The Company recorded a loss of $2,397,877 in its condensed consolidated statements of operations due to change in fair value for the nine months ending September 30, 2021 in connection with the Series E, F, G and H warrants which were exercised in March 2021 using a cashless exercise formula pursuant to the warrant agreement.

NOTE 13 — RELATED PARTY TRANSACTIONS

On September 7, 2012, the Company entered into an employment agreement with its CEO, which provides for annual compensation of $250,000 and an annual discretionary bonus as determined by the Board. Unpaid compensation accrues interest at a rate of 10% per annum. In 2019, the Compensation Committee approved an increase in Mr. O’Dowd’s annual salary to $300,000. On May 17, 2021, the Compensation Committee of the Board approved an increase in the base salary of Mr. O’Dowd from $300,000 to $400,000 per year. The increase was effective January 1, 2021.

As of September 30, 2021 and December 31, 2020, the Company had accrued $2,625,000 of compensation as accrued compensation and has balances of $1,784,394 and $1,756,438 respectively, in accrued interest in current liabilities on its condensed consolidated balance sheet, related to the CEO’s employment. Amounts owed under this arrangement are payable on demand. The Company recorded interest expense related to the accrued compensation in the condensed consolidated statements of operations amounting to $66,164 for both the three months ended September 30, 2021 and 2020, and $196,336 and $197,055 for the nine months ended September 30, 2021 and 2020, respectively. During the three and nine months ended September 30, 2021, the Company paid interest amounting to $168,379 in connection with the accrued compensation to the CEO.

The Company entered into the New DE LLC Note with an entity wholly owned by our CEO. See Note 6 for further discussion.

In connection with the acquisition of 42West, the Company and its CEO, as personal guarantor, entered into the Put Agreements with each of the sellers of 42West, pursuant to which the Company granted the Put Rights. During the nine months ended September 30, 2021, the Company made payments amounting to $400,000 to Ms. Leslee Dart, while she was a member of the Board, related to the Put Rights. No payments were made to Ms. Dart during the three months ended September 30, 2021. Pursuant to the terms of one such Put Agreement, Ms. Dart exercised 6,507 Put Rights at a purchase price of $46.10 per share during the nine months ended September 30, 2021. As of September 30, 2021, the Company does not owe Ms. Dart any amounts related to the exercise of these Put Rights. On May 16, 2021, Ms. Dart resigned from her position as a member of the Board effective as of such date.

NOTE 14 — SEGMENT INFORMATION

The Company operates in two reportable segments, Entertainment Publicity and Marketing Segment (“EPD”) and Content Production Segment (“CPD”). The Entertainment Publicity and Marketing segment is composed of 42West, The Door, Viewpoint, Shore Fire, Be Social, and B/HI, and provides clients with diversified services, including public relations, entertainment and hospitality content marketing and strategic marketing consulting. The Content Production segment is composed of Dolphin Entertainment and Dolphin Films and engages in the production and distribution of digital content and feature films. The activities of our Content Production segment also include all corporate overhead activities.

The profitability measure employed by our chief operating decision maker for allocating resources to operating segments and assessing operating segment performance is operating income (loss) which is the same as Income (Loss) before other income (expenses) on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2021. Salaries and related expenses include salaries, bonuses, commissions and other incentive related expenses. Legal and professional expenses primarily include professional fees related to financial statement audits, legal, investor relations and other consulting services, which are engaged and managed by each of the segments. In addition, general and administrative expenses include rental expense and depreciation of property, equipment and leasehold improvements for properties occupied by corporate office employees.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

In connection with the acquisitions of 42West, The Door, Viewpoint, Shore Fire, Be Social, and B/HI, the Company assigned $6,537,065 of intangible assets, net of accumulated amortization of $6,932,935, and goodwill of $20,015,800 as of September 30, 2021 to the Entertainment Publicity and Marketing segment. The balances reflected as of September 30, 2020 for Entertainment Publicity and Marketing segment comprise 42West, The Door, Viewpoint, and Shore Fire.

NOTE 15 — LEASES

The Company and its subsidiaries are party to various office leases with terms expiring at different dates through December 2026. The amortizable life of the right-of-use asset is limited by the expected lease term. Although certain leases include options to extend the Company did not include these in the right-of-use asset or lease liability calculations because it is not reasonably certain that the options will be executed.

The table below shows the lease income and expenses recorded in the condensed consolidated statements of operations incurred during the three and nine months ended September 30, 2021 and 2020.

DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021

Lease Payments

For the three and nine months ended September 30, 2021, the Company made payments in cash related to its operating leases in the amounts of $664,650 and $2,067,546, respectively.

Future maturities lease payments for operating leases for the remainder of 2021 and thereafter, were as follows:

As of September 30, 2021, the Company’s weighted average remaining lease terms on its operating lease is 4.27 years and the Company’s weighted average discount rate is 7.58% related to its operating leases.

NOTE 16 — COMMITMENTS AND CONTINGENCIES

Litigation

The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. In the opinion of management and based upon the advice of its outside counsels, the liability, if any, from any pending litigation is not expected to have a material effect in the Company’s financial position, results of operations and cash flows. The Company is not aware of any pending litigation as of the date of this report.

Letter of Credit

Pursuant to the lease agreements of 42West’s New York and Los Angeles office locations, the Company is required to issue letters of credit to secure the leases. On July 24, 2018, the Company renewed the letter of credit issued by City National Bank for the 42West office space in New York. The original letter of credit was for $677,354 and originally expired on August 1, 2018. This letter of credit renews automatically annually unless City National Bank notifies the landlord 60-days prior to the expiration of the bank’s election not to renew the letter of credit. In connection with the annual renewal in 2021, the letter of credit was reduced to $541,833. The Company granted City National Bank a security interest in bank account funds totaling $541,883 pledged as collateral for the letter of credit. The letters of credit commit the issuer to pay specified amounts to the holder of the letter of credit under certain conditions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit.

The Company is not aware of any other claims relating to its outstanding letters of credit as of September 30, 2021.

NOTE 17 — SUBSEQUENT EVENTS

As discussed in Note 5, on October 7, 2021 the Company was notified that the SBA had approved the application to forgive the entire amount of the PPP loan related to Be Social, which amounted to $0.3 million.

As also discussed in Note 5, subsequent to September 30, 2021, the holders of three convertible notes converted the principal balance of $1,850,000 into 172,550 shares of Common Stock at conversion prices ranging between $10.71 and $10.74 per share.