DOLPHIN ENTERTAINMENT, INC. DISCUSSION AND ANALYSIS OF MANAGEMENT’S FINANCIAL POSITION AND RESULTS (Form 10-Q)

OVERVIEW



We are a leading independent entertainment marketing and premium content
production company. Through our subsidiaries, 42West, The Door, Shore Fire,
Viewpoint and Be Social, we provide expert strategic marketing and publicity
services to many of the top brands, both individual and corporate, in the
entertainment, hospitality and music industries. 42West, The Door and Shore Fire
are each recognized global leaders in the PR services for the industries they
serve. Viewpoint adds full-service creative branding and production capabilities
and Be Social provides influencer-marketing capabilities through its roster of
highly engaged social media influencers. Dolphin's legacy content production
business, founded by our Emmy-nominated Chief Executive Officer, Bill O'Dowd,
has produced multiple feature films and award-winning digital series, primarily
aimed at family and young adult markets. Our common stock trades on The Nasdaq
Capital Market under the symbol "DLPN."



We have established an acquisition strategy based on identifying and acquiring
companies that complement our existing entertainment publicity and marketing
services and content production businesses. We believe that complementary
businesses, such as live event production, can create synergistic opportunities
and bolster profits and cash flow. We have identified potential acquisition
targets and are in various stages of discussion with such targets.



We have also established an investment strategy, "Dolphin 2.0," based upon
identifying opportunities to develop internally owned assets, or to acquire
ownership interest in others' assets, in the categories of entertainment
content, live events and consumer products. We believe these categories
represent the types of assets wherein our expertise and relationships in
entertainment marketing most influences the likelihood of success. We are in
various stages of internal development and outside conversations on a wide range
of opportunities within Dolphin 2.0. We intend to enter into additional
investments during 2022 and 2023, but there is no assurance that we will be
successful in doing so, whether in 2022, 2023 or at all.



We operate in two reportable segments: our entertainment publicity and marketing
segment and our content production segment. The entertainment publicity and
marketing segment comprises 42West, The Door, Shore Fire, Viewpoint and Be
Social and provides clients with diversified services, including public
relations, entertainment content marketing, strategic marketing consulting,
digital marketing capabilities, creative branding and in-house production of
content for marketing. The content production segment comprises Dolphin Films
and Dolphin Entertainment and specializes in the production and distribution of
digital content and feature films. The activities of our Content Production
segment also include all corporate overhead activities.



Dolphin 2.0



We believe our ability to engage a broad consumer base through our best-in-class
pop culture marketing assets provides us an opportunity to make investments in
products or companies which would benefit from our collective marketing power.
We call these investments "Dolphin 2.0" (with "Dolphin 1.0" being the underlying
businesses of each of our subsidiaries mentioned above). Simply put, we seek to
own an interest in some of the assets we are marketing. Specifically, we want to
own an interest in assets where our experience, industry relationships and
marketing power will most influence the likelihood of success. This leads us to
seek investments in the following categories of assets: 1) Content; 2) Live
Events; and 3) Consumer Products.



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



On October 2, 2022, we minted (offered for sale) our first collection, "Creature
Chronicles: Exiled Aliens", a generative art collection of 7,777 unique avatars
designed by Anthony Francisco, former Marvel Studio artist. The collection
generated approximately 13,175 SOL, equaling approximately $435,000.



Our second Dolphin 2.0 investment was made in October, 2021, when we acquired an
ownership interest in Midnight Theatre, a state-of-the-art contemporary variety
theater and restaurant in the heart of Manhattan. An anchor of Brookfield
Properties' recently opened $4.5 billion Manhattan West development, the
Midnight Theatre opened on September 21, 2022. The restaurant, Hidden Leaf,
opened on July 6, 2022.



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Our third Dolphin 2.0 investment was made in December, 2021, when we acquired an
ownership interest in Crafthouse Cocktails, a pioneering brand of
ready-to-drink, all-natural classic cocktails. During the third quarter of 2022,
Crafthouse Cocktails began its first international operations, with distribution
in London, United Kingdom.


We also made our first content investment on Dolphin 2.0. Please see Note 17 above for details of our collaboration agreement with IMAX to produce and distribute the documentary The Blue Angels.


COVID Update



The continued spread of new COVID-19 variants did not have a significant impact
on our business during the quarter ended September 30, 2022. The future course
of the pandemic could have adverse effects in the U.S and global economies and
thus negatively impact our business and financial results.



Revenues


For the three and nine months ended September 30, 2022 and 2021, we derived all
of our revenues from our entertainment publicity and marketing segment. The
entertainment publicity and marketing segment generates its revenues from
providing public relations services for celebrities, musicians and brands,
entertainment and targeted content marketing for film and television series,
strategic communications services for corporations, public relations, marketing
services and brand strategies for hotels and restaurants and digital marketing
through its roster of social media influencers. Refer to discussion under
Revenues in the Results of Operations section below for further discussion on
the revenues from the content production segment.



entertainment advertising and marketing



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



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



       ?    Talent - We earn fees from creating and implementing strategic
            communication campaigns for performers and entertainers, including
            Oscar, Tony and Emmy winning film, theater and television stars,
            directors, producers, celebrity chefs and Grammy winning recording
            artists. Our services in this area include ongoing strategic counsel,
            media relations, studio and/or network liaison work, and event and
            tour support. We believe that the proliferation of content, both
            traditional and on social media, will lead to an increasing number of
            individuals seeking such services, which will drive growth and revenue
            in our Talent departments for several years to come.




       ?    Entertainment Marketing and Brand Strategy - We earn fees from
            providing marketing direction, public relations counsel and media
            strategy for entertainment content (including theatrical films,
            television programs, DVD and VOD releases, and online series) from
            virtually all the major studios and streaming services, as well as
            content producers ranging from individual filmmakers and creative
            artists to production companies, film financiers, DVD

dealer,

            and other entities. In addition, we provide entertainment 

marketing

            services in connection with film festivals, food and wine 

festivals

            awards campaigns, event publicity and red-carpet management. As 

Part

            of our services, we offer marketing and publicity services 

tailored to

            reach diverse audiences. We also provide marketing direction targeted
            to the ideal consumer through a creative public relations and creative
            brand strategy for hotel and restaurant groups. We expect that
            increased digital streaming marketing budgets at several large key
            clients will drive growth of revenue and profit in 42West's
            Entertainment Marketing division over the next several years.




       ?    Strategic Communications - We earn fees by advising companies looking
            to create, raise or reposition their public profiles, primarily in the
            entertainment industry. We also help studios and filmmakers deal with
            controversial movies, as well as high-profile individuals address
            sensitive situations. We believe that growth in the Strategic
            Communications division will be driven by increasing demand for these
            varied services by traditional and non-traditional media

customers who

            are expanding their activities in the content production, 

Brand,

            and consumer products PR sectors.



? Creative Branding and Production – We offer creative branding to our clients

            and production services from concept creation to final 

Delivery. Our

            services include brand strategy, concept and creative 

Development,

            design and art direction, script and copyrighting, live action
            production and photography, digital development, video editing 

and

            composite, animation, audio mixing and engineering, project 

management

            and technical support. We expect that our ability to offer 

this

            services to our existing clients in the entertainment and 

consumer

            products industries will be accretive to our revenue.



? Digital Media Influencer Marketing Campaigns – We design strategically

           marketing agreements between brands and social media

influencers, e.g

           both organic and paid campaigns. We also offer services for social
           media activations at events, as well as editorial work on behalf of
           brand clients. Our services extend beyond our own captive

influencer

           network, and we manage custom campaigns targeting specific 

demographics

           and locations, from ideation to delivery of results reports. We expect
           that our relationship with social media influencers will provide us the
           ability to offer these services to our existing clients in the
           entertainment and consumer products industries and will be
accretive to
           our revenue.




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Content Production


project development and related services

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



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



In June 2022, we entered into an agreement with IMAX Corporation ("IMAX") to
co-produce and co-finance a documentary motion picture on the flight
demonstration squadron of the United States Navy called the Blue Angels. IMAX
and Dolphin have each agreed to fund 50% of the production budget. On June 29,
2022 and September 30, 2022, respectively, we made payments in the amount of
$500,000 and $1,000,000 pursuant to this agreement. We anticipate a final
$500,000 payment to be made in Q1 2023.



 Expenses


Our expenses mainly consist of:

(1) Direct costs – includes certain costs for services as well as certain

           production costs, related to our entertainment publicity and 

marketing

           business. Included within direct costs are immaterial

impairments for

           any of our content production projects.




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



(3) Selling, General and Administrative Expenses – including all overheads

           costs except for payroll, depreciation and amortization and 

legal and

           professional fees that are reported as a separate expense item.




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

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



(6) Change in fair value of contingent consideration – includes changes in

           the fair value of the contingent earn-out payment obligations for the
           Company' acquisitions. The fair value of the related contingent
           consideration is measured at every balance sheet date and any changes
           recorded on our condensed consolidated statements of operations.



(7) Attorney and Counsel Fees – including fees paid to our attorneys, fees

           for investor relations consultants, audit and accounting fees and fees
           for general business consultants.




Other Income and Expenses



For the three and nine months ended September 30, 2022, other income and
expenses consisted primarily of: (1) changes in fair value of convertible notes;
(2) changes in fair value of warrants; and (3) interest expense. For the three
and nine months ended September 30, 2021, other income and expenses consisted
primarily of: (1) gain on extinguishment of debt; (2) change in fair value of
convertible notes; (3) change in fair value of warrants and (4) interest
expense. For the nine months ended September 30, 2021, other income and expenses
also included a change in the fair value of put rights.





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                             RESULTS OF OPERATIONS


Three and nine months ended 09/30/2022 compared to three and nine months ended September 30, 2021


Revenues



For the three and nine months ended September 30, 2022 and 2021 revenues were as
follows:



                                          For the three months ended          For the nine months ended
                                                 September 30,                      September 30,
                                             2022              2021             2022              2021

Revenues:

Entertainment publicity and marketing   $    9,899,013$ 9,399,432$  29,366,748$ 25,219,793
Total revenue                           $    9,899,013$ 9,399,432$  29,366,748$ 25,219,793




Revenues from entertainment publicity and marketing increased by approximately
$0.5 million and $4.1 million for the three and nine months ended September 30,
2022, respectively, as compared to the same periods in the prior year. The
increase is primarily driven by increased revenues across most of our
subsidiaries, as cross-selling across our subsidiaries has provided additional
customers and increased demand for the service our subsidiaries provide.



We did not derive any revenues from the content production segment as we have
not produced and distributed any of the projects discussed above and the
projects that were produced and distributed in 2013 and 2016 have mostly
completed their normal revenue cycles. We expect to begin generating income in
our content production segment in the second half of 2023 with the release of
the Blue Angels documentary film.



Expenses



For the three and nine months ended September 30, 2022 and 2021, our expenses
were as follows:



                                          For the three months ended          For the nine months ended
                                                 September 30,                      September 30,
                                             2022              2021             2022              2021
Expenses:
Direct costs                            $      837,429$    991,708$   2,941,044$  2,578,295
Payroll and benefits                         7,030,814        5,875,755        20,947,531       16,770,091
Selling, general and administrative          1,663,288        1,519,812         4,644,264        4,234,309
Acquisition costs                              315,800                -           315,800           22,907
Depreciation and amortization                  415,836          475,207         1,248,621        1,436,189
Change in fair value of contingent
consideration                                   (5,000 )      1,110,000        (1,439,778 )      1,310,000
Legal and professional                         774,613          498,661    
    2,317,800        1,301,267
Total expenses                          $   11,032,780$ 10,471,143$  30,975,282$ 27,653,058




Direct costs decreased by approximately $0.2 million and increased by
approximately $0.4 million for the three and nine months ended September 30,
2022, respectively, as compared to the three and nine months ended September 30,
2021. The increase in direct costs is mainly driven by $0.9 million of NFT
production and marketing costs for the nine months ended September 30, 2022,
respectively, that were not present in the same period in 2021, offset by
approximately $0.5 million decrease in direct costs primarily attributable to a
decrease in Viewpoint's revenue as compared to the nine months ended September
30, 2021. The decrease in direct costs of approximately $0.2 million for the
three months ended September 30, 2022 is primarily attributable to the decrease
in Viewpoint's revenue, in comparison with the same period in the prior year, as
Viewpoint incurs third party costs related to the production of marketing
materials, which are included in direct costs.



Payroll and benefits expenses increased by approximately $1.2 million and $4.2
million for the three and nine months ended September 30, 2022, respectively, as
compared to the three and nine months ended September 30, 2021, primarily due to
additional headcount in 2022 to support the growth of our business and stock
compensation issued to our employees under the 2017 Plan.



Selling, general and administrative expenses increased by approximately $0.1
million and $0.4 million for the three and nine months ended September 30, 2022,
respectively, as compared to the three and nine months ended September 30, 2021,
mainly due to the fair value of the commitment shares issued as consideration
for the Lincoln Park agreement and a $98.9 thousand impairment of an ROU asset.



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Acquisition costs for the three and nine months ended September 30, 2022 were
$0.3 million, related to our acquisition of the membership interest of Socialyte
LLC on November 14, 2022. Acquisition costs for the three and nine months ended
September 30, 2021 were not significant, as the Company did not have any
significant acquisition activity during 2021.



Depreciation and amortization remained constant for the past three and nine months 09/30/2022compared to the three and nine months ended
September 30, 2021.



Change in fair value of the contingent consideration was a $5.0 thousand gain
and $1.4 million gain for the three and nine months ended September 30, 2022,
respectively, compared to the change in fair value of the contingent
consideration of $1.1 million loss and a $1.3 million loss for the three and
nine months ended September 30, 2021, respectively. The main components of the
change in fair value of contingent consideration were the following:



· The Door: This contingent consideration was agreed June 2022so no

Changes have been recorded in the past three months 09/30/2022. The enterprise

recorded a $0.3 million Profit for the past three months September 30, 2021and

a $1.4 million win and $0.1 million Earnings for the nine months ended September

30, 2022 and 2021 respectively.

· B/HI: This contingent consideration has been settled June 2022so no

Changes have been recorded in the past three months 09/30/2022. The enterprise

recorded a $1.1 million Loss for the past three months September 30, 2021and

a $76.1 thousand win and $1.1 million loss for the nine months ended September

30, 2022 and 2021 respectively.

· Be social: $5.0 thousand win and $0.3 million Loss for the past three months

09/30/2022 or 2021 and $5.0 thousand win and $0.3

   million loss for the nine months ended September 30, 2022 and 2021,
   respectively.




Legal and professional fees increased by approximately $0.3 million and $1.0
million for the three and nine months ended September 30, 2022, as compared to
the three and nine months ended September 30, 2021 due primarily to: (1)
entering into the 2022 Lincoln Park agreement and related filing of the
Registration Statement on Form S-1 during the third quarter of 2022 and (2)
legal, consulting and audit fees related to our restatement of the September 30,
2021 Form 10-Q, revisions of the Forms 10-Q for March 31, 2021 and June 30, 2021
included in our Form 10-K filed on May 26, 2022 and fees associated with our
change of auditors.



Other Income and Expenses



                                             For the three months ended          For the nine months ended
                                                    September 30,                      September 30,
                                               2022               2021             2022              2021
Other Income and expenses:
Gain on extinguishment of debt, net        $           -       $ 1,733,400     $           -     $  2,689,010
Loss on disposal of fixed assets                       -                 -                 -          (48,461 )

Change in fair value of convertible bonds 45,642 (223,923 ) 577,522 (826,398 ) Change in fair value of warrants

                  10,000           (55,000 )         105,000       (2,552,877 )
Change in fair value of put rights                     -                 -                 -          (71,106 )
Interest expense                                (126,147 )        (241,115 )        (400,884 )       (576,146 )
Total other (expenses) income, net         $     (70,505 )$ 1,213,362
   $     281,638$ (1,385,978 )
We did not record any gain or loss on extinguishment of debt for the three and
nine months ended September 30, 2022. During the three and nine months ended
September 30, 2021, we recorded a gain on extinguishment of debt of
approximately $1.8 million and $2.7 million, respectively, in connection with
forgiveness of the PPP Loans of 42West, Dolphin, Viewpoint, Shore Fire and The
Door. Both periods were offset by a loss on extinguishment of debt of $57,400
related to the exchange of certain put rights for shares of our common stock.



We elected the fair value option for one convertible note issued in 2020. The
fair value of this convertible note is remeasured at every balance sheet date
and any changes are recorded on our condensed consolidated statements of
operations. For the three months ended September 30, 2022 and 2021, we recorded
a change in the fair value of the convertible note issued in 2020 in the amount
of a $45,642, gain and $0.2 million loss, respectively. For the nine months
ended September 30, 2022 and 2021, we recorded a change in the fair value of the
convertible note issued in 2020 in the amount of a gain of $0.6 million and a
loss of $0.8 million, respectively. None of the decrease in the value of the
convertible note was attributable to instrument specific credit risk and as
such, all of the gain in the change in fair value was recorded within net (loss)
income.



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Warrants issued with the convertible note payable issued in 2020, were initially
measured at fair value at the time of issuance and subsequently remeasured at
estimated fair value on a recurring basis at each reporting period date, with
changes in estimated fair value of each respective warrant liability recognized
as other income or expense. In March 2021, one of the warrant holders exercised
146,027 warrants via a cashless exercise formula. The price of our common stock
on the exercise date was $19.16 per share and we recorded a change in fair value
of the exercised warrants of $2.5 million on our condensed consolidated
statements of operations. The fair value of the 2020 warrants that were not
exercised decreased by approximately $10.0 thousand and $0.1 million; therefore,
we recorded a change in the fair value of the warrants for the three and nine
months ended September 30, 2022 for those amounts, respectively, on our
condensed consolidated statements of operations.



The fair value of put rights related to the 42West acquisition were recorded on
our condensed consolidated balance sheet on the date of the acquisition. The
fair value of the put rights are measured at every balance sheet date and any
changes are recorded on our condensed consolidated statements of operations. The
fair value of the put rights decreased by approximately $71,000 for the nine
months ended September 30, 2021. The final put rights were settled in March of
2021; therefore we did not have a liability related to the put rights as of
September 30, 2022 and no changes in fair value occurred in 2022.



Interest expense decreased by $0.1 million and $0.2 million for the three and
nine months ended September 30, 2022, respectively, as compared to the same
periods in the prior year, primarily due to lower convertibles and
nonconvertible notes outstanding during 2022, as compared to the same periods in
the prior year.


Share in the loss of unconsolidated related companies

Equity in profits or losses of unconsolidated affiliated companies includes our share of profits or losses from equity investments.

For the three and nine months ended September 30, 2022, we recorded losses of
$39,437 and $82,837, respectively, from our equity investment in Crafthouse
Cocktails. The Crafthouse Cocktails investment was not present in the three and
nine months ended September 30, 2021.



Midnight Theatre commenced operations at the end of the second quarter of 2022;
we recorded a loss of $60,786 thousand for the three months ended September 30,
2022. No equity gains or losses have been recorded prior to the third quarter of
2022.



Income Taxes



We recorded an income tax expense of $7,224 and $21,672 for the three and nine
months ending September 30, 2022, which reflects the accrual of a valuation
allowance in connection with the limitations of our indefinite lived tax assets
to offset our indefinite lived tax liabilities. To the extent the tax assets are
unable to offset the tax liabilities, we have recorded a deferred expense for
the tax liability (a "naked credit").



We recorded an income tax benefit of $38,851 for the nine months ended September
30, 2021, due to a reduction of the valuation allowance, as the net deferred tax
asset was reduced as a result of the deferred tax liability recorded in the B/HI
acquisition. There was no income tax expense or benefit for the three months
ended September 30, 2021.



Net (Loss) Income



Net loss was approximately $1.3 million or $0.14 per share based on 9,664,681
weighted average shares outstanding for basic loss per share and $0.14 per share
based on 9,793,715 weighted average shares on a fully diluted basis earnings per
share for the three months ended September 30, 2022. Net income was
approximately $0.1 million or $0.02 per share based on 7,740,085 weighted
average shares outstanding for both basic and diluted earnings per share for the
three months ended September 30, 2021. The change in net income for the three
months ended September 30, 2022 as compared to the three months ended September
30, 2021, is related to the factors discussed above.



Net loss was approximately $1.5 million or $0.16 per share based on 9,307,830
weighted average shares outstanding for basic loss per share and $0.23 per share
based on 9,437,807 weighted average shares on a fully diluted basis earnings per
share for the nine months ended September 30, 2022. Net loss was approximately
$3.8 million or $0.50 per share based on 7,551,974 weighted average shares
outstanding for both basic and diluted loss per share for the nine months ended
September 30, 2021. The change in net loss for the nine months ended September
30, 2022 as compared to the nine months ended September 30, 2021, is related to
the factors discussed above.



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