Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

We are a leading independent entertainment marketing and production company. We were first incorporated in the State of Nevada on March 7, 1995 and domesticated in the State of Florida on December 4, 2014. Our common stock trades on The Nasdaq Capital Market under the symbol "DLPN."

Through our subsidiaries, 42West LLC ("42West"), The Door Marketing Group LLC ("The Door"), Shore Fire Media, Ltd ("Shore Fire"), The Digital Dept, LLC ("The Digital Dept.") formerly known as Socialyte LLC ("Socialyte") and Be Social Relations LLC ("Be Social") that merged effective January 1, 2024, Special Projects Media, LLC ("Special Projects"), Always Alpha Sports Management, LLC ("Always Alpha") and Elle Communications, LLC ("Elle") we provide expert strategic marketing and publicity services to many of the top brands, both individual and corporate, in the motion picture, television, music, gaming, culinary, hospitality, lifestyle and charitable industries. 42West (Film and Television, Gaming), Shore Fire (Music), The Door (Culinary, Hospitality, Lifestyle) and Elle (Impact, Philanthropy, Non-Profit) are each recognized global public relations and marketing leaders for the industries they serve. As a group, they were recognized as the #1 PR firm in the country in the prestigious Observer rankings earlier this year. The Digital Dept. (formerly, Socialyte and Be Social) provides influencer marketing capabilities through divisions dedicated to influencer talent management, brand campaign strategy and execution, and influencer event ideation and production. Always Alpha is a talent management firm primarily focused on representing female athletes, broadcasters and coaches. Special Projects is the entertainment industry's leading celebrity booking firm, specializing in uniting brands and events with celebrities and influencers across the entertainment, media, fashion, consumer product and tech industries. Dolphin's legacy content production business, Dolphin Films, founded by our Emmy-nominated Chief Executive Officer, Bill O'Dowd, has produced multiple feature films and award-winning digital series, primarily aimed at family and young adult markets.

We 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 can create synergistic opportunities and bolster profits and cash flow. While we may acquire additional companies in the future, we are not in active negotiations with any such companies, and there is no assurance that we will be successful in acquiring any additional companies, whether in 2025 or at all.

We have also established an investment strategy, "Ventures" or "Dolphin 2.0," based upon identifying opportunities to develop internally owned assets, or acquire ownership stakes in others' assets, in the categories of entertainment content, live events and consumer products. We believe these categories represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various stages of internal development and outside conversations on a wide range of opportunities within these Ventures. We intend to enter into Venture investments during 2025, but there is no assurance that we will be successful in doing so, whether in 2025 or at all.

Elle Communications Acquisition

On July 15, 2024, we acquired all of the issued and outstanding membership interests of Elle, a California limited liability company, pursuant to a membership interest purchase agreement between us and the seller, Danielle Finck. Elle is a public relations agency specializing in social and environmental impact for a client roster of mission-centered brands, nonprofits and philanthropic foundations, social enterprises, sustainability and ethically made products and activists. Elle is headquartered in Los Angeles, California.

The consideration paid by us in connection with the acquisition of Elle is approximately $4.7 million. On July 15, 2024, we paid the sellers $1.9 million cash and issued the seller 961,000 shares of our common stock. At various dates during the months between July and December 2024, we paid the Elle's seller approximately $0.6 million related to cash and working capital adjustments and will pay approximately $0.5 million on March 31, 2025 for the contingent consideration pursuant to the membership interest purchase agreement. As part of the membership interest purchase agreement, we entered into employment agreements with Danielle Finck and Silvie Snow Thomas, a key employee, each for a period of four years.

For more information on the acquisition of Elle, refer to Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, direct costs, payroll and benefits, selling, general and administrative expenses, legal and professional expenses, other income/expense and net income. Other income/expense consists mainly of interest expense, interest income and non-cash changes in fair value of liabilities,

We operate in two reportable segments: our entertainment publicity and marketing segment and our content production segment. The entertainment publicity and marketing segment is composed of 42West, The Door, Shore Fire, The Digital Dept., Special Projects, Elle and Always Alpha, and provides clients with diversified services, including public relations, entertainment content marketing, strategic communications, influencer marketing, celebrity booking and live event production. The content production segment is composed of Dolphin Films and Dolphin Digital Studios, which produce and distribute feature films and digital content.

Entertainment Publicity and Marketing ("EPM")

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

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

·

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

·

Entertainment Marketing and Brand Strategy- We earn fees from providing marketing direction, public relations counsel and media strategy for entertainment content (including theatrical films, television programs, DVD and VOD releases, and online series) from virtually all the major studios and streaming services, as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. In addition, we provide entertainment marketing services in connection with film festivals, food and wine festivals, awards campaigns, event publicity and red-carpet management. As part of our services, we offer marketing and publicity services tailored to reach diverse audiences. We also provide marketing direction targeted to the ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups.

·

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

	·	Digital Media Influencer Marketing Campaigns- We arrange strategic marketing agreements between brands and social media influencers, for both organic and paid campaigns. We also offer services for social media activations at events. Our services extend beyond our own captive influencer network, and we manage custom campaigns targeting specific demographics and locations, from ideation to delivery of results reports. We expect that our relationship with social media influencers will provide us the ability to offer these services to our existing clients in the entertainment and consumer products industries and will be accretive to our revenue.
	·	Celebrity Booking and Live Event Programming- We arrange for brands and events to book celebrity and influencer talent. Our services include the creation of the strategy to elevate the brand or event through celebrity and/or influencer inclusion, to the booking of celebrities and influencers for commercial endorsements or appearances, to the curation of event lists and securing attendance, to the coordination and production of live events. We believe the expansion of brands seeking celebrity and/or influencer endorsements, as well as celebrity and/or influencers to attend brand-sponsored live events, will drive growth and revenue for the next several years.

Content Production ("CPD")

Project Development and Related Services

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

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

In 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 each agreed to fund 50% of the production budget which was estimated at approximately $4 million. On November 7, 2023, we agreed to pay and paid an additional $250,000, which represented 50% of the estimated additional production costs to complete the documentary. We paid $2,250,000 related to productions costs of The Blue Angels in connection with this agreement. On April 25, 2023, IMAX entered into an acquisition agreement with Amazon Content Services LLC, (the "Amazon Agreement") for the distribution rights of The Blue Angels. We estimate that we will derive approximately $3.75 million from this agreement. On February 22, 2024, we received $777,905 from IMAX, as a first installment in connection with the Amazon Agreement and on July 9, 2024, we received the second installment from IMAX in the amount of $2,556,452. The Blue Angels documentary motion picture was released in theatres on May 17, 2024 and began streaming on Amazon Prime Video on May 23, 2024.

In February, 2025, Dolphin Films partnered with Aircraft Productions of Toronto, Canada to produce a re-boot of the popular 1986 MGM hockey movie "Youngblood." The film is expected to be completed and ready for delivery in the second half of 2025.

Revenues

For the years ended December 31, 2024 and 2023, we derived substantially all of our revenues from our entertainment publicity and marketing segment. The entertainment publicity and marketing segment includes revenues from Elle from July 1, 2024 through December 31, 2024.

During the year ended December 31, 2024, we generated revenue in our content production segment related to The Blue Angels documentary motion picture. For the year ended December 31, 2023, our content production segment derived revenues from the domestic distribution of Believe, a feature film that was released in 2013.

The table below sets forth the percentage of total revenue derived from our segments for the years ended December 31, 2024 and 2023:

		December 31,
		2024				2023
Revenues:
Entertainment publicity and marketing			93.4	%			99.9	%
Content production			6.6	%			0.1	%
Total revenue			100	%			100	%

Expenses

Our expenses consist primarily of:

(1)

Direct costs - includes the amortization of film production costs related to The Blue Angels, using the individual film-forecast-computation method which amortizes film production costs in the same ratio as the current period actual revenue bears to estimated remaining unrecognized ultimate revenue. Direct costs also include certain costs of services, as well as certain production costs, related to our entertainment publicity and marketing business.

(2)

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

	(3)	Selling, general and administrative expenses - includes all overhead costs except for payroll, depreciation and amortization and legal and professional fees that are reported as a separate expense item.
	(4)	Acquisition costs - includes legal, consulting and audit fees related to our acquisitions.

(5)

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

(6)

Impairment of goodwill - includes an impairment charge related to ceasing operations in Viewpoint and triggering events identified during the years ended December 31, 2024 and 2023.

(7)

Impairment of intangible assets - includes an impairment charge as a result of a rebranding of two of our subsidiaries during the third quarter of 2023.

(8)

Impairment of notes receivable - includes the write-off of the notes receivable from Midnight Theatre. Refer to Note 8 to the consolidated financial statement elsewhere on this Annual Report on Form 10-K for additional information.

(9)

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

(10)

Legal and professional fees - includes fees paid to our attorneys, fees for investor relations consultants, audit and accounting fees and fees for general business consultants.

Other Income and Expenses

For the years ended December 31, 2024 and 2023, other income and expenses consisted primarily of: (1) changes in the fair values of convertible notes and warrants; (2) interest income; and (3) interest expense.

RESULTS OF OPERATIONS

Year ended December 31, 2024 as compared to year ended December 31, 2023

Revenues

For the years ended December 31, 2024 and 2023, our revenues were as follows:

		December 31,
		2024				2023
Revenues:
Entertainment publicity and marketing		$	48,263,843			$	43,067,557
Content production			3,421,141				55,518
Total revenue		$	51,684,984			$	43,123,075

Revenues from entertainment publicity and marketing increased by approximately $5.2 million, or 12.1%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

The increase for the year ended December 31, 2024 is primarily driven by increases across substantially all subsidiaries and inclusion of $4.5 million of Special Projects, Always Alpha and Elle revenues that were not present for the full year in 2023, offset by the decrease in revenues of Viewpoint. We decided to cease the operations of Viewpoint during the year ended December 31, 2024.

Revenues from content production increased by approximately $3.4 million during the year ended December 31, 2024, compared to the same period in the prior year, in connection with revenue generated from The Blue Angels documentary film, which was released in theatres on May 17, 2024.

Expenses

For the years ended December 31, 2024 and 2023, our operating expenses were as follows:

		December 31,
		2024				2023
Expenses:
Direct costs		$	3,266,461			$	946,962
Payroll and benefits			38,123,040				35,030,257
Selling, general and administrative			7,795,610				8,434,549
Acquisition costs			164,044				116,151
Impairment of goodwill			6,671,557				9,484,215
Impairment of intangible assets			-				341,417
Write-off of notes receivables			1,270,000				4,108,080
Change in fair value of contingent consideration			50,000				33,226
Depreciation and amortization			2,382,361				2,253,619
Legal and professional			2,447,083				2,485,096
Total expenses		$	62,170,156			$	63,233,572

Direct costs increased $2.3 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023. The increase in direct costs for the year ended December 31, 2024 is directly attributable to (i) $1.8 million of capitalized production costs being amortized for the production of The Blue Angels and (ii) the increase in subsidiaries' revenues as compared with the same period in the prior year.

Payroll and benefits expenses increased by approximately $3.1 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily related to an increase of $1.7 million for a full year of Special Projects payroll in 2023 compared to only three months in 2023, $1.2 million of Elle payroll for the period between July 15, 2024 and December 31, 2024, $0.6 million of payroll for Always Alpha for the period between June 1, 2024 and December 31, 2024, offset by a reduction in Viewpoint payroll of $0.5 million due to ceasing operations.

Selling, general and administrative expenses decreased by approximately $0.6 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023. The decrease is primarily related to a decrease in office rent expense from the expiration of one of the New York office leases in August 2023, a cost savings of approximately $0.1 million and a reduction of bad debt expense of approximately $0.4 million due to improvements in our collection of accounts receivable.

Acquisition costs for the year ended December 31, 2024 were $0.2 million, related to our acquisition of Elle on July 15, 2024. Acquisition costs for the year ended December 31, 2023 were $0.1 million, primarily related to our acquisition of Special Projects on October 2, 2023.

Depreciation and amortization increased $0.1 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023 related primarily to nine months amortization of Special Projects intangible assets and six months amortization of Elle intangible assets in 2024, in the amount of $0.5 million that were not present in the prior year. This increase was offset by a decrease in amortization of intangible assets of the other subsidiaries in the amount of $0.4 million related to intangible assets that had previously been impaired or were fully amortized.

Impairment of goodwill was $6.7 million for the year ended December 31, 2024 compared to $9.5 million for the year ended December 31, 2023.

As discussed in Note 5 to our consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K, in the third quarter of 2024, we performed a quantitative assessment driven by triggering events related to declines in our market capitalization combined with decreased revenue projections for certain of our subsidiaries. The quantitative assessment resulted in the impairment of goodwill in the amount of $6.5 million of three of our entertainment publicity and marketing segment reporting units, and $0.2 million goodwill impairment as a result of the closure of one of our reporting units. During the year ended December 31, 2023, we impaired $9.5 million allocated to several of our reporting units.

Impairment of intangible assets was $0.3 million for the year ended December 31, 2023. As discussed in Note 5 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, during the year ended December 31, 2023, we recognized an impairment of the trademarks and trade names of Socialyte and Be Social in connection with the rebranding of both subsidiaries as the new "The Digital Dept.". No such impairment was recorded during the year ended December 31, 2024.

Write-off of notes receivables was $1.3 million and $4.1 million for the years ended December 31, 2024 and 2023, respectively. As discussed in Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, during the third quarter of the year ended December 31, 2024, we determined the Midnight Theatre Notes issued during the year ended December 31, 2024 had been impaired, resulting from a review of Midnight Theatre's operating results and projections. As a result, as of December 31, 2024 we wrote off all outstanding Midnight Theatre Notes. During the fourth quarter of year ended December 31, 2023, we determined that Midnight Theatre Notes issued in 2021 and 2022 had been impaired and wrote off the outstanding Midnight Theatre Notes and any accumulated unpaid interest receivable.

Change in fair value of the contingent consideration was a loss of $50 thousand for the year ended December 31, 2024, compared a loss of $33.2 thousand for the year ended December 31, 2023. The main components of the change in fair value of contingent consideration were the following:

·

Elle: We recorded a loss of $50 thousand for the year ended December 31, 2024 related to the remeasurement of fair value as of December 31, 2024. During the year ended December 31, 2024, Elle achieved the conditions for earnout consideration, which will be paid and settled in cash in March 2025. This contingent consideration was not in place during the year ended December 31, 2023.

·

Be Social: We recorded a loss of $33.2 thousand for the year ended December 31, 2023, related to the remeasurement of fair value as of that date the contingent consideration was settled.

Legal and professional fees had an insignificant decrease of approximately $38 thousand, or 1.5% for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

Other Expenses

		December 31,
		2024				2023
Other (expense) and income:
Change in fair value of convertible note		$	35,000			$	(11,444	)
Change in fair value of warrants			5,000				10,000
Interest income			11,462				2,877
Interest expense			(2,081,661	)			(2,085,107	)
Total		$	(2,030,199	)		$	(2,083,674	)

Change in fair value of Convertible Note at Fair Value - We elected the fair value option for a convertible note issued in 2020. The fair value of the convertible note is re-measured at every balance sheet date and any changes are recorded on our consolidated statements of operations. For the years ended December 31, 2024 and 2023, we recorded changes in the fair value of the convertible note issued in 2020 in the amount of a gain of $35.0 thousand and a loss of $11.4 thousand, respectively. None of the decrease in the value of the convertible note was attributable to instrument specific credit risk.

Change in fair value of warrants - The warrant issued with the convertible note payable at fair value issued in 2020 was 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 the warrant liability recognized as other income or expense. The change in fair value of the 2020 warrant that was not exercised decreased minimally for the year ended December 31, 2024 and 2023.

Interest income - Interest income increased by $8.6 thousand for the year ended December 31, 2024 as compared to the year ended December 31, 2023, primarily due to the reversal of interest income in connection with the write-off of the Midnight Theatre Notes receivable during 2023. We did not record any interest income in connection with the Midnight Theatre Notes during the year ended December 31, 2024.

Interest expense - Interest expense remained consistent for the year ended December 31, 2024 as compared to the year ended December 31, 2023. Although, we obtained new related party nonconvertible notes and an increase in the term loan financing in 2024, the increase in debt was offset by one-time interest expenses incurred in 2023 of $79,286 of prepayment penalty and $91,859 write-off of unamortized debt issuance costs in connection with the Refinancing Transaction as defined in Note 11 to our consolidated financial statements included elsewhere in this Annual Report on the Form 10-K.

Equity in losses of unconsolidated affiliates

Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investees. We impaired our equity investments in the unconsolidated affiliates during the fourth quarter of 2023. Therefore, no income or loss has been recorded during the year ended December 31, 2024.

Income Tax Expense

We had an income tax expense of $87.9 thousand for the year ended December 31, 2024, compared to an expense of $53.5 thousand for the year ended December 31, 2023. The income tax expense for years ended December 31, 2024 and 2023 reflect the accrual of a valuation allowance in connection with the limitations of our indefinite lived tax assets to offset our indefinite lived tax liabilities. To the extent the tax assets are unable to offset the tax liabilities, we have recorded a deferred expense for the tax liability (a "naked credit").

As of December 31, 2024, we have approximately $58.9 million of pre-tax net operating loss carryforwards for U.S. federal income tax purposes that begin to expire in 2029; federal net operating losses generated after December 31, 2017 have an indefinite life and do not expire. Additionally, we have state net operating loss carryforwards amounting to $63.8 million that begin to expire in 2030. A portion of the carryforwards may expire before being applied to reduce future income tax liabilities.

In assessing the ability to realize the deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. We believe it is more likely than not that the deferred tax asset will not be realized, and we have accordingly recorded a full valuation allowance as of both December 31, 2024 and 2023.

Net Loss

Net loss was approximately $12.6 million or $1.22 per share based on 10,306,904 weighted average shares outstanding for basic and fully diluted loss per share for the year ended December 31, 2024.

Net loss was approximately $24.4 million or $3.39 per share based on 7,206,577 weighted average shares outstanding for basic and fully diluted loss per share for the year ended December 2023.

Net loss for the years ended December 31, 2024 and 2023, respectively, were related to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

		Year Ended December 31,
		2024				2023
Statement of Cash Flows Data:
Net cash used in operating activities		$	(157,851	)		$	(5,017,167	)
Net cash used in investing activities			(2,458,289	)			(4,537,174	)
Net cash provided by financing activities			4,184,295				9,917,183
Net increase in cash and cash equivalents and restricted cash			1,568,155				362,842
Cash and cash equivalents and restricted cash, beginning of period			7,560,691				7,197,849
Cash and cash equivalents and restricted cash, end of period		$	9,128,846			$	7,560,691

Operating Activities

Net cash used in operating activities was approximately $0.2 million for the year ended December 31, 2024, a change of $4.9 million from the year ended December 31, 2023. The increase in cash flows from operations was primarily as a result a $11.9 million of decreased net loss for the year and a decrease of $0.3 million net change in working capital, which was offset by an increase of $7.3 million non-cash items such as depreciation and amortization, bad debt expense, share-based compensation, impairment of capitalized production costs, impairment of goodwill and other non-cash losses.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2024 was $2.5 million, which related primarily to:

Outflows:

	·	$1.3 million net issuance of notes receivable to Midnight Theatre; and
	·	$1.2 million payment related to the acquisition of Elle, net of cash acquired.

Net cash used in investing activities for the year ended December 31, 2023 was $4.5 million, which related primarily to:

Outflows:

·

$4.5 million payment related to the acquisition of Special Projects, net of cash acquired; and

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2024 was $4.2 million and mainly related to:

Inflows:

	·	$2.1 million proceeds from related party loans;
	·	$2.0 million proceeds from the second term loan from Bank United; and
	·	$1.2 million proceeds from the Lincoln Park facility.

Outflows:

	·	$1.0 million of repayment of the first term loan; and
	·	$88 thousand of repayment of finance leases.

Net cash provided by financing activities for the year ended December 31, 2023 was $9.9 million and mainly related to:

Inflows:

	·	$5.8 million proceeds from the first term loan from Bank United;
	·	$3.6 million proceeds from convertible and non-convertible note payable;
	·	$2.2 million proceeds from and the Lincoln Park facility;
	·	$2.0 million proceeds from the sale of common stock through an offering; and
	·	$0.4 million net proceeds from the revolving credit facility.

Outflows:

	·	$3.2 million of repayment of the first term loan;
	·	$0.5 million payment of Be Social contingent consideration;
·	·	$0.2 million payment on convertible and non-convertible notes payable; and
	·	$0.2 million payments of debt origination and debt extinguishment costs.

Debt and Financing Arrangements

Total debt amounted to $22.4 million as of December 31, 2024 compared to $19.3 million as of December 31, 2023, an increase of $3.1 million. The increase related primarily to $2.1 million increase in related party nonconvertible promissory notes and $2.0 million of the second term loan that was entered into during the year ended December 31, 2024, offset by the repayments of the first term loan.

Our debt obligations in the next twelve months from December 31, 2024 increased from the obligations as of December 31, 2023. The current portion of the debt increased to $5.4 million from $4.9 million, mainly due to an increase in the current portion of the Bank United Credit Facility (defined below in "BankUnited Loan Agreements - Refinancing Transaction") in the amount of $0.6 million as compared to the current portion of the Bank United Credit Facility in the prior year. We expect our current cash position, cash expected to be generated from our operations and other availability of funds, as detailed below, to be sufficient to meet our debt requirements.

2022 Lincoln Park Transaction

On August 10, 2022, we entered into a purchase agreement (the "LP 2022 Purchase Agreement") and a registration rights agreement (the "LP 2022 Registration Rights Agreement") with Lincoln Park Capital Fund, LLC ("Lincoln Park"), pursuant to which we could sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $25,000,000 in value of our common stock from time to time over a 36-month period. Pursuant to the terms of the LP 2022 Registration Rights Agreement, the issuance of shares pursuant to the LP 2022 Purchase Agreement have been registered pursuant to our effective registration statement on Form S-1, and the related prospectus dated September 15, 2022.

We may direct Lincoln Park, at its sole discretion, and subject to certain conditions, to purchase up to 50,000 shares of common stock on any business day (a "Regular Purchase"). The amount of a Regular Purchase may be increased under certain circumstances up to 37,500 shares if the closing price is not below $15.00 and up to 50,000 shares if the closing price is not below $20.00, provided that Lincoln Park's committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. The purchase price for Regular Purchases (the "Purchase Price") shall be equal to 98.75% of the lesser of: (i) the lowest sale price of our common stock during the Purchase Date, or (ii) the average of the three (3) lowest closing sale prices of our common stock during the ten (10) business days prior to the Purchase Date. In the event we purchase the full amount allowed for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as accelerated and additional accelerated purchases. The purchase price for the accelerated and additional accelerated purchases shall be equal to the lesser of 96% of (i) the closing sale price on the accelerated purchase date, or (ii) such date's volume weighted average price.

Pursuant to the terms of the LP 2022 Purchase Agreement, at the time we signed the LP 2022 Purchase Agreement and the LP 2022 Registration Rights Agreement, we issued 28,657 shares of common stock to Lincoln Park as consideration for its commitment ("LP 2022 commitment shares") to purchase shares of our common stock under the LP 2022 Purchase Agreement. The commitment shares were recorded as a period expense and included within selling, general and administrative expenses in the consolidated statements of operations.

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

During the year ended December 31, 2024, we sold 475,000 shares of common stock at prices ranging between $2.14 and $3.06 pursuant to the LP 2022 Purchase Agreement and received proceeds of $1.2 million.

During the year ended December 31, 2023, we sold 575,000 shares of common stock at prices ranging between $3.30 and $4.54 pursuant to the LP 2022 Purchase Agreement and received proceeds of $2.2 million.

We evaluated the contract that includes the right to require Lincoln Park to purchase shares of common stock in the future ("put right") considering the guidance in ASC 815-40, "Derivatives and Hedging - Contracts on an Entity's Own Equity" ("ASC 815-40") and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. We analyzed the terms of the freestanding put right and concluded that it has insignificant value as of December 31, 2024 and 2023.

Convertible Notes Payable

As of December 31, 2024 and 2023, we had ten convertible notes payable outstanding. The convertible notes payable bear interest at a rate of 10% per annum, with initial maturity dates ranging between the second anniversary and the sixth anniversary of their respective issuances. The balance of each convertible note payable 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. Three of the convertible notes payable may not be converted at a price less than $5.00 per share, four of the convertible notes payable may not be converted at a price less than $4.00 per share, and three of the convertible notes payable may not be converted at a price less than $2.00 per share. On November 15, 2023, we entered into agreements with two noteholders, holding a total of five convertible notes payable, to extend the maturity date for two additional years. For one of these noteholders (holding three convertible notes), we agreed to lower the minimum conversion price to $2.00 per share.

On January 13, 2025, we entered into a second amendment to three of the convertible notes payable held by the same investor and agreed to extend the maturity date to January 13, 2027 and lower the minimum conversion price to $1.00. For the remaining convertible notes payable, three may not be converted at a price less than $5.00 per share and four of the convertible notes payable may not be converted at a price less than $4.00 per share, which were their original terms.

As of December 31, 2024 and 2023, the principal balance of the convertible promissory notes was $5,100,000 of which all were recorded as noncurrent liabilities on our consolidated balance sheets under the caption convertible notes payable.

We recorded interest expense related to these convertible notes payable of $510,250 and $543,472 during the year ended December 31, 2024 and 2023, respectively. In addition, we made cash interest payments amounting to $510,250 and $538,764 during the year ended December 31, 2024 and 2023, respectively, related to the convertible notes payable.

During the year ended December 31, 2023, the holder of two convertible notes payable converted the aggregate principal balance of $900,000 into 225,000 shares of common stock at a conversion price of $4.00 per share. At the moment of conversion, accrued interest related to these notes amounted to $9,500 and was paid in cash.

During the year ended December 31, 2023, we paid $50,000 to a noteholder as partial repayment for the convertible note payable.

In January and February of 2025, we entered into four convertible notes payable with an aggregate principal balance of $775,000. The convertible notes payable bear interest at a rate of 10% per annum with maturity dates ranging between the second and fifth anniversary of their respective issuance dates. The conversion price of one $100,000 convertible note payable is the 90-day trailing average trading price of our common stock prior to the date of conversion, with a floor price of $1.01. The conversion price of the second $100,000 convertible note payable is the 30-day trailing average trading price of our common stock prior to the date of conversion, with a floor price of $1.01. The conversion price of the third $100,000 convertible note payable is $1.02 per share and the conversion price of the fourth $325,000 convertible note payable is $1.11 per share.

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

Convertible Note Payable at Fair Value

As of December 31, 2024, we have one convertible note payable outstanding with an aggregate principal amount of $0.5 million for which we elected the fair value option. As such, the estimated fair value of the convertible note payable was recorded on its issue date. At each balance sheet date, we record the fair value of the convertible note payable with any changes in the fair value recorded in the consolidated statements of operations. The convertible note payable at fair value may be converted at a price of $7.82 per share, matures on March 4, 2030 and as of December 31, 2024, we had a balance of $0.3 million in noncurrent liabilities related to this convertible promissory note measured at fair value.

We recorded interest expense related to this convertible note payable at fair value of $39,472 during the years ended December 31, 2024 and 2023. In addition, we made cash interest payments amounting to $39,472 during the years ended December 31, 2024 and 2023 related to this convertible note payable at fair value.

We recorded a gain in fair value of $35,000 and a loss of $11,444 for the year ended December 31, 2024 and 2023, respectively, on its consolidated statements of operations related to this convertible note payable at fair value.

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

Nonconvertible Promissory Notes

As of December 31, 2024, we have outstanding five unsecured nonconvertible promissory notes in the aggregate amount of $3.9 million which bear interest at a rate of 10% per annum and mature between June 2025 and March 2029.

As of both December 31, 2024 and December 31, 2023, we had a balance of $0.8 million and $0.5 million, respectively, recorded as current liabilities and $3.1 million and $3.4 million, respectively, in noncurrent liabilities on its consolidated balance sheets related to these unsecured nonconvertible promissory notes.

We recorded interest expense related to these nonconvertible promissory notes of $388,000 and $338,843 for the year ended December 31, 2024 and 2023, respectively. We made interest payments of $388,000 and $308,044 during the year ended December 31, 2024 and 2023, respectively, related to the nonconvertible promissory notes.

On February 28, 2025, we issued a nonconvertible promissory note in the amount of $250,000 and received $250,000. The note bears interest at a rate of 10% per annum and matures on February 10, 2028.

Unsecured Nonconvertible Promissory Notes - Socialyte

As discussed in Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, as part of the acquisition of Socialyte, we entered into an unsecured promissory note amounting to $3.0 million ("Socialyte Promissory Note"). The Socialyte Promissory Note matured on September 30, 2023 and was payable in two payments: $1.5 million on June 30, 2023 and $1.5 million on September 30, 2023. The Socialyte purchase agreement allows us to offset a working capital deficit against the Socialyte Promissory Note. As such, on June 30, 2023, we deferred these installment payments until the final post-closing working capital adjustment is agreed upon with the seller of Socialyte. As of December 31, 2024 and 2023, we have a balance of $3,000,000 in current liabilities under the caption notes payable, current portion in our consolidated balance sheets related to this note.

We recorded interest expense related to this Socialyte Promissory Note of $120,000 and $135,000 for the years ended December 31, 2024 and 2023, respectively. No interest payments were made during the year ended December 31, 2024 and 2023, related to the Socialyte Promissory Note.

Nonconvertible Promissory Notes from Related Parties

We issued Dolphin Entertainment, LLC ("DE LLC"), an entity wholly owned by our Chief Executive Officer, William O'Dowd (the "CEO"), a nonconvertible promissory note with a principal balance of $1,107,873 which matures on December 31, 2026. On April 29, 2024 and June 10, 2024, we issued two nonconvertible promissory notes to DE LLC in the amounts of $1,000,000 and $135,000, respectively, which mature on April 29, 2029 and June 10, 2029, respectively, (collectively, "the DE LLC Notes"). The DE LLC Notes each bear interest at a rate of 10% per annum.

As of December 31, 2024 and 2023, we had an aggregate principal balance of $2,242,873 and $1,107,873, respectively, and accrued interest amounted to $263,767 and $277,423, respectively, related to the DE LLC Notes. For both the year ended December 31, 2024 and 2023, we did not repay any principal balance on the DE LLC Notes. During the year ended December 31, 2024, we made cash interest payments in the amount of $200,000 related to the DE LLC Notes.

On January 16, 2024, May 28, 2024 and December 30, 2024, we issued three nonconvertible promissory notes to Mr. Donald Scott Mock, the brother of Mr. O'Dowd, in the amount of $900,000, $75,000 and $8,112, respectively, and received proceeds of $983,112 (the "Mock Notes"). The Mock Notes bear interest at a rate of 10% per annum and mature on January 16, 2029, May 28, 2029 and December 30, 2029, respectively. As of December 31, 2024, we had a principal balance of $983,112, and accrued interest of $90,417. We did not make cash payments during the year ended December 31, 2024 related to these loans from related party.

We recorded interest expense of $276,761 and $110,787 for the year ended December 31, 2024 and 2023, respectively, related to the DE LLC Notes and Mock Notes. No interest payments were made during the year ended December 31, 2024 and 2023, related to the Mock Notes.

BankUnited Loan Agreements - Refinancing Transaction

On September 29, 2023, we entered into a loan agreement with BankUnited ("BankUnited Loan Agreement") in which an existing term loan with BankProv was repaid (the "Refinancing Transaction"). The BankUnited Loan Agreement includes: (i) $5,800,000 secured term loan ("First BKU Term Loan"), (ii) and $750,000 of a secured revolving line of credit ("BKU Line of Credit") and (iii) $400,000 Commercial Card ("BKU Commercial Card"). The First BKU Term Loan carries a 1.0% origination fee and matures in September 2028, the BKU Line of Credit carries an initial origination fee of 0.5% and an 0.25% fee on each annual anniversary and matures in September 2026; the BKU Commercial Card does not have any initial or annual fee and matures in September 2026. The BKU Term Loan has a declining prepayment penalty equal to 5% in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five of the outstanding balance. The BKU Line of Credit and BKU Commercial Card can be repaid without any prepayment penalty.

On December 6, 2024, we entered into a second Bank United Loan Agreement ("Second BKU Loan Agreement") for $2.0 million to finance the acquisition of Elle Communications, LLC. The Second BKU Loan Agreement carries a 1.0% origination fee and matures in December 2027. Similar to the First BKU Term Loan, the Second BKU Loan Agreement has a declining prepayment penalty equal to 3% in year one, 2% in year two and 1% in year three of the outstanding balance. (The First BKU Term Loan, Second BKU Term Loan, BKU Line of Credit and BKU Commercial Card are collectively referred to as the "Bank United Credit Facility").

Interest accrues at 8.10% fixed rate per annum on the First BKU Term Loan and 7.10% fixed rate per annum on the Second BKU Term Loan. Principal and interest are payable on a monthly basis based on a 5-year amortization for the First BKU Term Loan and 3-year amortization for the Second BKU Term Loan. Interest on the BKU Line of credit is payable on a monthly basis, with all principal due at maturity. The BKU Commercial Card payment is due in full at the end of each bi-weekly billing cycle. During the years ended December 31, 2024 and 2023, we did not used the BKU Commercial Card. During the year ended December 31, 2024 and 2023, we made payments in the amount of $1,418,482 and $354,621, inclusive of $421,009 and $117,141 of interest related to the First BKU Term Loan, respectively. During the year ended December 31, 2023, we also made payments of $479,745, inclusive of $158,316 of interest on the Bank Prov term loan that was refinanced with the BKU Term Loan. No payments were made related to the Second BKU Term Loan during the year ended December 31, 2024.

Interest on the BKU Line of Credit is variable based on the Lender's Prime Rate. During the year ended December 31, 2024 and 2023, we recorded interest expense and made payments of $31,722 and $12,311, respectively, related to the BKU Line of Credit.

As of December 31, 2024, we had a balance of $1,686,018 classified as current liabilities and $4,782,271 classified as noncurrent liabilities, net of $96,759 of debt issuance costs, in our consolidated balance sheet related to the First BKU Term Loan and the Second BKU Term Loan. As of December 31, 2023, we had a balance of $980,651 classified as current liabilities and $4,501,963 classified as noncurrent liabilities, net of $79,907 of debt issuance costs, in our consolidated balance sheet related to the First BKU Term Loan. As of December 31, 2024 and 2023, we had a balance of $400,000 of principal outstanding under the BKU Line of Credit.

Amortization of debt origination costs under the BKU Credit Facility is included as a component of interest expense in the consolidated statements of operations and amounted to approximately $16,823 and $4,206 for the year ended December 31, 2024 and 2023, respectively.

The BankUnited Credit Facility contains financial covenants tested semi-annually, starting on June 30, 2024, on a trailing twelve-month basis that require us to maintain a minimum debt service coverage ratio of 1.25:1.00 and a maximum funded debt/EBITDA ratio of 3.00:1.00. In addition, the BankUnited Credit Facility contains a liquidity covenant that requires us to hold a cash balance at BankUnited with a daily minimum deposit balance of $2,000,000.

The Refinancing Transaction was accounted for as an extinguishment of debt. In connection with this extinguishment, we incurred a prepayment penalty of $79,286 and wrote-off unamortized debt origination costs of $91,859 related to the Bank Prov term loan, which were both recognized as interest expense in the consolidated statement of operations for the year ended December 31, 2023.

IMAX Agreement

As discussed in Note 25 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, on June 24, 2022, we entered into the Blue Angels Agreement with IMAX. Under the terms of this agreement, we paid a total of $2,250,000 related to the production costs of The Blue Angels and recorded this amount as capitalized production costs.

On April 25, 2023, IMAX entered into an acquisition agreement with Amazon Content Services LLC, (the "Amazon Agreement") for the distribution rights of The Blue Angels. The Blue Angels documentary motion picture was released in theatres on May 17, 2024 and began streaming on Amazon Prime Video on May 23, 2024.

On February 22, 2024, we received $777,905 from IMAX, as a first installment in connection with the Amazon Agreement and on July 9, 2024, we received the second installment from IMAX in the amount of $2,556,452. During the year ended December 31, 2024, we recorded revenue of $3,421,141 related to the Amazon Agreement.

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are discussed in Part II, Item 8, Financial Statements and Supplementary Data, Note 2, "Summary of Significant Accounting Policies."

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

We consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management. Further details on each item are discussed below. See Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.

Goodwill

Goodwill results from business combination acquisitions. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets and other intangible assets acquired. As of December 31, 2024, in connection with the acquisitions of our subsidiaries, we have a balance of $21.5 million of goodwill on our consolidated balance sheets which management has assigned to the entertainment publicity and marketing segment. We account for goodwill in accordance with ASC 350, "Intangibles-Goodwill and Other" ("ASC 350"). Goodwill is not amortized; however, it is assessed for impairment at least annually, or more frequently if triggering events occur. Our annual assessment is performed in the fourth quarter.

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

During the third quarter of 2024, our stock price declined and this, in combination with recurring net losses, resulted in our market capitalization to be less than our book value. In addition, we adjusted downward the revenue projections of certain subsidiaries. We considered these to be triggering events, and therefore performed a quantitative analysis of the fair value of goodwill as of August 31, 2024. As a result of this quantitative analysis, during the third quarter of 2024, we recorded an impairment of goodwill amounting to $6.5 million, which is included in the consolidated statement of operations for the year ended December 31, 2024. During the year ended December 31, 2024, we decided to close the Viewpoint subsidiary, and therefore we impaired goodwill for $0.2 million, which is the balance of goodwill attributable to Viewpoint immediately prior to the decision to shut down. This impairment is included in the consolidated statement of operations for the year ended December 31, 2024.

During the second quarter of the 2023 year, our stock price remained constant and did not respond as positively as expected to new information on our future projects and forecasts; this, in combination with recurring net losses, resulted in our market capitalization to be less than our book value. We considered this to be a triggering event, and therefore performed a quantitative analysis of the fair value of goodwill during the second quarter of 2023. As a result of this quantitative analysis, during the second quarter of 2023, we recorded an impairment of goodwill amounting to $6.5 million, which is included in the consolidated statement of operations for the year ended December 31, 2023.

In addition, as part of our annual goodwill impairment review, we performed a quantitative assessment that determined that the fair value was greater than the carrying value with the exception of one of the reporting units in the entertainment publicity and marketing segment. For the goodwill value assigned to that reporting unit, we concluded the fair value of that reporting unit's goodwill was below its carrying amount. As a result, we recorded an impairment charge amounting to $3.0 million, which is included in the consolidated statement of operations for the year ended December 31, 2023.

Intangible assets

In connection with the acquisitions of our subsidiaries, we acquired in aggregate an estimated $23.4 million of intangible assets with finite useful lives initially estimated to range from 2 to 13 years. The intangible assets consist primarily of customer relationships, trade names and non-compete agreements.

Intangible assets are initially recorded at fair value and are amortized using the straight-line method over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If a triggering event has occurred, an impairment analysis is required. The impairment test first requires a comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, the asset would not be deemed recoverable. Impairment would then be measured as the excess of the asset's carrying value over its fair value. See Note 5 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion. Events or circumstances that might require impairment testing include the loss of a significant client or clients, the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, significant decline in stock price or a significant adverse change in business climate or regulations.

During the year ended December 31, 2023, we recognized an impairment of the trademarks and trade names of Socialyte and Be Social in connection with the rebranding of both subsidiaries as the new "The Digital Dept.". The impairment amount was determined to be the carrying value of both the trademark and trade name intangible assets as of September 30, 2023 (the date the rebranding was effective), which amounted to $341,417 during the year ended December 31, 2023 and is included within impairment of intangible assets in the consolidated statements of operations.

During the year ended December 31, 2024, we amortized $2.3 million that was recorded in our consolidated statement of operations related to our intangible assets.

Business Combinations and Contingent Consideration

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

Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a "measurement period" of up to one year in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition of, or an adjustment to the fair values of, acquisition-related assets and liabilities and/or consideration paid, and are referred to as "measurement period" adjustments. Measurement period adjustments are recorded to goodwill. Other revisions to fair value estimates for acquisitions are reflected as income or expense, as appropriate. See Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.

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

Convertible debt

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

Estimation methods are used to determine the fair values of the liability and equity components of compound financial instruments and to determine the fair value of embedded derivatives included in hybrid financial instruments. Fair values of convertible debt are estimated using pricing models such as the Monte Carlo Simulation. Evaluating the reasonableness of these estimations and the assumptions and inputs used in the valuation methods requires a significant amount of judgement and is therefore subject to an inherent risk of error. See Note 13 and Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information pertaining to fair value adjustments.

Recent Accounting Pronouncements

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