Dolphin Entertainment, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2021. Dolphin provides entertainment publicity and marketing services through its agencies and also develops and produces film and digital content. It acquired B/HI Communications effective January 1, 2021. All reported revenue came from publicity and marketing; the content-production segment generated no revenue in the periods shown.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $8.64 million | $5.19 million | $15.82 million | $11.83 million |
| Operating income (loss) | $56,293 | $(179,038) | $(1.14) million | $(1.05) million |
| Net income (loss) | $1.35 million | $(2.94) million | $(3.92) million | $(869,754) |
| Basic EPS | $0.17 | $(0.62) | $(0.53) | $(0.20) |
- Revenue rose approximately 66% year over year in Q2 and 34% for the first half. Management attributed the increase to Be Social and B/HI, higher activity at other subsidiaries, and customers resuming spending.
- Q2 operating margin was approximately 0.7%, versus negative 3.4% a year earlier. First-half operating margin was approximately negative 7.2%. Q2 net income included significant non-operating items and should not be read as equivalent to recurring operating profitability.
- Q2 expenses were $8.59 million, including $5.62 million of payroll and benefits. First-half expenses increased to $16.96 million from $12.88 million, with payroll and benefits accounting for much of the increase; the company said salary and staffing reductions made in 2020 had been reversed.
- First-half operating cash flow was $30,060, down from $716,066. Investing cash outflow was $525,856, principally for B/HI; financing provided $1.79 million, mainly from convertible-note proceeds. Cash and restricted cash totaled $9.93 million at June 30, 2021, including $677,354 restricted as letter-of-credit collateral.
- At June 30, current assets were $15.78 million and current liabilities $14.52 million, implying working capital of approximately $1.26 million and a current ratio of about 1.09. Total assets were $50.99 million and total liabilities $28.82 million.
- Reported debt was $8.04 million, including $2.04 million of PPP loans; this debt schedule excludes the separately reported $1.11 million related-party loan. Lease liabilities were another $7.77 million. The term loan balance was $700,227.
Material changes and unusual items
- Q2 moved from a net loss to net income, while the first-half net loss widened year over year. Results included a $1.01 million Q2 gain on debt extinguishment, primarily from forgiveness of PPP loans, and a $955,610 first-half gain. The filing also reports volatile fair-value movements, including a $2.50 million first-half warrant loss and a $602,475 loss on convertible notes and derivative liabilities.
- The SBA approved forgiveness of $1.1 million of PPP loans in June. After quarter-end, it approved forgiveness of a further approximately $0.8 million; applications for approximately $1.2 million remained pending as of the report. These later approvals are subsequent events, not June 30 balance-sheet cash receipts.
- Dolphin acquired B/HI for provisional consideration of $0.8 million, primarily cash and stock, with up to a further $1.2 million contingent on performance targets in 2021 and 2022. The company issued $3.05 million of new convertible notes during the first half, bearing 10% interest and maturing two years after issuance. It also converted or settled earlier convertible notes into shares, contributing to dilution.
- The company reported 7,638,469 common shares outstanding at June 30, compared with 6,618,785 at year-end; 7,640,404 were outstanding as of August 13, 2021. The CEO-affiliated Series C preferred stock carried approximately 65% of voting power and was subject to a restriction on conversion.
Outlook, risks, and controls
- Management reported signs of improving demand as clients resumed spending, but noted continuing COVID-19 uncertainty, including the Delta variant and possible renewed restrictions. Hospitality and talent-related activity had been adversely affected by the pandemic.
- The filing provides no formal numerical revenue or earnings guidance. Management intended to pursue one additional acquisition in 2021 and described expected growth opportunities in streaming marketing and strategic communications, while noting that neither acquisition plans nor growth expectations are assured. Film projects remain dependent on obtaining financing.
- Management and the filing state that recurring losses, a $101.89 million accumulated deficit, and reliance on external financing raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Additional equity or convertible financing could substantially dilute shareholders; failure to obtain funding could require curtailing operations or liquidation.
- The company believed it was out of compliance with certain Bank United term-loan covenants, and therefore classified the entire $700,227 balance as current. This adds near-term liquidity risk.
- Disclosure controls and procedures were not effective at June 30 because previously reported material weaknesses in internal control had not been remediated. The company said it was working on remediation and had engaged an accounting firm to assist with complex transactions.
- Management said it was not aware of pending litigation expected to have a material effect. The filing identified no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Current status and terms of PPP-loan forgiveness, including the remaining applications and subsequent approvals.
- Whether the term-loan covenant issue has been resolved, and the consequences under the loan agreement.
- Cash needs, financing access, and the company’s progress in addressing the stated going-concern uncertainty.
- Conversion, repayment, and dilution terms for outstanding notes, warrants, put-related obligations, and the Series C voting arrangement.
- Progress toward remediating internal-control weaknesses and the sustainability of operating cash flow and segment profitability.