Dolphin Entertainment, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. The company provides entertainment publicity and marketing services and produces film and digital content.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $24.05 million | $25.00 million |
| Operating loss | $2.56 million | $4.09 million |
| Net loss | $1.94 million | $2.33 million |
| Basic loss per share | $0.35 | $0.70 |
| Cash used in operating activities | $1.51 million | $2.91 million |
| Cash and cash equivalents at year-end | $7.92 million | $2.20 million |
| Working capital deficit | $2.96 million | $15.6 million |
- Entertainment publicity and marketing generated $23.95 million, or 99.6% of 2020 revenue; content production generated $0.11 million.
- Revenue declined 3.8% year over year. Direct costs fell to $2.58 million from $5.04 million. Approximate revenue less direct costs was 89.3% of revenue, versus 79.8% in 2019; this is not a company-reported gross margin.
- The operating loss narrowed, while net loss improved partly amid material, non-operating gains and fair-value movements. 2020 included a $3.31 million debt-extinguishment gain and a $1.75 million gain from changes in the fair value of put rights, offset in part by a $1.48 million loss on deconsolidating the Max Steel variable-interest entity.
- Year-end cash, cash equivalents and restricted cash totaled $8.64 million; $0.71 million was restricted as lease collateral. Total assets were $49.35 million, total liabilities $29.68 million, and stockholders’ equity $19.67 million.
- Management reported approximately $10.9 million of total debt, including about $3.1 million of PPP loans, $3.0 million of convertible notes, $1.3 million of other notes, and $0.9 million on a bank term loan. Lease liabilities were an additional $7.76 million.
Changes and significant events
- COVID-19 reduced demand from hospitality clients and talent clients affected by halted content production. Increased streaming activity and consumer-product demand partly offset those declines. Management cut costs through hiring freezes, staff reductions, salary reductions and reduced discretionary spending.
- The company acquired influencer-marketing agency Be Social in August 2020. Shore Fire, acquired in December 2019, contributed for a full year in 2020. Be Social contributed approximately $0.97 million of revenue after acquisition.
- The company raised approximately $7.6 million net through a June 2020 registered offering of 1.58 million shares and received approximately $2.8 million in PPP loans; Be Social had also received a $0.30 million PPP loan before acquisition. Forgiveness had not been approved as of the filing.
- A 1-for-5 reverse stock split took effect in November 2020. Share and per-share figures in the filing reflect the split.
- The 2020 statements restated third-quarter and year-to-date revenue and direct costs downward by $862,710 because pass-through third-party costs were incorrectly reported gross. The adjustment did not change operating loss, net loss, cash flows or the balance sheet. The affected 2020 Form 10-Q should no longer be relied upon.
Outlook, risks and unusual items
- Going concern: Management and the auditor cited substantial doubt about the company’s ability to continue as a going concern, driven by recurring losses, an accumulated deficit of $97.97 million and a working capital deficit. Management planned to seek additional debt or equity financing, but gave no assurance it could obtain funding; equity financing could dilute shareholders.
- Debt covenant: The company believed it was out of compliance with certain BankUnited term-loan covenants at year-end. It classified the $0.90 million loan balance as current; the bank had not yet completed its annual covenant testing.
- PPP: Forgiveness was uncertain. If not forgiven, the loans generally require repayment over two years at 1% interest, subject to the stated terms.
- Management outlook: Dolphin saw potential growth from streaming-platform content marketing, cross-selling among subsidiaries and selective acquisitions. It intended to pursue at least one acquisition in 2021, but provided no quantified financial guidance. Film projects remained dependent on obtaining financing.
- Controls and reporting: Management found disclosure controls and internal control over financial reporting ineffective and identified material weaknesses involving risk assessment and monitoring, documented review of complex accounting and revenue recognition, and segregation of duties. The company began remediation, including engaging a consultant and improving close procedures.
- Other notable risks: COVID-19 and client spending, reliance on key employees and short-notice client termination rights, acquisition integration and goodwill impairment, production financing and audience risk, dilution and share-price volatility, and cybersecurity. The CEO’s affiliated Series C preferred shares carried voting rights equivalent to approximately 63% of voting securities at year-end, though conversion was restricted absent independent-director approval.
Important facts for investors to verify
- Whether the company can raise adequate capital and meet obligations as they come due, and how subsequent financing affected cash, debt and share dilution.
- The outcome of BankUnited covenant testing, any waiver or amendment, and the repayment or refinancing status of debt and PPP loans.
- Progress and results of internal-control remediation, including whether revenue-recognition controls prevent further errors or restatements.
- Post-year-end conversions of convertible debt into shares and the effect on the outstanding share count; the filing also reports a subsequent B/HI acquisition.
- Whether COVID-19 recovery, streaming-related demand, acquisitions and cross-selling translate into sustained revenue and operating profitability rather than gains from debt extinguishment or fair-value changes.