Dolphin Entertainment, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. Dolphin provides entertainment publicity, marketing and content production services through subsidiaries including 42West, The Door, Shore Fire, Viewpoint and Be Social.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $6.39 million | $5.95 million | $18.22 million | $18.55 million |
| Loss before other income/expenses | $(0.49) million | $(1.41) million | $(1.54) million | $(3.44) million |
| Net loss | $(0.14) million | $(0.33) million | $(1.01) million | $(1.00) million |
| Diluted loss per share | $(0.01) | $(0.05) | $(0.09) | $(0.17) |
- Q3 revenue increased about 7% year over year, primarily reflecting Shore Fire and Be Social contributions. Nine-month revenue declined about 2%, with content production contributing no revenue in 2020.
- Approximate operating loss margin, using loss before other income/expenses divided by revenue, was (7.7)% in Q3 2020 versus (23.7)% in Q3 2019, and (8.5)% for the 2020 nine-month period versus (18.5)% in 2019.
- For the nine months, operating cash flow was $(0.61) million versus $(2.15) million in 2019. Investing cash use was $1.06 million, including $1.05 million for the Be Social acquisition; financing provided $8.69 million.
- Cash and cash equivalents were $9.21 million at September 30, 2020, plus $0.71 million restricted cash. Working capital was negative $2.35 million. Total assets were $51.28 million, total liabilities $30.80 million, and stockholders’ equity $20.48 million.
- The company reported approximately $7.7 million of total debt, excluding PPP funds it expected to be forgiven. PPP loan liabilities on the balance sheet totaled about $3.10 million, including Be Social’s acquired loan. Lease liabilities totaled $8.20 million.
Material changes and unusual items
- Revenue was affected by COVID-19-related disruption to hospitality clients and suspended content production, partly offset by increased streaming and consumer-product marketing demand. Management implemented hiring freezes, staff and salary reductions, and cuts to non-essential spending.
- Dolphin acquired Be Social on August 17, 2020, for consideration valued at approximately $2.31 million at acquisition, including cash, stock and contingent consideration. Shore Fire, acquired in December 2019, also affected year-over-year comparability.
- A June registered direct offering of 7.9 million shares generated approximately $7.6 million net proceeds. Common shares outstanding rose from 17.89 million at December 2019 to 32.80 million at September 2020.
- A $3.31 million gain from extinguishment of Max Steel production debt was partly offset by a $1.48 million loss on deconsolidation of the Max Steel VIE. Fair-value changes in put rights, convertible notes, warrants and contingent consideration also materially affected reported results.
- On November 12, 2020, the board determined a Series C preferred-stock conversion threshold had been met. The holder, an entity owned by CEO William O’Dowd, became entitled to 56.1 million votes, approximately 63% of voting securities, and the preferred stock became convertible into 18.7 million common shares. A November 16 agreement prohibits conversion or transfer until approved by a majority of independent directors, and terminates upon a change of control.
Outlook, risks and contingencies
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year. It cites the working-capital deficit, accumulated deficit of $97.04 million, funding needs and COVID-19 exposure. Continued operations depend on raising capital, refinancing or other financing; there is no assurance it will succeed, and equity financing could substantially dilute shareholders.
- The company expected COVID-19 effects to continue to weigh on results, cash flows and financial position; the duration and severity were uncertain. Management reported no goodwill impairment from its assessment to date but warned future impairment could result.
- Management believed it might fail certain BankUnited term-loan covenants at year-end 2020 and classified the full $1.00 million outstanding as current. The loan matures in March 2023 and includes financial and other covenants.
- PPP loan forgiveness is not assured. If not forgiven, the loans are repayable over two years at 1% interest; eligibility, certifications, audits and potential penalties are also disclosed risks.
- Management planned to seek additional capital and stated an intention to complete at least one acquisition during 2021, without assurance. Film projects depend on obtaining financing, and no assurance was given that production or expected fees would materialize.
- Management said no pending litigation was known as of the report date and did not expect ordinary-course claims to have a material effect. A Motion Picture Industry Plans audit resulted in an accrued $87,532 obligation.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2020 because previously reported material weaknesses had not been remediated. The company said it hired three accounting professionals and was enhancing segregation of duties.
Important facts for investors to verify
- Progress on funding, liquidity and the going-concern plan, including the status and terms of any subsequent financing.
- Bank covenant compliance, any waiver or amendment, and repayment or refinancing needs.
- PPP forgiveness determinations and any related audit, eligibility or repayment exposure.
- The status and practical effect of the Series C preferred voting and conversion restrictions, including any later board action.
- COVID-19 effects on client spending, revenue recovery, cash generation and goodwill or intangible-asset impairment assessments.
- Remediation of internal-control weaknesses and any subsequent changes to reported financial information.