Dolphin Entertainment, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Dolphin provides entertainment publicity and marketing services and develops and produces film and digital content. The statements are unaudited; the company filed the report on August 17, 2020.
Financial performance
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 | Prior-year comparison |
|---|---|---|---|
| Revenue | $5.19 million | $11.83 million | Down 17.2% for the quarter and 6.1% for the half-year |
| Operating loss | $179,000 | $1.05 million | Prior-year losses were $1.20 million and $2.03 million, respectively |
| Net loss | $2.94 million | $870,000 | Prior-year losses were $797,000 and $674,000, respectively |
| Basic loss per share | $0.12 | $0.04 | Prior-year losses per share were $0.05 and $0.04 |
| Cash flow from operations | Not separately reported for the quarter | $716,000 provided | $1.28 million used in the prior-year half |
Quarterly revenue was entirely from entertainment publicity and marketing; content-production revenue was zero. The publicity and marketing segment generated $876,000 of operating income in Q2, while content production recorded a $1.05 million operating loss. The filing does not present gross profit or gross margin.
For the six months, cash provided by investing activities was $8,000 and cash provided by financing activities was $9.66 million. Cash and cash equivalents were $12.56 million at June 30, excluding $714,000 of restricted cash. The financing inflow included $7.64 million net from a stock offering and $2.80 million of PPP loans. Thus, the cash increase primarily reflected external financing, not operating cash generation.
Balance sheet, debt and liquidity
- Total assets were $49.75 million, total liabilities $30.21 million and stockholders’ equity $19.54 million at June 30. Working capital was negative $2.38 million; accumulated deficit was $96.90 million.
- Management reported approximately $9.6 million of total debt, excluding PPP funds it expected might be forgiven; this figure includes approximately $2.7 million of 42West put-right obligations. The balance sheet also reported $2.80 million of PPP loans, $7.17 million of lease liabilities and other borrowing obligations.
- The $1.10 million BankUnited term-loan balance was classified as current because management believed COVID-related uncertainty could result in covenant noncompliance at year-end. The loan matures in March 2023 and has financial and other covenants.
- Five PPP loans totaled $2.80 million. Forgiveness depends on eligibility and compliance with program requirements; if not forgiven, amounts are repayable at 1% interest over two years.
Changes, outlook and notable items
- COVID-19 reduced demand from hospitality clients and talent clients affected by halted content production. Increased streaming and consumer-product marketing partly offset the downturn. Dolphin cut or reduced hiring, staffing, salaries and non-essential spending. Management expects pandemic effects to continue, with duration and severity uncertain.
- Q2 revenue fell about $1.08 million year over year; Shore Fire, acquired in December 2019, partly offset declines. Six-month revenue declined about $774,000. Payroll expense fell, while six-month selling, general and administrative expense rose, including Shore Fire costs and higher bad-debt expense.
- Q2 net loss widened despite a smaller operating loss, reflecting higher interest expense and unfavorable fair-value changes in convertible notes, warrants and contingent consideration. For the half-year, results included a $3.26 million gain on extinguishment of Max Steel debt and a $1.48 million loss on deconsolidating the Max Steel VIE.
- A June registered direct offering of 7.9 million shares at $1.05 per share generated approximately $7.64 million net. Common shares outstanding rose from 17.89 million at year-end 2019 to 31.61 million at June 30. Further equity or convertible-security financing may dilute existing holders.
- The company stated that substantial doubt exists about its ability to continue as a going concern. It may need additional equity or debt financing and warned that failure to obtain funding within 12 months could require it to curtail operations or liquidate. Management gave no assurance that additional capital would be available.
- Management said its COVID-related goodwill impairment test found no impairment at the time, but further deterioration could lead to future impairment. The company also disclosed revisions to prior-period accounting for certain convertible notes and warrants, concluding the errors were not material to prior periods.
- Subsequent to quarter-end, Lincoln Park converted $360,000 of the 2020 note into shares. On August 17, Dolphin acquired Be Social Public Relations for $2.2 million plus up to $800,000 of contingent consideration, funded partly with cash and shares.
- Disclosure controls and procedures were deemed ineffective as of June 30 because previously reported material weaknesses had not been remediated. Nasdaq’s bid-price compliance deadline was December 28, 2020; failure to meet the $1 minimum for the required period could lead to delisting proceedings.
Investor verification priorities
- Assess the going-concern warning, cash needs, financing availability and potential dilution.
- Verify PPP eligibility, forgiveness status and any repayment or government-review exposure.
- Monitor BankUnited covenant compliance and the timing and payment of put rights and other debt.
- Track COVID-related client demand, collection of receivables, cash flow and possible goodwill impairment.
- Review remediation of material weaknesses and progress toward Nasdaq bid-price compliance.
- Confirm the terms, funding and contingent consideration for the post-quarter Be Social acquisition.