Dolphin Entertainment, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. Dolphin provides entertainment publicity and marketing services and develops film and digital content.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $9.90 million | $9.40 million | $29.37 million | $25.22 million |
| Operating income (loss) | $(1.13) million | $(1.07) million | $(1.61) million | $(2.43) million |
| Net income (loss) | $(1.31) million | $0.14 million | $(1.49) million | $(3.78) million |
| Operating margin | (11.5%) | (11.4%) | (5.5%) | (9.6%) |
- Revenue increased 5.3% year over year in Q3 and 16.4% for the first nine months. All reported revenue came from Entertainment Publicity and Marketing (EPM); Content Production reported no revenue.
- Q3 operating loss widened slightly despite higher revenue. For the nine-month period, the operating loss narrowed, while payroll and benefits rose $4.2 million to $20.9 million, mainly reflecting additional headcount and share-based compensation.
- Q3 net loss compares with prior-year net income, which included a $1.7 million net gain on debt extinguishment. Nine-month 2022 results also benefited from a $1.44 million gain from changes in contingent consideration fair value. These items make period comparisons less indicative of underlying operations.
- EPM generated operating income of $0.60 million in Q3 and $3.34 million for the nine months. Content Production, which includes corporate overhead, recorded operating losses of $1.74 million and $4.95 million, respectively.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $4.45 million, with restricted cash of $1.14 million. Cash and restricted cash totaled $5.59 million, down from $8.23 million at year-end 2021.
- For the first nine months, operating activities used $3.63 million; investing activities used $3.17 million, primarily for $3.11 million in notes receivable; and financing activities provided $4.17 million, mainly from equity sales through Lincoln Park.
- Current assets were $17.63 million and current liabilities $15.50 million, or approximately $2.12 million of working capital. Total debt was $4.83 million, down from $6.18 million at year-end. Separately, operating lease liabilities totaled $8.62 million.
- Management said cash, expected operating cash generation and other available funding should be sufficient to meet debt requirements. The company also stated that historical experience was for convertible notes to convert to stock rather than be repaid in cash.
- Notes receivable included $4.32 million due from Midnight Theatre, including accrued interest. The notes carry 10% interest and were extended to maturities between January and March 2023. The company had not established a credit-loss allowance.
Business developments, outlook and risks
- Management attributed EPM growth to increased revenue across most subsidiaries and cross-selling. It expected to begin generating Content Production revenue in the second half of 2023 with the planned release of the Blue Angels documentary; timing and revenue are not assured.
- Under its IMAX co-production agreement, Dolphin had funded $1.5 million toward the documentary and committed up to a further $0.5 million, expected in Q1 2023. No income or expense had been recorded for the collaboration through September 30.
- After quarter-end, Dolphin acquired Socialyte on November 14 for stated consideration of $13 million, plus potential earnout consideration of up to $5 million. Consideration included $5 million cash, stock, and a $3 million seller note. A $3 million, five-year secured Bank Prov loan partially financed the cash payment and is guaranteed by Dolphin. The acquisition also creates share dilution and near-term repayment obligations.
- After quarter-end, the company issued $1.3 million of additional convertible notes. It also reported approximately $435,000 of proceeds from its October NFT collection. Management described further acquisition and Dolphin 2.0 investment ambitions but gave no quantified financial guidance.
- Management reported no significant COVID-19 impact in Q3, but warned that future effects could harm business and results. It reported no known pending litigation expected to have a material effect.
- Disclosure controls and procedures were deemed ineffective as of September 30 because previously reported material weaknesses had not been remediated. Management described remediation work in progress.
Most important facts for investors to verify
- Whether EPM growth and operating profitability can continue, and when the content segment will produce revenue.
- Collection and recoverability of the $4.32 million Midnight Theatre notes receivable, including their extended maturities and absence of an allowance.
- Liquidity after the Socialyte acquisition, including the new secured loan, seller note, potential earnout, and subsequent convertible-note issuance.
- The extent and timing of dilution from Lincoln Park equity sales, convertible notes, and Socialyte acquisition shares.
- Progress remediating the material weaknesses in financial reporting controls. The filing also contains differing descriptions of the classification of $2.4 million in convertible notes; investors should check the balance-sheet and debt-note presentation against subsequent filings.