Dolphin Entertainment, Inc. annual report, FY2021

Dolphin Entertainment, Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. This is an annual report, not a standalone Q4 report, and the supplied filing text does not provide a complete Q4-only financial summary. Dolphin operates entertainment publicity and marketing (EPM) and content production businesses.

Financial performance

Metric	FY2021	FY2020
Revenue	$35.73 million	$24.05 million
Operating loss	$5.48 million	$2.61 million
Net loss	$6.46 million	$1.94 million
Basic loss per share	$0.85	$0.35
Cash used in operating activities	$1.32 million	$1.51 million

• Revenue increased 48.5%. EPM generated $35.71 million, or 99.9% of total revenue, up 49.1%; content production revenue was only $21,894. Management attributed the increase mainly to recovery in client industries as COVID restrictions eased, plus B/HI revenue and a full year of Be Social.
• Operating margin was approximately negative 15.3%, compared with negative 10.9% in 2020; net margin was approximately negative 18.1%, compared with negative 8.1%. The filing does not present gross profit or a gross margin measure.
• Total expenses rose to $41.21 million from $26.67 million. Payroll and benefits increased $7.83 million; the company also recorded a $3.75 million operating expense from the change in fair value of acquisition contingent consideration.
• EPM reported an operating loss of $451,406, versus operating income of $19,743 in 2020. Content production reported an operating loss of $5.03 million, versus $2.63 million.
• Cash and cash equivalents were $7.69 million; restricted cash was $542,000. Cash, cash equivalents and restricted cash totaled $8.23 million, down from $8.64 million. Current assets were $18.24 million and current liabilities $14.98 million, yielding positive working capital of approximately $3.26 million.
• Total debt was $6.18 million, down from $9.35 million. The current portion was $308,000; debt included $2.90 million of convertible notes, $998,000 of notes carried at fair value, $1.18 million of nonconvertible notes and $1.11 million owed to a related party. Operating lease liabilities were an additional $6.73 million.
• Cash used in investing activities was $3.03 million; financing activities provided $3.94 million. The company reported total assets of $52.75 million, total liabilities of $29.81 million and stockholders’ equity of $22.93 million at year-end.

Material changes and notable items

• Revenue rebounded from pandemic-affected 2020, but losses widened as expenses grew faster than revenue. Management said 2020 included client reductions or suspensions tied to restaurant restrictions and halted production.
• Dolphin acquired B/HI effective January 1, 2021, adding $3.5 million of reported revenue for the year. The company also invested in Midnight Theatre and Crafthouse Cocktails and began developing an NFT business. It recorded $500,000 of NFT production and marketing costs.
• A $2.99 million gain on extinguishment of debt, primarily from forgiveness of PPP loans, partly offset operating losses. The filing also reports $2.48 million of warrant fair-value expense and $571,000 of expense from changes in fair value of convertible notes and derivative liabilities. These items make reported earnings less representative of operating performance.
• The company restated its third-quarter 2021 interim financial statements and revised first- and second-quarter presentations after identifying an error in classifying contingent consideration fair-value changes between operating and non-operating results. The filing says this classification error did not affect the periods’ net income, balance sheets or cash flows. It also revised an immaterial 2020 tax calculation error.
• Common shares outstanding increased from 6.62 million at year-end 2020 to 8.02 million at year-end 2021. The filing reports 9.10 million shares outstanding on May 20, 2022. Convertible notes, earnouts and the equity facility create additional potential dilution.

Outlook, risks and contingencies

• Outlook: Dolphin cited expected demand for publicity and marketing as studios and streaming platforms invest in original programming, and described opportunities to cross-sell services across subsidiaries. It also planned to pursue at least one acquisition and additional Dolphin 2.0 investments in 2022, while stating there is no assurance these plans will be completed. The filing provides no numeric revenue or earnings guidance.
• Liquidity and going concern: Management concluded that cash, forecast operating cash flows and potential proceeds from its Lincoln Park equity facility were sufficient for at least the next 12 months and that substantial doubt about going concern had been alleviated. The $25 million facility is discretionary and may dilute shareholders; after year-end, Dolphin sold 1.035 million shares under it for approximately $4.37 million.
• Key risks: continuing losses, debt service and access to financing; sensitivity to economic conditions, client marketing budgets and COVID-related effects; dependence on key executives, employees and client relationships; acquisition and new-venture execution; stock-price volatility and dilution; and the ability to maintain Nasdaq listing compliance.
• Controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2021 because of material weaknesses involving the control environment, risk assessment, monitoring, IT access and segregation of duties, accounting policies, period-end reporting and management review of complex accounting. Remediation was underway. The auditor did not attest to internal controls.
• Other: The filing identifies no material pending litigation. The CEO-related balances included $2.63 million in accrued compensation and substantial accrued interest; the company also owed his entity $1.11 million of principal. The Series C preferred stock carried voting rights representing approximately 65% of voting securities at year-end, subject to the disclosed stock restriction agreement.

Investor verification priorities

1. Review the quarterly restatement and revised segment reporting, and confirm future filings consistently classify contingent consideration changes.
2. Track operating cash generation, working capital and debt maturities, including whether proceeds from the Lincoln Park facility are sufficient without excessive dilution.
3. Assess progress in remediating material weaknesses and watch for any further revisions or restatements.
4. Verify whether EPM growth translates into improved operating profitability after payroll, contingent consideration and acquisition-related costs.
5. Monitor the performance, funding needs and accounting treatment of Midnight Theatre, Crafthouse Cocktails and the NFT initiative, as well as potential share issuance from convertible debt and acquisition earnouts.