Dolphin Entertainment, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Dolphin provides entertainment publicity and marketing services and develops and produces film and digital content. All reported revenue came from publicity and marketing; content production generated no revenue in either comparable period.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $9.40 million | $5.53 million | $25.22 million | $17.36 million |
| Operating income (loss) | $38,289 | ($493,185) | ($1.10 million) | ($1.54 million) |
| Net income (loss) | $141,651 | ($137,630) | ($3.78 million) | ($1.01 million) |
| Basic EPS | $0.02 | ($0.02) | ($0.50) | ($0.19) |
Revenue increased about 70% in Q3 and 45% year to date. Approximate operating margin was 0.4% for Q3 2021 versus negative 8.9% in Q3 2020; year-to-date margin was negative 4.4% versus negative 8.9%. Approximate net margin was 1.5% for Q3 and negative 15.0% year to date. Q3 profitability included a $1.73 million gain on debt extinguishment, largely from PPP loan forgiveness, partly offset by a $1.11 million fair-value loss on contingent consideration. Nine-month results also reflected noncash fair-value losses, including $2.55 million on warrants and $1.31 million on contingent consideration.
Entertainment publicity and marketing segment operating income was $1.62 million for Q3 and $1.82 million for the first nine months. The content production segment reported operating losses of $1.58 million and $2.92 million, respectively.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $12.65 million, with another $0.54 million restricted. Current assets were $19.95 million and current liabilities $15.42 million, yielding positive working capital of about $4.53 million; the company said it had achieved positive working capital for two consecutive quarters.
- For the first nine months, operating activities provided $0.52 million, compared with $0.61 million used in 2020. Investing used $0.53 million, primarily for the B/HI acquisition; financing provided $4.56 million. Cash and restricted cash increased $4.56 million to $13.19 million.
- Total debt was $8.11 million, compared with $8.25 million at December 31, 2020. It included $4.75 million of convertible notes, $1.25 million of notes carried at fair value, $1.20 million of other notes, a $0.60 million term loan and $0.30 million of PPP debt pending forgiveness at quarter-end. Lease liabilities totaled $7.26 million.
- The term loan had a $0.60 million balance and was classified as current because management believed the company was out of compliance with certain covenants. Management expected to repay it in Q4 2021.
Changes, outlook and risks
- Management attributed revenue growth to the Be Social and B/HI acquisitions and increased customer spending as clients resumed activity. B/HI contributed $1.08 million of Q3 revenue and $2.51 million for the nine months.
- Payroll, direct, selling and administrative, and legal costs increased year over year, reflecting acquired businesses and restored salaries and staffing after pandemic-related reductions. The company recorded about $0.1 million of production-cost impairment and about $0.1 million of receivable impairment in Q3.
- The SBA had forgiven approximately $2.8 million of PPP loans by quarter-end, producing debt-extinguishment gains. The remaining $0.3 million Be Social loan was forgiven in October 2021.
- Management reported no formal financial guidance. It expected growth opportunities from digital-streaming marketing budgets and strategic communications, and planned to pursue acquisitions; it said it intended to complete one additional acquisition during 2021 but gave no assurance. Film projects in development remained dependent on obtaining financing.
- The filing states that recurring losses and the accumulated deficit of $101.75 million raise substantial doubt about the company’s ability to continue as a going concern within one year. Management may seek equity, convertible securities, debt or other financing, but stated there is no assurance of success; additional equity financing could substantially dilute shareholders.
- COVID-19, including the Delta variant, continued to create uncertainty and had affected hospitality and entertainment-production-related demand. The company also cited substantial debt and potential difficulty servicing it. The filing reported no pending litigation expected to have a material effect.
- Disclosure controls were deemed ineffective. Existing material weaknesses remained unremediated, and the company identified an additional weakness involving documentation of review and approval of significant inputs to fair-value models.
Other notable items
During 2021, Dolphin issued $5.95 million of 10% convertible notes, generally due two years after issuance, convertible at the holder’s option subject to a $2.50-per-share floor. After quarter-end, holders converted $1.85 million of principal into 172,550 shares. The company had 7,768,684 shares outstanding at September 30 and 7,941,234 at November 17. Series C preferred stock held by an entity wholly owned by the CEO carried approximately 65% of voting power. The company also reported $2.63 million of accrued CEO compensation payable on demand and related accrued interest.
Subsequent events included an October investment in Manhattan’s Midnight Theatre and a November 15 advance of a $0.5 million, 10% convertible note related to that investment, due May 15, 2022 unless converted earlier.
Key facts for investors to verify
- Whether operating cash generation and positive working capital can be sustained, and whether the company can meet near-term obligations without additional financing.
- The status of the term-loan covenant compliance and repayment, and the effect of outstanding convertible notes and subsequent conversions on dilution.
- Whether acquisition-related growth translates into durable operating profitability, particularly given the content production segment’s losses.
- How much of reported earnings depends on PPP forgiveness and volatile fair-value adjustments rather than recurring operations.
- Progress remediating disclosure-control and fair-value-model weaknesses, and the potential consequences of the stated going-concern uncertainty.