Dolphin Entertainment, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2021, Dolphin operated entertainment publicity and marketing businesses and a content production business. It acquired B/HI Communications effective January 1, 2021; Be Social, acquired in 2020, and B/HI contributed to the period’s results. All reported revenue came from publicity and marketing; content production generated no revenue.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $7.18 million | $6.63 million; up 8.2% |
| Operating loss | $1.19 million | $0.87 million loss |
| Operating margin | (16.6%) | (13.1%) |
| Net income (loss) | ($5.27 million) | $2.07 million income |
| Basic and diluted earnings (loss) per share | ($0.73) | Basic $0.40; diluted $0.05 |
| Cash used in operating activities | $52,000 | $352,000 |
| Cash and cash equivalents at quarter-end | $7.11 million | $7.92 million at Dec. 31, 2020 |
| Working capital | Deficit of $4.03 million | Deficit of approximately $10.7 million at March 31, 2020 |
| Total debt, including PPP loans | $6.60 million | $8.25 million at Dec. 31, 2020 |
Cash used in investing activities was $526,000, principally for B/HI; financing activities used $234,000. Cash, cash equivalents and restricted cash totaled $7.83 million at quarter-end, including $714,000 of restricted cash. Total liabilities were $28.68 million and stockholders’ equity was $20.49 million. The filing reports no separate gross profit or gross margin measure.
Material changes and unusual items
- Publicity and marketing revenue rose by about $543,000, mainly from Be Social and B/HI, partly offset by COVID-19-related reductions in food, hospitality and talent-related work.
- Total expenses increased 11.6% to $8.37 million. Payroll rose to $5.23 million, and selling, general and administrative expenses rose to $1.48 million, with acquired-company costs contributing to the increases.
- The prior-year profit included a $3.26 million debt-extinguishment gain. Q1 2021 included significant noncash fair-value losses, including $2.56 million on warrants and $871,000 on convertible notes and derivative liabilities. These items substantially affected the year-over-year net result.
- During Q1, holders converted $2.545 million of convertible-note principal into shares; the company also issued shares for warrant exercises, acquisitions and exchanges of put rights. Common shares outstanding increased from 6.62 million at year-end to 7.61 million at March 31.
- B/HI was acquired for provisional consideration of $800,000, with up to an additional $1.2 million potentially payable based on performance targets.
Outlook, risks and contingencies
- Going concern: Management stated that recurring losses, a $103.24 million accumulated deficit and the $4.03 million working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern within one year. The company expects to seek equity, convertible, debt or other financing; success is not assured, and equity financing could materially dilute shareholders.
- Debt covenant: Management believed 42West and The Door were out of compliance with certain BankUnited term-loan covenants. The full $800,000 balance was classified as current, creating potential repayment or refinancing pressure.
- COVID-19: The pandemic continued to affect hospitality and talent-related business and cash flows. Management cited cost reductions, including hiring freezes, staff and salary reductions, and cuts to nonessential spending. The duration and extent of the impact remain uncertain.
- PPP loans: Approximately $3.10 million remained outstanding at quarter-end. Forgiveness was not assured; any unforgiven amounts would require repayment.
- Management plans: Dolphin intended to pursue an additional acquisition during 2021, with no assurance it would do so. It also described expected opportunities in streaming-related marketing and strategic communications, but provided no quantified financial guidance.
- Controls and other matters: Management concluded disclosure controls were not effective because previously reported material weaknesses had not been remediated. It reported no material changes to risk factors from the 2020 Form 10-K. Subsequent events included $1.05 million of convertible notes issued in April and executive salary increases approved in May, effective January 1, 2021.
Important facts for investors to verify
- Whether Dolphin obtained sufficient financing to address its going-concern uncertainty and near-term working-capital needs.
- Whether the BankUnited covenant issues were resolved, waived or otherwise affected the term loan’s repayment terms.
- The status and outcome of PPP-loan forgiveness applications and the company’s repayment obligations.
- How much of reported revenue growth came from acquired businesses versus organic activity, and whether acquired operations improve profitability and cash generation.
- The potential effects of further share issuance, convertible debt and contingent acquisition payments on dilution, liabilities and cash resources.
- Whether internal-control material weaknesses were remediated and whether subsequent reports identify changes to the going-concern assessment or risk outlook.