Dolphin Entertainment(DLPN) - 2020 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements The company reported net losses for Q2 and the six months ended June 30, 2020, with balance sheet improvements from a stock offering, PPP loans, and Max Steel VIE deconsolidation impacts Condensed Consolidated Balance Sheets Total assets increased to $49.7 million by June 30, 2020, driven by cash, with equity doubling to $19.5 million from capital raising | Balance Sheet Highlights | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $12,560,206 | $2,196,249 | | Total current assets | $15,983,684 | $6,864,365 | | Goodwill | $18,072,825 | $17,947,989 | | Total Assets | $49,746,571 | $42,571,726 | | Liabilities & Equity | | | | Total current liabilities | $18,363,819 | $22,421,511 | | Total Liabilities | $30,207,126 | $32,995,194 | | Total Stockholders' Equity | $19,539,445 | $9,576,532 | - The company received five separate unsecured loans totaling $2.8 million under the Paycheck Protection Program (PPP) between April 19 and April 23, 2020, with the current portion at $1.04 million and non-current portion at $1.75 million as of June 30, 2020[11][92][93] Condensed Consolidated Statements of Operations Revenues decreased for Q2 and six months ended June 30, 2020, leading to increased net losses from lower revenue and non-cash fair value adjustments | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $5,194,725 | $6,273,983 | $11,828,525 | $12,602,880 | | Total expenses | $5,373,763 | $7,476,062 | $12,878,423 | $14,630,120 | | Net loss | $(2,943,601) | $(796,650) | $(869,754) | $(674,042) | | Basic Loss per Share | $(0.12) | $(0.05) | $(0.04) | $(0.04) | - For the six months ended June 30, 2020, the company recognized a $3.26 million gain on debt extinguishment and a $1.48 million loss on the deconsolidation of the Max Steel VIE, significantly impacting other income (expenses)[14] Condensed Consolidated Statements of Cash Flows Net cash from operations significantly improved for the six months ended June 30, 2020, with financing activities providing $9.7 million from a stock offering and PPP loans, substantially increasing cash | Cash Flow Activity (Six Months Ended June 30) | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $716,066 | $(1,277,279) | | Net Cash (Used in) Investing Activities | $(7,723) | $(37,929) | | Net Cash Provided by (Used in) Financing Activities | $9,655,614 | $(1,667,145) | | Net Increase (Decrease) in Cash | $10,363,957 | $(2,982,353) | - Key financing activities in the first six months of 2020 included $7.6 million in proceeds from a registered direct offering, $2.8 million from PPP loans, and $2.4 million from convertible notes, offset by repayments of other debt[17] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail COVID-19 impacts, a $7.6 million stock offering, $2.8 million in PPP loans, a going concern uncertainty, Max Steel VIE deconsolidation, and extensive debt and fair value measurement information - The company's business was adversely affected by COVID-19, particularly in the food, hospitality, and talent representation sectors, leading to cost-cutting measures and securing $2.8 million in PPP loans[29] - On June 5, 2020, the company raised approximately $7.6 million in net proceeds from a registered direct offering of 7,900,000 shares of common stock at $1.05 per share[30] - Substantial doubt about the company's ability to continue as a going concern is raised due to a net loss of $0.9 million for the six months ended June 30, 2020, an accumulated deficit of $96.9 million, and a working capital deficit of $2.4 million[55] - Subsequent to the quarter end, on August 17, 2020, the company acquired 100% of Be Social Public Relations, LLC for consideration of $2.2 million plus potential earn-outs[211] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses COVID-19's adverse impact on revenue and expenses, highlights going concern uncertainty, details improved liquidity from a stock offering and PPP loans, and notes the ongoing acquisition strategy Results of Operations Q2 2020 revenues decreased by $1.1 million due to COVID-19, partially offset by an acquisition, while total expenses significantly decreased from payroll reductions and volatile non-operating items - Revenues from the entertainment publicity and marketing segment decreased by approximately $1.1 million for the three months ended June 30, 2020, compared to the prior year, primarily due to the negative effects of COVID-19 on clients in the food, hospitality, and talent sectors[242] - Payroll expenses decreased by approximately $1.3 million for Q2 2020 compared to Q2 2019, as the company reduced salaries and staff in response to the business slowdown from COVID-19[249] - For the six months ended June 30, 2020, the company recorded a gain on debt extinguishment of $3.3 million related to the Max Steel VIE and a loss on deconsolidation of the same VIE of approximately $1.5 million[250][252] Liquidity and Capital Resources As of June 30, 2020, liquidity improved with $12.6 million cash from a $7.6 million stock offering and $2.8 million PPP loans, despite a $2.4 million working capital deficit and $96.9 million accumulated deficit raising going concern doubts - Cash flows from financing activities were a net inflow of $9.7 million for the first six months of 2020, primarily due to a $7.6 million stock offering and $2.8 million in PPP loans[263] - The company's accumulated deficit of $96.9 million as of June 30, 2020, raises substantial doubt about its ability to continue as a going concern[265] - As of June 30, 2020, total debt was approximately $9.6 million, not including the PPP loans, and includes about $2.7 million for the fair value of put rights from the 42West acquisition[268] Critical Accounting Policies, Judgments and Estimates Management identifies Goodwill, Leases, Revenue Recognition, and Fair Value Measurements as critical accounting policies, noting no goodwill impairment despite COVID-19 impacts, and emphasizing Level 3 inputs for complex liabilities requiring significant assumptions - The company determined that the adverse effects of COVID-19 were an indicator of possible goodwill impairment, but after performing a test, concluded that an impairment adjustment was not necessary as of June 30, 2020[305] - The company uses Level 3 inputs for fair value measurements of derivative liabilities (warrants, conversion options), put rights, and contingent consideration, which involve significant unobservable inputs and management assumptions[312][314][319][321] Controls and Procedures Management concluded disclosure controls were not effective as of June 30, 2020, due to un-remediated material weaknesses from the 2019 Form 10-K, with plans to enhance segregation of duties controls - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to material weaknesses disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019[326] - The company plans to remediate the material weaknesses by performing a comprehensive review of procedures and enhancing controls over the segregation of duties[330] PART II — OTHER INFORMATION Risk Factors The company highlights new material risks from the COVID-19 pandemic, including uncertain impacts on client spending and operations, and potential non-forgiveness or ineligibility challenges of its PPP loans - The extent to which the COVID-19 outbreak will adversely impact the business is highly uncertain and depends on factors like the duration of the outbreak, government actions, and the effect on clients and financial markets[334][335] - The company's $2.8 million in PPP loans may not be forgiven and could subject the company to penalties if it is found to have been ineligible, which could harm the business and its reputation[337][341] Other Information The company provides an update on its non-compliance with Nasdaq's $1.00 minimum bid price requirement, with the compliance period extended to December 28, 2020, due to market conditions - The company received a deficiency notice from Nasdaq for failing to meet the $1.00 minimum bid price requirement, with the compliance period extended to December 28, 2020[342][343] Exhibits This section lists exhibits filed with the Form 10-Q, including Paycheck Protection Program loan agreements, the June 2020 Share Purchase Agreement, and officer certifications - Exhibits filed include the Paycheck Protection Program Term Note, the Share Purchase Agreement from the June 5, 2020 registered direct offering, and certifications by the CEO and CFO[346]