After you defeat Octo the Huge and rescue the boy Dolphin, the Dolphin family guides you to a new area.

Wait to Wake Up

You will be washed up on the shore. Wait for a cutscene, and then you will wake up.

Drink Some Coconut Milk

Go south, then go up the stairs. Go into the house and talk to the old man to drink some Coconut Milk, which restores your health.

Go to the Cave

Exit the hut, then go east, then south, and enter the first cave of Chapter 3.