Dolphin Entertainment, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018. Dolphin provides entertainment publicity, marketing and creative production services, alongside film and digital content production. The financial statements are unaudited.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / period-end comparison |
|---|---|---|
| Revenue | $6.32 million | $5.78 million, up 9.2% |
| Entertainment publicity and marketing revenue | $6.24 million | $5.46 million |
| Content production revenue | $0.08 million | $0.33 million |
| Operating loss | $0.83 million | $0.10 million loss |
| Net income | $0.12 million | $0.83 million |
| Basic / diluted EPS | $0.01 / $(0.08) | $0.07 / $0.07 |
| Operating cash flow | $(0.39) million | $0.001 million provided |
| Cash and cash equivalents | $3.62 million | $5.54 million at Dec. 31, 2018 |
| Restricted cash | $0.73 million | $0.73 million at Dec. 31, 2018 |
| Working capital | $(15.53) million | Deficit of approximately $13.0 million at Mar. 31, 2018 |
| Total liabilities | $31.94 million | $27.21 million at Dec. 31, 2018 |
| Stockholders’ equity | $9.91 million | $10.78 million at Dec. 31, 2018 |
Reported net income included a $1.53 million noncash gain from the lower fair value of 42West put rights, partly offset by a $0.27 million noncash loss from revaluing The Door contingent consideration. The resulting diluted loss per share reflects the assumed settlement of put rights in the diluted EPS calculation; it does not represent a reported net loss.
Revenue was approximately 98.7% from publicity and marketing, versus 94.3% a year earlier. Operating margin, calculated as operating loss divided by revenue, was approximately (13.1)%, compared with (1.7)% in Q1 2018. The filing does not provide a separately reported gross margin.
Cash, cash equivalents and restricted cash totaled $4.35 million at March 31, 2019. Financing cash outflow was $1.52 million, including put-right payments, acquisition-related payments and debt repayments, partly offset by $0.20 million from a new convertible note. The company reported approximately $13.5 million of total debt, including approximately $5.2 million representing the fair value of put rights; this figure should not be read as conventional borrowings alone. It also recorded $7.34 million of operating lease liabilities following adoption of the new lease standard.
Material changes and notable items
- Publicity and marketing revenue increased about $0.8 million, principally reflecting the acquisitions of The Door and Viewpoint, partly offset by reduced 42West revenue following publicist departures. Content production revenue declined about $0.3 million as Max Steel revenue continued its post-release decline.
- Expenses rose to $7.14 million from $5.88 million. Payroll increased about $0.7 million and direct costs about $0.6 million, mainly with the addition of The Door and Viewpoint; lower legal and professional costs partly offset these increases.
- The Door and Viewpoint acquisitions added operations and acquisition-related obligations. Viewpoint’s purchase price included scheduled cash installments; The Door deal includes contingent consideration of up to $7 million, subject to performance targets. Acquisition valuations remained provisional.
- Effective January 1, 2019, Dolphin adopted lease accounting requirements and recognized a $6.90 million right-of-use asset and $7.34 million of lease liabilities at quarter-end. Comparative periods were not restated.
Outlook, risks and contingencies
- Going concern: Management disclosed substantial doubt about Dolphin’s ability to continue as a going concern. The company reported a $15.53 million working-capital deficit and a $94.41 million accumulated deficit, and stated it lacks adequate capital to meet obligations as they come due. It depends on additional debt, equity or convertible financing and shareholder support; funding is not assured and equity issuance could substantially dilute shareholders.
- Debt and liquidity: Management said available assets and cash flow may be insufficient to repay debt when due or maintain operations. The company may need to reduce or delay productions, sell assets, restructure or refinance debt, raise capital or seek bankruptcy protection. Certain notes carry interest rates of 8%–10%; the $1.4 million net balance of the 2018 secured convertible note matures January 2020, and the $1.7 million BankUnited line matures March 2020. Dolphin reported compliance with the line’s covenants at quarter-end.
- Max Steel exposure: Max Steel-related loans were past maturity and totaled approximately $2.3 million. Foreclosure could cost the company distribution rights and impair approximately $0.6 million of capitalized production costs and $0.04 million of related receivables. Dolphin also disclosed a $0.62 million backstop guarantee related to the prints-and-advertising loan.
- Put rights and commitments: 42West sellers can require repurchase of shares at $9.22 per share through specified periods ending in 2020. $0.70 million of exercised puts remained unpaid at March 31; additional exercises were reported after quarter-end. Viewpoint installments and The Door contingent consideration also create cash or equity obligations.
- Other risks: The filing describes potential losses of up to $0.325 million in an old Canadian litigation matter, which the company did not accrue because it considered a loss not probable. A 42West pension-plan audit settlement had $0.09 million remaining accrued at quarter-end. The company did not expect to exercise a California lease termination option that would cost approximately $0.64 million.
- Management outlook: Dolphin planned to pursue acquisitions in 2019 and expected digital-streaming marketing budgets, cross-selling and creative production services to support growth. It also intended to finance development of several film scripts. These are expectations, not quantified financial guidance, and the filing gives no specific revenue or earnings forecast.
- Controls: Management concluded disclosure controls were not effective at March 31, 2019 because previously disclosed material weaknesses had not been fully remediated. Remediation efforts included documenting close procedures and enhancing segregation of duties.
Important facts for investors to verify
- Whether Dolphin obtained sufficient financing to address the going-concern uncertainty, working-capital deficit and upcoming debt and acquisition-related payments.
- Cash conversion and operating performance excluding fair-value gains and losses, including whether publicity and marketing growth offsets higher payroll and direct costs.
- The status and potential cash or share dilution from 42West put rights, The Door contingent consideration and convertible notes.
- Whether Max Steel lenders take enforcement action and what that would mean for the company’s distribution rights and recorded assets.
- Final acquisition valuations, integration results, and progress in remediating internal-control material weaknesses.