Dolphin Entertainment, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Dolphin provides entertainment publicity and marketing services through 42West and produces and distributes film and digital content. The 2017 comparison is not fully comparable for the six-month period: 42West was acquired on March 30, 2017, so the prior-year first half included only about three months of its results.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $5.22 million | $7.83 million | $11.00 million | $8.36 million |
| Operating income (loss), before other items | $69,267 | $(155,753) | $(29,657) | $(1.03) million |
| Net income (loss) | $170,474 | $(1.56) million | $1.00 million | $3.40 million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(13,806) | $2.73 million |
- Q2 revenue fell about 33% year over year, primarily because Max Steel production and distribution revenue declined to $97,961 from $2.69 million. Entertainment publicity revenue was approximately flat at $5.12 million.
- First-half revenue increased about 32%, reflecting six months of 42West in 2018 versus approximately three months in 2017. Publicity revenue was $10.58 million; production and distribution revenue was $427,153.
- Q2 and first-half 2018 net income included noncash gains from changes in fair value of warrant liabilities and 42West put rights: $683,158 in Q2 and $1.94 million in the first half. First-half net income also included $280,620 of income tax expense. Diluted loss per share was reported as $(0.01) for Q2 and $(0.03) for the first half, despite positive basic earnings per share.
- Cash used in first-half operations was nearly breakeven, compared with $2.73 million provided in the prior-year period. Financing activities used $3.18 million, including $2.5 million for put-right share repurchases and debt and related-party loan repayments. Cash declined by $3.26 million to $2.03 million.
Balance sheet, debt and liquidity
- At June 30, 2018, cash was $2.03 million, current assets were $5.39 million, and current liabilities were $19.00 million. The resulting working-capital deficit was $13.61 million, versus $18.5 million at June 30, 2017.
- Total liabilities were $23.35 million and stockholders’ equity was $5.29 million. Management described total debt as approximately $12.2 million, including approximately $5.0 million of 42West acquisition put rights. Borrowings and notes also include Max Steel-related obligations and other debt.
- 42West drew $1.69 million on a new revolving credit line; the June 30 balance was $1.70 million. The facility matures in March 2020, and the company reported compliance with its covenants at quarter end.
- The company reported substantial doubt about its ability to continue as a going concern, citing the working-capital deficit, accumulated deficit of $91.90 million, and dependence on external financing and stockholder support. It warned that inability to obtain funding could force liquidation.
Outlook, material developments and risks
- After quarter end, Dolphin acquired The Door Marketing Group on July 5, 2018. Consideration included $2.0 million in stock, $2.0 million in cash, and up to $7.0 million of contingent consideration. The company also issued a $1.5 million secured convertible note at 8%, due January 2020, to help finance the acquisition.
- On July 24, 2018, Dolphin completed a public offering of 2.0 million shares at $3.00 per share, receiving approximately $5.58 million net of underwriting discount and before estimated offering expenses. Management said proceeds were for general corporate purposes, working capital, and put-right purchases; the offering diluted existing shareholders.
- Management intends to pursue growth and cost synergies across 42West and The Door and expects publicity-business opportunities, but stated there is no assurance of realizing revenue growth, synergies, or cost savings. It also intends to finance a film project during 2018 for a planned 2019 release, subject to obtaining financing and production proceeding.
- Three senior 42West publicists and related staff left in June; management expected at least a short-term negative impact on revenue and results.
- Max Steel loans were not repaid by maturity. Foreclosure could result in loss of domestic or international distribution rights and impairment of related receivables and production costs. The company also disclosed a $620,000 backstop guaranty related to the prints-and-advertising loan.
- Other items include approximately $9.59 million of future minimum rent payments, an approximately $300,000 multiemployer-plan exposure that was accrued, and a Canadian litigation matter with a possible loss range of $0 to $325,000 that was not accrued because management considered a loss not probable.
- Disclosure controls and procedures were deemed ineffective at June 30, 2018 because previously reported material weaknesses had not been fully remediated. Management described planned remediation, including added accounting staff and stronger review and documentation controls.
Most important facts for investors to verify
- Whether the July equity offering and subsequent financing provide sufficient liquidity, given the going-concern warning and working-capital deficit.
- Whether the business can generate sustainable operating cash flow apart from fair-value gains, and how the The Door acquisition affects cash needs, debt and dilution.
- The status of Max Steel loan repayment, lender remedies, and any potential loss of distribution rights or asset impairment.
- The revenue and client-retention impact of the senior publicist departures and whether anticipated integration benefits are achieved.
- Progress in remediating internal-control weaknesses and resolution or changes in disclosed contingencies.