Dolphin Entertainment, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Figures are unaudited and compared with the corresponding 2017 periods unless otherwise noted.
Business context
Dolphin combines entertainment publicity and marketing services with film and digital-content production. Its publicity division includes 42West, acquired in March 2017, and The Door, acquired July 5, 2018. The Door’s results are included from the acquisition date. After quarter-end, on October 31, 2018, Dolphin acquired Viewpoint Computer Animation for stated consideration of $2.0 million before adjustments.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.72 million | $6.81 million | $16.72 million | $15.17 million |
| Operating income (loss) | $(0.54) million | $1.35 million | $(0.57) million | $0.30 million |
| Net income | $0.18 million | $6.17 million | $0.67 million | $9.58 million |
| Operating margin, calculated | (9.4%) | 19.8% | (3.4%) | 2.0% |
Q3 revenue declined about 16%, while nine-month revenue rose about 10%. Publicity revenue increased to $5.72 million in Q3 from $5.41 million and to $16.30 million for nine months from $10.55 million. Production and distribution revenue fell to zero in Q3 and $0.43 million year to date, mainly reflecting the declining revenue cycle of Max Steel. No gross-margin figure is presented in the filing.
Q3 included an $819,451 income tax benefit, which turned a $639,306 pretax loss into reported net income. Nine-month results also included a $538,831 tax benefit. Prior-year net income was materially affected by nonrecurring gains, including warrant fair-value changes and debt extinguishment; reported profit comparisons therefore do not solely reflect operating performance. The filing’s face statement reports Q3 basic and diluted EPS of $(0.01), while Note 13 reports $0.01 for both; this discrepancy should be verified. Nine-month EPS was $0.05 basic and $(0.04) diluted.
- Cash flow: Nine-month operating cash outflow was $0.38 million, versus $6.67 million provided in 2017. Investing used $1.00 million; financing provided $3.88 million. Cash and cash equivalents increased $2.49 million.
- Liquidity: September 30 cash and equivalents were $7.11 million, plus $0.68 million restricted cash. Current assets were $11.57 million and current liabilities $20.51 million, a working-capital deficit of $8.94 million.
- Debt and obligations: Management reported total debt of approximately $13.6 million, including $5.2 million fair value of 42West put rights that sellers may exercise. Balance-sheet liabilities also included $1.70 million drawn on the BankUnited line, $2.76 million of current debt, $1.11 million owed to a related party, $1.97 million of convertible notes, and other notes and acquisition obligations. Stockholders’ equity was $14.40 million.
- Capital and dilution: Dolphin raised approximately $6.7 million net through 2018 common-stock offerings. Shares outstanding rose from 10.57 million at December 31, 2017 to 13.93 million at September 30, 2018; 14.12 million were outstanding November 8.
Material changes and significant items
- Three senior 42West publicists and related staff left in June. Management attributed approximately $1.5 million of lower Q3 revenue versus the prior-year quarter to the departures, partly offset by The Door’s contribution. Dolphin said it had begun hiring replacement senior publicists.
- The Door acquisition had provisional fair-value consideration of $5.87 million, including cash, shares and $1.62 million estimated contingent consideration. The agreement permits up to an additional $7 million in cash and shares, subject to performance targets over four years. Acquisition valuation and goodwill remained provisional.
- In July, Dolphin issued a secured $1.5 million convertible note bearing 8% interest, convertible at $3.25 per share and maturing January 2020. The 42West revolving facility had $1.70 million outstanding at quarter-end and matures in March 2020; Dolphin reported compliance with its covenants.
- Adoption of ASU 2017-11 reclassified $1.44 million of warrants from liability to equity. The 2018 offering also triggered a deemed dividend of $20,645 through down-round provisions.
- Open Road Films, the U.S. distributor of Max Steel, filed for Chapter 11 bankruptcy in September. Dolphin recorded a reserve against domestic receivables and recognized no domestic distribution revenue for the quarter pending the potential sale of Open Road’s assets.
Outlook, risks and contingencies
- Going concern: The filing states that the working-capital deficit, accumulated deficit of $90.81 million and reliance on external funding raise substantial doubt about Dolphin’s ability to continue as a going concern. Management planned to seek debt and equity financing, but gave no assurance it could obtain it. Additional equity or convertible securities could substantially dilute existing holders.
- Debt and film collateral: Max Steel-related loans were past maturity and had approximately $2.8 million outstanding. Foreclosure could result in loss of distribution rights and impairment of approximately $0.6 million of production costs and $0.7 million of receivables. The filing also describes a $0.62 million company backstop guarantee associated with the prints-and-advertising loan.
- Management plans: Dolphin intended to finance a film for production in 2019 and release in 2020, and said it was exploring further acquisitions, including potential acquisitions during 2019. These plans depend on financing and execution; no quantified financial guidance is provided. Management also expected digital-streaming marketing budgets and strategic communications demand to support future publicity growth.
- Other exposures: The filing disclosed $9.67 million of future minimum rent payments, a $258,414 remaining obligation under a pension-plan settlement, and an unaccrued Canadian litigation claim with a stated possible loss range of $0–$325,000. Management said the claim was not probable. The company had $2.63 million of accrued compensation and $1.16 million of related interest associated with the CEO.
- Controls: Management concluded disclosure controls were ineffective at September 30 because previously reported material weaknesses had not been fully remediated. It reported hiring two finance employees during the quarter and ongoing remediation work.
Most important facts for investors to verify
- How Dolphin will fund operations and meet obligations given the working-capital deficit and going-concern warning, and what dilution or refinancing may result.
- The timing and recoverability of Max Steel receivables and the risk of losing distribution rights through lender enforcement, including the outcome of Open Road’s bankruptcy process.
- Whether the 42West publicist departures have been offset, and whether The Door and Viewpoint acquisitions contribute sustainable revenue and cash flow relative to their purchase costs and contingent payments.
- The composition and repayment terms of the approximately $13.6 million debt figure, including the treatment and potential exercise of 42West put rights.
- The Q3 EPS inconsistency between the statement of operations and Note 13, and the effect of tax benefits and fair-value adjustments on reported earnings.
- Progress in remediating material weaknesses in financial reporting controls and finalization of provisional acquisition valuations.