Dolphin Entertainment, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; the filing does not provide a clear standalone Q4 results summary. Comparisons below are with fiscal 2017.
Business context
Dolphin operates two segments: entertainment publicity and marketing (42West, The Door and Viewpoint) and content production (Dolphin Films and Dolphin Digital Studios). In 2018, it acquired The Door in July and Viewpoint in October, expanding its marketing, branding and production services. The 2017 comparison includes 42West for only nine months, while 2018 includes 42West for the full year, The Door for six months and Viewpoint for two months.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $22.55 million | $22.41 million |
| Entertainment publicity and marketing revenue | $21.92 million | $16.46 million |
| Content production revenue | $0.63 million | $5.95 million |
| Total expenses | $26.70 million | $23.38 million |
| Operating loss, before other income and expenses | $4.15 million | $0.96 million |
| Net income (loss) | $(2.91) million | $6.91 million |
| Operating cash flow | $(0.62) million | $8.36 million |
Revenue increased about 0.6% year over year. The marketing segment represented 97.2% of revenue, compared with 73.4% in 2017. Approximate net margin was -12.9% in 2018 versus 30.8% in 2017; the prior-year profit benefited substantially from nonrecurring or non-operating gains, including a $9.02 million warrant-liability fair-value gain and a $4.01 million gain on debt extinguishment. These figures make the reported net-income comparison less indicative of underlying operating performance.
Marketing segment operating results moved to a $1.19 million loss from $2.21 million of income. Content production reported a $2.93 million operating loss, versus a $3.18 million loss. A $1.86 million goodwill impairment, related to 42West and reduced cash-flow estimates, was recorded in 2018. Payroll rose to $14.08 million from $11.41 million; depreciation and amortization rose to $1.98 million from $1.25 million.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $5.54 million; restricted cash was $0.73 million. Cash available for working capital was reported as approximately $5.5 million, excluding restricted collateral.
- Working capital deficit was approximately $11.9 million, compared with $10.7 million in 2017. Current assets were $10.07 million and current liabilities were $21.94 million.
- Total debt, as described by the company, was approximately $14.3 million, including approximately $6.0 million fair value of 42West put-option liabilities. Stockholders’ equity was $10.78 million.
- Cash from financing activities was $3.22 million, including net proceeds from equity offerings and borrowing. Investing activities used $1.62 million, primarily for acquisitions. Cash, cash equivalents and restricted cash totaled $6.27 million at year-end.
- The BankUnited revolving line had $1.70 million outstanding at year-end, with a $2.30 million maximum and a March 2020 maturity. The filing says the company was in compliance with its covenants at December 31, 2018.
Material changes, outlook and risks
- Marketing revenue growth from acquisitions was partly offset by the departure of three senior 42West publicists and related staff in June 2018. The company attributed approximately $3.0 million of lower 2018 revenue versus 2017 to those departures.
- Content production revenue fell by $5.32 million, principally reflecting the normal post-release decline in revenue from Max Steel. The film did not generate enough funds to repay its related loans by maturity. Foreclosure could result in loss of distribution rights and impairment of approximately $0.63 million in capitalized production costs.
- Open Road, the domestic distributor of Max Steel and Believe, filed for Chapter 11 in September 2018. Raven Capital acquired its assets; Dolphin expected distribution agreements to continue on their existing terms, but did not guarantee successful distribution.
- Management saw potential growth from streaming-platform content spending, cross-selling among its marketing businesses, and expansion into additional client sectors. It intended to pursue at least one acquisition in 2019 and develop film projects, but these plans depended on financing and execution. No quantified financial guidance is provided.
- The independent auditor’s report includes a going-concern explanatory paragraph. Recurring losses, an accumulated deficit of $94.53 million and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. Management planned to seek additional debt or equity financing; success was not assured, and equity financing could dilute shareholders.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses, including insufficient documented risk and close procedures, inadequate review of certain accounting matters, and segregation-of-duties and IT-control deficiencies. Remediation efforts were underway.
- Other risks include key-person and client retention, highly competitive and project-dependent markets, acquisition integration, potential dilution, contingent put and earn-out obligations, and uncertainty in film and digital-content performance. The Door’s acquisition consideration included up to $7 million of contingent consideration over four years; the filing’s year-end fair-value liability was $0.55 million.
Important facts for investors to verify
- Whether Dolphin can obtain sufficient financing to meet obligations and fund operations, and the timing and dilution effects of any financing.
- Current status and repayment terms of the Max Steel-related loans, collateral and $620,000 backstop, and whether distribution rights or future receipts are at risk.
- Whether 42West has restored client relationships and revenue following the senior-publicist departures, and whether the acquired businesses deliver expected cross-selling and profitability.
- Progress in remediating internal-control weaknesses and the results of subsequent control evaluations.
- Cash requirements from 42West put rights, acquisition installment payments, The Door earn-out and other debt obligations; also verify subsequent events after year-end.
- Standalone fourth-quarter performance, which is not clearly stated in the supplied filing text.