Dolphin Entertainment, Inc. — Q2 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. Dolphin combines content production and distribution with entertainment publicity. On March 30, it acquired 42West, an entertainment public-relations and marketing firm; reported results include 42West from the acquisition date. The company also plans to discontinue its online kids clubs by year-end 2017.
Financial results and liquidity
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Revenue | $7.83 million | $8.36 million | $7,750 and $25,185, respectively |
| Operating income (loss), before other items | $93,580 | $(779,092) | $(1.27) million and $(2.26) million, respectively |
| Net income (loss) | $(1.56) million | $3.40 million | $(7.70) million and $(11.25) million, respectively |
| Operating cash flow | Not separately reported for the quarter | $2.73 million | $(2.29) million |
- Q2 revenue included $5.14 million from 42West and $2.69 million from production and distribution, primarily Max Steel. Six-month revenue included 42West only from its acquisition date. Comparisons with 2016 are therefore not like-for-like.
- Six-month net income was primarily attributable to a $6.29 million gain from the change in fair value of warrant liabilities; it does not indicate comparable operating profitability. Q2 included a $534,000 warrant-liability loss, $249,000 of acquired-intangible amortization, $207,000 of acquisition costs, and $396,864 of interest expense.
- Q2 operating income was $93,580, while the content-production segment recorded a six-month operating loss of $1.48 million; the entertainment-publicity segment recorded $698,000 of operating income for the period reported.
- Cash and cash equivalents were $1.07 million at June 30, versus $663,000 at year-end 2016. Working capital was negative $18.48 million. Six-month operating cash flow was positive, but cash from operations benefited from working-capital movements and 42West.
- Total assets were $35.54 million and total liabilities $38.57 million; stockholders’ deficit was $3.02 million. Goodwill from the 42West acquisition was $14.34 million and net intangible assets were $8.86 million.
- The company disclosed approximately $20.6 million of total debt, including related-party debt and acquisition put-option fair value. Major film-related balances were $9.69 million under the Max Steel prints-and-advertising loan and $3.20 million under the production-service agreement. The 42West line of credit had $750,000 outstanding.
Material changes and outlook
- 42West added a new publicity segment and accounted for most reported Q2 revenue. Acquisition consideration included shares, potential earn-out shares of up to approximately $9.3 million, and seller put rights at $4.61 per share. Sellers exercised puts for $700,000 during the half-year; the company reported a further $75,000 exercise after quarter-end.
- Max Steel generated film revenue, but management said its domestic performance was below expectations. Dolphin reported that further Max Steel revenue depends on servicing film-related loans; failure to repay could result in loss of the film copyright and related revenues. The filing says the P&A loan matured August 25, 2017, and the 42West credit line matured August 31, 2017; the company was pursuing renewals or extensions.
- Management described plans to finance feature-film and digital projects during 2017–2018, with releases expected beginning in 2018, and to expand 42West’s services. These are plans, not assured results; the filing gives no formal earnings or revenue guidance.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. It had a $96.41 million accumulated deficit and said it lacked adequate capital to meet obligations or maintain operations without additional funding. Management intended to seek loans and equity or convertible financing; success was not assured and equity issuance could dilute shareholders.
- After quarter-end, the company reported several convertible notes totaling $575,000, generally bearing 10% interest and convertible at market-linked prices. It also reported that nine employees were taken off payroll pending production approval.
Risks, contingencies, and unusual items
- A putative Fyre Festival class action names 42West and seeks damages exceeding $5 million. Dolphin said it believes the claims are without merit; the outcome is uncertain.
- 42West recorded a $300,000 accrual for a Motion Picture Industry Plans audit and a related indemnification asset. The ultimate liability remains uncertain. A separate Canadian lease-related claim could result in a loss of up to $325,000, but the company did not accrue it, saying a loss was not probable.
- Disclosure controls and procedures were reported ineffective at June 30 because previously identified material weaknesses had not been fully remediated. Management planned remediation steps, including improved accounting documentation, review controls, and segregation of duties.
- Fair-value changes in derivative warrants, seller put rights, and contingent consideration are sensitive to assumptions and contributed materially to reported results. The acquisition purchase-price allocation remained provisional.
Important facts for investors to verify
- Whether Dolphin refinanced or repaid the Max Steel loans and renewed the 42West credit line after their stated August 2017 maturities.
- Whether the company obtained sufficient financing to address its working-capital deficit and going-concern uncertainty, and the resulting dilution and terms.
- Cash conversion and collectability of receivables, particularly Max Steel international receivables, and the sustainability of 42West’s contribution to results.
- Final 42West acquisition valuation, earn-out outcomes, seller put exercises, and any resulting cash or share obligations.
- Developments in the Fyre Festival litigation and pension-plan audit, as well as progress in remediating material weaknesses in internal controls.