Dolphin Entertainment, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 15, 2018. Dolphin is an entertainment marketing and content production company. Its 2017 acquisition of 42West added the entertainment publicity business, which generated most of Q1 revenue. The 2017 comparison period largely predates the acquisition.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior year-end |
|---|---|---|
| Revenue | $5.785 million | $0.533 million in Q1 2017 |
| Operating result before other income and expenses | Loss of $98,924 | Loss of $871,692 in Q1 2017 |
| Net income | $832,959; $0.07 per basic and diluted share | $4.962 million; $0.69 basic and $0.10 diluted per share |
| Operating cash flow | $1,139 | $3.751 million in Q1 2017 |
| Cash and cash equivalents | $4.538 million | $5.297 million at December 31, 2017 |
| Total assets / stockholders’ equity | $31.793 million / $5.245 million | $33.597 million / $6.076 million at December 31, 2017 |
| Current assets / current liabilities | $8.151 million / $21.208 million | $9.420 million / $20.126 million at December 31, 2017 |
- Entertainment publicity revenue was $5.456 million, or 94.3% of revenue; production and distribution revenue was $329,192, all primarily from Max Steel. Publicity revenue was absent from the Q1 2017 comparison because 42West was acquired on March 30, 2017.
- By segment, entertainment publicity reported operating income of $525,739; content production reported an operating loss of $624,663.
- Net income included $1.252 million of gains from changes in fair value of put rights and warrant liabilities. These noncash gains exceeded the $98,924 operating loss; interest expense was $267,426 and income tax expense was $52,604.
- Financing cash flows used $719,386. Cash declined by $758,751 during the quarter. The company drew $1.690 million on a new BankUnited line, repaid the former $750,000 line balance, and made debt and put-related payments.
- Management reported total debt of approximately $13.1 million, including approximately $5.1 million representing the fair value of 42West acquisition put rights. Separately, the balance sheet reported $5.142 million of put-right liabilities, $1.700 million drawn on the line of credit, $2.948 million of debt, $875,000 of convertible notes, $900,000 of notes payable, and $1.578 million owed to a related party.
Changes, outlook and material risks
- Revenue growth mainly reflects the inclusion of 42West. Production and distribution revenue fell about $204,000 year over year as Max Steel moved beyond its principal release period. Total expenses rose to $5.884 million from $1.405 million, largely reflecting 42West payroll and operating costs, intangible amortization and other acquired-business expenses.
- The company reported a $13.058 million working capital deficit and a $92.067 million accumulated deficit at March 31, 2018. Management and the filing state that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Dolphin depends on additional financing and stockholder support; it cautions that financing may not be available and equity issuance could substantially dilute shareholders. A Form S-3 permits potential equity sales of up to $30 million, but does not assure proceeds.
- Management intended to finance a feature film in 2018 for a planned 2019 release and said it intended to complete at least one acquisition during 2018. Both plans depend on financing and execution; the filing gives no assurance they will occur. Management also cited possible 42West service expansion and expense synergies.
- Foreclosure risk remains on the matured Max Steel production and prints-and-advertising loans. The filing warns that foreclosure could cost the company distribution rights and revenues and require impairment of related production costs and receivables. The company also has a $620,000 backstop guaranty related to the prints-and-advertising loan.
- Put rights granted in connection with the 42West acquisition can require share repurchases at $9.22 per share through 2020. Sellers exercised rights for 183,296 shares during the quarter; $1.690 million was paid in April. Certain 42West employees also held additional put rights.
- Other disclosed exposures include $9.886 million in future minimum rent payments, a probable approximately $300,000 multiemployer pension contribution liability, $40,000 of accrued information-return penalties, and an unaccrued Canadian litigation claim with a stated possible loss range of $0 to $325,000. A separate California lease termination option could entail an approximately $637,000 fee; the company said it did not expect to exercise it.
- Disclosure controls and procedures were deemed ineffective because previously reported material weaknesses had not been fully remediated. Management described planned remediation steps, including improved accounting documentation, review controls and segregation of duties.
- The company adopted revenue standard ASC 606 on January 1, 2018 using the modified retrospective approach and reported no cumulative adjustment. Management said the change had no material impact on the financial statements.
Investor verification priorities
- Assess near-term liquidity, debt maturities and the feasibility and terms of additional financing, including any dilution from equity issuance.
- Reconcile reported net income to operating cash flow and identify the effect of noncash fair-value gains on earnings.
- Verify status and potential cash requirements of 42West put rights, including payments made after quarter-end and remaining exercisable rights.
- Review loan status, collateral and foreclosure exposure for Max Steel, and the related impact on receivables, production assets and future revenue.
- Track remediation of material weaknesses and confirm any material developments in pension, litigation, lease and other contingent exposures.