Dolphin Entertainment, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dolphin provides entertainment publicity and marketing services through 42West, The Door and Viewpoint, and develops and distributes film and digital content.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $6.274 million | $5.219 million | $12.603 million | $11.004 million |
| Operating income (loss), before other items | $(1.202) million | $69,000 | $(2.027) million | $(30,000) |
| Net income (loss) | $(892,000) | $170,000 | $(769,000) | $1.003 million |
| Basic EPS | $(0.06) | $0.01 | $(0.05) | $0.08 |
- Revenue increased about 20% in Q2 and 15% in the first half, primarily because The Door and Viewpoint were included in 2019 results; 42West revenue was affected by publicist departures. Content production revenue declined as the Max Steel revenue cycle matured.
- Expenses rose to $7.476 million in Q2 and $14.630 million in the first half, driven largely by direct costs and payroll associated with the acquired businesses. Six-month interest and debt amortization expense was $589,000.
- Reported other income included noncash fair-value gains: $1.778 million on put rights and $90,000 on The Door contingent consideration in the first half. These gains partly offset operating losses.
- Operating cash use was $1.277 million for the first half, versus $14,000 in the prior-year period. Investing cash use was $38,000 and financing cash use was $1.667 million. Cash and cash equivalents were $2.559 million at June 30; restricted cash was another $733,000.
- Current assets were $6.386 million versus current liabilities of $22.529 million, a $16.143 million working-capital deficit. Total liabilities were $31.089 million and stockholders’ equity was $8.490 million. Lease liabilities totaled about $7.016 million following adoption of the lease standard.
- Management described total debt of approximately $13.9 million, a figure that includes the $4.7 million fair value of put rights. The company also had a $1.7 million line of credit and obligations related to Max Steel financing.
Material changes, outlook and risks
- The Door and Viewpoint acquisitions expanded the marketing segment and increased revenue, payroll, direct costs and amortization. Marketing revenue represented 99.4% of first-half revenue; content production represented 0.6%.
- Management expressed expectations that streaming-related marketing budgets and cross-selling Viewpoint’s creative production services could support growth. It intended to pursue additional acquisitions in 2019 and finance production of projects in development; neither growth nor financing is assured. No quantitative earnings or revenue guidance was provided.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management depends on raising equity, convertible or debt financing, or obtaining other financing; failure to secure funds within 12 months could force liquidation. Additional equity or convertible securities could materially dilute shareholders.
- Max Steel loans were past maturity and had not been repaid from film proceeds. Foreclosure could cost the company distribution rights and lead to impairment of approximately $630,000 of capitalized production costs and related receivables.
- 42West sellers’ put rights create material cash obligations. The company reported $4.708 million of put-right liabilities at June 30, with amounts exercised but unpaid also outstanding. The BankUnited line of credit matures in March 2020; the Pinnacle convertible note matures in January 2020. The filing states the company was compliant with line-of-credit covenants at quarter-end.
- After quarter-end, the company raised $150,000 through a convertible note, issued additional Lincoln Park warrants, and exchanged put rights with two 42West executives: one exchange involved a $702,500, 10% convertible note and the other issued 385,514 common shares. CEO and CFO annual salary increases of $50,000 each were approved, effective January 1, 2019.
- Disclosure controls were deemed ineffective because previously reported material weaknesses had not been remediated. A Canadian litigation matter had a possible loss range of zero to $325,000; no accrual was recorded because management considered a loss not probable.
Investor facts to verify
- Available financing, near-term debt maturities and the company’s plans to address the going-concern uncertainty and working-capital deficit.
- Put-right exercise and settlement amounts, including the impact of the August 2019 exchanges on cash obligations, debt and share dilution.
- Whether acquired businesses deliver expected revenue growth, cross-selling benefits and cost synergies, and how segment operating performance develops.
- The status of Max Steel collateral, financing obligations and potential impairment exposure.
- Progress in remediating internal-control weaknesses and any subsequent developments in the disclosed litigation.