Business Context and Reporting Period
Company: Dolphin Digital Media, Inc. (formerly Dolphin Entertainment, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company focuses on online safety for children through "Dolphin Secure," a fingerprint-based authentication system for social networking. In September 2010, the Company launched "Dolphin Digital Studios" to produce original web series for tweens and teens. The Company is a smaller reporting company with a significant accumulated deficit.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Balance Sheet (Sep 30, 2010) |
|---|---|---|---|
| Revenues | $498 | $976 | N/A |
| Net Loss | $(431,633) | $(2,627,365) | N/A |
| Cash and Cash Equivalents | N/A | N/A | $81,006 |
| Total Assets | N/A | N/A | $2,255,474 |
| Total Liabilities | N/A | N/A | $3,525,202 |
| Working Capital | N/A | N/A | $(3,025,057) Deficit |
| Accumulated Deficit | N/A | N/A | $(30,156,891) |
| Shares Outstanding | N/A | N/A | 64,190,987 |
Material Changes vs. Prior Period
- Revenue: The Company generated nominal revenue ($976) for the nine months ended September 30, 2010, compared to $0 in the same period in 2009. Management expects meaningful revenue from Dolphin Secure and Dolphin Surf to begin in Q1 2011.
- Expenses: General and Administrative expenses decreased significantly by $2,621,229 (from $3.4M to $794k) for the nine-month period due to reduced marketing and administrative costs. However, total other expenses increased by $959,059, primarily driven by a $945,614 charge for warrant restructuring.
- Net Loss: The net loss for the nine months ended September 30, 2010, was $2,627,365, a decrease from the $3,950,248 loss in the prior year period.
- Intangible Assets: Increased from $1,208,268 to $1,994,998, reflecting capitalization of website development costs.
- Debt: Related party loans decreased from $1,079,000 to $804,000 following a $320,000 repayment, though new convertible notes and a $100,000 third-party loan were added.
Guidance, Outlook, Risks, and Unusual Items
- Going Concern: The filing includes a "Going Concern" warning. The Company has an accumulated deficit of over $30 million and inadequate working capital. Continuation depends on raising additional funds through loans or equity sales, with no assurance of success.
- Outlook: Management anticipates revenue generation from core products in Q1 2011. Dolphin Digital Studios aims to produce 8-10 web series annually, projecting $1 million revenue per series with 20-30% net margins.
- Unusual Items: A significant non-cash expense of $966,649 was recorded for the repricing of warrants issued to T-Squared Investments LLC. Additionally, $275,000 in deferred licensing fees was received for European technology rights.
- Legal Risks: The Company is involved in multiple lawsuits, including a suit against former counsel (Peikin and Gold) regarding alleged misappropriation of stock and funds, and a counterclaim filed by those individuals. There is also ongoing litigation in Canada regarding a commercial lease breach.
- Acquisition Attempt: The Company advanced $170,500 to 24eight, LLC for a potential acquisition that was subsequently abandoned; repayment is expected.
Investor Verification Checklist
- Liquidity Status: Verify the Company's ability to meet obligations given the $3.0 million working capital deficit and reliance on related-party loans and equity sales.
- Revenue Realization: Confirm if the projected Q1 2011 revenue launch for Dolphin Secure materializes, as current operations are not generating sustainable income.
- Warrant Dilution: Assess the impact of the complex warrant restructuring with T-Squared Investments LLC, which allows for further exercise price reductions and potential significant dilution.
- Legal Exposure: Monitor the outcome of the litigation against former counsel and the Canadian lease dispute, as these could result in significant financial liabilities.
- Intangible Asset Valuation: Review the $2 million in intangible assets, as the Company noted it is still evaluating these assets for impairment and has not yet generated significant economic benefits from them.