Dolphin Digital Media, Inc. — Form 10-Q summary
Period: Quarter and nine months ended September 30, 2014; filed November 19, 2014. The supplied filing identifies the registrant as Dolphin Digital Media, Inc., rather than Dolphin Entertainment, Inc.
Business context and results
The company produces digital programming, principally online web series, and operates online Kids Clubs. It also earns service revenue under a related-party management and back-office services agreement. The interim statements are unaudited.
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Revenue | $516,502 | $505,950 | $1,567,694 | $1,793,130 |
| Operating loss | $(363,467) | $(284,848) | $(1,002,127) | $(1,628,970) |
| Net loss | $(535,599) | $(441,430) | $(1,480,239) | $(1,986,711) |
| Basic and diluted loss per share | $(0.01) | $(0.01) | $(0.02) | $(0.02) |
Third-quarter operating and net margins were approximately negative 70% and negative 104%, respectively; nine-month margins were approximately negative 64% and negative 94%. The filing reports no positive operating income or net income.
Liquidity, cash flow, debt, and balance sheet
- Cash was $409,974 at September 30, 2014, down from $706,641 at December 31, 2013. Current assets were $524,516 versus current liabilities of $9,709,899, a working-capital deficit of approximately $9.2 million.
- For the first nine months, operating cash outflow was $865,961, investing cash outflow was $73,850, and financing cash inflow was $643,144; cash decreased by $296,667.
- Current balance-sheet debt was $3,155,000; loans from a related party were $3,005,767; and notes payable were $300,000. These balances total approximately $6.46 million, in addition to accrued compensation of $1,687,500 and other current liabilities of $1,415,111. The filing reports no long-term liabilities.
- Stockholders’ deficit was $8,389,075. Accumulated deficit was $38,166,803. The company had 81,892,352 common shares outstanding at September 30 and November 18, 2014.
Changes versus the prior comparable period
- Nine-month revenue fell approximately 13%, primarily because production and foreign licensing revenue from the completed Cybergeddon project declined: production revenue was $51,192 versus $793,130. Related-party service revenue rose to $1.5 million from $1.0 million; Kids Club membership revenue was approximately $16,500, with none reported in 2013.
- Nine-month net loss narrowed approximately 25%, although the third-quarter net loss increased from $441,430 to $535,599. Lower year-to-date general and administrative and direct costs were partly offset by higher payroll and interest expense.
- Payroll expense increased by approximately $422,000 year over year for the nine months, which management attributed mainly to five additional employees. General and administrative expense fell approximately $757,000, principally due to lower consulting costs and nonrecurring prior-year expenses.
- Operating cash use improved from $2,444,777 to $865,961. Financing inflow declined from $2,383,000 to $643,144, including approximately $1.38 million in repayments to the CEO during 2014.
Outlook, risks, and unusual items
- Going concern: Management stated that inadequate working capital, recurring losses, and dependence on private investors and stockholder support raise substantial doubt about the company’s ability to continue as a going concern. It planned to seek loans and equity financing; there is no assurance it can raise needed capital.
- Financing and project outlook: The company received $2.09 million under project-related loan agreements by quarter-end and obtained an additional $500,000 after quarter-end. Management described a target of $4 million in commitments. Loans are secured by specified series’ revenues and carry lender participation rights in future project profits. The filing describes interest terms somewhat differently in different sections: 10% initially and 11.25% on extension in the material-agreement disclosure, but up to 12% elsewhere.
- Potential revenue: After quarter-end, the company signed an online-platform agreement with a $500,000 minimum guarantee for promotional content, subject to delivery at least three weeks before the series premiere. Management expected digital-production revenue and increased Kids Club revenue in the first quarter of 2015; neither outcome was assured.
- Impairment: The company recorded a $113,472 impairment of capitalized production costs in the quarter because estimated ultimate revenues were below prior projections. Capitalized production costs were $659,526 at quarter-end.
- Related parties: The company recorded $500,000 of quarterly and $1.5 million of nine-month service revenue from a related party. It also owed the CEO $3,005,767 under a demand loan and had accrued CEO compensation and related interest.
- Controls and contingencies: Management concluded disclosure controls were ineffective because previously reported material weaknesses had not been fully remediated. The filing reported $80,000 accrued for tax-filing penalties and no changes in legal proceedings during the quarter.
Important facts for investors to verify
- Whether the company obtained the remaining planned project financing, and the applicable loan interest, maturity, security, reserve, and profit-participation terms.
- Whether the $500,000 platform minimum guarantee and expected 2015 production and Kids Club revenues were delivered, earned, and collected.
- The sustainability and terms of related-party service revenue, CEO-related debt and accrued compensation, and the company’s ability to meet current obligations.
- Whether management remediated the disclosed material weaknesses and how the going-concern financing need was addressed.
- The recoverability of capitalized production costs and the status of the $80,000 accrued tax penalties.