Dolphin Digital Media, Inc. — FY 2013 Form 10-K
Filing and period: This is Dolphin Digital Media, Inc.’s annual report for the fiscal year ended December 31, 2013, filed August 15, 2014—not a quarterly report. The filing identifies the registrant as Dolphin Digital Media, Inc.; the request metadata names Dolphin Entertainment, Inc. The filing compares FY 2013 with FY 2012.
Business context
The company produced and distributed original online video content through Dolphin Digital Studios and developed branded online “Kids Clubs.” Most 2013 operations related to digital studios. Production revenue largely came from two web series released in 2012; 2013 production receipts were mainly sponsorship and foreign sales. The company also recognized service revenue under a management-services agreement with a company indirectly owned by its CEO. It discontinued Dolphin Secure, decided to cancel the uncompleted Cambio partnership, and discontinued the University of Miami kids-club program.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $2.294 million | $3.864 million |
| Production revenue | $0.794 million | $3.864 million |
| Service revenue | $1.500 million | None reported |
| Direct production costs | $0.683 million | $3.416 million |
| General and administrative costs | $2.394 million | $1.913 million |
| Payroll | $1.164 million | $1.926 million |
| Loss before other income/expense | $1.947 million | $3.391 million |
| Net loss | $2.462 million | $3.386 million |
| Cash used in operating activities | $1.768 million | $2.959 million |
| Cash at year-end | $0.707 million | $0.283 million |
| Working-capital deficit | $7.734 million | $5.478 million |
Revenue fell about 41%, as the 2012 releases generated substantially less production revenue in 2013. The $1.5 million service revenue was earned from a related party indirectly owned by the CEO. Net loss narrowed, mainly as production costs and payroll declined; G&A increased. No gross-margin figure is presented in the filing. Interest expense rose to $0.563 million from $0.336 million. The company reported no income-tax expense.
At year-end, total assets were $1.620 million and current liabilities were $8.529 million. Current liabilities included $1.100 million of debt, $4.383 million of loans from a related party, $0.335 million of notes payable, and $1.500 million of accrued compensation. The CEO’s revolving loan bears 10% interest and is payable on demand with ten days’ notice. Stockholders’ deficit was $6.909 million. Financing cash flow was $2.207 million in 2013, principally reflecting $2.5 million borrowed from the CEO, partly offset by repayments.
Changes, outlook, risks and unusual items
- Outlook: Management expected additional kids-club membership revenue in the third and fourth quarters of 2014 and was negotiating digital projects it expected to generate revenue in the first quarter of 2015. It planned to finance productions on a project-specific basis. These were expectations, not reported results or guaranteed contracts.
- Going concern: The auditor and management cited recurring losses, negative operating cash flow and insufficient working capital, expressing substantial doubt about the company’s ability to continue as a going concern. Management planned to seek loans, subsidiary-level financing and common-stock sales; success was not assured.
- Related parties: All reported 2013 service revenue came from one related party. The CEO was also a major lender, and unpaid CEO compensation accrued interest at 10%. These arrangements merit review for terms, collectability, cash settlement and governance oversight.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective due to material weaknesses, including inadequate documented review and approval, lack of segregation of duties, and weak board-level risk and monitoring controls. Some remediation steps were taken; further remediation was planned for 2014.
- Other exposures: A Canadian lease-related claim could result in a loss of $0 to $325,000; no accrual was recorded because management considered a loss not probable. The company also reported $80,000 of accrued IRS information-return penalties. Capitalized production costs were $0.781 million at year-end; no 2013 impairment was recorded, but recoverability depends on estimated future revenues.
- Capital and trading risks: Shares were quoted on the OTC pink sheets, with limited trading liquidity. The company reported 21 million warrants outstanding and 1.043 million convertible preferred shares; additional share issuance could dilute holders. It did not expect to pay common-stock dividends.
Most important facts for investors to verify
- Confirm the issuer and reporting period: the filing is for Dolphin Digital Media, Inc., FY 2013, despite the request’s Dolphin Entertainment, Inc. and “2013 Q4” labels.
- Assess cash runway and funding availability, including the demand terms and accrued interest on CEO loans, the working-capital deficit, and any subsequent financing.
- Verify the related-party services agreement’s scope, performance, cash collection and continuation; it accounted for all 2013 service revenue.
- Check subsequent results against management’s 2014 kids-club and Q1 2015 digital-project expectations, including whether projects and project financing were secured.
- Review progress remediating internal-control weaknesses and the status of the unaccrued litigation claim and accrued tax penalties.
- Reconcile reported net-loss figures: the statements of operations report a 2013 net loss of $2.462 million, while the stockholders’ deficit statement shows a different 2013 loss amount.