Dolphin Digital Media, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The filing identifies the registrant as Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.). It produces online digital content, operates online kids clubs, and, following a March 2016 transaction with an entity under common control, includes Dolphin Films’ motion-picture business. Comparative periods were retrospectively adjusted for that transaction.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2016 | $7,750 | $25,185 |
| Revenue, 2015 | $12,377 | $36,640 |
| Operating loss before other income/expenses, 2016 | $1.273 million | $2.259 million |
| Net loss, 2016 | $7.704 million | $11.248 million |
| Basic and diluted loss per share, 2016 | $1.63 | $2.57 |
- Revenue fell approximately 37% for the quarter and 31% for the six-month period versus the retrospectively adjusted 2015 periods. Q2 2016 revenue comprised $4,000 of production revenue and $3,750 of membership revenue.
- Six-month interest expense was $3.155 million. Debt-extinguishment losses were $5.844 million for the six months, including $4.652 million in Q2; these losses principally arose when debt was exchanged for common shares at prices below market value. Thus, the reported net loss substantially reflects financing and conversion costs in addition to operating losses.
- Six-month operating cash use was $2.287 million, compared with $4.902 million in 2015. Financing provided $4.859 million, including $6.225 million from common-stock sales, partly offset by repayments. Cash rose to $4.965 million from $2.393 million at year-end.
- At June 30, current assets were $7.378 million and current liabilities were $28.491 million, producing a $21.114 million working-capital deficit. Total liabilities were $28.491 million; the balance sheet reported $18.933 million of current debt and no non-current debt. The separate current related-party loan balance was $2.018 million.
- Total assets were $23.110 million, including $15.292 million of capitalized production costs, principally $14.893 million related to the completed film Max Steel. Total stockholders’ deficit was $5.381 million.
Material changes and unusual items
- The company converted approximately $23.5 million of principal and accrued interest into about 4.7 million common shares during the six months. The reported debt balance fell materially; however, common shares outstanding increased from 4.095 million at year-end to 10.674 million at June 30. A 1-for-20 reverse stock split became effective May 10, 2016, and comparative share data were adjusted for it.
- The March 7 acquisition of Dolphin Films was a transaction between entities under common control, accounted for at historical carrying values with prior periods retrospectively adjusted. The consideration included 2.3 million Series B and 1 million Series C preferred shares issued to Dolphin Entertainment, an entity owned by the CEO.
- Revenue remained minimal. Management attributed the six-month decline in production and distribution revenue mainly to prior-year revenue from international distribution of Believe. Lower selling, general and administrative and legal/professional costs partly offset higher payroll and interest costs.
- A $2.439 impairment of previously capitalized web-series costs was recorded in the six-month period. The company also settled an equity-finance investor claim for $200,000, recording a $95,000 settlement loss.
Outlook, risks, and contingencies
- Going concern: The filing states that substantial doubt exists about the company’s ability to continue as a going concern. It reported a six-month net loss of $11.248 million, accumulated deficit of $73.868 million, and working-capital deficit of $21.114 million. It depends on private investors and stockholder support; management planned to seek additional loans and equity, but gave no assurance financing would be available. The company warned it could be forced to liquidate if it could not obtain funding within 12 months.
- Production and revenue plans: Management expected to obtain prints-and-advertising financing to release Max Steel in fall 2016, with potential film revenues in 2017 or later. It also expected a new digital project to be available for distribution and to generate revenue in late 2016. These plans depended on financing, distribution and commercial performance, and were not assured.
- Debt obligations: Certain film and web-series loans carried interest rates generally in the 10%–13.25% range. The production-service financing for Max Steel had accrued approximately $823,000 of interest at June 30 because release delays prevented scheduled repayments. Some remaining loans had near-term maturities or extension conditions.
- Dilution and governance: The filing warns that further debt-for-equity exchanges and stock sales could dilute existing holders and pressure the trading price. Series C preferred shares carry voting and anti-dilution provisions; the merger and other transactions involved entities related to the CEO.
- Controls: Management said disclosure controls were not effective because previously identified material weaknesses had not been fully remediated. Planned actions included improved accounting documentation and review, stronger revenue-recognition support, and additional accounting and finance personnel.
- Contingencies: A Canadian lease-related claim could result in a loss ranging from $0 to $325,000; the company had not accrued a loss, stating it did not consider one probable. It also reported a $40,000 accrual for late information-return penalties. Talent and producer participation payments may become due based on future film performance, but amounts were not estimable.
Key facts for investors to verify
- Whether the company obtained the financing needed to release Max Steel and whether the film and digital projects generated the revenues and cash flows projected.
- Current cash runway, financing availability, debt maturities and interest obligations, and the extent of any further debt conversions or equity issuances.
- The recoverability of the $15.292 million in capitalized production costs, particularly the carrying value of Max Steel.
- The potential dilution and voting effects of common-stock issuances and Series B and Series C preferred-stock terms, including related-party transactions.
- Progress in remediating material weaknesses in internal controls and developments in the disclosed litigation and other contingencies.