Dolphin Digital Media, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. The filing identifies the registrant as Dolphin Digital Media, Inc.; “Dolphin Entertainment, Inc.” is a related party and is not the filer.
Business context
The company develops online entertainment, including web series, children’s “Kids Clubs,” and online-safety products. Its principal operating focus in the quarter was Dolphin Digital Studios. The interim financial statements are unaudited.
Financial results and position
| Metric | Q1 2012 | Q1 2011 or comparison |
|---|---|---|
| Revenue | $0 | $275,000 |
| Gross profit | $0 | $275,000 |
| General and administrative expense | $909,388 | $358,914 |
| Operating loss | $909,388 | $105,288 |
| Net loss | $747,987 | $131,127 |
| Basic and diluted loss per share | $0.01 | $0.00 |
| Operating cash flow | $(377,157) | $(372,239) |
| Cash at quarter end | $479,978 | $18,755 at December 31, 2011 |
| Capitalized production costs | $1,875,022 | $1,538,251 at December 31, 2011 |
Margins are not meaningful for Q1 2012 because the company reported no revenue. Financing provided $850,000 of cash, while investing activities used $11,620. Total current assets were $492,176 against current liabilities of $7,424,150, a working-capital deficit of approximately $6.93 million. The balance sheet reports $995,000 of debt, $2,120,623 owed to a related party, and $1,390,000 of notes payable, all classified as current liabilities. Stockholders’ deficit was $5,031,112.
Material changes versus the prior period
- Revenue declined from $275,000 to zero; the prior-year revenue related to licensing Dolphin Secure rights for Germany.
- Net loss increased to $747,987. Management attributed higher general and administrative costs principally to personnel costs, including $312,500 of CEO compensation and bonus accruals; a $100,000 charitable contribution also contributed to expense.
- Interest expense increased to $67,241 from $25,839, reflecting additional borrowing and related-party debt.
- Cash increased from the year-end balance, primarily because of $850,000 in note proceeds, despite operating cash use.
- On March 23, the Canadian subsidiary entered bankruptcy and was deconsolidated. The company recorded a $293,730 gain, largely from removing the subsidiary’s liabilities, and a $65,235 foreign-currency translation loss.
Outlook, risks, and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern, citing losses, accumulated deficit of $35,148,061, inadequate working capital, and dependence on investors and stockholders. Management plans to seek financing, but says there is no assurance it will succeed.
- Production and revenue expectations: Management expected revenue from the completed “Hiding” web series in Q2 2012 and expected another series to be completed in fall 2012, with revenue by year-end. The filing reports April receipts of $123,581 in one section and $123,381 in another; the amount is unclear from the filing. It also says an additional $125,000 was paid directly to a related-party vendor against a company liability.
- Cybergeddon: The company received $720,000 for a project, recorded as deferred revenue because production had not begun by March 31. Additional payments were contingent on completion and securing an international distributor. Management described a planned fall 2012 release.
- Subsequent financing and arrangement: After quarter-end, the company received a further $200,000 note. On May 18, it agreed to convert $1.5 million of notes into a 25% interest in Dolphin Kids Clubs LLC, with the company retaining 75%. The noteholder also agreed to contribute another $1.5 million by November 15, subject to milestones that had not yet been determined.
- Contingencies: The company faces a Canadian lease-related third-party claim, which it did not accrue because management considered a loss not probable. It decided to pay $40,000 in IRS penalties after its request for abatement was denied; the filing says $120,000 had been accrued for these and other information-return penalties.
- Controls: Management concluded disclosure controls were ineffective due to material weaknesses, including deficiencies in governance and risk oversight, documented accounting reviews, segregation of duties, and review of significant agreements. Remediation was planned; the filing does not report that the weaknesses had been remedied.
- The company reported no off-balance-sheet arrangements and no defaults upon senior securities.
Most important facts for investors to verify
- Current liquidity, near-term cash needs, and whether planned external financing and the additional $1.5 million Kids Clubs contribution are received.
- The terms, milestones, accounting treatment, and economic impact of converting $1.5 million of notes into a 25% LLC interest.
- Actual receipts, recognition timing, production costs, and distribution arrangements for Hiding and Cybergeddon; reconcile the conflicting April Hiding revenue figures.
- Status and potential exposure from the Canadian litigation, IRS penalties, and other accrued liabilities.
- Progress in remediating the disclosed material weaknesses and whether subsequent filings report effective controls.
- Related-party balances, CEO compensation and bonus accruals, and the reported $100,000 charitable contribution.