Dolphin Digital Media, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The filing reports Dolphin Digital Media, Inc. (now identified in the request as Dolphin Entertainment, Inc.). Comparative 2015 figures were retrospectively adjusted to include Dolphin Films, acquired from an entity controlled by the CEO, and to reflect a 1-for-20 reverse stock split.
Financial performance and position
- Revenue: Q3 revenue was $1.15 million, down 53% from $2.44 million; nine-month revenue was $1.17 million, down 53% from $2.48 million. Revenue was primarily from international film distribution; web-series revenue that contributed in 2015 did not recur.
- Losses and costs: Q3 net loss was $11.54 million versus $1.45 million; nine-month net loss was $22.79 million versus $5.86 million. Nine-month loss included $9.24 million of film distribution and marketing expense and $5.84 million loss on debt extinguishment. Interest expense was $3.77 million, up from $2.30 million. Basic and diluted loss per share was $1.08 for Q3 and $3.56 for nine months.
- Cash flow: Operating cash use was $15.58 million for nine months, versus $6.08 million in 2015, principally reflecting Max Steel marketing costs. Cash and cash equivalents fell from $2.39 million at year-end to $982,000; an additional $1.25 million was restricted as loan collateral.
- Liquidity and debt: Current assets were $6.73 million and current liabilities $39.61 million, a $32.88 million working-capital deficit. Reported current debt was $29.50 million; total liabilities were $39.61 million. The company disclosed substantial doubt about its ability to continue as a going concern and said it may need additional loans or equity financing.
- Equity and dilution: Common shares outstanding rose to 10.67 million at September 30 from 4.09 million at year-end, substantially through debt-for-equity exchanges and private placements. Outstanding common shares were 14.13 million as of November 21, 2016.
Material changes and unusual items
- The March 2016 common-control acquisition of Dolphin Films expanded the business into motion-picture production and distribution; prior-period financials were recast rather than presenting the acquisition as a fair-value purchase.
- Max Steel was released domestically on October 14, after quarter-end, and performed below expectations. Management was assessing a possible impairment of capitalized film costs for the fourth quarter. The company reported approximately $9 million of international distribution agreements, but collections and further revenues were uncertain.
- The company converted substantial debt to common stock at $5 per share when market prices were higher, recording $5.84 million of extinguishment losses. These exchanges reduced debt but increased dilution. Further debt exchanges were contemplated.
- A $14.5 million non-revolving P&A credit facility was arranged for Max Steel, maturing August 25, 2017. At quarter-end, $10.57 million, including a lender reserve, was recorded; $1.25 million of cash was pledged as collateral. The facility carries a floating rate based on a base rate plus 5.5% or LIBOR plus 6.5%.
Outlook, risks, and controls
- Management planned to seek financing for scripts and digital projects, including an NFL-player restaurant series targeted for distribution in early 2017. It cautioned that production, release, financing, and expected fees or revenues were not assured.
- The company stated it depended on private investors and stockholder support; failure to obtain funding within 12 months could force liquidation. Its $85.42 million accumulated deficit and working-capital deficit were cited as going-concern factors.
- Risks include weak film performance, uncertain project revenues, dependence on outside financing, high debt costs and maturities, and substantial potential dilution. A Canadian lease-related claim could result in a loss of up to $325,000; no loss was accrued because management considered a loss not probable.
- Management and the CEO/CFO concluded disclosure controls were ineffective because previously identified material weaknesses had not been fully remediated. Planned actions included improved accounting documentation, review procedures, and additional accounting and finance staffing.
Most important facts for investors to verify
- Whether Max Steel generated sufficient domestic, international, and later-window receipts, and the size of any fourth-quarter impairment.
- Actual unrestricted liquidity, cash burn, debt balances and maturities, and the terms and availability of additional financing.
- The effects of continuing debt exchanges, preferred-stock conversions, warrants, and private placements on fully diluted ownership.
- The filing’s cash-flow statement displays financing cash flow with a negative sign, while its listed financing components and MD&A indicate approximately $14.2 million provided; verify the correct presentation.
- Progress remediating material weaknesses and the status of the disclosed litigation and other contingencies.