Dolphin Digital Media, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 14, 2015. The filing registrant is Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.). The company produces online digital content and operates online kids clubs.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $12,377 | $548,692 | $16,127 | $1,051,192 |
| Operating loss before interest | $(846,237) | $(333,127) | $(1,713,387) | $(638,661) |
| Interest expense | $204,466 | $152,491 | $393,453 | $305,979 |
| Net loss | $(1,050,703) | $(485,618) | $(2,106,840) | $(944,640) |
| Basic and diluted loss per share | $(0.01) | $(0.01) | $(0.03) | $(0.01) |
Revenue fell sharply as the prior-year period included service revenue from an affiliated company and production/distribution revenue. The service agreement ended December 31, 2014 and was not renewed. 2015 revenue was primarily kids-club memberships; no meaningful margin comparison is provided. General and administrative expense rose year over year, while payroll expense declined.
Cash, liquidity, and obligations
- At June 30, cash was $790,511, versus $198,470 at December 31, 2014. Total assets were $3.24 million, including $2.30 million of capitalized production costs.
- Six-month operating cash use was $1.78 million, largely reflecting $1.61 million invested in capitalized production costs. Financing provided $2.38 million, mainly from CEO advances and investor production loans.
- Current liabilities were $14.15 million against current assets of $804,920, producing negative working capital of $13.34 million. Total stockholders’ deficit was $10.91 million.
- Current obligations included $5.15 million of production financing debt, $3.68 million owed to the CEO, a $300,000 demand note, and $1.88 million of accrued compensation. The CEO note bears 10% interest and is repayable on ten days’ notice; the production loans bear interest of up to 12% and include participation in project profits.
- Management and the filing state that these conditions raise substantial doubt about the company’s ability to continue as a going concern. The company depends on private investors and stockholder support; additional financing is not assured.
Developments, outlook, and risks
- “South Beach-Fever” was completed during Q2 and released in July 2015. The company had capitalized $1.66 million of production costs for the series and expected to begin amortizing them as revenue was recognized.
- At quarter-end, the company had received approximately $750,000 in advertising advances and a $500,000 producer-fee advance, both recorded as deferred revenue. Management cited approximately $2.4 million in advertising commitments and a $500,000 net producer fee, and expected an additional $2.1 million after release. These are expectations, not reported Q2 revenue.
- After quarter-end, the company received $297,500 in CEO advances. Management planned to seek further CEO and third-party loans, project-specific funding, and potentially common-stock financing.
- Related-party dependence is significant: the ended service agreement was with an entity owned by the CEO; the CEO is also a major lender, and the new series used a script owned by a CEO-controlled entity for an agreed $250,000 fee.
- A Canadian lease-related claim could result in a loss ranging from $0 to $325,000; no accrual was recorded because management considered a loss not probable. A $40,000 accrual remains for late tax-information filings.
- Management said disclosure controls were not effective because previously reported material weaknesses had not been fully remediated. No material changes in internal control were reported during the quarter.
Most important facts to verify
- Whether “South Beach-Fever” release proceeds and the stated advertising commitments were realized, and when deferred revenue was recognized.
- Whether the company secured sufficient financing to meet near-term obligations, particularly demand and related-party loans, and how it addresses the going-concern uncertainty.
- Whether the $2.30 million capitalized production asset is recoverable through future revenues and whether additional amortization or impairment is required.
- The filing contains inconsistent figures: MD&A reports a six-month 2015 revenue total of $16,011 in one table, while the financial statements report $16,127; MD&A also cites a working-capital deficit of about $10.9 million, whereas the balance sheet implies $13.34 million. Confirm against the filed statements.
- Progress in remediating material weaknesses, and developments in the unaccrued litigation claim.