Dolphin Digital Media, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; filed August 21, 2014. The filing identifies the registrant as Dolphin Digital Media, Inc. Its business focuses on digital productions and online “Kids Clubs.”
Key financial results
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $502,500 | $769,620 |
| Operating loss | $305,536 | $812,605 |
| Net loss | $459,061 | $907,764 |
| Loss per share | $0.01 | $0.01 |
| Operating cash flow | $189,055 provided | $619,145 used |
| Cash at period end | $800,696 | $1,993,825 at March 31, 2013; $706,641 at December 31, 2013 |
| Total assets | $1,705,039 | $1,619,867 at December 31, 2013 |
| Current liabilities | $9,072,936 | $8,528,704 at December 31, 2013 |
| Stockholders’ deficit | $7,367,897 | $6,908,837 at December 31, 2013 |
Revenue consisted of $2,500 from production and $500,000 in service revenue under an agreement with a related party. Direct costs were $1,851; general and administrative expense was $396,085; payroll was $410,100. Interest expense was $153,559. The filing does not present a gross-margin percentage.
Cash from operations was positive primarily because the company received $500,000 in advance for services expected in Q2 2014, recorded as deferred revenue, and accrued additional liabilities. Financing activities used $95,000, including $75,000 repaid to the CEO and $10,000 each in debt and note repayments.
Liquidity, debt, and material changes
Current assets were $884,968 against current liabilities of $9,072,936, a working-capital deficit of approximately $8.19 million. Current liabilities included a $4.31 million related-party loan, $1.09 million of debt, $325,000 of notes payable, and $1.56 million of accrued compensation. The CEO’s unsecured loan bears 10% interest and is payable on demand with ten days’ notice. The company reported an accumulated deficit of $37.14 million and stated that inadequate working capital and reliance on private investors and stockholder support raise substantial doubt about its ability to continue as a going concern.
Revenue declined about 35% year over year, mainly because most revenue from the 2012 web production Cybergeddon had already been recognized in 2012 and 2013. Net loss narrowed by about 49%, reflecting lower production amortization and lower general and administrative costs; payroll and interest expense increased. Management attributed the payroll increase partly to six additional employees and lower consulting costs to hiring some consultants as employees.
Outlook, risks, and unusual items
- Management planned to raise funds through loans, subsidiary-level financing, and common-stock sales, but gave no assurance that funding would be available. It said it was pursuing digital projects and expected production income in Q1 2015; Kids Club revenue was expected to begin in Q3 2014 and increase in Q4. These expectations were not assured.
- The $500,000 related-party service revenue is significant to the quarter; the corresponding cash was received for services expected in Q2 2014. The service provider is an entity indirectly owned by the CEO; the annual fee is $2 million for the arrangement through December 2014.
- Capitalized production costs were $779,544, including approximately $630,000 for scripts and projects not yet in production. Management reported no impairment indicators, but future revenue depends on production and distribution opportunities.
- Disclosure controls were deemed ineffective as of March 31, 2014 because previously reported material weaknesses had not been fully remediated. Management described remediation plans, including stronger documentation and review procedures.
- A Canadian lease-related third-party claim remains disclosed; the company did not accrue a loss, saying it was not probable. It also carried $80,000 in estimated IRS information-return penalties.
- After quarter-end, the company entered a 62-month Los Angeles office lease beginning June 1, 2014, at monthly rent of $13,746 with scheduled increases.
- The filing checked “No” to whether the company had filed all required Exchange Act reports in the preceding 12 months and “No” for required Interactive Data Files. Investors should verify filing compliance and the circumstances behind these responses.
Most important facts for investors to verify
- Whether the company can secure sufficient financing to address the substantial working-capital deficit and going-concern uncertainty.
- Whether the related-party service arrangement is fully performed, collectible/earned as reported, and appropriately governed given the CEO relationship.
- Repayment terms, accrued interest, and any demands on the CEO loan and other debt; also the extent of unpaid executive compensation.
- Commercial progress and recoverability of capitalized production costs, including unproduced scripts, and the timing of anticipated Kids Club and production revenues.
- Remediation of material weaknesses, ongoing reporting compliance, and the status or resolution of the Canadian claim and tax penalties.