Dolphin Digital Media, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing is by Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.). Financial statements are unaudited.
Business context and financial results
The company develops and distributes digital entertainment, including online series and children’s “Kids Clubs.” Q2 revenue came from delivery of the completed production “Hiding.”
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $998,582 | $197,824 | $998,582 | $472,824 |
| Gross profit | $37,599 | $194,552 | $37,599 | $469,552 |
| Gross margin | 3.8% | 98.3% | 3.8% | 99.3% |
| Operating loss | $814,052 | $272,275 | $1,723,441 | $377,563 |
| Net loss | $840,838 | $304,098 | $1,588,825 | $435,225 |
Six-month results include a $293,730 gain on deconsolidation of a Canadian subsidiary, offset in comprehensive loss by a $65,235 foreign-currency translation write-off. Basic and diluted loss per share was $0.01 in 2012 periods versus reported $0.00 in 2011 periods.
Cash, liquidity and debt
- Cash at June 30 was $103,910, up from $18,755 at December 31, 2011. Six-month operating cash use was $1,951,010, compared with $683,163 in 2011; investing cash use was $13,835. Financing provided $2,050,000.
- Current assets were $342,227 versus current liabilities of $5,922,794, a working-capital deficit of about $5.58 million. Total assets were $2,550,844 and stockholders’ deficit was $3,371,950.
- Current liabilities included $995,000 of debt, a $2,120,623 related-party loan to the CEO, and $90,000 of notes payable. The CEO loan and notes bear 10% interest and are payable on demand; the CEO can demand repayment with ten days’ notice.
- Net capitalized production costs were $2,181,808. The company also reported $1,080,000 of deferred revenue for a series not yet completed, and $222,500 of deferred app-related costs.
Changes and management outlook
- Revenue increased year over year, but gross profit fell sharply as $960,983 of production costs were recognized for “Hiding.” General and administrative expense rose to $851,651 in Q2 and $1,761,040 for the six months; management attributed the increase mainly to personnel costs, including accrued CEO compensation and bonuses.
- The company reported substantial doubt about its ability to continue as a going concern, citing losses, accumulated deficit of $35,988,899, inadequate working capital, and dependence on private investors and stockholder support. Management planned to seek loans, subsidiary-level financing, and equity funding; success was not assured.
- Management expected another web series to be completed in fall 2012 and to generate revenue by year-end. The Cybergeddon project was described as planned for fall release; H+ was expected on a major digital platform in summer 2012. These are expectations, not guaranteed results.
- The company received $1,080,000 under sponsorship agreements for the upcoming series, but revenue recognition depends on completion and other contractual criteria. Further payments were contingent on securing an international distributor and completing the series.
- On May 21, the company formed Dolphin Kids Clubs LLC, retaining 75% and consolidating it; a noteholder received a 25% interest in exchange for $1.5 million of notes. The noteholder also funded $750,000 during the first half and was to provide another $750,000 by November 15, 2012.
Risks, contingencies and unusual items
- Internal controls were deemed ineffective due to material weaknesses, including inadequate documented review and approval of accounting entries and reconciliations, limited segregation of duties, and deficiencies in entity-level controls. Management described planned remediation; no material control changes had occurred during the quarter.
- A Canadian lease-related third-party claim remained unresolved. The company had not accrued a loss, stating it considered loss not probable; the outcome could not be predicted with certainty.
- The company accrued $625,000 of CEO compensation for the first half, including a quarterly bonus arrangement, while the employment agreement was still being finalized. It also reported charitable contributions of $200,000 in the first half.
- Subsequent to quarter-end, the company received a $300,000 unsecured, demand promissory note bearing 10% interest. It reported no off-balance-sheet arrangements.
Key facts investors should verify
- Ability to meet near-term obligations given cash of $103,910, the working-capital deficit, and callable related-party debt.
- Completion, distribution, and revenue recognition of the in-production series; collection of the remaining conditional sponsorship payments.
- Availability and terms of planned financing, including the remaining $750,000 Kids Clubs funding commitment.
- Remediation of material weaknesses and status of the Canadian litigation and related exposure.
- Share-count and dilution details: 64,190,987 shares were reported outstanding, while 1,000,000 shares sold for $250,000 had not yet been issued; 10,109,906 warrants were outstanding at June 30.