Dolphin Digital Media, Inc. — FY2012 Form 10-K Summary
Filing identity and period: The filing identifies the registrant as Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.) and reports the fiscal year ended December 31, 2012, with comparative 2011 and 2010 figures. It also incorporates unaudited quarterly information through September 30, 2012; a clear standalone fourth-quarter income statement is not provided in the filing text. Filed April 21, 2014, with the audit report dated April 23, 2014.
Business context
The company focused chiefly on producing and distributing online video through Dolphin Digital Studios, including the productions “Hiding” and “Cybergeddon.” It also pursued online children’s clubs and Dolphin Secure, an online-safety product. Management described revenue opportunities from production fees, advertising, sponsorships, licensing, and distribution, but the filing reports little or no material revenue from the Kids Clubs or Dolphin Secure during 2012.
Financial performance and liquidity
- Revenue: $3.864 million in 2012, versus $472,824 in 2011 and none in 2010. The 2012 revenue came from completed productions; “Cybergeddon” contributed approximately $2.865 million and “Hiding” approximately $999,000.
- Gross profit and margin: $447,790 and approximately 11.6% in 2012, compared with $469,552 and approximately 99.3% in 2011. The 2012 cost of revenue was $3.416 million, largely reflecting production-cost amortization.
- Operating result and net loss: Operating loss was approximately $3.391 million; net loss was $3.386 million, or $0.04 per share. In 2011, net loss was $1.227 million, or $0.01 per share. The 2012 net loss was approximately 87.6% of revenue.
- Expenses and unusual items: General and administrative expense was $1.973 million and payroll expense $1.866 million. These amounts included substantial CEO compensation accruals. The company also recorded $423,224 in advertising costs and a $228,541 impairment of production costs. A $293,730 gain from deconsolidating a bankrupt Canadian subsidiary partly offset expenses; a $65,235 foreign-currency-related accumulated loss was written off.
- Cash flow: Cash used in operating activities was $2.959 million, compared with $2.252 million in 2011. Investing activities used $16,658; financing activities provided $3.240 million. Year-end cash was $282,675, up from $18,755.
- Liquidity and liabilities: Working capital deficit was $5.478 million, improving from $6.266 million in 2011. Current assets were $535,491 against current liabilities of $6.013 million. Total liabilities were current. Major obligations included $2.121 million owed to the CEO, $1.1 million of revenue-participation debt, and $390,000 of notes payable. The CEO loan and notes were payable on demand and generally bore 10% interest.
- Capital and dilution: The company issued 17,701,365 shares to its CEO under an anti-dilution agreement; year-end common shares outstanding were 81,892,352. It reported 21,824,477 warrants outstanding at year-end. The company had a $4.447 million total stockholders’ deficit.
Material changes versus prior periods
- Revenue rose sharply from 2011 as the company completed productions, but production costs and operating expenses meant it remained loss-making.
- Operating cash outflow increased year over year. Financing provided $3.240 million, including $1.5 million in cash capital contributions to the Kids Clubs subsidiary, $1.35 million in note proceeds, $250,000 from common stock, and other warrant and revenue-participation proceeds.
- The company formed Dolphin Kids Clubs, LLC, retained a 75% controlling interest, and consolidated it. An investor contributed $1.5 million and converted $1.5 million of notes for a 25% interest.
- The company restated prior annual and quarterly financial information after determining that its CEO anti-dilution arrangement should have been accounted for as a derivative liability, with fair-value changes recognized in earnings. The CEO received the associated 17.7 million shares in September 2012 and waived further liability under the arrangement.
Outlook, risks, and unusual matters
- Going concern: The auditor’s report includes an explanatory paragraph stating that recurring losses, negative operating cash flows, and inadequate working capital raise substantial doubt about the company’s ability to continue as a going concern. The financial statements include no adjustments for the outcome of this uncertainty. Management said it might seek loans, subsidiary-level financing, and common-stock sales; there is no assurance of obtaining capital.
- Subsequent developments: After year-end, the company reported receiving $2.5 million in loans from its CEO and a $150,000 producer fee. It also described a verbal related-party production-services agreement for $2 million annually, effective April 1, 2013, initially for two years; the written agreement had not been finalized.
- Controls and reporting: Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2012, citing multiple material weaknesses, including deficient review and approval, segregation of duties, documentation, revenue-support retention, and accounting for significant agreements. The filing also says the company had not filed all required reports on time; its OTC Bulletin Board quotation ended in November 2012 and its shares were quoted on the OTC pink sheets.
- Business and financing risks: Management cited limited operating history, dependence on key personnel, uncertain audience and advertiser acceptance, revenue volatility, and the need for additional capital. Additional equity financing could materially dilute shareholders. Trading in the common stock was thin, and the company did not expect to pay dividends.
- Contingencies: A Canadian lease-related third-party claim could result in a loss ranging from zero to $325,000; no amount was accrued because management considered a loss not probable. The company also reported $80,000 remaining accrued for IRS information-return penalties.
- Auditor opinion: The auditor stated that the audited financial statements presented fairly, in all material respects, in accordance with U.S. GAAP. The opinion was not modified for the going-concern uncertainty or the restatement matter.
Important facts for investors to verify
- Whether the company obtained sufficient financing and how the going-concern uncertainty evolved after the reporting date.
- Whether the $2 million annual related-party services arrangement was finalized, performed, and recognized as revenue, and what approval and conflict-management procedures applied.
- Whether production revenues, remaining capitalized production costs, tax credits, and future investor revenue shares were supported by contracts and realized as expected.
- Whether management remediated the disclosed material weaknesses and established reliable financial-reporting controls.
- The current status and terms of demand notes, CEO-related obligations, revenue-participation debt, warrants, and potential dilution.
- The status and potential exposure of the Canadian claim and IRS penalties, and whether the company’s subsequent filings and trading-market status improved.