Dolphin Digital Media, Inc. — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; comparisons are with FY2014. The filing is by Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.). Dolphin Films was acquired after year-end, on March 7, 2016, and is not included in FY2015 results.
Business context
Before the acquisition, the company focused on producing and distributing online video through Dolphin Digital Studios and operating online kids clubs with US Youth Soccer and United Way Worldwide. Its principal FY2015 production was the web series South Beach-Fever, released on Hulu. The acquired Dolphin Films produces motion pictures, including Max Steel.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $2.999 million | $2.070 million |
| Direct production costs | $2.291 million | $0.160 million |
| Gross profit (revenue less direct costs) | $0.709 million; 23.6% margin | $1.911 million; 92.3% margin |
| Selling, general and administrative expense | $2.479 million | $1.533 million |
| Payroll expense | $1.436 million | $1.630 million |
| Operating loss | $3.206 million | $1.253 million |
| Interest expense | $0.940 million | $0.661 million |
| Net loss | $4.050 million | $1.874 million |
| Basic and diluted loss per share | $0.05 | $0.02 |
| Cash used in operating activities | $1.781 million | $1.355 million |
Revenue rose 45%, mainly because of web-series production and distribution revenue of $2.930 million. The prior-year $2.0 million of related-party service revenue was not repeated; the service agreement expired at the end of 2014. Kids-club revenue was $69,761, up from $19,002. FY2015 advertising revenue was reported as $2.9 million, with $2.4 million received; the filing also separately describes $2.4 million earned from advertising commitments, so amounts and recognition should be reconciled.
Direct production costs increased with the series release and included $1.642 million of production-cost amortization and $648,525 of impairment charges, including write-offs of older scripts. The increase in revenue did not prevent a wider loss, as production, overhead and interest costs rose. No income tax expense or benefit was recorded.
At December 31, 2015, cash was $2.260 million, current assets $2.830 million and current liabilities $8.059 million, resulting in a $5.230 million working-capital deficit. Total liabilities were $15.806 million and stockholders’ deficit was $12.877 million. Reported debt and financing balances included $2.545 million of current debt, $2.600 million of noncurrent debt, a $3.164 million convertible note, $1.982 million of noncurrent related-party loans and a $0.300 million note payable. The filing reports no off-balance-sheet arrangements.
Cash from financing activities was $3.845 million, including proceeds from production loans, a $3.164 million convertible note and related-party advances, partly offset by repayments. Cash increased from $198,470 to $2.260 million over the year. The company reported an accumulated deficit of $42.628 million.
Material changes and subsequent events
- Operating revenue shifted from related-party services in 2014 to the release and distribution of South Beach-Fever in 2015.
- On March 7, 2016, the company completed its acquisition of Dolphin Films, issuing 2.3 million Series B and 1.0 million Series C convertible preferred shares to Dolphin Entertainment. The transaction involved the CEO’s related party.
- After year-end, the $3.164 million convertible note automatically converted into 12.656 million common shares. In March 2016, another $3.073 million of CEO-related note principal and interest converted into common shares; holders of additional notes converted $2.883 million into 11.534 million shares.
- Common shares outstanding were 118,375,502 as of March 31, 2016. The filing also describes a planned 1-for-20 reverse split and an increase in authorized common shares to 400 million.
Outlook, risks and unusual items
- The independent auditor’s report includes a going-concern explanatory paragraph. Recurring losses, negative operating cash flow and inadequate working capital raise substantial doubt about the company’s ability to continue. Management planned to seek loans, project financing and equity; success was not assured.
- Management said it did not anticipate operating profit in 2016. It expected to produce at least one additional digital project and reported a first-quarter 2016 co-production agreement for a six-episode series, with the company responsible for 50% of the approved budget. Production and release timing were expectations, not guarantees.
- Max Steel was expected to be released in 2016. The company estimated domestic distribution spending of $18–$25 million for a release on approximately 2,000 screens; the filing does not establish that this financing was secured.
- Key risks include reliance on external financing and distributors, uncertain audience and advertising demand, production delays or cost overruns, and the ability to recoup project investments. The merger adds integration and related-party governance risks. The CEO held approximately 52.5% of share capital after the merger-related transactions and Series C preferred shares carry enhanced voting and anti-dilution provisions.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of material weaknesses in risk oversight, documentation and review of accounting, segregation of duties, and IT controls. Remediation was planned for 2016.
- The filing describes ordinary-course legal proceedings as not expected to have a material adverse effect, but separately discloses an unresolved Canadian claim with a possible loss range of $0–$325,000; no accrual was recorded because management considered loss not probable.
Investor verification priorities
- Confirm post-merger consolidated debt, cash, working capital and the terms and status of all note conversions and related-party balances.
- Verify funding commitments and distribution arrangements for Max Steel and planned digital projects, including the estimated $18–$25 million theatrical distribution spend.
- Reconcile the reported advertising revenue, amounts earned and amounts collected, and assess collectability of year-end receivables.
- Track auditor and management updates on going-concern uncertainty and remediation of internal-control weaknesses.
- Review the merger’s accounting, related-party approvals, preferred-stock voting and anti-dilution terms, and the resulting fully diluted share count.