Business context and reporting period
Dolphin Digital Media, Inc. and subsidiaries filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company develops digital entertainment and online content, including web series and children’s “Kids Clubs.” The request metadata names Dolphin Entertainment, Inc.; the filing identifies the registrant as Dolphin Digital Media, Inc.—investors should verify the intended issuer.
Financial results and position
All amounts are in U.S. dollars.
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $548,692 | $1,051,192 | $517,560; $1,287,180 |
| Operating loss | ($333,127) | ($638,661) | ($531,516); ($1,344,120) |
| Net loss | ($485,582) | ($944,640) | ($637,517); ($1,545,281) |
| Basic and diluted loss per share | ($0.01) | ($0.01) | ($0.01); ($0.02) |
Direct costs were $36,167 for the quarter and $38,017 for six months. Revenue less direct costs equaled approximately 93% and 96% of revenue, respectively; this is a simple calculation and not a company-reported margin. Six-month general and administrative expense was $850,431 and payroll expense was $801,405.
Six-month operating cash outflow was $195,486, investing cash outflow was $73,141, and financing cash outflow was $310,000. Cash fell from $706,641 at December 31, 2013 to $128,014 at June 30, 2014. Current assets were $203,277 against current liabilities of $8,950,631, a working-capital deficit of approximately $8.75 million. Stockholders’ deficit was $7,853,477.
Current liabilities included $1,075,000 of debt, $310,000 of notes payable, and $4,122,623 owed to a related party. The CEO’s unsecured revolving note bears 10% interest and is payable on ten days’ notice; other notes described in the filing are also payable on demand. Interest expense was $306,031 for the first half.
Material changes versus prior comparable periods
Second-quarter revenue rose about 6% year over year, while first-half revenue fell about 18%. Management attributed the first-half decline mainly to lower licensing and product-integration revenue from the completed Cybergeddon production ($51,192 versus approximately $787,000 in the first half of 2013). Related-party service revenue was $1,000,000 for the first half of 2014, compared with $500,000 in 2013. First-half net loss narrowed by approximately $601,000.
Management said lower general and administrative costs—particularly reduced consultant, legal, licensing, web-development, and travel costs—partly offset higher payroll, which increased with five additional employees. Interest expense also rose year over year, primarily due to the CEO loan. Operating cash use improved substantially from $1,814,747 in the first half of 2013, helped by lower losses, collections, higher deferred revenue and other current liabilities, and lower production-cost investment.
Outlook, risks, contingencies, and unusual items
The filing states that substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses, a $37.6 million accumulated deficit, inadequate working capital, and dependence on private investors and stockholder support. Management planned to seek loans, subsidiary-level financing, and common-stock sales; it gave no assurance that funding would be obtained.
Management was negotiating digital projects and expected production income in the first quarter of 2015, with Kids Club revenues expected to begin in the third quarter of 2014 and increase in the fourth quarter. These are expectations, not guarantees. The filing also describes plans for project-specific financing and a Cambio partnership targeting four to six web series annually; no productions under that partnership had been completed by June 30, 2014.
Disclosure controls were reported ineffective because material weaknesses identified in the 2013 annual report had not been fully remediated. A Canadian lease-related legal claim remained unresolved; the company had not accrued a loss, believing it was not probable. The company entered a 62-month Los Angeles office lease, with monthly rent of $13,746 and contractual escalations. No off-balance-sheet arrangements were reported.
The balance sheet reports $211,502 of deferred revenue, while the Kids Club discussion identifies approximately $9,000 as deferred revenue for those programs. The filing text does not clearly reconcile these amounts.
Important facts for investors to verify
- Confirm the registrant’s identity: the filing is for Dolphin Digital Media, Inc., although the request metadata names Dolphin Entertainment, Inc.
- Assess the company’s near-term funding needs, ability to raise capital, and the going-concern uncertainty given minimal cash and a large working-capital deficit.
- Verify the amounts, terms, and repayment demands for related-party loans and other debt, as well as the substantial accrued CEO compensation and interest.
- Reconcile the $211,502 deferred-revenue balance with the approximately $9,000 Kids Club amount discussed in the notes and MD&A.
- Track remediation of material weaknesses and the status and potential exposure of the Canadian litigation.
- Evaluate whether forecast project and Kids Club revenues materialize, and the effect of reliance on related-party service revenue.