Business context and reporting period
Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.) filed this Form 10-Q for the quarter ended September 30, 2013, covering the three and nine months ended that date. The filing was signed August 14, 2014. This differs from the request metadata identifying 2013 Q1; the filing itself reports Q3 and year-to-date results.
The company develops digital productions and online children’s “Kids Clubs.” Its reported revenue also includes management and back-office services provided under a related-party agreement.
Key financial results
| Metric | Three months ended September 30, 2013 | Nine months ended September 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Revenue | $505,950 | $1,793,130 | $2,098,500 / $3,097,082 |
| Operating loss | $284,848 | $1,628,970 | $1,034,960 / $2,758,402 |
| Net loss | $441,430 | $1,986,711 | $1,230,511 / $2,642,494 |
| Loss per share | $0.01 | $0.02 | $0.02 / $0.03 |
Revenue fell 76% for the quarter and 42% year to date versus 2012. For the 2013 nine-month period, production revenue was $793,130 and service revenue was $1,000,000; service revenue came from a related party at an annual fee of $2 million. Direct costs were $676,977, leaving approximately 62% revenue after direct costs, before general and administrative and payroll expenses. Nine-month general and administrative expense rose to $1,950,865 from $1,627,524, while payroll declined to $794,258 from $1,689,492. Interest expense increased to $405,846 from $225,291.
At September 30, 2013, cash was $205,615 and current assets were $1,284,255, compared with current liabilities of $8,546,425. Total assets were $2,112,527 and stockholders’ deficit was $6,433,898. Cash used in operations for the first nine months was $2,444,777; financing provided $2,383,000, principally net advances from the CEO, and cash declined by $77,060. Capitalized production costs were $781,945.
Material changes and significant items
- The revenue mix shifted: 2012 revenue was principally from productions, while 2013 included $1 million of related-party service revenue and lower production revenue. Production revenue for the first nine months fell to $793,130 from $3,097,082.
- Related-party loans rose to $4,548,623 from $2,120,623 at year-end 2012. The CEO’s unsecured loan bears 10% interest and is callable on ten days’ notice. The company also reported $1,100,000 of revenue-participation debt and $345,000 of notes payable.
- Receivables and other current assets increased to $1,078,640, primarily including a $1 million receivable under the related-party service agreement. The filing does not establish collection timing.
- The company discontinued sales and marketing of Dolphin Secure and wrote off approximately $8,000 of inventory. It also discontinued the University of Miami Kids Club program after quarter-end.
Outlook, risks and contingencies
Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing losses, accumulated deficit of $36,207,500, inadequate working capital, and reliance on private investors and stockholder support. Management planned to seek additional loans and equity financing, but stated there was no assurance of success. It described anticipated Kids Club revenue growth in 2014 and possible digital-production revenue in 2015; these were expectations, not assured guidance.
Management reported that only one of eleven projects supported by equity-finance agreements was completed by September 30, 2013, and no producer gross revenue under those agreements had been generated by that date. Investors have contractual revenue-sharing rights. The company reported a Canadian lease-related third-party claim, which it did not accrue because management considered a loss not probable; it also reported $80,000 accrued for tax-filing penalties. No off-balance-sheet arrangements were reported.
Disclosure controls and procedures were deemed ineffective because material weaknesses had not been fully remediated. The filing also indicates the company checked “No” to whether it had filed all required Exchange Act reports during the preceding 12 months. The filing’s period, signature date and stated comparative net-loss figures in MD&A warrant reconciliation: the financial statements show nine-month 2012 net loss of $2,642,494, while MD&A also cites $2,577,259, which is the comprehensive-loss figure.
Important facts for investors to verify
- Confirm the correct reporting period and filing history, given the metadata mismatch and the “No” response regarding required filings.
- Assess collectability and payment timing of the $1 million related-party service receivable, and review the agreement’s terms and related-party governance.
- Review the CEO loan’s demand provisions, interest accruals, and the company’s ability to meet near-term liabilities and fund operations.
- Reconcile the 2012 comparative loss figures and assess the status and financial prospects of production projects and Kids Clubs.
- Track remediation of material weaknesses, the lease litigation and tax penalties, and whether management can obtain additional financing.