Dolphin Digital Media, Inc. — Form 10-Q Summary
Entity and period: The filing identifies the registrant as Dolphin Digital Media, Inc., not Dolphin Entertainment, Inc. It reports the quarter and six months ended June 30, 2013. The report was signed August 14, 2014, and the company checked “No” when asked whether it had filed all required reports during the preceding 12 months.
Business context
The company develops online video productions and branded children’s “Kids Clubs.” Management described digital studios as its primary focus; substantially all operating activity during the first half of 2013 related to the studios. Reported production revenue came mainly from foreign licensing and product integration. The company also began earning revenue under a related-party management and back-office services agreement.
Financial results
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $517,560 | $998,582 | $1,287,180 | $998,582 |
| Operating loss | $531,516 | $814,052 | $1,344,120 | $1,723,441 |
| Net loss | $637,517 | $455,406 | $1,545,281 | $1,411,981 |
| Basic and diluted loss per share | $0.01 | $0.01 | $0.02 | $0.02 |
Quarterly revenue declined about 48% year over year, while first-half revenue increased about 29%. The first-half increase reflected $500,000 of revenue from the related-party services agreement, which began April 1, 2013 and carries an annual fee of $2 million. Production revenue was $787,180 for the first half, compared with $998,582 in the prior-year period. First-half operating loss narrowed, but net loss increased; higher interest expense and the prior-year period’s nonrecurring gains affected comparisons. The filing does not report a margin measure.
General and administrative expense rose to $1,458,789 for the first half from $801,990, with management citing project consultants, public and investor relations, legal and other consulting, travel, and other costs. Payroll expense fell to $513,996 from $959,050. Interest expense rose to $249,191 from $143,083, largely due to the CEO’s related-party loan and interest accruing on compensation.
Liquidity, debt, and cash flow
- At June 30, 2013, cash was $777,648; current assets were $1,791,424 and current liabilities were $8,527,998, implying a working-capital deficit of approximately $6.74 million.
- Current debt included $1.1 million under revenue participation agreements, $360,000 of notes payable, and $4,470,623 owed to a related party. The CEO’s unsecured loan bears 10% interest and is payable on demand with ten days’ notice. The notes payable also bear 10% interest and are payable on demand.
- For the first half, operating cash use was $1,814,747 and investing cash use was $10,280. Financing provided $2,320,000, primarily from $2.5 million of CEO advances, net of $150,000 in principal repayments. Cash increased by $494,973 to $777,648.
- Receivables and other current assets included a $500,000 receivable related to the services agreement. The company reported total stockholders’ deficit of $5,992,468.
Changes, outlook, and risks
Management stated that the company expected insignificant Kids Club revenue in 2014 to increase later that year, and anticipated revenue from digital productions in the first quarter of 2015. It was negotiating projects and planned to use project-specific financing. These were expectations, not assured results.
The filing states that recurring losses, a $35.8 million accumulated deficit, inadequate working capital, and dependence on private investors and stockholder support raise substantial doubt about the company’s ability to continue as a going concern. Management planned to seek loans and equity financing, but gave no assurance it could obtain capital. The company had completed only one of eleven projects financed under its equity finance agreements by June 30, 2013; investors are entitled to participate in specified future production revenues.
Other items include an $80,000 accrued IRS information-return penalty and an Ontario lease-related claim for which the company recorded no accrual, stating it believed a loss was not probable. It discontinued Dolphin Secure sales and marketing and wrote off approximately $8,000 of inventory. Management concluded disclosure controls were ineffective because previously identified material weaknesses had not been fully remediated. The filing also describes a subsequent Los Angeles office lease with monthly rent of $13,746 and annual increases.
Important facts for investors to verify
- Registrant identity and filing timing: Confirm the relationship, if any, between the filing’s Dolphin Digital Media, Inc. and the requested Dolphin Entertainment, Inc.; also verify the significance of the August 2014 filing date and the “No” response regarding timely reports.
- Loss figures: The financial statements report 2013 net losses of $637,517 for the quarter and $1,545,281 for six months. The MD&A reverses those 2013 period figures and also appears to use the prior-year six-month comprehensive loss as net loss; reconcile against the statements.
- Liquidity and related-party exposure: Verify the availability and repayment terms of CEO funding, the company’s ability to raise additional capital, and collection of the $500,000 services receivable from a related party.
- Forecasts and project economics: Test the assumptions behind anticipated Kids Club and production revenue, production funding, and investor participation in future revenues.
- Contingencies and controls: Review the status of the Ontario litigation, accrued penalties, and remediation of material weaknesses in financial reporting controls.