Dolphin Digital Media, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011. The filing identifies the registrant as Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.). Financial statements are unaudited.
Business context
The company focused on Dolphin Digital Studios, producing online content for tweens and teens, alongside its child-safety software and social-networking business. Its projects included Aim High, H+ and Hiding. Aim High premiered online in October 2011; H+ was in post-production, and Hiding was in production.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $0 | $498 | $472,824 | $976 |
| Gross profit | $0 | $498 | $469,552 | $656 |
| General and administrative expense | $342,353 | $377,947 | $1,189,468 | $1,510,447 |
| Operating loss | $(342,353) | $(377,449) | $(719,916) | $(1,509,791) |
| Net loss | $(377,467) | $(431,633) | $(812,692) | $(2,627,365) |
| Loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.01) | $(0.05) |
- Nine-month gross margin was approximately 99% on reported revenue, though revenue was largely recognized from prior contracts and was not generated in Q3.
- Operating cash use was $1.57 million, versus $971,885 in the prior-year period. Investing cash flow was zero, versus $957,230 used in 2010; financing provided $1.649 million, versus $2.134 million.
- Cash was $80,147 at September 30, 2011, up from $1,467 at year-end 2010. The company reported a $5.06 million working-capital deficit, total liabilities of $5.15 million and stockholders’ deficit of $3.93 million.
- Liabilities included $995,000 of production/revenue-participation financing, $1.67 million of loans from the CEO, and $95,000 of convertible advances. The CEO note bears 10% interest and is callable on 10 days’ notice.
- Capitalized production costs were $1.13 million for the unfinished Hiding picture. Of this amount, $365,000 had been paid and the balance was included in accounts payable. No amortization had begun.
Changes, outlook and risks
- Nine-month revenue rose to $472,824 from $976, mainly from recognition of software-license and production-service revenue; Q3 revenue was zero. G&A and interest expense declined, and the prior-year $987,649 warrant-related finance charge did not recur, contributing to the lower nine-month loss.
- Operating cash use increased year over year, principally reflecting $1.13 million of capitalized production costs and a decline in deferred revenue, partly offset by higher accounts payable and other liabilities.
- Management expected additional Digital Studios revenue beginning in Q1 2012 and planned to scale production to six to eight web series annually. The company had a licensing agreement providing for a non-refundable $750,000 advance against future royalties, payable on the later of January 4, 2012 or delivery; delivery was required by February 12, 2012. These are expectations and contractual terms, not reported receipts or realized results.
- The filing states substantial doubt exists about the company’s ability to continue as a going concern. Management planned to seek loans and issue common stock, but gave no assurance that financing would be available. The business depended on private investors and CEO support.
- Disclosure controls were deemed ineffective because of material weaknesses in accounting for revenue under material agreements. The filing describes revenue-recognition errors that led to a Q1 2011 restatement and an identified weakness relating to a related-party production-services agreement. Remediation was planned.
- A Canadian lease-related action and related crossclaims were pending; the company said the outcome could not be predicted. It reported no off-balance-sheet arrangements.
- Related-party exposure includes CEO loans and a $125,000 option to acquire film-script rights from Dolphin Entertainment, a company owned by the CEO. The option purchase was recorded in accounts payable.
Most important facts for investors to verify
- Whether the company met the Hiding delivery deadline and received the $750,000 advance, and whether projected production revenue materialized.
- Available liquidity, access to additional financing, the status and repayment terms of CEO loans, and the risk posed by the callable note.
- Progress in remediating the disclosed material weaknesses and whether subsequent filings report further accounting corrections or restatements.
- The recoverability and impairment assessment of the $1.13 million in capitalized production costs, along with the unpaid production-related payables.
- Potential dilution: 64,190,987 common shares were outstanding as of November 11, 2011; the filing also reports 10,614,007 warrants outstanding and describes anti-dilution rights.
- Reconcile comparative figures: the financial-statement table reports Q3 2010 net loss of $431,633, while MD&A states $431,663. The filing also gives slightly different nine-month 2010 G&A figures in the table and MD&A.