Dolphin Digital Media, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The filing is by Dolphin Digital Media, Inc. (not Dolphin Entertainment, Inc.); the company acquired Dolphin Films, Inc. on March 7, 2016. Because the entities were under common control, comparative financial statements were retrospectively adjusted to include Dolphin Films. Share amounts were also retrospectively adjusted for a 1-for-20 reverse split effective May 10, 2016.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $17,278 | $24,263 |
| Operating loss, before other income/expense | $985,185 | $1,594,024 |
| Net loss | $3,448,848 | $2,281,249 |
| Net loss attributable to Dolphin Digital Media | $3,453,168 | $2,282,186 |
| Basic and diluted loss per share | $1.85 | $0.56 |
| Cash used in operations | $570,769 | $2,199,016 |
Revenue fell approximately 29%. Q1 2016 revenue came entirely from kids-club memberships; there was no production or distribution revenue. The company reported a $1.19 million loss on extinguishment of debt and $1.28 million of interest expense. The per-share loss included a $5.23 million deemed preferred-stock dividend in the loss available to common shareholders.
At March 31, cash was $2.76 million, current assets were $5.10 million, and current liabilities were $45.22 million, resulting in a $40.12 million working-capital deficit. Total liabilities were $46.72 million, against total assets of $20.71 million; stockholders’ deficit was $26.01 million. Capitalized production costs totaled $15.17 million. The filing reports no meaningful positive operating margin; revenue was very limited relative to expenses.
Operating cash use improved by about $1.63 million year over year, while financing activities provided $941,795. Cash increased by $371,026 during the quarter. Cash-flow improvement reflected, among other factors, collections and tax-credit receivables and lower production spending than in the prior-year period.
Changes and significant transactions
- Q1 2015 included $20,513 of motion-picture distribution revenue; Q1 2016 did not. Membership revenue increased to $17,278 from $3,750.
- Operating expenses declined to $1.00 million from $1.62 million, mainly due to lower direct, selling and administrative, and legal and professional costs; payroll increased.
- The company converted approximately $9.03 million of debt and interest into common shares during the quarter, including $3.07 million owed to related party Dolphin Entertainment. The conversions, at a price below the reported market price, generated the $1.19 million extinguishment loss.
- The company issued Series B and Series C preferred shares as consideration for the Dolphin Films acquisition. Series C carries voting and anti-dilution provisions described in the filing.
- After quarter-end, an April 1 private placement generated $5.375 million gross proceeds for common shares. The filing says $1.5 million had been received by March 31 and recorded as non-current debt. Investors also received options to subscribe for additional shares in later 2016 quarters.
Outlook, risks and contingencies
Management expected the motion picture Max Steel to be released in summer 2016 and anticipated that it would be a major source of 2016 revenue. The company was seeking financing for release and advertising costs. Management also expected additional digital-project revenue later in 2016, including a co-produced NFL-player restaurant project intended for distribution in Q4, and anticipated higher kids-club revenue. These are forward-looking expectations, not assured results.
The filing states that substantial doubt exists about the company’s ability to continue as a going concern: it had a $3.45 million quarterly net loss, a $66.07 million accumulated deficit, and a $40.12 million working-capital deficit, and depended on private investors and stockholder support. Management planned to raise funds through loans, project financing, and additional stock issuance; it warned that funding might not be available. Management further stated that all debt was due during 2016, despite some debt being presented as non-current on the balance sheet.
Risks include film and digital-project performance, distribution and financing availability, the ability of investors to exercise subscription options, and execution of planned releases. The filing identifies litigation with a possible loss range of $0 to $325,000, which was not accrued because management considered a loss not probable. It also reports $40,000 of accrued information-return penalties and contingent talent, director, and producer payments dependent on future film performance. No off-balance-sheet arrangements were reported.
Management concluded disclosure controls were not effective because material weaknesses in internal control over financial reporting had not been fully remediated. Planned remediation included stronger review and documentation processes and additional accounting and finance personnel.
Important facts for investors to verify
- Whether the post-quarter $5.375 million equity placement and any later subscription options provided sufficient liquidity, and the resulting dilution.
- Debt balances, maturities, interest and default terms, particularly management’s statement that all debt was due in 2016 and the financing needed to meet obligations.
- Actual release timing, financing costs, distribution arrangements, and cash receipts for Max Steel and planned digital projects.
- Terms and potential effects of the related-party acquisition, Series C preferred-stock voting and anti-dilution protections, and other related-party balances or transactions.
- Progress in remediating material weaknesses and the status of the disclosed litigation and other contingencies.