Business context and reporting period
This is Dolphin Digital Media, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2013, signed August 14, 2014. The filing’s registrant name differs from the metadata company name, Dolphin Entertainment, Inc.; investors should confirm the intended issuer and filing. The company produced online content through Dolphin Digital Studios and also developed branded online “Kids Clubs.”
Key financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $769,620 | $0 |
| Direct costs | $634,521 | $0 |
| Gross profit / margin | $135,099 / 17.6% | Not applicable |
| General and administrative | $688,882 | $428,866 |
| Payroll | $258,822 | $480,522 |
| Operating loss | $(812,605) | $(909,388) |
| Net loss | $(907,764) | $(956,575) |
| Basic and diluted loss per share | $(0.01) | $(0.01) |
| Operating cash flow | $(619,145) | $(377,157) |
2013 revenue was mainly from foreign licensing sales and product integration for productions released in 2012. Direct costs included approximately $492,000 of production-cost amortization. Interest expense was $95,327, versus $67,241 a year earlier. The MD&A gives a 2012 loss comparison of $891,340, which is comprehensive loss; the statement of operations reports net loss of $956,575.
At March 31, 2013, cash was $1,993,825, up from $282,675 at year-end, largely because of financing from the CEO. Current assets were $2,518,317 and current liabilities were $8,562,219, implying a working-capital deficit of approximately $6.04 million. Current liabilities included $1.10 million of revenue-participation debt, $4.47 million owed to a related party, and $375,000 of notes payable. Stockholders’ deficit was $5,354,952. Financing cash flow was $2,335,000, including $2.5 million of CEO advances, partly offset by repayments.
Material changes, outlook, and risks
- Revenue rose from zero as completed digital productions generated licensing and product-integration income, but the company remained loss-making and operating cash use increased year over year. Receivables and other current assets increased by approximately $285,000.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, accumulated deficit of $35.1 million, inadequate working capital, and reliance on private investors and stockholders. It planned to seek loans and issue common stock, with no assurance of success.
- Management expected producer revenue from certain productions during 2014; a separate going-concern note referred to expected digital-production income beginning in Q1 2015. These were expectations, not assured results. Kids Club income was limited, and the company reported no Q1 revenue from its new philanthropic organization arrangement.
- After quarter-end, the company agreed to provide management and back-office services to a related party for an annual fee of $2 million through December 31, 2014. This is a material related-party arrangement to review.
- Disclosure controls were deemed ineffective because material weaknesses had not been fully remediated. The company reported some remediation steps, with further controls planned.
- An Ontario lease-related third-party claim remained unresolved; the company did not accrue a loss, stating it believed a loss was not probable. It also carried an $80,000 accrual for information-return penalties.
- The company discontinued sales and marketing of Dolphin Secure and wrote off approximately $8,000 of inventory. It also decided after quarter-end to discontinue the Junior Canes Club program.
Important facts for investors to verify
- Confirm issuer identity and filing status: the report is for Dolphin Digital Media, Inc., and the cover indicates the company had not filed all required reports during the preceding 12 months; the filing was signed in August 2014 for Q1 2013.
- Assess the going-concern funding plan, working-capital deficit, and dependence on CEO/related-party financing, including the demand terms and interest on related-party loans.
- Review the economics and collection status of production revenues, receivables, capitalized production costs, and revenue-sharing obligations to production investors.
- Examine the terms and approvals for the $2 million annual related-party services agreement and other CEO compensation and accrued amounts.
- Track remediation of disclosed material weaknesses, the outcome of the Ontario claim, and whether management’s revenue expectations were realized.