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DOLPHIN DIGITAL MEDIA INC - 10-Q - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Special Note Regarding Forward Looking Statements Certain statements in this Form 10-Q under "Management's Discussion and Analysis" constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements are indicated by words or phrases such as "anticipates," "projects," "believes," "intends," "expects," and similar words or phrases. Such factors include, among others, the following: competition; seasonality; success of operating initiatives; new product development and introduction schedules; acceptance of new product offerings; advertising and promotional efforts; adverse publicity; availability, changes in business strategy or development plans; availability and terms of capital; labor and employee benefit costs; changes in government regulations; and other factors particular to the Company. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements of the Company may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company disclaims any obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Business Summary Dolphin Digital Media, Inc. is dedicated to the twin causes of online safety for children and the production of high-quality digital content. By creating and managing child-friendly social networking websites utilizing state-of the-art fingerprint identification technology, Dolphin Digital Media has taken an industry-leading position with respect to Internet safety. Also, with the launch of Dolphin Digital Studios, the Company is at the forefront of the growing digital entertainment sector. Dolphin Secure Our core product, Dolphin Secure, is easy-to-use software that downloads onto any computer in a child's life, and gives parents the ability to guide where their children can go, and who they can talk to, while online. Safer Surfing with Dolphin Secure During a registration process that takes less than 10 minutes, parents receive a "master white list" of pre-determined age-appropriate web sites for their child to visit. The Dolphin Secure "master white list" of pre-approved sites is updated daily, and ensures that children are free to explore and learn online more safely without the risk of stumbling onto pornography, inappropriate content or other illicit material. Parents can also customize the specific "white list" for each individual child, including the opportunity to add to, or delete from, the Dolphin Secure "master white list." So, a parent could add or allow specific sites for her teenager that would remain blocked for her younger children. With Dolphin Secure, children can only visit sites on their specific "white list," as customized (or not) by their parent. Safer Chat with Dolphin Secure For the first time, parents have the option to set the boundaries of who their child can speak to, or who they can be approached by to speak with, online. Upon registration, parents have a wide variety of options to customize these parameters, from general groups to specific individuals, including: 12 -------------------------------------------------------------------------------- ? Everyone within the Dolphin Surf social network. ? Only children of a specific gender. ? Only other children within a specific age range chosen by the parent. ? Only a select group of hand-picked friends. ? No one at all. All other chat applications otherwise installed on the applicable computer are blocked from a child's use, thereby ensuring that everyone that could approach the child with an IM request needs to be registered with Dolphin Secure. How "Dolphin Secure" Works: Fingerprint Log-In In a truly revolutionary offering, and one of the major aspects that makes Dolphin Secure a unique service, a child may fully utilize the "Dolphin Surf" social network and communicate with their friends only following Dolphin Secure fingerprint identification. Upon registration, a new user scans their finger using the Dolphin Secure UPEK fingerprint reader. The scanned fingerprint is then converted into a number and stored in a protected, remote database. The child's account details (e.g. parental settings and personal preferences) are associated with this number, which is created by an irreversible algorithm. A copy (or a "print") of any user's actual fingerprint is never taken, let alone stored anywhere within the Dolphin Secure system. Only the unique number created by any user's unique fingerprint is kept. After registration, each time an internet browser or an IM application is attempted to be used on the computer that is Dolphin Secure, a log-in page is triggered. Children simply enter their user name and scan their fingerprint. Dolphin Secure then verifies the child's identity by matching the unique number created by this fingerprint scan with the number associated with the child's user name in the Dolphin Secure database. Once a match has been created, the Dolphin Secure system promptly loads each child's personal, customizable home page within Dolphin Surf. That child is now free to surf to websites, and free to seek other children to be friends with, that are within the controls established by the parent. When parents or other adults in the household want to use the same computer, a master username and password can be entered, which unlocks the computer and allows them to freely access the Internet. Once the parent logs out, Dolphin Secure is automatically back in place for the next session. "Dolphin Surf" "Dolphin Surf" is a social network featuring the advanced functionality associated with the leading online communities and virtual worlds. Kids have the opportunity to create a profile, IM with approved friends, search for new friends, upload photos, send e-mails and customize a homepage that includes a widget library of content, friend updates and much more, all under the protection of the Dolphin Secure system. Children can set their own site themes, backgrounds and add or delete widgets on their homepage, making their Dolphin Surf experience totally unique to them. "Dolphin Surf" will be the online destination for children to create, explore, interact and play, with the assurance that access to their account is available only to them - unlike other social networking sites where users, and their personal content, are vulnerable to anyone who knows, or can guess, their password. It is the sharing of passwords among the overwhelming majority of children that exposes them to so many dangers of cyber-bullying, including online impersonation (e.g. when a classmate or "friend" who knows their password goes into their social network account and sends out an embarrassing e-mail, photo or IM to their entire address book, pretending to be them while also switching their password so that they can't even access their account after the fact to try and limit the damage). 13 --------------------------------------------------------------------------------"Dolphin Groups" Dolphin Groups allows all children's organizations (e.g. schools, little leagues, after-school programs, charitable organizations, etc.) to create their own mini-sites within Dolphin Surf. Any group will have the ability to upload content such as videos and photos to the group page, send out messages to the whole group, write on an individual member's "wall," create a calendar, schedule events, and much more. Of course, the group sites have the full instant messaging capability that is a revolutionary aspect of Dolphin Secure, thereby allowing the children to chat live with each other while viewing the group's site. For the first time, a children's organization can safely create their own environment with full online interactivity occurring by their children. Dolphin Surf offers different levels of privacy for any group, including: (1) Open: where any child within Dolphin Surf can join (e.g. a "fan club" started by a child in support of a favorite television show), or (2) Semi-Private: where a group administrator can set parameters for who can join their group, such as age range or gender (e.g. a particular Little League Division only open to boys and girls twelve and under), or (3) Private: where a group administrator will have to review and approve each individual who requests to join the group (e.g.: a specific Little League team). Dolphin Digital Media has focused much of its recent development efforts on the expansion of the functionality and use of Dolphin Groups. Now, each group is in control of their own pricing, either on a monthly or annual basis, which gives them complete freedom to respond to their own fundraising needs, and to monetize their content on their own digital platform. For the first time, a children's organization can safely create their own environment with full online interactivity occurring by their children. In addition, groups now have the ability to "link" with one another. Any group administrator may request affiliation with any other group within Dolphin Surf. If accepted, the group members will receive an invitation to join the new group. For example, a child joining his Little League team group site may be invited to join a fantasy baseball league site selected by his group administrator. Or, a parent purchasing admission for her child into a fan club site for a popular actor may be invited to join the fan club of the actor's television series. Furthermore, links between groups can be automatically set-up for each new member, either in single-direction or dual-direction. Single-direction groups simply means that only the members from one group are invited to join the other group, but not the other way around (i.e. members of a particular local Girl Scout Troop are invited to join the group site for the Girl Scouts in that particular state, but not every girl scout in the state is invited to join the group site for that particular local Girl Scout Troop). Dual-direction groups simply means that the members from each group are automatically invited to join the other group (e.g. upon entering into the fan club for the leading actress of a popular television show, a member is automatically invited to the fan club for the leading actor of the same television show, and vice versa). It is management's belief that such "links," or affiliations with other groups, will allow group administrators to drive membership for their own groups, while enriching the online experience for their members, and that these dual features of affiliation and monetization create a unique and compelling opportunity for any children's organization or content owner. The Need for "Dolphin Secure" Many parents want to protect their children online without feeling like they are spying on them. Spyware is difficult to use in the best of circumstances, but it has two even more fundamental problems. First, it is oftentimes reactive. It only tells a parent which sites their child has visited, and who their child has chatted with, after the damage has already been done. Secondly, by its very definition, spyware assumes the parent has the time to constantly review and monitor their children's online activities. 14 --------------------------------------------------------------------------------Dolphin Secure was born out of a decision to provide a proactive solution for parents concerned with the online safety of their children. Busy parents need an easy-to-use system which gives them peace of mind that their rules for internet safety are being followed even when they are not around. Now, a mother busy doing the five hundred tasks in her typical day, usually all at once, doesn't have to stop to worry that her 8 year-old daughter is receiving an instant message from someone that she doesn't know, or that her 11 year-old son has incorrectly spelled the name of a new game and has wound up on a pornography site. Pricing & Availability An annual child membership to Dolphin Secure costs $59.95 per year (approx. $5 per month) plus an additional one-time fee of $15.00 for a fingerprint reader. Each additional child membership is $29.95 per year; a parent account is free. A monthly subscription can be purchased for $5.95 per month for the first child, and $2.95 per month for each additional child in the household. Parents pay per child on their family account, not per software download. This way, a family can download Dolphin Secure onto every computer in the home for no additional charge. Extra fingerprint readers can be purchased for $24.95 each. Dolphin Secure currently works for PCs using Windows 7, XP or Vista operating systems, as well as Mac computers. Target Market Our primary initial target market is North America. This market represents 43.85 million girls and boys aged 5-15. This number breaks down as follows: ? In Canada, there are 3.71 million girls and boys aged 5-15. This represents 11.19% of the Canadian population. ? In the United States, there are 40.13 million girls aged 5-15. This represents 13.21% of the US population. International Expansion - Germany On February 8, 2011, the Company announced its entry into the European market by licensing its core product, Dolphin Secure, in Germany. Philip von Alvensleben, a twenty-year veteran of the media space within Germany and the U.S., has formed Dolphin Media Germany and has recruited a team of top-level marketing and technology experts to localize, promote, distribute and support Dolphin Secure within Europe, beginning with the German market. Under the deal terms, Dolphin Digital Media will receive a royalty from all customer licenses and sales, one royalty payments due to the Company exceed the initial license fee of $275,000. In turn, Dolphin Media Germany has retained the German-language rights to Dolphin Secure, as well as a right of first negotiation to launch the product in other European territories. Mr. von Alvensleben is involved in a number of digital and media ventures such as Adconion Media Group, one of the largest online audience networks in the world, as well as Smaato and Burstly, pioneering mobile advertising companies, and Filmaka Inc. and Alive Entertainment. Mr. von Alvensleben's 20 year career also includes the position of Managing Director at the TeleMunchen Group, one of Germany's largest media conglomerates, with interests in broadcasting, feature film and television production and distribution, and music. Dolphin Digital Studios During the six months ended June 30, 2011 the Company focus has primarily been devoted to its new division of the company, Dolphin Digital Studios. Dolphin Digital Studios will create original content that premieres online, with an initial focus on content geared toward tweens and teens. Substantially all of the Company's operating expenses during the six months ended June 30, 2011 were related to the initial set-up of its new division. Dolphin Digital Studios is a natural fit and progression in the core business of Dolphin Digital Media-entertaining its customers through high-quality digital programming. Furthermore, the web series from Dolphin Digital Studios can be repackaged for distribution into "traditional media," such as television and home video. 15 --------------------------------------------------------------------------------For distribution into such outlets, Dolphin Digital Studios will capitalize on its existing relationship with Dolphin Entertainment, one of the top independent producers and distributors of children's programming in the world. Founded in 1996, Dolphin Entertainment is an Emmy-nominated production and distribution company that has recently produced programming for Nickelodeon, Cartoon Network, and Canada's Family Channel. Dolphin Entertainment currently distributes its children's programming into 300 million homes in over 100 countries. The Company expects the launch of Dolphin Digital Studios to create near-term revenue, since the new division already has several projects due to commence development within the next 12 months. Web series, in general, have a fairly short development and production cycle, thus allowing for quick distribution (as opposed to traditional television and film models). Thus, the Company anticipates that its financials will be positively impacted shortly after the distribution of any particular web series produced by Dolphin Digital Studios. Dolphin Digital Studios will ramp up to produce between 6 and 8 web series a year. Some projects may be self-financed, while some projects will feature strategic and financial partnerships. This will allow Dolphin Digital Studios to have attractive project financing alternatives while developing its slate of programming. According to a recent study by the Kaiser Family Foundation, 8-18 year-olds devote an average of 7 hours and 38 minutes across a typical day, or more than 53 hours per week, to using entertainment media. This creates a huge opportunity for quality content for this audience, which is no longer merely entertained by traditional television programming. In addition, advertisers have taken notice, with digital-marketing research firm eMarketer estimating that online video ad spending will have grown 48 percent to $1.5 billion in 2010 and will hit $5 billion by 2014. Warner Bros. Digital Distribution Partnership Dolphin Digital Media, Inc. announced in 2010 the first two productions for Dolphin Digital Studios. These first two live-action multi-platform digital series with top Hollywood talent are being co-financed through an agreement with entertainment industry veteran Dolphin Entertainment (Executive Producer of hit Nickelodeon series Zoey 101) and Warner Bros. Digital Distribution. The first titles produced under this agreement will be the futuristic survival tale H+: The Series from blockbuster Director / Producer Bryan Singer (Director of X-Men, Superman Returns and The Usual Suspects, and Executive Producer of hit television series House) and the action-packed high school spy thriller Aim High from multi-talented Executive Producer and Director McG (Director of Charlie's Angels, Terminator: Salvation and Executive Producer of television series Chuck and Supernatural). "H+: The Series" H+ takes viewers on an episodic two-and-a-half hour, apocalyptic journey into the future where technology has gone horrifically wrong. In 2019, 33% of the world's population uses a radical new piece of technology - an implanted computer system called H+. This allows a person's mind and nervous system to be connected to the Internet 24 hours a day. But that same year, a mysterious and vicious computer virus is released, and within seconds millions of people die - leading to radical changes to the political and social landscape of the planet. H+ is produced by Director / Producer Bryan Singer in association with Bad Hat Harry Productions (House). The series comes from the imaginative minds of writers John Cabrera (Gilmore Girls) and Cosimo de Tommaso who also serve as Executive Producers, directed by Stewart Hendler (Sorority Row) and produced by Lance Sloane (Yucatan). H+ is currently in post-production and was filmed in Santiago Chile. "Aim High" Aim High is the story of a young man leading a double life - juggling his studies by day and serving as a government agent by night. This series chronicles the life of Nick Green, a high school sophomore who's just starting a new school year as one of the country's 64 highly trained teenage operatives. 16 --------------------------------------------------------------------------------When he's not risking his life on top-secret missions, Nick is dreaming of Amanda Meyers, the most popular girl in school, who's cool, intelligent, and very alluring. Amanda mercilessly flirts with Nick, but before he can enjoy her advances he has to avoid Derek - her overly protective boyfriend who threatens him for even looking at her. Aim High comes from Director/ Producer McG, production company Wonderland Sound and Vision, and production services were provided by Bandito Brothers. Peter Murrieta, who served as Executive Producer for the Disney Channel mega-hit Wizards of Waverly Place, is the Executive Producer. The series is written by Heath Corson (Living with Abandon / Scary Godmother) and Richie Keen (Living with Abandon), who also serve as Executive Producers, directed by Thor Freudenthal (Hotel for Dogs/ Diary of a Wimpy Kid) and produced by Lance Sloane (Yucatan). Jackson Rathbone, best known for his role as the scarred vampire "Jasper Hale" in the Twilight movie series, stars as teenage government operative "Nick Green." He is joined by Aimee Teegarden, known to loyal Friday Night Lights fans as "Julie Taylor," who stars as Nick's charming love interest "Amanda Miles." Aim High also stars Rebecca Mader (Lost) as Nick's sultry science teacher "Ms. Walker," Johnny Pemberton (Megadrive) as the well connected best friend "Marcus," Clancy Brown (Highlander) as Russian mercenary "Boris the Bear," Jonathan McDaniel (That's So Raven) as Amanda's jealous boyfriend and swim team captain "Derek Long," and Greg Germann (Ally McBeal) as the protective "Vice Principal Ockenhocker." Management Expertise The launch of Dolphin Digital Studios leverages our management expertise in creating high-quality entertainment for children and young adults. Dolphin Entertainment ("DE"), founded in 1996 by our Chairman, C.E.O. and President, Bill O'Dowd, is one of the world's leading entertainment companies specializing in children's and young adult live-action programming, with divisions dedicated to Television Production, Feature Film Production, International Distribution, and Merchandising and Licensing. DE served as Executive Producer to Nickelodeon's Emmy™-nominated hit series Zoey 101 and Ned's Declassified School Survival Guide, as well as eight different television movies that have premiered on Nickelodeon in the past three years. DE enjoys worldwide distribution of its programs, with sales in over 100 countries (reaching almost 300 million homes) for its current children's properties, including Mexico, Italy, France, Spain, the United Kingdom, Germany, Canada, Australia, New Zealand, Brazil, and South Africa, among many others. DE has successfully launched international merchandising lines for its children's properties in nearly every consumer category, including publishing, apparel, sleepwear, accessories, and cosmetics. We hold a multiyear exclusive licensing agreement with DE. Under the terms of our 10 year agreement, DE will work with us to create and manage social networking websites which will be themed around DE's own branded properties. Under the license, the Company is authorized to use Dolphin Entertainment's brand properties in connection with the social networking sites. The license requires that the Company pays Dolphin Entertainment royalties at the rate of fifteen percent of the net sales from performance of the licensed activities. Results for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 The Company had revenues of $197,824 and $472,824 from licensing and production fees for the three and six months ended June 30, 2011 compared to $222 and $478 for three and six months ended June 30, 2010. The Company expects to begin generating additional revenues from Dolphin Secure, Dolphin Surf websites and Dolphin Digital Media during fiscal 2011. During the three and six months ended June 30, 2011 the Company focus has primarily been devoted to its new division of the company, Dolphin Digital Studios. Dolphin Digital Studios will create original content that premieres online, with an initial focus on content geared toward tweens and teens. Substantially all of the Company's operating expenses during the three and six months ended June 30, 2011 were derived from its new division. 17 --------------------------------------------------------------------------------General and administration costs decreased by $78,764 from $545,591 for the three months ended June 30, 2010 to $466,827 for the three months ended June 30, 2011 as a result of decreased marketing, administrative, and advertising costs. General and administration costs decreased by $301,524 from $1,131,817 for the six months ended June 30, 2010 to $847,115 for the six months ended June 30 2011 as a result of decreased marketing, administrative, and advertising costs relating to the change in the Company's focus to its new division of the company, Dolphin Digital Studios. Finance charges decreased by $21,000 from $21,000 for the three months ended June 30, 2010 to $0 for the three months ended June 30, 2011. Finance charges decreased by $987,649 from $987,649 for the six months ended June 30, 2010 to $0 for the six months ended June 30, 2011. Financing charges for the three and six months ended June 31, 2010 was primarily as a result of expenses associated with re-pricing of stock warrants. Interest expense decreased by $5,810 from $37,633 for the three months ended June 30, 2010 to $31,823 for the three months ended June 30, 2011. Interest expense decreased by $20,029 from $74,741 for the six months ended June 30, 2010 to $57,662 for the six months ended June 30, 2011. The net loss was $304,098 and $435,255 or $(.00) and $(.01) per share based on 64,190,987 weighted average shares outstanding for three and six months ended June 30, 2011, respectively compared to a loss of $604,082 and $2,195,049 or $(.01) and $(.04) per share based on 61,076,413 and 60,540,104 weighted average shares outstanding for the three and six months ended June 30, 2010, respectively. Liquidity and Capital Resources Cash flows used in operating activities increased by $82,134 from $601,029 for the six months ended June 30, 2010 to $683,163 for the six months ended June 30, 2011. During the six months ended June 30, 2010 the Company incurred a loss from operation of $2,195,049 which was primarily offset by amortization of debt discount of $48,351, common stock issued for compensation of $128,500 and warrant repricing of $945,615. Cash flows used in investing activities decreased by $605,893 from $605,893 for the six months ended June 30, 2010 to $0 for the six months ended June 30, 2011. During the six months ended June 30, 2010 the Company capitalized costs of $548,893 for web-site development and advance funds of $57,000 to 24eight, LLC. Cash flows from financing activities increased by $12,490 from $1,331,510 for the six months ended June 30, 2010 to $1,344,000 for the six months ended June 30, 2011. During the six months ended June 30, 2010 the Company received advances of $45,000 from our President and CEO and repaid advances of $220,000. We received $800,000 from the pay down of warrants and we sold a total of 2,248,957 shares of common stock for proceeds of $698,000. During the six months ended June 30, 2011 we have relied on advances of $275,500 from our President and CEO and we repaid $25,500. The Company has largely relied on loans from the CEO to meet working capital requirements. To date, it has received a net total of $1,391,361 in loans from him. There is no guarantee that Mr. O'Dowd will continue to loan the Company money. During the six months ended June 30, 2011, we received $100,000 from the pay down of warrants. In addition, during the six months ended June 30, 2011, the Company received $995,000 in advances for future productions. Prior to December 31, 2012, the Company may utilize all, or any portion, of the total equity investment to fund the production. On January 1, 2013, the production "cycle" will cease and all of the Company's gross receipts will be distributed in accordance with the Equity Finance Agreements. The Company will be entitled to a production fee that will not exceed $250,000 per production. As of June 30, 2011, the Company had cash of $662,304 and a working capital deficit of $3,576,740. Our independent auditors issued an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern based upon our net loss for the year ended December 31, 2010, our accumulated deficit as of December 31, 2010, and our level of working capital. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is planning to raise any necessary additional funds through loans and additional sales of its common stock, however, there can be no assurance that the Company will be successful in raising any necessary additional capital. Management is currently focusing it efforts on Dolphin Digital Studios producing additional web productions which we expect will generate additional revenues in the upcoming months. 18 --------------------------------------------------------------------------------Critical Accounting Policies The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, with the exception of the following: Revenue Recognition Revenue is recognized in accordance with the provision of FASB ASC Topic 605, "Revenue Recognition". In general, the Company records revenue when persuasive evidence of an arrangement exists, products have been delivered or services have been rendered, the selling price is fixed and determinable, and collectability is reasonably assured. The Company recognizes monthly and annual subscription revenues over the service period. Advertising revenue is recognized over the period the advertisement is displayed. We account for contracts for development, production and services activities consistent with FASB ASC 605-35, Accounting for Performance of Construction-Type and Certain Production-Type Contracts , and other relevant revenue recognition accounting literature. We consider the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract. Generally for fixed-price contracts, other than service-type contracts, revenue is recognized primarily under the percentage of completion method or, for certain short-term contracts, by the completed contract method. Revenue from service-type fixed-price contracts is recognized ratably over the contract period or by other appropriate input or output methods to measure service provided, and contract costs are expensed as incurred. We establish billing terms at the time project deliverables and milestones are agreed. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled receivables. The risk to us on a fixed-price contract is that if estimates to complete the contract change from one period to the next, profit levels will vary from period to period. For all types of contracts, we recognize anticipated contract losses as soon as they become known and estimable. Out-of-pocket expenses that are reimbursable by the customer are included in revenue and cost of revenue. The use of contract accounting requires significant judgment relative to estimating total contract revenues and costs, including assumptions relative to the length of time to complete the contract, the nature and complexity of the work to be performed, anticipated increases in wages and prices for subcontractor services and materials, and the availability of subcontractor services and materials. Our estimates are based upon the professional knowledge and experience of our personnel. Changes in estimates are applied retrospectively and when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments to earnings applicable to performance in prior periods. Effect of Inflation We do not believe that inflation has had a material effect on our business, results of operations or financial condition during the past two years. Off-Balance Sheet Arrangements As of June 30, 2011, we did not have any off-balance sheet arrangements. 19-------------------------------------------------------------------------------- |