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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. References in this Form 10-Q to "Company," "we," "us," and "our," are references to Dolphin Digital Media, Inc. and its consolidated subsidiaries, Hiding Digital Productions, LLC, Cybergeddon Productions, LLC and Dolphin Kids Clubs LLC. Business Summary Dolphin Digital Media, Inc. is dedicated to the production of high-quality digital content. With the launch of Dolphin Digital Studios, the Company is at the forefront of the growing digital entertainment sector. Dolphin Digital Studios is committed to delivering premium, best-in-class entertainment and securing premiere distribution partners to maximize audience reach and commercial advertising potential. The growth of online video viewing is well-documented. While all major demographics have experienced an increase in online video viewing for several years in a row, it is worth mentioning the potential of the "tween" and "teen/young adult" space online. According to a 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 increasingly turns to the internet to source its entertainment options. Advertisers have taken notice, with leading digital-marketing research firm eMarketer estimating that online video ad spending (the fastest-growing advertising segment) will surpass $5 billion in the United States of America alone by 2014. Management sees an opportunity for Dolphin Digital Media to become a "market leader" digital studio. Dolphin Digital Media has also announced its entry into "Kids Clubs," or online websites to serve as destinations for entertainment and information. Management seeks to partner with established "brands" in the children's space, and to expand each brand's existing online audience through the promotion of original content supplied and/or sourced by Dolphin Digital Studios. Premium entertainment offerings, such as original web series, will serve to both increase audience through positive word-of-mouth and to increase engagement, or length of time on site. Furthermore, the Kids Clubs will serve as the platform for sponsorships and other marketing opportunities, such as contests and sweepstakes. In addition, the Kids Clubs are tremendous marketing vehicles for the respective brands, as they keep the brands "top of mind" for the youngest generation, and in a space (the online world) where they increasingly go. In February 2012, the Company entered into an agreement with United States Youth Soccer Association, Inc. to launch a Kids Club. During 2013, Dolphin Digital Media, Inc. partnered with a worldwide philanthropic organization to create a Kids Club to promote the organization's philanthropic philosophy and encourage literacy programs. Donors can sponsor membership for all children in a particular school and that donation entitles the school to receive a Reading Oasis from Scholastic Books. The Company did not record any revenues related to this arrangement and incurred $0 and $22,500 in expenses for the quarters ended March 31, 2014 and 2013, respectively. Dolphin Digital Studios During the quarter ended March 31, 2014, the Company's focus has primarily been devoted to Dolphin Digital Studios, which creates original content to premiere online. Substantially all of the Company's operating income and expenses during the three months ended March 31, 2014 were incurred related to Dolphin Digital Studios. 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. Premium online video is the largest growth sector for online advertising, with market leaders such as Yahoo!, Hulu, Netflix, YouTube and AOL making major initiatives around original programming. 14 --------------------------------------------------------------------------------Dolphin Digital Media foresees 3 distinct demographics for its upcoming "web series": ? Tweens (roughly 9-14 years old); ? Teens and Young Adults (roughly 14-24 years old); and ? General Market (roughly 14-49 years old). Each of these demographics will be served with different content, and the Company may have different distribution partners for each of these demographics. Dolphin Digital Studios earns revenue from the online distribution of its web series in three different ways: Producer's Fees: Dolphin Digital Studios will earn fees for producing each web series, as included in the production budget for each project; Advertising Revenue: typically, Dolphin Digital Studios will be entitled to between 50-60% of all advertising revenue generated by its distribution partner from the online distribution of any particular web series; and Sponsorship Revenue: Dolphin Digital Studios will generally retain between 70-100% of any product integration fees, or sponsorship revenues, associated with any of its web series. During the quarter ended March 31, 2014, Dolphin Digital Studios concentrated its efforts in identifying certain properties that it intends to produce for online distribution and negotiating strategic agreements with advertisers and platforms for the production and distribution of a variety of web series. 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. The Company secured financing for a slate of projects through Equity Finance Agreements in the amount of $1,000,000 that were entered into during 2011 and 2012. Funding received through these investments is meant to help finance the costs of the web series. Per the agreements, the Company invests in projects through January 1, 2013. Investors are then entitled to share in the future revenues of any productions for which the funds invested were used. Investors share in the producers' revenues up to 115% of their investment and afterwards, as a group, will receive 50% of the revenues derived from these web series. Per the Equity Finance Agreements, the Company is entitled to a producer's fee, not to exceed $250,000, for each web series before calculating the share of revenues owed to the investors. Based on the gross producers' revenues to date, the Company is not required to pay the investors any amount in excess of the existing liability already recorded as of March 31, 2014 and December 31, 2013. The Company has invested these funds in eleven projects. Two productions were completed as of March 31, 2014 and there was no producer gross revenue generated as defined in the Equity Finance Agreements as of March 31, 2014. The Company expects to generate gross producer revenues subsequent to quarter end at which time the investors will receive their pro rata share of the revenue. Furthermore, the web series from Dolphin Digital Studios can be repackaged for distribution into "traditional media," such as television and home video, on a worldwide scale, which will significantly increase the revenue potential for any particular web series. Web series that migrate to traditional media outlets will also benefit from having a pre-established track record and viewer base. For distribution into such outlets, Dolphin Digital Studios will capitalize on its existing relationship with Dolphin Entertainment, one of the top independent television producers and distributors in the world, with a specialty in quality children's and teen programming. Founded in 1996, Dolphin Entertainment is an Emmy-nominated production and distribution company that has produced programming for Nickelodeon, Cartoon Network, and Canada's Family Channel. Dolphin Entertainment currently distributes its children's and teen programming into 300 million homes in over 100 countries. Furthermore, Dolphin Entertainment has great experience with "general market" programming, as well, having distributed television movies from U.S. partners that include Lifetime, Anchor Bay, and Starz, to name a few. The Company recognized $2,500 and $769,620 of revenues from online content for the quarters ended March 31, 2014 and 2013, respectively. These were derived from online productions that premiered in 2012. The revenues in 2014 and 2013 were mainly derived from product integration and sale of licensing rights in foreign territories of the productions. 15 --------------------------------------------------------------------------------Cybergeddon During 2012, the Company produced Cybergeddon. Anthony Zuiker, the visionary creator of the CSI franchise and his production company Dare to Pass, and Yahoo, Inc. the premier digital media company partnered with Dolphin Digital Studios for this ground breaking motion picture event which brings to life the growing threat of cybercrime. True to his storytelling form, Zuiker engaged Norton by Symantec to leverage its technical credibility and security insights to help inform and guide the narrative. Cybergeddon was released September 25, 2012, through Yahoo's global online distribution. During 2012, the Company incorporated Cybergeddon Productions, LLC as a wholly owned subsidiary. The Company entered into agreements with certain vendors and in accordance with these agreements was responsible for creating 6-12 digital episodes of approximately eight to fifteen minutes in length. The Company completed the web series during the third quarter of 2012 and began to amortize the capitalized production costs using the individual film forecast computation method. During the quarter ended March 31, 2014, the Company recorded revenues of $2,500 and amortized costs of approximately $1,851 related to this production. On April 9, 2012, the Company entered into an agreement with a vendor to create a universal (iPhone and iPad) iOS app and an Android app for the series and expensed $320,000 as advertising costs related to this app during 2012. The Company did not generate any revenues or incur any expenses related to these app's for the quarter ended March 31, 2014. During 2013, the production was nominated for three Streamy Awards and Missy Peregrym (Rookie Blue), the lead actress, won for Best Female Performance in a Drama. Management expects future announcements relating to distribution partners for the tween and general market demographics. Cambio Distribution Partnership Cambio and Dolphin Digital Media have entered into an exclusive content deal, in which 4-6 original web series will be financed per year. In this deal, Dolphin Digital Media and Cambio will collaborate to identify original material to produce, with an emphasis on established screenwriters, actors, directors and producers. Cambio holds exclusive rights to distribute the content online in the United States. Dolphin Digital Media holds the underlying copyright in each production, as well as worldwide distribution rights outside of the online rights in the United States. As of March 31, 2014, no productions associated with this partnership have been completed. Kids Clubs Dolphin Digital Media sees tremendous opportunity from the combination of the following two consumer trends: 1) a greater number of children under 18 have access to the internet in their lives (and most "own" their own devices - i.e. laptop computers, tablets, smartphones, etc.); and 2) those children who do have access to the internet spend an increasingly greater amount of time "online." Simply put, the internet has become the next generation's "go to" destination for both entertainment and information. "Offline" brands need to engage with their participants "online" or risk losing them altogether. It is a tremendous lost opportunity to build successful engagement with children and teenagers in the "real world" and offer them nothing (let alone an equivalent engagement opportunity) in the digital world. For example, Little Leagues may exist for the enjoyment of children, but their websites are overwhelmingly only used by parents. Similarly, non-profits may exist to provide enrichment and cultural opportunities for children, but their websites are seldom visited by the children they cater to. Dolphin Digital Media recognizes that it is uniquely positioned to offer such children's organizations a real alternative. Management has tremendous experience building engaging websites for children, in creating best-in-class premium original online entertainment content, and in coordinating large-scale sweepstakes and promotional contests. Management believes that Dolphin Digital Media will quickly become the preferred partner for a variety of children's organizations that have neither the time, financial resources or experience to provide online engagement for their participants, but who see the value in doing so. 16 --------------------------------------------------------------------------------In February 2012, Dolphin Digital Media entered into an agreement with U.S. Youth Soccer to create the "US Soccer Clubhouse" website. During the quarter ended March 31, 2012, the Company hired a third party to begin building the US Soccer Clubhouse website at an initial cost of $125,000. The first installment of $25,000 was paid during the first quarter of 2012, the second $25,000 installment was paid during the second quarter of 2012 and the remaining payments are being made monthly over a period of two years upon receipt of the completed site. On May 21, 2012, Dolphin Digital Media, Inc. entered into an agreement with a note holder to form Dolphin Kids Club LLC. Under the terms of the agreement, the parties agreed to convert $1,500,000 of notes payable into equity of Dolphin Kids Club, LLC and the Company received additional capital contributions of $1,500,000 during the year ended December 31, 2012 for a 25% member interest in the newly formed entity. Dolphin holds the remaining 75% and thus controlling interest in the entity. The purpose of this entity is to create and operate online Kids Clubs for selected charitable, educational and civic organizations. The agreement encompasses Kids Clubs created between January 1, 2012 and December 31, 2016. It is a "gross revenue agreement" and Dolphin Digital Media, Inc. will be responsible for paying all associated operating expenses. Net income will be attributable to each member based on the thresholds established in the operating agreement of the entity. Dolphin Kids Clubs, LLC has been consolidated in these financial statements with amounts attributable to the noncontrolling interest presented as a separate component of shareholders' equity. As of March 31, 2014 and December 31, 2013, the Company recorded a noncontrolling interest of $3,000,000 for the 25% interest in Dolphin Kids Clubs LLC. In 2013, the Company entered into an agreement with a worldwide philanthropic organization to create Club Connect. Club Connect is a kids club that promotes the organization's philanthropic philosophy and encourages literacy in elementary school age children. High School drop-out rates have a direct, proportional correlation to 3rd grade reading proficiency. If a child is already behind in their reading proficiency after 3rd grade, they are over 4x more likely to drop-out of high school (a rate which increases to 10x for minority children). In the US, nearly 60% of fourth graders are not reading at their grade level. Club Connect is an online site that offers reading activities, articles and games. It also promotes parent engagement by emailing parents and continuously messaging the importance of reading and parent involvement to achieve reading proficiency. Club Connect has also partnered with Scholastic Books to provide a Reading Oasis to schools that are sponsored by a donor. Donors may sponsor a school for $10,000 which entitles each child in the school to receive an annual Club Connect membership and a Reading Oasis for the school. A Reading Oasis is a location in a school that is transformed into a reading room. Scholastic will provide the Reading Oasis with hundreds of books (K-3), listening library, colorful bean bag chairs, a reading themed carpet, book cases, and a stereo listening center with four headphones. During 2013, the Company hired a third party to create the website. As per the terms of the agreement, the Company will share revenues derived from net memberships to Club Connect with the philanthropic organization. For the quarter ended March 31, 2014, no revenues related to this agreement were derived and approximately $90,000 in expenses were incurred since inception for the development of the website. Dolphin Secure During 2013, the Company decided that it would no longer pursue any sales or marketing of its internet safety product, Dolphin Secure. As a result, during the quarter ended March 31, 2013, the Company wrote off approximately $8,000 of finger print readers that were recorded as inventory. On February 8, 2011, the Company entered into a licensing agreement with Dolphin Media Germany, an unrelated party, for the licensing rights of Dolphin Secure. Under the deal terms, Dolphin Digital Media will receive a royalty from all customer licenses and sales, once 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. During the quarters ended March 31, 2014 and 2013 the Company did not receive any royalties in relation to the licensing agreement. 17 --------------------------------------------------------------------------------Management Expertise The launch of Dolphin Digital Studios leverages our management expertise in creating high-quality entertainment, especially for children and young adults. Dolphin Entertainment, 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. Dolphin Entertainment 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 ten years. Dolphin Entertainment distributes its programs worldwide, 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. Dolphin Entertainment has successfully launched international merchandising lines for its children's properties in nearly every consumer category, including publishing, apparel, sleepwear, accessories, and cosmetics. Dolphin Digital Media holds a multiyear exclusive licensing agreement with Dolphin Entertainment, Inc., a related party, currently set to expire in June, 2018. Under the license, Dolphin Digital Media is authorized to use Dolphin Entertainment's brand properties in connection with social networking sites. The license requires that Dolphin Digital Media pays Dolphin Entertainment royalties at the rate of fifteen percent of the net sales from performance of the licensed activities. During the period ended March 31, 2014 and December 31, 2013, the Company did not use Dolphin Entertainment's brand properties and therefore no royalties were payable under the licensing agreement. Results for the three months ended March 31, 2014 and March 31, 2013 The Company recorded revenues of $2,500 from the licensing rights in international territories and $500,000 in service revenues from its agreement with a related party for the quarter ended March 31, 2014. Revenues of $769,620 for the three months ended March 31, 2013 was related to additional foreign licensing sales and product integration revenues. Cybergeddon premiered in 2012 and the decrease in sales is part of the natural revenue cycle of this production in which the majority of revenues were recognized in 2012 and 2013. The Company incurred direct costs of $1,851 and $634,521 mainly related to the amortization of capitalized production costs for the three months ended March 31, 2014 and 2013, respectively. Payroll costs increased by $151,278 from $258,822 for the three months ended March 31, 2013 to $410,100 for the three months ended March 31, 2014, mostly due to increasing headcount by six people. General and administrative costs decreased from $688,882 for the three months ended March 31, 2013 to $396,085 for the three months ended March 31, 2014. This decrease is mainly due to an overall decrease in the use of consultants. During the quarter ended March 31, 2013, the Company paid approximately $194,000 in consulting fees for digital projects and public relations work. In addition, it paid approximately $25,000 in legal fees and a one time $58,000 license fee during the quarter ended March 31, 2013. The Company hired several of its consultants as employees and did not incur these consulting fees for the quarter ended March 31, 2014. Interest expense increased by $58,232 for the three months ended March 31, 2014 as compared with the three months ended March 31, 2013 mostly due to an increase in the principal balance of the note from our CEO. The net loss was $459,061 or $(.01) per share based on 81,892,352 weighted average shares outstanding for the quarter ended March 31, 2014 compared to a loss of $907,764 or $(.01) per share based on 81,892,352 weighted average shares outstanding for the quarter ended March 31, 2013. The decrease in net loss was a result of the factors described above. Liquidity and Capital Resources Cash flows provided by operating activities increased from $(619,145) for the three months ended March 31, 2013 to $189,055 for the three months ended March 31, 2014. This increase is mainly due to an increase in deferred revenue of $500,000 that was received as payment for services for the second quarter of 2014. In addition, the Company increased its other current liabilities by $180,134 mainly due to an increase in interest owed to its CEO. The Company used its cash from operations to reduce its accounts payable by paying down certain vendors by approximately $103,000. 18 --------------------------------------------------------------------------------Cash flows from financing activities decreased from $2,335,000 provided during the three months ended March 31, 2013 to $(95,000) used during the three months ended March 31, 2014. This is primarily due to the Company repaying its CEO $75,000 for the notes payable and reducing notes payable and debt by $10,000 each. For the three months ended March 31, 2013, the Company received $2,350,000 net of advances from our CEO. 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, 2013, our accumulated deficit as of December 31, 2013, 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, financing at the subsidiary level and additional sales of its common stock; however, there can be no assurance that the Company will be successful in raising any necessary additional loans or capital. Critical Accounting Policies See "Summary of Significant Accounting Policies" in the Notes to the unaudited condensed consolidated financial statements and our current annual report on Form 10-K for the year ended December 31, 2013, for discussion of significant accounting policies, recent accounting pronouncements and their effect, if any, on the Company. These policies have been followed for the three months ended March 31, 2014. Recent Accounting Pronouncements Recent accounting pronouncements that the Company has adopted or will be required to adopt in the future are summarized below. In May 2014, the FASB issued an accounting standard update relating to the recognition of revenue from contracts with customers, which will supersede most current U.S. GAAP revenue recognition guidance, including industry-specific guidance. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance will be effective for our fiscal year beginning January 1, 2017, and can be applied either retrospectively or under a cumulative-effect transition method. We are currently evaluating the impact that the adoption of this new guidance will have on our consolidated financial statements. Other recent Accounting Standards Updates not effective until after March 31, 2014 are not expected to have a significant effect on the Company's consolidated financial position or results of operations. Off-Balance Sheet Arrangements As of March 31, 2014, we did not have any off-balance sheet arrangements. |