10-K 1 dpdm_10k.htm ANNUAL REPORT dpdm_10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
(Mark One)
   
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

Or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-50621

DOLPHIN DIGITAL MEDIA, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other jurisdiction of
incorporation or organization)
 
86-0787790
(I.R.S. Employer
Identification No.)
 
2151 LeJeune Road, Suite 150-Mezzanine, Coral Gables, FL
 
33134
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number (305) 774-0407

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
None
 
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.015 par value
(Title of class)

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o Yes þ No

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   o Yes þ No

Indicate by a check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes þ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 o Yes þ No

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) o Yes þ No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter is: $1,561,957

Indicate the number of shares outstanding of the registrant’s common stock as of April 23, 2014 is 81,892,352.

DOCUMENTS INCORPORATED BY REFERENCE—NONE
 


 
 
 
 
 
TABLE OF CONTENTS
FORM 10-K
 
   
Page
PART I
   
     
EXPLANATORY PARAGRAPH
 
5
     
Item 1. BUSINESS
 
9
     
Item 1A. RISK FACTORS
 
16
     
Item 1B. UNRESOLVED STAFF COMMENTS
 
19
     
Item 2. PROPERTIES
 
19
     
Item 3. LEGAL PROCEEDINGS
 
19
     
PART II
   
     
Item 4. MINE SAFETY DISCLOSURE    19 
     
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
20
     
Item 6. SELECTED FINANCIAL DATA
 
21
     
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
21
     
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
26
     
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
26
     
Item 9A. CONTROLS AND PROCEDURES
 
27
     
Item 9B. OTHER INFORMATION
 
30
     
PART III
   
     
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 
30
     
Item 11. EXECUTIVE COMPENSATION
 
31
     
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
32
     
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
33
     
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
34
     
PART IV
   
     
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
36
     
Signatures
 
37
     
Exhibit 31    
     
Exhibit 32    
 
 
 
 

 
 
   
Page
     
PART V — FINANCIAL INFORMATION – QUARTERLY
   
     
ITEM 1. FINANCIAL STATEMENTS
 
60
     
Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited), June 30, 2012 (unaudited), March 31, 2012 (unaudited) and December 31, 2011 and September 30, 2011 (unaudited), June 30, 2011 (unaudited), March 31, 2011 (unaudited) and December 31, 2010.
 
60
     
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months and nine months ended September 30, 2012 and September  30, 2011 (unaudited), three and six months ended June 30, 2012 and June 30, 2011 (unaudited) and the three months ended March 31 2012 and March 31, 2011 (unaudited)
 
62
     
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and September 30, 2011 (unaudited), six months ended June 30, 2012 and June 30, 2011 and three months ended March 31, 2012 and March 31, 2011 (unaudited)
 
65
     
Notes to Condensed Consolidated Financial Statements (unaudited)
 
69
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
85
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
 
97
     
ITEM 4. CONTROLS AND PROCEDURES
 
97
     
PART VI — OTHER INFORMATION-QUARTERLY
 
100
     
ITEM 1. LEGAL PROCEEDINGS
 
100
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
101
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
101
     
ITEM 4. MINE SAFETY DISCLOSURES
 
101
     
ITEM 5. OTHER INFORMATION
 
101
     
ITEM 6. EXHIBITS
 
101
     
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 Exhibit 101 Interactive Data Files
 
 
 
4

 
 
Special Note Regarding Forward Looking Statements
 
Certain statements in this Form 10-K 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-K to “Company,” “we,” “us,” and “our,” are references to Dolphin Digital Media, Inc. and its consolidated subsidiaries, Dolphin Digital Media (Canada) Inc., Anne’s World Limited, Curtain Rising Inc., Cybergeddon Productions LLC, Hiding Digital Productions, LLC and Dolphin Kids Clubs LLC.

EXPLANATORY NOTE

This annual report on Form 10-K is a comprehensive filing for the fiscal year ended December 31, 2012 and the quarter ended September 30, 2012.  In addition, as part of this comprehensive filing, we are amending our previously filed annual 10-K reports for the years ended December 31, 2011 and 2010 and previously filed quarterly reports on Form 10-Q for the interim periods ended June 30, 2012, March 31, 2012, September 30, 2011, June 30, 2011 and March 31, 2011. This is our first periodic filing since the second quarter of 2012.   
 
During the quarter ended September 30, 2012, the Company identified errors related to the accounting of an anti-dilution agreement that had been granted to our CEO, Bill O’Dowd, on June 23, 2008 as part of the Purchase agreement on that date. Under the terms of the agreement, Mr. O’Dowd was to receive the number of common shares necessary to maintain his fifty one percent shareholding each time a third party was issued shares or exercised options, warrants, notes or other securities exercisable or exchangeable for, or convertible into, any shares of our common stock, for a period of five years.   On September 13, 2012, the Company issued 17,701,365 common shares to Mr. O’Dowd in compliance with the agreement.  The Company evaluated the accounting for the common shares issued and determined that the anti-dilution provision should have been recorded as a liability and changes in the fair value recorded through earnings at each reporting period.  The Company is amending the previously filed annual and quarterly reports as discussed above that were materially affected by this error.  See Note 10 for further discussion on the valuation of the derivative liability.

In addition, below we are presenting the effects of the correction for the quarters and years ended September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009,  September 30, 2009, June 30, 2009, March 31, 2009, December 31, 2008, September 30, 2008 and June 30, 2008.  The information provided below has not been audited and is meant to provide information to the readers of these financial statements.


 
5

 
 
September 30, 2010
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                 
Total Liabilities
  $ 3,525,202     $ 339,501     $ 3,864,703  
Stockholders’ Deficit
  $ (1,269,728 )   $ (339,501 )   $ (1,609,229 )
Quarterly Statement of Operations
                       
Net Loss
  $ (431,633 )   $ 350,100     $ (81,533 )
Weighted Average Shares
    62,107,736       18,478,046       80,585,782  
Loss Per Share
  $ (0.01 )           $ (0.00 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (2,627,365 )   $ 746,696     $ (1,880,669 )
Weighted Average Shares
    60,786,041       16,948,515       77,734,556  
Loss Per Share
  (0.04 )           (0.02 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (2,627,365 )   $ 746,696     $ (1,880,669 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ (746,696 )   $ (746,696 )
June 30, 2010
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 3,575,282     $ 689,601     $ 4,264,883  
Stockholders’ Deficit
  $ (1,662,060 )   $ (689,601 )   $ (2,351,661 )
                         
Quarterly Statement of Operations
                       
Net Loss
  $ (604,082 )   $ 463,229     $ (140,853 )
Weighted Average Shares
    61,076,413       16,214,516       77,290,929  
Loss Per Share
  $ (0.01 )           $ (0.00 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (2,195,049 )   $ 396,596     $ (1,798,453 )
Weighted Average Shares
    60,540,104       15,788,594       76,328,698  
Loss Per Share
  $ (0.04 )           $ (0.02 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (2,195,049 )   $ 396,596     $ (1,798,453 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ (396,596 )   $ (396,596 )
March 31, 2010
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 3,450,233     $ 1,152,830     $ 4,603,063  
Stockholders’ Deficit
  $ (1,726,595 )   $ (1,152,830 )   $ (2,879,425 )
                         
Quarterly Statement of Operations
                       
Net Loss
  $ (1,590,967 )   $ (66,633 )   $ (1,657,600 )
Weighted Average Shares
    59,997,836       15,325,318       75,323,154  
Loss Per Share
  $ (0.03 )           $ (0.02 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (1,590,967 )   $ (66,633 )   $ (1,657,600 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ 66,633     $ 66,633  
 
 
6

 
 
December 31, 2009
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 3,427,608     $ 1,086,197     $ 4,513,805  
Stockholders’ Deficit
  $ (1,912,499 )   $ (1,086,197 )   $ (2,998,696 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (4,919,741 )   $ 2,925,727     $ (1,994,014 )
Weighted Average Shares
    53,926,712       14,166,772       68,093,484  
Loss Per Share
  $ (0.09 )           $ (0.03 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (4,919,741 )   $ 2,925,727     $ (1,994,014 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ (2,925,727 )   $ (2,925,727 )
September 30, 2009
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 3,3,443,148     $ 2,076,387     $ 5,519,535  
Stockholders’ Deficit
  $ (1,835,483 )   $ (2,076,387 )   $ (3,911,870 )
                         
Quarterly Statement of Operations
                       
Net Loss
  $ (1,972,700 )   $ 177,578     $ (1,795,122 )
Weighted Average Shares
    53,855,596       9,276,006       63,131,602  
Loss Per Share
  $ (0.04 )           $ (0.03 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (3,950,248 )   $ 1,935,537     $ (2,014,711 )
Weighted Average Shares
    52,322,109       8,239,263       60,561,372  
Loss Per Share
  $ (0.08 )           $ (0.03 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (3,950,248 )   $ 1,935,537     $ (2,014,711 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ (1,935,537 )   $ (1,935,537 )
June 30, 2009
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 2,611,118     $ 2,253,965     $ 4,865,083  
Stockholders’ Deficit
  $ (1,293,376 )   $ (2,253,965 )   $ (3,547,341 )
                         
Quarterly Statement of Operations
                       
Net Loss
  $ (692,874 )   $ 529,041     $ (163,833 )
Weighted Average Shares
    51,412,261       6,310,834       57,723,095  
Loss Per Share
  $ (0.01 )           $ (0.00 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (1,977,548 )   $ 1,757,959     $ (219,589 )
Weighted Average Shares
    52,942,556       3,507,953       56,450,509  
Loss Per Share
  $ (0.04 )           $ (0.00 )
Statement of Cash Flows
                       
Net Loss
  $ (1,977,548 )   $ 1,757,959     $ (219,589 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ (1,757,959 )   $ (1,757,959 )
 
 
7

 
 
March 31, 2009
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 2,202,056     $ 2,783,006     $ 4,985,062  
Stockholders’ Deficit
  $ (1,254,804 )   $ (2,783,006 )   $ (4,037,810 )
                         
Quarterly Statement of Operations
                       
Net Loss
  $ (1,284,674 )   $ 1,228,918     $ (55,756 )
Weighted Average Shares
    49,236,904       2,603,548       51,840,452  
Loss Per Share
  $ (0.03 )           $ (0.00 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (1,284,674 )   $ 1,228,918     $ (55,756 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ (1,228,918 )   $ (1,228,918 )
December 31, 2008
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 1,516,030     $ 4,011,924     $ 5,527,954  
Stockholders’ Deficit
  $ (650,894 )   $ (4,011,924 )   $ (4,662,818 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (14,716,881 )   $ 19,802     $ (14,697,079 )
Weighted Average Shares
    35,521,287       140,046       35,661,333  
Loss Per Share
  $ (0.41 )           $ (0.41 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (3,398,772 )   $ 19,802     $ (3,378,970 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ (19,802 )   $ (19,802 )
                         
September 30, 2008
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                       
Total Liabilities
  $ 407,198     $ 4,421,041     $ 4,828,239  
Stockholders’ Equity (Deficit)
  $ 9,275     $ (4,421,041 )   $ (4,411,766 )
                         
Quarterly Statement of Operations
                       
Net Loss
  $ (650,934 )   $ (389,314 )   $ (1,040,248 )
Weighted Average Shares
    47,183,793       32,474       47,216,267  
Loss Per Share
  $ (0.01 )           $ (0.02 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (2,453,870 )   $ (389,314 )   $ (2,843,184 )
Weighted Average Shares
    30,937,314       141,457       30,795,857  
Loss Per Share
  $ (0.08 )           $ (0.09 )
Statement of Cash Flows
                       
Net Loss
  $ (2,453,870 )   $ (389,314 )   $ (2,843,184 )
(Gain) loss on change in fair value of derivative liability
  $ -     $ 389,314     $ 389,314  
 
 
 
8

 
 
June 30, 2008
 
(Unaudited)
As Filed
   
(Unaudited) Adjustment
   
(Unaudited) Restated
 
Balance Sheet
                 
Total Liabilities
  $ 485,033     $ 4,031,726     $ 4,516,759  
Stockholders’ Deficit
  $ (168,700 )   $ (4,031,726 )   $ (4,200,426 )
                         
Quarterly Statement of Operations
                       
Net Loss
  $ (958,943 )   $ -     $ (958,943 )
Weighted Average Shares
    23,625,658       -       23,625,658  
Loss Per Share
  $ (0.04 )           $ (0.04 )
                         
YTD Statement of Operations
                       
Net Loss
  $ (1,815,279 )   $ -     $ (1,815,279 )
Weighted Average Shares
    22,517,594       -       22,517,594  
Loss Per Share
  $ (0.08 )           $ (0.08 )
                         
Statement of Cash Flows
                       
Net Loss
  $ (1,815,279 )   $ -     $ (1,815,279 )
 
PART I
ITEM 1.  BUSINESS.

Introduction

           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 consistently 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 tremendous 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.

Dolphin Digital Media partnered with the University of Miami to launch its first kids club, the Coca-Cola Junior Canes Club, in September, 2011.  In February 2012, the Company entered into an agreement with United States Youth Soccer Association, Inc. to launch a Kids Club in this upcoming back-to-school season.  These are perfect examples of high-quality brands with tremendous reach to children nationwide that will benefit from the engagement that comes from a highly entertaining and informative Kids Club.  The Company has not generated any material revenue and has incurred approximately $50,000 of expenses related to the Kids Clubs.
 
 
9

 

Finally, Dolphin Digital Media continues to enhance and support its online safety product for children, Dolphin Secure, which is an 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.  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.

Dolphin Digital Studios

During the years ended December 31, 2012 and 2011, 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 twelve months ended December 31, 2012 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 recently announcing major initiatives around original programming.

Dolphin Digital Media foresees 3 distinct demographics for its upcoming “web series”:

1.  
Tweens (roughly 9-14 years old);
2.  
Teens and Young Adults (roughly 14-24 years old); and
3.  
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:

1.  
Producer’s Fees:  Dolphin Digital Studios will earn fees for producing each web series, as included in the production budget for each project;
2.  
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
3.  
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.

For the year ended December 31 2012, the Company recognized revenues of $3,863,935 and cost of revenues of $3,416,145 related to Dolphin Digital Studios. For the year ended December 31, 2011, the Company did not have any revenues or costs of revenues related to the production of web series. 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).  For the year ended December 31, 2011, the Company received $895,000 from investors to finance the production of web series through Equity Finance Agreements.  For the year ended December 31, 2012, the Company received an additional $105,000 from an investor through an Equity Finance Agreement.   Funding received through these investments is meant to help finance the costs of the web series.  On January 1, 2013, the production “cycle” will cease and the Investors will be entitled to share in the future revenues of any productions for which the funds invested were used.  Investors share in 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 production revenues to date and the amount of investor funds used to date, the Company is not required to pay the investors any amount in excess of the existing liability already recorded as of December 31, 2012 and December 31, 2011. The Company has invested these funds in eleven projects.  Only one of the productions was completed as of December 31, 2012 and there was no producer gross revenue as defined in the Equity Finance Agreements as of December 31, 2012.  The Company expects to have gross producer revenues subsequent to year end at which time the investors will receive their pro rata share of the revenue.
 
 
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Dolphin Digital Studios expects to produce several web series a year. Some projects may be self-financed, while some projects currently under development will feature strategic and financial partnerships. This will allow Dolphin Digital Studios to have attractive project financing alternatives while developing its slate of programming.

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 recently 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.

Warner Bros. Digital Distribution Partnership

Dolphin Digital Studios’ first web series was co-financed through an agreement with Dolphin Entertainment and Warner Bros. Digital Distribution.

The first title produced under this agreement is 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).

 “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.

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 Nick for even looking at Amanda.

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, serves as an 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.  Aim High is 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.”
 
 
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Aim High simultaneously premiered on Facebook and Cambio (AOL’s Teen Site) in October, 2011, Aim High represented Facebook’s first social web series from major Hollywood partners. Consumers became part of the show by integrating their profile information – including photos, text and friends – by simply opting into an application on the show’s Facebook page at www.facebook.com/aimhighseries.  By choosing to watch Aim High in a personalized viewing mode through the show’s Facebook page, viewers see themselves or their friends integrated into select scenes throughout the series – from their photo appearing on a student body election poster, to having their name seen as graffiti on the bathroom wall.  This video application not only allows consumers to have an immersive and engaging viewing experience, but also social one where they can share comments, scenes and Tweets about their favorite moments from the show.

Aim High won the Writer’s Guild Award for Outstanding Achievement in Writing for Original New Media at the Writer’s Guild Awards ceremony hosted by Joel McHale and Zooey Deschanel on February 19, 2012 in Los Angeles, California.

“H+”

Dolphin Digital Studios’ never became involved with the production of the second web series in this partnership  (“H+”) and subsequently focused its resources on the production of Cybergeddon.

Cybergeddon

On March 30, 2012, the Company announced its new project 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 have partnered with Dolphin Digital Studios for this ground breaking motion picture event which will bring 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 the first quarter of 2012, the Company incorporated Cybergeddon Productions, LLC as a wholly owned subsidiary.  The company entered into agreements with certain vendors and in compliance 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 has recorded revenues of approximately $2,900,000 related to this production during the year ended December 31, 2012.  The Company has begun to amortize the capitalized production costs using the individual film forecast computation method and has amortized costs of approximately $1,973,000 related to this production.   As of December 31, 2012, the Company has capitalized production costs, net of accumulated amortization and estimated tax credits, of approximately $663,000 that are recorded in the Consolidated Balance Sheets as capitalized production costs.
 
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 the year ended December 31, 2012.
 
Subsequent to year end, 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.
 
 
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This relationship with Cambio ensures a premium online distribution partner for the upcoming slate of teen/young adult web series from Dolphin Digital Studios. As of December 31, 2012, no productions associated with this partnership have been completed.

Management expects future announcements relating to distribution partners for the tween and general market demographics.

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.

In September, 2011, Dolphin Digital Media partnered with the University of Miami to launch the enhanced Coca-Cola Junior Canes Club, an exciting fan club for children that combines unique “real-world” offerings with an engaging online experience.  The core of the Junior Canes Club is a fun and unique fan experience online at www.juniorcanesclub.com.  Junior Canes Club members can ask their favorite player or coach a question, see exclusive videos and photos from University of Miami athletics, play online games, create and customize their own personal profile page, take fan polls, and much more.  The Junior Canes Club is open to children 12-years of age and younger.  A registration fee of $20 provides each Junior Canes Club member with a Welcome Kit, which includes an Official Coca-Cola Junior Canes T-shirt, a membership card, and an autographed photo from Sebastian the Ibis. Each month thereafter is only $9.99, and entitles Junior Canes Club members to an array of benefits, both at sporting events and online, which currently hold over a $400 annual value.  On November 25th, all Junior Canes were invited to receive free admission to the University of Miami vs. Boston College ACC Conference football game.  Club members also received free admission to select men’s and women’s basketball games, as well as to select baseball games. By using their exclusive membership card, they also received free admission to all home women’s soccer and women’s volleyball games.  There are multi-child discounts, with the second child (and each additional child) per household receiving 50% off the monthly fee (only $4.99 per month per additional child).  The Company will share equally revenues from net membership fees with the University of Miami. For the years ended December 31, 2012 and 2011, the Company did not generate any significant revenues from this Partnership with the University of Miami.

In February 2012, Dolphin Digital Media entered into an agreement with U.S. Youth Soccer to create the “US Soccer Clubhouse” website.  This site will give kids the opportunity to view photos of their favorite players and teams, get up to date news on games and events, view videos of popular TV shows and celebrities and play online games.  Similar to the Junior Canes Club, they will be able to create their own personal profile page.  The site will also feature an event calendar so the members can stay informed of upcoming games, fan celebrations, etc.   In addition, there will be several sweepstakes throughout the year for an opportunity to meet a national celebrity.   The Company is still in the process of finalizing the details concerning the membership benefits and fees. During the first quarter of 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, the second $25,000 installment was paid during the second quarter and the remaining payments will be made monthly over a period of two years upon receipt of the completed site.
 
 
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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 December 31, 2012, the Company recorded a noncontrolling interest of $3,000,000 for the 25% interest in Dolphin Kids Clubs LLC.  Except as noted in the preceding paragraph, the Company did not incur any liabilities or derive any revenue from this agreement during the year ended December 31, 2012.

Dolphin Secure

Dolphin Digital Media has developed Dolphin Secure, a groundbreaking family Internet solution that gives parents the tools to protect their children online.  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 by using 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.

Once Dolphin Secure has been downloaded, the computer is unable to access the internet or IM applications without requiring identification from the user.  With a fingerprint swipe, obviously unique to the user, Dolphin Secure is able to identify each user, thus allowing its safety settings to be customizable to each individual child within the household.  Thus, Dolphin Secure protects where each child may go online, and who they may talk to, even when the parents are not home.  The Dolphin Secure “master white list” of pre-approved sites 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.  Furthermore, 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.

“Dolphin Surf,” the “landing page” associated with Dolphin Secure (i.e. where the child “starts from” on the internet once they’ve provided their fingerprint swipe) is a social network where 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.  “Dolphin Surf” differentiates itself from 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).

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 for children.

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 years ended December 31, 2012 and 2011, the Company did not receive any royalties in relation to the licensing agreement.
 
 
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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 five 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, currently not set to expire until 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 years ended December 31, 2012, 2011 and 2010, the Company did not use Dolphin Entertainment’s brand properties and therefore no royalties were payable under the licensing agreement.

Corporate History

Dolphin Digital Media, initially known as Rising Fortune Incorporated, was incorporated in the State of Nevada on March 7, 1995. We were inactive between the years 1995 and 2003.

On June 23, 2008, we obtained an exclusive license to Dolphin Entertainment’s family entertainment brand properties through the acquisition of 100% of the capital stock of Dolphin Digital Media (“DDM”), a newly formed Delaware corporation wholly owned by Mr. O’Dowd. In consideration of the acquisition, we issued 24,063,735 shares of our common stock (constituting fifty-one percent of our issued and outstanding common stock) to Mr. O’Dowd, and appointed Mr. O’Dowd our Chief Executive Officer and Chairman of the Board of Directors. At the time of the acquisition, DDM was the grantee of an exclusive ten-year worldwide license from Dolphin Entertainment, dated as of the date of the closing of the acquisition, to use Dolphin Entertainment’s family entertainment brand properties. This license was the sole asset of DDM at the time of the acquisition, and DDM had not yet commenced planned principal operations. Under the license, we are authorized to use Dolphin Entertainment’s brand properties in connection with the creation, promotion and operation of subscription based Internet social networking websites for children and young adults. The license requires that we pay to Dolphin Entertainment royalties at the rate of fifteen percent of our net sales from performance of the licensed activities. The acquisition was accounted for as a reverse merger and the goodwill was immediately impaired.

On July 29, 2008, we amended our Articles of Incorporation to change our name from Logica Holdings, Inc. to Dolphin Digital Media, Inc.

On August 4, 2011, the Company incorporated its wholly owned subsidiary Hiding Digital Productions, LLC.

On March 6, 2012, the Company incorporated its wholly owned subsidiary Cybergeddon Productions, LLC.
 
 
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On May 21, 2012, the Company formed Dolphin Kids Clubs, LLC, and owns 75% interest in the entity, for the purpose of creating online kids clubs. In accordance with Accounting Standards Codification (ASC) 810-20, Dolphin Kids Clubs LLC is consolidated in the Company’s financial statements. Amounts attributable to the noncontrolling interest will follow the provisions in the contractual arrangement.  A note holder converted $1,500,000 of notes payable and contributed an additional $1,500,000 during the year ended December 31, 2012, for a 25% interest in Dolphin Kids Clubs, LLC.  The Company will develop and maintain the kids club websites for its 75% interest in the entity.  Noncontrolling interest is presented as a separate component of shareholders’ equity.

Corporate Offices

Our corporate headquarters is located at 2151 Le Jeune Road, Suite 150-Mezzanine, Coral Gables, Florida 33134. Our telephone number is (305) 774-0407.

ITEM 1A. RISK FACTORS.

The Company has limited historical operations and we urge you to consider our likelihood of success and prospects in light of risks, expenses and difficulties encountered by entities at similar stages. The following is a summary of certain risks we face but they are not the only risks we face. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business and results of operations. The trading price of our common stock could decline due to the occurrence of any of these risks, and investors could lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in our other filings with the Securities and Exchange Commission.

Certain Risk Factors Relating to our Business

Our independent auditors have expressed that there is substantial doubt about our ability to continue as a going concern.

For the year ended December 31, 2012, our independent auditors issued an explanatory paragraph in their audit report expressing substantial doubt about our ability to continue as a going concern based upon our net loss and negative cash flows from operations for the years ended December 31, 2012, 2011 and 2010 and our levels of working capital as of December 31, 2012, 2011 and 2010.  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 capital.

We may need to raise additional capital in the near future, and, if we are unable to secure adequate funds on acceptable terms, we may be unable to support our business plan and be required to suspend operations.

We may need to raise additional capital in the near term, and may seek to do so by conducting one or more private placements of equity securities, selling additional securities in a registered public offering, or through a combination of one or more of such financing alternatives. There can be no assurance that any additional capital resources will be available to us as and when required, or on terms that will be acceptable to us.

The following terms of our October 2007 financing, as amended, will make obtaining additional financing with acceptable terms more difficult and/or expensive: (i) no dividends may be paid with respect to common stock while the Preferred Stock is outstanding, unless said dividends are paid pro rata to the holders of the Preferred Stock; (ii) as long as the Preferred Stock is outstanding, the Company may not, without the approval of the holders of the Preferred Stock, authorize or create authorize or create any class of stock ranking as to dividends or distribution of assets upon a liquidation senior to or otherwise pari passu with the Preferred Stock, or any preferred stock possessing greater voting rights or the right to convert at a more favorable price than the Preferred Stock; (iii) the Preferred Stock is entitled to a $0.25 per share preferred distribution, prior to any distribution to holders of common stock, upon a liquidation of the Company; and (iv) for a period of 5 years post closing, the Company is prohibited from effecting or entering into an agreement to effect any subsequent financing involving a transaction in which the Company issues or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of common stock either (a) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of common stock at any time after the initial issuance of such debt or equity securities, or (b) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock exclusive in all cases of stock splits, stock dividends, recapitalization and other similar rights, or, a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future transactions of the Company on terms more favorable than those granted to such investor in such offering.
 
 
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If we are unable to raise the capital required on a timely basis, we may not be able to fund our projects and the development of the businesses of our subsidiaries. In such event, we may be required to suspend our plan of operations. Moreover, even if the necessary funding is available to us, the issuance of additional securities would dilute the equity interests of our existing stockholders, perhaps substantially.

Our success depends on the attraction and retention of senior management and technicians with relevant expertise.

Our future success will depend to a significant extent on the continued services of William O’Dowd, who conceived the business and overall operating strategy, and has been most instrumental in assisting us in raising capital and currently serves as our CEO. The Company entered into a three year employment agreement with Mr. O’Dowd effective January 1, 2012.  Our ability to execute our strategy also will depend on our ability to attract and retain qualified technicians and sales, marketing and additional managerial personnel. If we are unable to find, hire and retain qualified individuals, we could have difficulty implementing our business plan in a timely manner, or at all.

A number of factors may cause our consolidated operating results to fluctuate on a quarterly or annual basis, which may make it difficult to predict our future operating results.

We expect our consolidated revenues and expenses to fluctuate, making it difficult to predict our future operating results. Factors that could cause our operating results to fluctuate include:

 
 
demand in the markets that we serve;
       
 
 
our ability to define, design and release new products that meet customer needs, and to do so quickly and cost effectively;
       
 
 
market acceptance of new and enhanced versions of our products;
       
 
 
variations in the performance of our businesses;
       
 
 
our ability to forecast demand in the markets that we serve;
       
 
 
general economic conditions in the countries where we operate; and
       
 
 
changes in exchange rates, interest rates and tax rates.
 
Any of the above factors, many of which are beyond our control, could significantly harm our business and results of operations. The results of a prior quarter or annual period should not be relied upon as an indicator of future operating performance.
 
 
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Certain Risk Factors Relating to our Common Stock

The market for common stock is limited, and you may not be able to sell the shares of our common stock that you hold.

Our common stock is currently traded on pink sheets of the OTC Bulletin Board, not on a national securities exchange. Therefore, our common stock is thinly traded, the market for purchases and sales of our common stock is limited and the sale of a limited number of shares could cause the price to fall significantly. Accordingly, it may be difficult to sell shares of our common stock quickly without significantly depressing the value of the stock. Unless we are successful in developing continued investor interest in our stock, sales of our stock could continue to result in major fluctuations in the price of the stock.

Stockholder interest in us may be substantially diluted as a result of the sale or issuance of additional securities pursuant to existing commitments and to fund our plan of operation.

Issuances of additional shares of common stock would result in dilution of the percentage interest in our common stock of all stockholders ratably and might result in dilution in the tangible net book value of a share of our common stock, depending upon the price and other terms on which the additional shares are issued. In addition, the issuance of additional shares of common stock upon exercise of the warrants or stock options, or even the prospect of such issuance, may have an effect on the market for our common stock and may have an adverse impact on the price at which shares of our common stock trade.

If securities or industry analysts do not publish research reports about our business or if they make adverse recommendations regarding an investment in our common stock, our stock price and trading volume may decline.
 
The trading market for our common stock will be influenced by the research reports that industry or securities analysts publish about our business. We do not currently have, and may never obtain, research coverage by industry or securities analysts. If no industry or securities analysts commence coverage of us, the trading price of our common stock could be negatively impacted. In the event, we obtain industry or security analyst coverage, and if one or more of the analysts downgrade our stock or comment negatively on our prospects, our stock price would likely decline. If one or more of these analysts cease to cover us or our industry or fails to publish reports about us regularly, our common stock could lose visibility in the financial markets, which could also cause our stock price or trading volume to decline.

We may be the subject of securities class action litigation due to future stock price volatility.

Our common stock price has fluctuated significantly and may continue to do so in the future. We expect that the market price of our common stock will likely continue to fluctuate significantly and remain highly volatile. We will not have control over the factors that cause such volatility. Historically, when the market price of a stock has been volatile, holders of that stock have often initiated securities class action litigation against the company that issued the stock. If any of our stockholders bring a similar lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management from the operation of our business.

We do not intend to declare cash dividends on our common stock.

We will not distribute any cash to our stockholders until and unless we can develop sufficient funds from operations to meet our ongoing needs and implement our business plan. As a result, your only opportunity to achieve a return on your investment in us will be if the market price of our common stock appreciates and you sell your shares at a profit. The future market price for our common stock may never exceed the price that you pay for our common stock.
We have identified  material weaknesses in our internal control over financial reporting and our business and stock price may be adversely affected if we do not adequately address those weaknesses.

The existence of these or one or more other material weaknesses or significant deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline, we may be unable to obtain additional financing to operate and expand our business and our business and financial condition could be harmed.
 
 
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ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

As of the date of this report, we do not own any real property.  The Company leases office space at 2151 Le Jeune Road, Suite 150-Mezzanine, Coral Gables, Florida 33134. In 2012, the Company opened an office in Los Angeles, California and currently leases office space at 10880 Wilshire Boulevard, Suite 1101, Los Angeles, California 90024.   We believe our current facilities are adequate for our operations for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

On or about January 25, 2010, an action was filed by Tom David against Winterman Group Limited, Dolphin Digital Media (Canada) Ltd., Malcolm Stockdale and Sara Stockdale in the Superior Court of Justice in Ontario (Canada) alleging breach of a commercial lease and breach of a personal guaranty. On or about March 18, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Statement of Defense and Crossclaim. In the Statement of Defense, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale deny any liability under the lease and guaranty. In the Crossclaim filed against Dolphin Digital Media (Canada) Ltd., Winterman Group Limited, Malcolm Stockdale and Sara Stockdale seek contribution or indemnity against Dolphin Digital Media (Canada) Ltd. alleging that it agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. On or about March 19, 2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale filed a Third Party Claim against the Company seeking contribution or indemnity against the Company, formerly known as Logica Holdings, Inc., alleging that the Company agreed to relieve Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from any and all liability with respect to the lease or the guaranty. The Third Party Claim was served on the Company on April 6, 2010. On or about April 1, 2010, Dolphin Digital Media (Canada) filed a Statement of Defense and Crossclaim. In the Statement of Defense, Dolphin Digital Media (Canada) denied any liability under the lease and in the Crossclaim against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale, Dolphin Digital Media (Canada) seeks contribution or indemnity against Winterman Group Limited, Malcolm Stockdale and Sara Stockdale alleging that the leased premises were used by Winterman Group Limited, Malcolm Stockdale and Sara Stockdale for their own use. On or about April 1, 2010, Dolphin Digital Media (Canada) also filed a Statement of Defense to the Crossclaim denying any liability to indemnify Winterman Group Limited, Malcolm Stockdale and Sara Stockdale. On or about March 12, 2012, the Court served a Status Notice on all the parties indicating that since more than (2) years had passed since a defence in the action had been filed, the case had not been set for trial and the case had not been terminated, the case would be dismissed for delay unless action was taken within ninety (90) days of the date of service of the notice.  The Company has not filed a motion to dismiss this case and no further action has been taken in this case.  The ultimate results of these proceedings against the Company could result in a loss ranging from 0 to $325,000.  On March 23, 2012, Dolphin Digital Media (Canada) Ltd filed for bankruptcy in Canada.  The bankruptcy will not protect the Company from the Third Party Claim filed against it. However, the Company has not accrued for this loss because it believes that the claims against it are without substance and it is not probable that they will result in loss.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable
 
 
19

 
 
 PART II
 
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market for Our Common Stock

Our common stock was traded on the over-the-counter market and was quoted on the OTC Bulletin Board under the symbol “DPDM.OB from November 2, 2006 to November 29, 2012.  Pursuant to NASD Rule 6530 (c), effective November 29, 2012, our securities were removed from quotation on the OTCBB for not meeting our reporting requirements three times in a 24 month period.  Our shares are currently quoted on the “pink sheets” of the over the counter market under the symbol “DPDM”.  We intend to become current in our filings beginning with the quarterly report on Form 10-Q for the quarter ended June 30, 2014.   The high and low bid information for each quarter since January 1, 2010, as quoted on the OTC, is as follows:
 
Quarter
 
High Bid
   
Low Bid
 
                 
Fourth Quarter 2012
 
$
.08
   
$
.04
 
Third Quarter 2012
 
$
.16
   
$
.10
 
Second Quarter 2012
 
$
.10
   
$
.04
 
First Quarter 2012
 
$
.13
   
$
.08
 
                 
Fourth Quarter 2011
 
$
0.18
   
$
0.08
 
Third Quarter 2011
 
$
0.25
   
$
0.09
 
Second Quarter 2011
 
$
0.10
   
$
0.05
 
First Quarter 2011
 
$
0.13
   
$
0.08
 
                 
Fourth Quarter 2010
 
$
0.13
   
$
0.08
 
Third Quarter 2010
 
$
0.22
   
$
0.09
 
Second Quarter 2010
 
$
0.40
   
$
0.16
 
First Quarter 2010
 
$
0.39
   
$
0.20
 

The quotations above reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not reflect actual transactions.  Such quotes are not necessarily representative of actual transactions or of the value of the Company’s securities, and are, in all likelihood, not based upon any recognized criteria of securities valuation as used in the investment banking community.

The trading volume for the Company’s common stock is relatively limited. There is no assurance that an active trading market will continue to provide adequate liquidity for the Company’s existing shareholders or for persons who may acquire the Company’s common stock in the future.

Holders

As of April 9, 2014, an aggregate of 81,892,352 shares of our common stock were issued and outstanding and were owned by approximately 275 stockholders of record, based on information provided by our transfer agent.

Dividends

We have never paid dividends on our common stock and do not anticipate that we will do so in the foreseeable future.
 
 
20

 
 
Equity Compensation Plan Information

On September 7, 2012, the Company’s Board of Directors approved an Incentive Compensation Plan.  The plan was enacted as a way of attracting and retaining exceptional employees and consultants by enabling them to share in the long term growth and financial success of the Company.  The plan will be administered by the Board of Directors or a committee designated by the board.  As part of the increase in authorized shares, the Board of Directors has designated 10,000,000 common shares for this plan.  No awards have been issued related to this plan.
 
 
Recent Sales of Unregistered Securities

None.

ITEM 6.  SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS.

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operation contains statements that are forward-looking. These statements are based on current expectations and assumptions, which are subject to risk, uncertainties and other factors.

Results for the years ended December 31, 2012, 2011 and 2010
 
For the year ended December 31, 2012, the Company had revenues of approximately $3,864,000.  These revenues were derived from the completion of two productions, “Hiding” and “Cybergeddon”.For the year ended December 31, 2011, the Company had revenues of $472,824.  This was primarily derived from the sale of the licensing rights of Dolphin Secure in Germany to an unrelated German company for $275,000.  In addition, the Company completed post production services for Wazzup Productions earning $97,824 and earned $100,000 from a related party (Dolphin Entertainment), for production services rendered for “AIM High”.  The Company did not generate any revenue in 2010.

General and administrative costs increased by $2,069,935 from $1,768,860 in 2011 to $3,838,795 in 2012. The net increase is mainly due to an increase in compensation expense of $1,250,000 related to the employment agreement with our CEO, increase of approximately $130,000 of commission expense related to packaging fees for our production Cybergeddon, $320,000 for an iOS and Android app used to advertise the production Cybergeddon, and $200,000 of charitable donations.  The General and administrative costs decreased by $2,641,297 from $4,410,157 in 2010 to $1,768,860 in 2011.  This net decrease is primarily due to an impairment of website development costs in 2010 in the amount of $2,166,143; an impairment of $170,500 in 2010 for advances made to an unrelated party, a decrease of $146,000 in outside consulting agreements that were not renewed in 2011; $192,500 decrease in legal fees because of litigation that was settled in early 2011 and $120,000 reserved in 2010 for contingencies associated with tax penalties.  Rent increased in 2011 by $14,000 and payroll costs increased by $112,900 due to new employees hired.
Finance charges decreased from $948,466 in 2010 to $0 in 2011.  This is primarily due to expenses related to the re-pricing of stock warrants in 2010. There were no finance charges for the years ended December 31, 2012.
 
Interest expense increased by $194,112 from $142,137 in 2011 to $336,249 in 2012. The increase is mainly due to interest on the revolving line of credit from our CEO and interest incurred on unpaid compensation expense to our CEO.  Interest expense decreased by $56,794 from $198,931 in 2010 to $142,137 in 2011 mainly due to a charge in 2010 of $57,000 for the amortization of a discount on convertible debt that was converted to preferred stock during 2010.

Other income decreased by $159,453 from $208,593 in 2011 to $49,140 in 2012.  In May of 2012, interest incurred on several promissory notes that were converted to equity in a subsidiary were forgiven and the extinguishment of debt was recorded against Other income.  Other income increased by $208,593 from $0 in 2010 to $208,593 in 2011 due to proceeds from litigation that was settled in early 2011 and the settlement with certain vendors for outstanding accounts payable for amounts less than what was owed.
 
 
21

 

The net loss was $3,385,964 or $(0.04) per share based on 81,892,352 weighted average shares outstanding for the year ended December 31, 2012, $1,227,119 or $(0.01) per share based on 81,892,352 weighted average shares outstanding for the year ended December 31, 2011 and a loss of $4,767,854 or $(0.06) per share based on 78,782,547 weighted average shares outstanding for the year ended December 31, 2010.  The increase in net loss between 2012 and 2011 and the decrease in net loss between 2010 and 2011 was related to the factors discussed above.
 
Liquidity and Capital Resources

Cash flows used in operating activities increased from $2,252,458 for the fiscal year ended December 31, 2011 to $2,959,422 for the fiscal year ended December 31, 2012. During 2012, the Company increased its capitalized production costs by $2,627,891 of which $238,727 was outstanding as of December 31, 2012 and included in other current liabilities. The Company decreased its accounts payable by $230,267 during 2012 by paying down certain vendors on a monthly basis and also by $293,730 through the deconsolidation of its foreign subsidiaries.  Other current liabilities decreased by $625,030 in 2012 mainly due to $916,000 of tax credits on its productions being applied against the liability to the unrelated production company.  Accrued compensation increased by $1,250,000 from December 31, 2011 to December 31, 2012 due to the employment agreement signed with our CEO.  Rent expense increased during the same period by approximately $43,500 due to the Company’s new office space in Florida and the opening of the California office.  Other current assets increased by $217,241 due to a producer’s fee of $150,000 and sales on one of the productions.  Cash flows used in operating activities increased from $1,411,189 for year ended December 31, 2010, to $2,252,659 for the year ended December 31, 2011.  During 2011, the Company capitalized costs of $1,538,251, of which $1,294,120 was outstanding as of December 31, 2011 and is included in other current liabilities, related to the production of a web series.  The Company also recognized $352,823 of revenue that had been deferred as of December 31, 2010.   During 2011, the Company also decreased its accounts payable by paying down certain vendors on a monthly basis and negotiating a partial write off in the amount of $76,481 with a certain vendor.  During 2010, the Company incurred a net loss from operations of $4,837,674 that was mainly offset by impairment of an internally developed website in the amount of $2,166,143 and an advance in the amount of $170,500. In addition during 2010, the company received payments under revenue contracts that were deferred for revenue recognition until 2011. During 2010, the Company also received $1,500,000 from the pay down of warrants and received $171,145 of loans from our CEO.
 
During 2012, cash flows used for investing activities increased by $10,383 from the cash flows used for investing activities during 2011, mostly due to purchases of computer and computer equipment.  Cash flows used in investing activities decreased by $1,122,100 from $1,128,375 for the year ended December 31, 2010 to $6,275 for the year ended December 31, 2011. During the year ended December 31, 2010, the Company capitalized $957,875 for web-site development and advanced funds in the amount of $170,500 to 24eight, LLC. During the year ended December 31, 2011, the company purchased $6,275 in property and equipment.
 
           Cash flows from financing activities increased from $2,276,021 in 2011 to $3,240,000 for the year ended December 31, 2012.  During 2012, the Company sold 1,000,000 common shares for $250,000 and 7,000,000 warrants with an exercise price of $0.25 for $35,000. During 2012 and 2011, the Company received $105,000 and $995,000 respectively related to the revenue participation agreements.  We also received $1,350,000 and $450,000 respectively in 2012 and 2011 as proceeds against promissory notes.  $1,500,000 of these proceeds were converted and an additional $1,500,000 were received for a 25% equity in a subsidiary of the Company.  Cash flows from financing activities decreased from $2,467,993 for the year ended December 31, 2010 to $2,276,021 for the year ended December 31, 2011.  During the years ended December 31, 2011 and 2010, the Company received $794,521 and $171,145 of advances, respectively, from our CEO and repaid $78,500 and $320,000, respectively.  The Company also received $125,000 in 2011 and $1,500,000 in 2010 for the re-pricing of stock warrants.  During the year ended December 31, 2011, we received $995,000 of proceeds from revenue participation agreements for the Kids Clubs and the web series productions that are accounted for as debt.  During the year ended December 31, 2010, the Company received $1,123,000 from the sale of common stock.  The Company received $450,000 of proceeds in 2011 in return for an unsecured note payable to an unrelated party.
 
 
22

 
 
As of December 31, 2012, 2011 and 2010 the Company had cash of $282,675, $18,755, $1,467 and a working capital deficit of $5,477,532, $6,265,655 and $3,607,832 respectively.

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 years ended December 31, 2012, 2011 and 2010 our accumulated deficit as of December 31, 2012, 2011 and 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, 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.    Subsequent to year end, the Company negotiated a verbal agreement with a related party to provide production services on an ongoing basis for $2,000,000 a year.  The agreement is effective April 1, 2013 and is for an initial period of two years.   During 2012, the Company generated revenues totaling $3,863,935 from two productions. Subsequent to year end it continued to generate international sales from one of those productions, received a producer’s fee of $150,000 and received loans totaling $2,500,000 from its CEO.

Critical Accounting Policies, Judgments and Estimates
 
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Advertising Costs

The Company accounts for advertising costs in accordance with provisions in ASC 720-35-25 which states that advertising costs can be expensed as incurred or the first time the advertising takes place.  The Company expensed $423,224 in advertising costs for certain web productions during the year ended December 31, 2012 and had $0 advertising costs for the years ended December 31, 2011 and 2010.

Capitalized Production Costs

We capitalize costs incurred for film production including costs to develop, acquire and produce films in accordance with FASB ASC Topic 926-20-50-2 “Other Assets – Film Costs”.  These costs primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to films.. Film costs are stated at the lower of cost, less accumulated amortization and tax credits, if applicable, or fair value.
 
Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates are likely to differ to some extent in the future from actual results.  Our management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized deferred production costs to its estimated fair value. Our management estimates the ultimate revenue based on existing contract negotiations with domestic distributors and international buyers as well as management’s experience with similar productions in the past.
 
 
23

 
 
An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, less amortization expense of deferred productions costs, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher amortization expense of deferred production costs, and also periodically results in an impairment requiring a write-down of the deferred production costs to fair value. These write-downs are included in production expense within our consolidated statements of operations.  For the year ended December 31, 2012, the Company impaired approximately $229,000 of capitalized production costs.  No impairments were recorded for the years ended December 31, 2011 and 2010.

Derivative Financial Instruments
 
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, we entered into an agreement to provide anti-dilution protection to our CEO for his 51% of outstanding shares.  Since the instrument did not meet the criteria for equity classification, it was required to be carried as a freestanding derivative instrument, at fair value, in our consolidated financial statements.
 
Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The changes in fair values at each reporting period, or interim period, are recorded as a charge or a benefit to earnings included in the Other Income (Expense) section of the Company’s Consolidated Statement of Operations.
 
We estimated the fair values of the derivative financial instruments using a Monte Carlo simulation that was considered to be consistent with the objective measurement of fair values. In selecting the appropriate technique, we considered, among other factors, the nature of the instrument, the market risks that it embodied and the expected means of settlement. Estimating fair values of the derivative financial instruments required the development of significant and subjective estimates that may have changed over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock. Since the derivative financial instruments were initially and subsequently carried at fair values, our income or loss reflected the volatility in the changes to these estimates and assumptions.

The Company adopted a sequencing policy for the latest-inception or maturity-date first for share reclassification as it relates to the total authorized and unissued common shares. The Company reviewed its classification of all contracts (warrants, issuable anti-dilution shares, convertible preferred shares and contingent shares) and concluded that their current classification is appropriate based upon the Company’s sequencing policy set forth in ASC 815-40-35-12 & 13 and that is has sufficient authorized and unissued shares.

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.
 
 
24

 
 
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.

Revenue from web series are recognized in accordance with guidance of FASB ASC 926-60 “Revenue Recognition – Entertainment-Films.  Revenue is recorded when a contract with a buyer for the web series exists, the web series is complete in accordance with the terms of the contract, the customer can begin exhibiting or selling the web series, the fee is determinable and collection of the fee is reasonable. On occasion, the Company may enter into agreements with third parties for the co-production or distribution of a web series.  Revenue from these agreements will be recognized when the web series is complete and ready to be exploited.  In addition, the advertising revenue is recognized at the time advertisements are shown when a web series is aired. Cash received and amounts billed in advance of meeting the criteria for revenue recognition is classified as deferred revenue.
 
Income Taxes
 
Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using tax rates in effect for the years in which the differences are expected to reverse.  The effects of changes in tax laws on deferred tax
balances are recognized in the period the new legislation in enacted.  Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.  In assessing the likelihood of realization, management considers estimates of future taxable income.  We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years.  Adjustments based on filed returns are recorded when identified.

Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.

Recent Accounting Pronouncements

Recent accounting pronouncements that the Company has adopted or will be required to adopt in the future are summarized below.

In June 2011, the FASB issued new guidance for comprehensive income which requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Also, the entity is required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. This new guidance is effective for us beginning with our financial statements issued for the quarterly period ending March 31, 2012 (with early adoption permitted), although in December 2011, the FASB deferred the effective date for the presentation of reclassification adjustments pending further Board deliberation.  The Company currently presents comprehensive income in one continuous statement and therefore adoption of this guidance does not impact current presentation of the financial statements.
 
 
25

 

In October 2012, the FASB issued new guidance on the Impairment Assessment of Unamortized Film Costs, ASU 2012-07, Entertainment –Films (Topic 926): Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs. The amendment in this ASU requires that if evidence of a possible need for a write down of unamortized film costs occurs after the date of the balance sheet but before the financial statements are issued, a rebuttable presumption exists that the condition leading to the write off existed at the balance sheet date and therefore requires that those conditions be incorporated into the fair value measurement as of the balance sheet date.  The amendment also eliminates the requirement that an entity incorporate into fair value measurements used in the impairment tests the effects of any changes in estimates resulting from the consideration of subsequent evidence if the information would not have been considered by the market participants at the measurement date.

For SEC filers, the amendments are effective for impairment assessments performed on or after December 15, 2012.  For all other entities, the amendments are effective for impairment assessments performed on or after December 15, 2013.  The amendments resulting from this ASU should be applied prospectively.  Earlier application is permitted, including for impairment assessments performed as of a date before October 24, 2012, if for SEC filers, the entity’s financial statements for the most recent annual or interim period have not yet been issued, or, for all other entities, have not yet been made available for issuance.  We adopted this guidance during the fourth quarter when performing our impairment analysis for the year ended December 31, 2012.

Other recent Accounting Standards Updates not effective until after December 31, 2012, 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 December 31, 2012, 2011 and 2010 we did not have any off-balance sheet arrangements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required by this Item 8 are included at the end of this Report beginning on page F-1 as follows:
 
   
Page
     
Reports of Independent Registered Public Accounting Firms
 
35
     
Consolidated Balance Sheets as of December 31, 2012, 2011 and 2010
 
37
     
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2012, 2011 and 2010
 
38
     
 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
 
39
     
Consolidated Statements of Changes in Stockholder’s Deficit for the years ended December 31, 2012, 2011 and 2010
 
40
     
Notes to Consolidated Financial Statements
 
41
     
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
 
26

 
 
ITEM 9A. CONTROLS AND PROCEDURES.
 
Management’s Report on the Effectiveness of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2012. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses identified in the Company's internal control over financial reporting described below.
 
We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Securities Exchange Act Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

The Company is neither an accelerated filer nor a large accelerated filer, as defined in Rule 12b-2 under the Exchange Act, and is not otherwise including in this Annual Report an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not required to be attested by the Company’s registered public accounting firm pursuant to Item 308(b) of Regulation S-K.

Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of December 2012, as required by Securities Exchange Act Rule 13a-15(c). In making our assessment, we have utilized the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in the 1992 Internal Control —Integrated Framework. We concluded that based on our evaluation, our internal control over financial reporting was not effective as of December 31, 2012, due to material weaknesses identified as follows:
 
In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2012, our independent registered accounting firm reported to our Board of Directors that they determined the following design deficiencies related to the entity level control environment, including risk assessment, information and communication and monitoring controls.
The Company does not have an employee handbook that details policies and procedures related to ethical behavior.
The Board of Directors does not maintain minutes of its meetings.  In addition, there is no independent Audit Committee of the Board of Directors.
There is no documented fraud risk assessment or risk management oversight function.
There are no documented procedures related to financial reporting matters (both internal and external) to the appropriate parties.
There is no budget prepared and therefore monitoring controls are not designed effectively as current results cannot be compared to expectations.
There is no documented process to monitor and remediate deficiencies in internal controls.
After a review of our current entity level control environment, management concluded that the above deficiencies represented a material weakness.
 
 
27

 
 
 
In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2012, our independent registered accounting firm reported to our Board of Directors that they observed inadequate documented review and approval of certain aspects of the accounting process including the documented review of accounting reconciliations and journal entries that they considered to be a material weakness in internal control. Specifically:
●There is no documented period end closing procedures, specifically the individuals that are responsible for preparation, review and approval of period end close functions.
● Reconciliations are performed on all balance sheet accounts, including noncontrolling interest on at least a quarterly basis; however there is no documented review and approval by a member of management that is segregated from the period end financial reporting process.
● Journal entries are initiated and posted by an outside accounting consultant.  However there is no review and approval for the posting of journal entries.
After a review of our current review and approval of certain aspects of the accounting process, management concluded that the inadequate documented review and approval process represented a material weakness.

In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2012, our independent registered accounting firm reported to our Board of Directors that they observed inadequate segregation of duties within the accounting process including the following:
 One individual has the ability to add vendors to the master vendor file.  This individual also has access to the Company checkbook that is maintained in a secured location.
 The same individual mentioned above reconciles the bank accounts with no formal review process.
 One individual has sole access to our information technology system to initiate, process and record financial information.  We have not developed any internal controls related to information technology systems including change management, physical security, access or program development.
After a review of our current accounting process and the individuals involved, management concluded that the inadequate documented review and approval process represented a material weakness.

During the quarter ended September 30, 2012, the Company did not correctly account for tax credits to be received in connection with certain web series production.  The Company had initially included the calculation as a component of ultimate revenues.  Upon further evaluation, the tax credits should have been recorded as a reduction of deferred production costs and reduction of other current liabilities.  After a review of our current analysis and approval of reporting requirements, management concluded that the inadequate review and approval process of proper accounting treatment represented a material weakness.
   
During the three month period ended March 31, 2011, the Company did not correctly account for revenue recognition related to a software license agreement. The Company had initially deferred revenue associated with the agreement and was recognizing revenue over a five year period. Upon further evaluation, revenue recognition was required upon delivery of the software. This error resulted in the restatement of the Company’s previously filed Form 10-Q for the period ended March 31, 2011 to recognize additional revenue of $261,250. After a review of our current review and approval of certain aspects of the accounting process, management concluded that the inadequate review and approval process of material agreements for the proper accounting treatment represented a material weakness.
 
During the three month period ended June 30, 2011, the Company did not correctly account for revenue recognition related to a Production Services Agreement with a related party.  The Company had initially deferred the revenue associated with the services agreement and was accounting for the agreement under the completed contract method. Upon further evaluation, revenue recognition was required as the services were provided to the related party. After a review of our current review and approval of certain aspects of the accounting process, management concluded that the inadequate review and approval process of material agreements for the proper accounting treatment represented a material weakness.
   
 
 
 
 
 
 
 
 
 
 
During the quarter ended June 30, 2008, the Company entered into an agreement with our CEO that provided certain anti-dilution protection for a period of five years.    During the quarter ended September 30, 2012, the Company issued common shares in compliance with the anti-dilution agreement.  Upon further evaluation of the accounting treatment, the Company concluded that the agreement should have been recorded as a derivative liability with changes in fair value recorded at each reporting period. Management concluded that there was a material error and restated the annual reports for the years ended December 31, 2011 and 2010 and the interim periods ended June 30, 2012, March 31, 2012, September 30, 2011, June 30, 2011 and March 31, 2011.  It has also provided supplementary information for the years ended December 31, 2008 and 2009 and the interim period ended September 30, 2010, June 30, 2010, March 31, 2010, September 30, 2009, June 30, 2009, March 31, 2009, September 30, 2008, and June 30, 2008.  After a review of our current review and approval of certain aspects of the accounting process, management concluded that the inadequate review and approval process of material agreements for the proper accounting treatment represented a material weakness
 
In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2012, our independent registered accounting firm reported to our Board of Directors that they determined the Company does not have sufficient controls surrounding the retention of support for certain revenue transactions.  We did not have documentation of agreements that provided persuasive evidence of a revenue arrangement for certain amounts of revenue that were recognized at December 31, 2012.
 
 
28

 
 
Remediation of Material Weaknesses in Internal Control over Financial Reporting

In order to remediate the material weaknesses in internal control over financial reporting, the Company is in the process of finalizing a remediation plan, under the direction of the Company’s Board of Directors, and intends to implement improvements during fiscal year 2014 as follows:

The Company’s Board of Directors will review the COSO “Internal Control over Financial Reporting - Guidance for Smaller Public Companies” that was published in 2006 including the control environment, risk assessment, control activities, information and communication and monitoring.  Based on this framework, the Board of Directors will implement controls as needed assuming a cost benefit relationship.   In addition, the Company’s Board of Directors will also evaluate the key concepts of the updated 2013 COSO “Internal Control – Integrated Framework”  as it provides a means to apply internal control to any type of entity
 
 
 
 
 
 
Document all significant accounting policies and ensure that the accounting policies are in accordance with accounting principles generally accepted in the United States and that internal controls are designed effectively to ensure that the financial information is properly reported. Management will engage independent accounting specialists to ensure that there is an independent verification of the accounting positions taken.
 
The Company will implement a higher standard for document retention and support for all items related to revenue recognition. All revenue arrangements that are entered into by the Company will be evaluated under the applicable revenue guidance and Management should document their position based on the facts and circumstances of each agreement.
 
  
In connection with the reported inadequately documented review and approval of certain aspects of the accounting process, management has plans to review the current review and approval processes and implement changes to ensure that all material agreements, accounting reconciliations and journal entries are reviewed and approved on a timely basis and that this review is documented by a member of management separate from the preparer. A documented quarter end close procedure will be established whereby management will review and approve reconciliations and journal entries prepared by the outside accountant.  Management will formally approve new vendors that are added to the master vendor file.
 
 
29

 
 
Limitations on Effectiveness of Controls and Procedures

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its Chief Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Changes in Internal Controls

Except as noted above, during the fiscal year ended December 31, 2012, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

Directors and Officers

The Directors and Executive Officers of the Company and the positions held by each of them are as follows. All directors serve until the Company’s next annual meeting of shareholders.
 
NAME
 
AGE
 
PRINCIPAL OCCUPATION
William O’Dowd, IV
 
43
 
Chief Executive Officer, Principal Financial Officer and Chairman of the Board of Directors
Michael Espensen
 
62
 
Director

Biographical Information

William O’Dowd, IV. Mr. O’Dowd graduated with honors from Harvard Law School, has received a master’s degree in modern European history from Creighton University, and was named 1st-Team Academic All-American by USA Today while an undergraduate at Creighton. He was appointed Chief Executive Officer and Chairman of the Board of Directors on June 25, 2008. Mr. O’Dowd founded Dolphin Entertainment, Inc. in 1996 and has served as its principal executive officer and chairman since that date. Dolphin Entertainment is an entertainment company specializing in children’s and young adult’s live-action programming.

Michael Espensen. Mr. Espensen was appointed a Director of the Company on June 25, 2008. Mr. Espensen has been a real estate developer for over thirty years. In that time he has developed over 5,000 multi-family units, twenty-nine office buildings, and over 2,500 residential lots in Texas, Florida, North Carolina, and South Carolina. Aside from real estate development and investment, Mr. Espensen is also involved as a producer and investor in family entertainment for television and feature films. Mr. Espensen attended Trinity University and the University of Texas at Austin. Past titles include: President of the San Antonio Homebuilders Association, Director of the Texas Association of Homebuilders, and Director of the National Title Company. Currently, he is the CEO and Director of Keraplast Technologies, LTD.
 
 
30

 

Background and Qualifications of Directors

When considering whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Company’s Board focuses primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. As more specifically described in the biographies set forth above, our directors possess relevant knowledge and experience, industry-specific and otherwise, in the family entertainment, Internet networking, legal, and business fields generally, which we believe enhances the Board’s ability to oversee, evaluate and direct our overall corporate strategy. Our Board annually reviews the composition and size of the Board so that the Board consists of members with the proper expertise, qualifications, attributes, skills, and personal and professional backgrounds needed by the Board, consistent with applicable regulatory requirements.

Code of Ethics

We have adopted a code of ethics for our officers and directors that is included as Exhibit 10.3 to this document.

Committees of the Board

Our Board of Directors does not currently have any committees. The roles and responsibilities of an audit committee, nominating committee and compensation committee are conducted by our full Board.

Of our two directors, only Michael Espensen is independent.

Compliance with Section 16(a) of the Exchange Act

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) during the year ended December 31, 2012, Mr. O’Dowd and Mr. Espensen have not filed on a timely basis the reports required by section 16(a) of the Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table
 
                       
Stock
   
Option
   
All Other
       
       
Salary
   
Bonus
   
Awards
   
Awards
   
Compensation
   
Total
 
Name and Principal Position
 
Year
 
($)
   
($)
   
($)
   
($)
   
($)
   
($)
 
William O’Dowd, IV, CEO,
 
2012
 
$
(3)
     
(3)
     
0
     
0
     
0
     
(3)
 
President and Chairman
 
2011
 
$
0
     
0
     
0
     
0
     
0
     
0
 
   
 2010
 
$
0
     
0
     
0
     
0
     
0
     
0
 
                                                     
Nelson Famadas, COO (1)
 
2012
 
$
16,500
     
0
     
0
     
0
     
0
     
16,500
 
   
2011
 
$
(2)
     
0
     
0
     
0
     
0
     
(2)
 
   
2010
 
$
(2)
     
0
     
0
     
0
     
0
     
(2)
 
 
     
(1)
 
Appointed Chief Operating Officer effective July 1, 2010.  Mr. Famadas resigned all positions with the Company on March 27, 2012.
     
(2)
 
For the year ended December 31, 2010, the Company accrued $90,000 of compensation for Mr. Famadas and he did not receive any payments.  During 2011, he received $60,500 of payments and accrued compensation as of December 31, 2011 was $160,000.  During 2011, he received the salary listed above and payments in the amount of $65,000. His accrued compensation as of December 31, 2012 was $95,000.
     
(3)
 
For the year ended December 31, 2012, the Company accrued $1,250,000 of compensation for Mr. O’Dowd.  $250,000 as an annual salary and $1,000,000 as a one-time bonus in agreement with his employment contract.  Mr. O’Dowd did not receive any payments related to this compensation.  There was no accrued compensation for Mr. O’Dowd for the years ended December 31, 2011 and 2010.
 
 
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Outstanding Equity Awards at Fiscal Year-End

None of the executive officers named in the table above had any outstanding equity awards as of December 31, 2012, 2011 and 2010.

On June 23, 2008, we acquired Dolphin Digital Media, a company owned by Mr. O’Dowd, which company was the grantee of an exclusive ten-year worldwide license from Dolphin Entertainment, dated as of the date of the closing of the acquisition, to use Dolphin Entertainment’s family entertainment brand properties.  In connection with the acquisition we issued to Mr. O’Dowd that number of shares of our common stock constituting fifty-one percent of our issued and outstanding common stock and we granted to Mr. O’Dowd certain anti-dilution protection for five (5) years from the date of the acquisition under which we agreed to issue such number of shares of our common stock as necessary for Mr. O’Dowd to maintain his fifty-one percent ownership any time that we issue additional shares to a party other than Mr. O’Dowd, or upon the exercise by any such party of options, warrants, notes or other securities exercisable or exchangeable for, or convertible into, any share of our common stock. During 2012, Mr. O’Dowd was issued 17,701,365 shares related to this agreement.  No shares related to this agreement were issued to Mr. O’Dowd during 2011 and 2010.

Employment Agreements

On September 7, 2012, the Company entered into an employment agreement with its CEO.  The employment agreement is effective January 1, 2012 and will continue for an initial term of three years, thereafter, subject to a two year renewal at the option of the CEO.  The agreement states that the Executive will receive annual compensation of $250,000. In addition, the CEO is entitled to an annual discretionary bonus as determined by the Company’s Board of Directors. The Executive is eligible to participate in all of the Company’s benefit plans offered to its employees.  In addition, he will receive a signing bonus of $1,000,000 as consideration for entering into this agreement waiving any claim to compensation for services rendered prior to this agreement.   Any compensation due to the Executive under this agreement and unpaid and accrued by the Company will accrue interest on the principal amount at a rate of 10% per annum from the date of this agreement until it is paid. The agreement includes provisions for disability, termination for cause and without cause by the Company, voluntary termination by executive and a non-compete clause.
 
Director Compensation

We have not paid either of our directors any compensation for serving on our Board of Directors.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
The following table sets forth the beneficial ownership of our common stock as of April 23, 2014 by each person known by us to be the beneficial owner of more than five percent (5%) of our common stock, by each director, by each named executive officer, and by all directors and executive officers as a group.

Except as otherwise indicated in the footnotes to the table, we believe that each of the persons or entities named in the table exercises sole voting and investment power over the shares of common stock that each of them beneficially owns, subject to community property laws where applicable. A person is deemed to be the beneficial owner of securities owned or which can be acquired by such person within 60 days of the measurement date upon the exercise of stock options. Each person’s percentage ownership is determined by assuming that stock options beneficially owned by such person (but not those owned by any other person) have been exercised. The percentages in the table are based upon 81,892,352 shares of our common stock outstanding as of April 9, 2014.
 
 
32

 

           
PERCENTAGE
 
           
OF TOTAL
 
           
SHARES
 
NAME AND ADDRESS OF OWNER (1)
 
SHARES
   
OUTSTANDING
 
William O’Dowd, IV
   
42,843,433
     
52.3
%
Michael Espensen
   
0
     
*
 
T Squared Investments LLC (2)
   
24,526,463
     
30.0
%
All Directors and Named Executive Officers as a Group (2 persons)
   
42,843,433
     
52.3
%
 
*
 
Less than 1%
     
(1)
 
Unless otherwise indicated in point (2) below, the address of each stockholder is c/o Dolphin Digital Media, Inc., 2151 Le Jeune Road, Suite 150-Mezzanine, Coral Gables, FL, 33134.
     
(2)
 
Mark Jensen and Thomas M. Suave are both principals of T Squared Investments LLC (1325 Sixth Avenue, Floor 28, New York, NY 10019). Includes: (i) 4,171,012 shares issuable upon conversion of 1,042,753 shares of Series A Convertible Preferred Stock; (ii) 7,000,000 shares issuable upon exercise of a common stock purchase warrant (the “Class E Warrant”); (iii) 7,000,000 shares issuable upon exercise of a common stock purchase warrant (the “Class F Warrant”) and (iv) 6,355,451 common shares held by related entities owned by Mark Jensen and/or Thomas M. Suave.  The Series A Preferred Stock and Class “E” Warrant contain provisions that prevent conversions/exercises to common stock to the extent that after giving effect to such conversion/exercise, the holder (together with the holder’s affiliates) would beneficially own in excess of 9.9% of the number of shares of the common stock outstanding immediately after giving effect to such conversion/exercise.
 
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
As of December 31, 2010 the Company’s CEO had loaned the Company $930,145. On December 31, 2011, the Company and the Company’s CEO, signed an unsecured Revolving Promissory Note in the amount of $2,120,623 for the outstanding advances made to the Company and $474,457 of accrued expenses that were previously included in other current liabilities, including $123,292 of accrued interest. The CEO has the right at any time to demand that all outstanding principal and accrued interest be repaid with a ten day notice to the Company. The note accrues interest at a rate of 10% per annum. Accrued interest on this note was $229,932 as of December 31, 2012. During the years ended December 31, 2012, 2011 and 2010, $229,932, $123,292 and $92,937, respectively, was expensed in interest.

On September 7, 2012, the Company entered into an employment agreement with its CEO, Bill O’Dowd for a period of three years effective January 1, 2012.  The agreement is for annual salary of $250,000 and a one- time bonus of $1,000,000.  Unpaid compensation accrues interest at a rate of 10% per annum.  As of December 31, 2012, the Company had recorded $38,573 of accrued interest related to this agreement.  The Company recorded $38,573 of interest expense for the year ended December 31, 2012.

On July 15, 2011 the Company entered into an agreement with Dolphin Entertainment, Inc. a related party owned by the Company’s CEO to purchase for $125,000 an exclusive option to acquire certain rights in and to the script for a motion picture. As of December 31, 2011, the purchase price of $125,000 is recorded in Other current liabilities in the accompanying Consolidated Balance Sheet. $125,000 was paid during 2012.
 
 
33

 

On November 18, 2010, we entered into an agreement with Dolphin Entertainment, Inc., for production services related to two digital episodic series. The total amount of the contract is $200,000.   One of the projects was completed in the second quarter of 2011 and the Company recorded $100,000 of revenue related to this agreement. Dolphin Entertainment and the Company mutually agreed to terminate the contract prior to commencing work on the second digital episodic series.

On October 4th, 2007, the Company entered into a financing agreement whereby warrants were issued to an investor to purchase the following amounts of common stock:
 
 
a)
650,000 shares of common stock exercisable at $0.72 per share.
     
 
b)
1,500,000 shares of common stock exercisable at $1.00 per share.
     
 
c)
1,500,000 shares of common stock exercisable at $2.00 per share.
 
On March 10, 2010 the Company and T Squared Investments LLC agreed to cancel the following warrants:
 
 
Warrant “A” for 650,000 shares;
     
 
Warrant “B” for 1,500,000 shares;
     
 
Warrant “C” for 1,500,000 shares; and,
     
 
Warrant “4” for 384,615 shares.
 
            Post such cancellation, the only warrants held by T Squared Investments LLC was their existing Warrant “D” for 231,000 shares with an exercise price of $0.0001 per share and the following warrant below. Pursuant to this agreement the expiration date of Warrant “D” was reduced from July 29, 2014 to December 31, 2012. In consideration for the cancellation of such warrants above and for the payment to Dolphin Digital Media, Inc. (DPDM), T Squared Investments LLC was issued a new Warrant “E” for 7,000,000 shares of DPDM with an expiration date of December 31, 2012 and an exercise price of $0.25 per share. T Squared Investments LLC wired Two Hundred Thousand Dollars ($200,000) to the Company, which resulted in the effective reduction of the exercise price of Warrant “E” from $0.25 per share to $0.2214 per share. T Squared Investments LLC can continually pay down the warrants until such time as the exercise price of Warrant “E” is effectively $0.0001 per share. Each time a payment by T Squared Investments LLC is made to DPDM, a side letter will be executed by both parties that states the new effective exercise price of Warrant “E” at that time. At such time when T Squared Investments LLC has paid down Warrant “E” to an exercise price of $0.0001 per share or less, T Squared Investments LLC shall have the right to exercise Warrant “E” via a cashless provision and hold for six months to remove the legend under Rule 144. T Squared Investments LLC may not exercise such warrant if post the exercise, T Squared Investments LLC would be above the 9.99% ownership level of the Company on February 16, 2011 T-Squared Investments, LLC paid down an additional $100,000 reducing the exercise price on the warrants to $.0214 on July 11, 2011 T-Squared Investments, LLC paid down an additional $25,000 reducing the exercise price on the warrants to $.0179. On September 13, 2012, the expiration date of Warrant “E” was extended to September 13, 2015 and Warrant “F” was issued for 7,000,000 shares at a purchase price of $.25 per share.  Similar to Warrant “E”, the holder can pay down the warrants to reduce the exercise price to $0.0001.  As of December 31, 2012, the Company had not received any money to reduce the exercise price of Warrant “F”.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
Crowe Horwath LLP has served as the Company’s independent registered public accounting firm for the years ended December 31, 2012 and 2011.  RBSM LLP served as the Company’s independent registered public accounting firm for the year ended December 31, 2010.
 
 
34

 

The following table shows the fees that we were billed for audit and other services provided by our independent auditors for the periods set forth.

   
Year
   
Year
   
Year
 
   
Ended
   
Ended
   
Ended
 
   
12/31/12
   
12/31/2011
   
12/31/2010
 
Audit Fees
  $ 124,450     $ 94,500     $ 41,500  
Audit-Related Fees
    0       0       0  
Tax Fees
    14,000       21,060       5,000  
All Other Fees
            0       0  
                         
Total
  $ 133,450     $ 115,560     $ 46,500  

Audit Fees— this category includes the audit of the Company’s annual financial statements, review of financial statements included in the Company’s Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those fiscal years.  For the year ended December 31, 2011 there is an additional $12,500 in fees related to the restatement of the first quarter 2011 filings.  For the year ended December 31, 2012 there is an additional $49,250 in fees related to consultation on the accounting treatment for the anti-dilution derivative instrument.

Audit-Related Fees— this category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported above under “Audit Fees”.

Tax Fees— this category consists of fees billed for professional services rendered by the independent auditors for tax compliance and advice. These services include assistance regarding federal, state and international tax compliance and assistance with tax reporting requirements and audit compliance.

All Other Fees— this category consists of fees for services rendered by the independent auditors in addition to those reported above.

Overview— the Board reviews, and in its sole discretion pre-approves, our independent auditors’ annual engagement letter including proposed fees and all audit and non-audit services provided by the independent auditors. Accordingly, all services described under “Audit Fees”, “Audit-Related Fees”, “Tax Fees” and “All Other Fees” were pre-approved by our Board. The Board may not engage the independent auditors to perform the non-audit services proscribed by law or regulation.
 
 
35

 
PART IV

EXHIBITS.    
   
2.6
Preferred Stock Purchase Agreement dated October 4, 2007, between Logica Holdings Inc., T Squared Partners LLC, and T Squared Investments LLC (5)
   
3(i).1
Articles of Incorporation of Rising Fortune Incorporated, as filed on March 7, 1995 (1)
   
3(i).2
Amendment to Articles of Incorporation, as filed on December 5, 2003 (1)
   
3(i).3
Amendment to Articles of Incorporation, as filed on May 29, 2007 (6)
   
3(i).4
Amendment to Articles of Incorporation, as filed on August 7, 2007 (6)
   
3(i).5
Certificate of Amendment to the Article of Incorporation, as filed on July 29, 2008 (7)
   
3(i)6
Designation of Preferences of Series A Convertible Preferred Stock, filed October 10, 2007 (5)
   
3(i)7
Amendment to Certificate of Designation of Series A Convertible Preferred Stock (10)
   
3(ii)
Bylaws (1)
   
4.1
Registration Rights Agreement dated October 4, 2007, between Logica Holdings and T Squared Partners LLC, and T Squared Investments LLC (5)
   
4.2
Letter Agreement with T Squared Investments, LLC, dated July 29, 2009 (9)
   
4.3
Subscription Agreement with T Squared Investments, LLC, dated July 29, 2009 (9)
   
4.4
Common Stock Purchase Warrant “D” with T Squared Investments, LLC, dated July 29, 2009 (9)
   
4.5
Letter Agreement with T Squared Investments, LLC, dated March 10, 2010 (9)
   
4.6
Common Stock Purchase Warrant “E” with T Squared Investments, LLC, dated March 10, 2010 (9)
   
10.1
Amendment to Preferred Stock Purchase Agreement, dated December 30, 2010 (8)
   
10.2
Promissory Note dated December 31, 2011
   
10.3 Code of Ethics
   
31
Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32
Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.)
 
(1)
Incorporated by reference to Exhibits set forth in the Company’s Registration Statement on Form 10-SB, filed with the Securities and Exchange Commission on March 4, 2004.
   
(2)
Incorporated by reference to exhibits set forth in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 8, 2004.
   
(3)
Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 13, 2007.
   
(4)
Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 2007.
   
(5)
Incorporated by reference to exhibits set forth in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2007.
   
(6)
Incorporated by reference to Exhibits set forth in the Company’s Registration Statement on Form S1, filed with the Securities and Exchange Commission on February 11, 2008.
   
(7)
Incorporated by reference to Exhibits set forth in the Company’s Form 10-Q for the three months ended June 30, 2008, filed with the Securities and Exchange Commission on August 18, 2008.
   
(8)
Incorporated by reference to Exhibits set forth in the Company’s Form 8-K filed with the Securities and Exchange Commission on January 5, 2011.
   
(9)
Incorporated by reference to Exhibits set forth in the Company’s Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on April 15, 2010.
   
(10)
Incorporated by reference to Exhibits set forth in the Company’s 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on May 12, 2011.
 
 
36

 
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
DOLPHIN DIGITAL MEDIA, INC.
 
       
April 21, 2014
By:
/s/ William O’Dowd IV  
    William O’Dowd IV  
   
Chief Executive Officer
 
       
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
April 21, 2014
By:
/s/ William O’Dowd IV  
    William O’Dowd IV  
   
Chairman, Chief Executive Officer, President, Principal Financial Officer and Principal Accounting Officer
 
       
 
April 21, 2014
By:
/s/ Michael Espensen  
    Michael Espensen  
   
Director
 
       
 
 
37

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Dolphin Digital Media, Inc.

We have audited the accompanying consolidated balance sheets of Dolphin Digital Media, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, cash flows and changes in stockholders' deficit for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the consolidated financial statements, the Company has incurred net losses, negative cash flows from operations and does not have sufficient working capital. These events raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 3.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2 to the consolidated financial statements, the 2011 consolidated financial statements have been restated to correct a misstatement. Our opinion is not modified with respect to this matter.


 
Crowe Horwath LLP

Fort Lauderdale, Florida
April 23, 2014
 
 
38

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
Dolphin Digital Media, Inc.
Miami, Florida

We have audited the accompanying consolidated balance sheet of Dolphin Digital Media, Inc. and its subsidiaries (the “Company”) as of December 31, 2010, and the related consolidated statements of operations, deficiency in stockholders’ equity and cash flows for the year ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We have conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dolphin Digital Media, Inc. and its subsidiaries as of December 31, 2010, and the consolidated results of its operations and its cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has incurred significant losses and has capital and working capital deficiencies, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The accompanying consolidated financial statements have been restated to give effect to the anti-dilution provision in purchase agreement dated June 23, 2008 (see Note 2, 5 and 10). Our opinion is not modified with respect to this matter.


/s/ RBSM LLP

New York, New York
May 9, 2011

(Except for Note 2, 5 and 10, as to which the date is April 21, 2014).
 
 
 
 
39

 

DOLPHIN DIGITAL MEDIA, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets
 
As of December 31, 2012, 2011 and 2010
 
 
   
2012
   
2011
   
2010
 
         
(Restated)
   
(Restated)
 
ASSETS
                 
                   
Current
                 
Cash
  $ 282,675     $ 18,755     $ 1,467  
Inventory
    7,968       7,701       8,256  
Prepaid Expenses
    5,589       4,512       -  
Other current assets
    239,259       22,018       724  
Total Current Assets
    535,491       52,986       10,447  
                         
Capitalized Production costs
    1,003,658       1,538,251       -  
Property and equipment
    17,732       6,275       -  
Deposits
    8,955       11,178       -  
Total Assets
  $ 1,565,836     $ 1,608,690     $ 10,447  
                         
LIABILITIES
                       
                         
Current
                       
Accounts payable
  $ 476,967     $ 1,000,964     $ 1,388,395  
Other current liabilities
    675,433       1,300,463       480,599  
Accrued compensation
    1,250,000       -       -  
Deferred revenue
    -       -       352,823  
Debt
    1,100,000       995,000       -  
Loan from related party
    2,120,623       2,120,623       930,145  
Notes payable
    390,000       540,000       -  
Advances-Convertible
    -       -       100,000  
Derivative liability
    -       361,591       366,317  
Total Current Liabilities
    6,013,023       6,318,641       3,618,279  
                         
STOCKHOLDERS' DEFICIT
                       
                         
Common stock, $0.015 par value, 200,000,000 shares authorized,
    1,243,270       962,750       962,750  
 81,892,352 issued and outstanding at December 31, 2012 and 100,000,000 shares authorized, 64,190,987  issued and outstanding at December 31, 2011 and 2010. 17,701,365 shares issuable at December 31, 2012, 2011 and 2010.
                       
Preferred stock $0.001 par value, 10,000,000 shares authorized
    1,043       1,043       1,043  
1,042,753 shares issued and outstanding, liquidation preference of $1,042,753
                 
at December 31, 2012, 2011 and 2010.
                       
Additional paid in capital
    25,529,289       25,040,281       24,915,281  
Accumulated deficit
    (34,220,789 )     (30,648,790 )     (29,421,671 )
Accumulated other comprehensive loss
    -       (65,235 )     (65,235 )
Total Dolphin Digital Media, Inc. Deficit
    (7,447,187 )     (4,709,951 )     (3,607,832 )
Noncontrolling interest
    3,000,000       -       -  
Total Stockholders' Deficit
    (4,447,187 )     (4,709,951 )     (3,607,832 )
Total Liabilities and Stockholders' Deficit
  $ 1,565,836     $ 1,608,690     $ 10,447  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
40

 
 
DOLPHIN DIGITAL MEDIA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
For the Years ended December 31, 2012, 2011 and 2010
 
   
2012
   
2011
   
2010
 
         
(Restated)
   
(Restated)
 
 
                 
                   
Revenues
  $ 3,863,935     $ 472,824     $ -  
Cost of revenues
     3,416,145       3,272       -  
Gross Profit
     447,790        469,552       -  
                         
Expenses:
                       
General and administrative
   
1,973,029
       1,231,512      
3,988,436
 
Payroll    
1,865,766
     
537,348
     
421,721
 
Loss before other income (expense)
     (3,391,005 )      (1,299,308 )      (4,410,157 )
                         
Other Income/(Expense)
                       
Other income
     49,140       208,593       -  
Gain on deconsolidation of subsidiary
     293,730       -       -  
Interest income
     557        1,007       -  
Write off of Other Accumulated Comprehensive Income due to deconsolidation of subsidiary
     (65,235 )     -       -  
Interest expense
     (336,249 )     (142,137 )     (198,931 )
Finance charges
    -       -       (948,466 )
Income/(Loss) from valuation of derivative
    63,098       4,726       719,880  
Total Other Income/Expense
    5,041       72,189       (427,517
Net Loss
    (3,385,964     (1,227,119     4,837,674 )
Net Income (Loss) attributable to non- controlling interest
    -       -       -  
Net Loss attributable to Dolphin Digital Media, Inc.
    (3,385,964     (1,227,119     (4,837,674 )
Movement in accumulated other comprehensive income due to deconsolidation of subsidiary
    65,235       -       -  
Foreign exchange gain
    -       -       69,820  
Comprehensive Loss
   $ (3,320,729 )     (1,227,119     (4,767,854  )
                         
Basic and Diluted Loss per Share
    (0.04 )     (0.01 )     (0.06 )
                         
Weighted average number of shares used in share calculation
    81,892,352       81,892,352       78,782,547  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
41

 
 
DOLPHIN DIGITAL MEDIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years ended December 31, 2012, 2011 and 2010
 
   
2012
   
2011
   
2010
 
         
(Restated)
   
(Restated)
 
CASH FLOWS FROM OPERATING ACTIVITES:
                 
Net Loss
  $ (3,385,964 )   $ (1,227,119 )   $ (4,837,674 )
Adjustments to reconcile net loss to net cash used in operating activities:
                 
  Depreciation
    5,201       -       -  
  Amortization of debt discount
    -       -       153,857  
  Impairment of internally developed website
    -       -       2,166,143  
  Impairment of advances
    -       -       170,500  
  Common stock issued for services
    -       -       128,500  
  Warrants re-pricing
    -       -       864,466  
  (Gain)loss from change in derivative liability
    ( 63,098 )     (4,726 )     (719,880 )
   Amortization of capitalized production costs
    2,933,951       -       -  
   Impairment of capitalized production costs
    228,541                  
   Net Gain upon Deconsolidation
    (293,730 )     -       -  
   Decrease in Accumulated Other Comprehensive Loss due to deconsolidation
    65,235       -       -  
Changes in operating assets and liabilities:
                       
   Prepaid expenses
    (1,077 )     (4,512 )     211,128  
   Other current assets
    (217,241 )     (21,294 )     (88 )
   Inventory
    (273 )     555       83,604  
   Capitalized production costs
    (2,627,891 )     (1,538,251 )     -  
   Deposits
    2,223       (11,178