Dolphin Entertainment, Inc.
Q2 2022 Earnings Call Transcript

Published: 15 Aug 2022

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Dolphin Entertainment Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara, the floor is yours.

[James Carbonara:]

Thank you. And once again, welcome to Dolphin’s second quarter 2022 earnings call. With me on the call are Bill O'Dowd, Chief Executive Officer; and Mirta Negrini, Chief Financial Officer. I'd like to begin the call by reading the safe harbor statement. This statement is made pursuant to the safe harbor statement for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although, the Company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risk factors and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the Company’s annual report on Form 10-K contained in subsequent filed reports on Form 10-Q as well as in other reports that the Company files from time to time with the Securities and Exchange Commission. Any forward-looking statements included in this earnings call are made only as of the date of this call. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events or circumstances. Now I'd like to turn the call over to Bill O'Dowd, Chief Executive Officer of Dolphin Entertainment. Bill, please proceed.

[Bill O'Dowd:]

Thanks, James, and hi everyone. Good afternoon. And thank you for joining us today. As always, we'll start with a review of some financial and operating highlights followed by a full financial review, and then we'll open it up for Q&A. So starting with the financials, Q2 revenue of $10.3 million represented a 19% increase year-over-year, six months 2022 revenue was $19.5 million, up 23% year-over-year. That's all organic revenue growth coming from our Dolphin 1.0 business of entertainment marketing. We continue to believe Dolphin is positioned to exceed $40 million in annual revenue for 2022 and to generate a larger EBITDA profit in 2022 versus last year. Turning to key profit metrics, operating income was $489,000. This includes non-cash items from depreciation and amortization of $416,000, as well as an impairment of the right-of-use asset and the amount of $100,000 related to the sublease of one of Dolphin's offices, offset by gain from the change in fair value of contingent consideration of approximately $671,000, that nets out to an operating profit of approximately $334,000, all while we continue to invest in Dolphin 2.0, which offers upside optionality and as great as positive operating income is our balance sheet is also worthy of extra focus. At the apex of our acquisition strategy to build the Super Group, our debt reached a high of over $16 million is now reached a record low of below $5.3 million. This is a dramatic reduction and furthermore, the vast majority of our debt is long-term. And even so, the total remaining debt is less than our cash on hand, but that only tells part of the story. It's also extremely important to point out that all puts, all puts, and all but one earn-out contingent consideration has been paid from all six of our acquisitions to-date. This complete transformation of our balance sheet has allowed us to remove our financial statement disclosure ongoing concern, and we believe serves as a differentiating factor for us in the marketplace. Simply put, financially speaking, we have moved to the next milestone for Dolphin, no going concern, more cash on the books in all remaining debt, which is at the lowest amount it's been since we listed on NASDAQ in 2017 and almost all of the debt remaining is long-term, anyway, all puts have been paid, all but one earn-out paid. Basically, we finished paying for the Super Group and we can look now to building profits and diversifying our investments. And as I mentioned on the last earnings call with Q1, at this point in our Company's history and continuing with our financial update in June, we announced a change of auditor to Grant Thornton LLP. Grant Thornton is a firm with more entertainment industry experience, providing professional services to 65% of the Fortune 1000 companies in the media and entertainment space, 65%, and half of the major studios. Dolphin is growing, and we believe Grant Thornton best understands where we are heading and has the systems and procedures in place to ensure timely filing of Qs and Ks as we did today. We are now current in our financial reporting and look forward to staying that way. I'm excited to share some of those 2.0 updates, but first let's move to operational highlights on Dolphin. 1.0, our Super Group of companies helping us to grow revenue on a double-digit basis profitably in which both enables and turbocharges our 2.0 investments. That in success could result in exponential upside. We'll start with our entertainment PR Powerhouse 42West. During the second quarter, 42West helped longtime client, Tom Cruise launched a sequel to his 1986 film Top Gun with more than $1.3 billion in global box office revenue so far, Top Gun

[Mirta Negrini:]

Thank you, Bill and good afternoon everyone. I will now discuss results for the quarter ended June 30, 2022. Revenues for the quarter were approximately $10.3 million as compared to approximately $8.6 million for the quarter ended June 30, 2021. Overall, operating expenses for the quarter ended June 30, 2022 were approximately $9.8 million compared to approximately $8.4 million in the same period of the prior year. Operating expenses are composed of direct costs, payroll and benefits, selling, general and administrative costs, SG&A, changes in the fair value of contingent consideration, depreciation and amortization and legal and professional fees. Direct costs for the quarter ended June 30, 2022 were approximately $939,000 compared to approximately $833,000 for the quarter ended June 30, 2021. The increase is primarily a result of expenses incurred in our NFT business. Payroll and benefit costs for the quarter ended June 30, 2022 were approximately $7 million compared to $5.6 million for the quarter ended June 30, 2021. The increase is primarily due to additional head count in 2022 to support the growth of our business. SG&A expenses for the quarter ended June 30, 2022 were approximately $1.5 million compared to approximately $1.2 million for the quarter ended June 30, 2021, primarily due to an increase in our bad debt expense. Legal and professional fees were approximately $613,000 for the quarter ended June 30, 2022, compared to approximately $458,000 for the quarter ended June 30, 2021. The increase is primarily due to legal consulting and audit fees related to our restatement of the September 30, 2021 Form 10-Q, revisions of the Form 10-Q for March 31, 2021 and June 30, 2021 included in our Form 10-K filed on May 26, 2022, as well as fees associated with our change of auditors in June of 2022. Operating income for the quarter ended June 30, 2022 of $488,958, includes non-cash items from depreciation and amortization of $415,547. An impairment of the right-of-use asset in the amount of $98,857 related to the sublease of one of our LA offices and gain in the change of fair value of contingent consideration of $670,000 – $670,878 compared to operating income of $221,293 for the quarter ended June 30, 2021, which includes non-cash items from depreciation and amortization of $478,270 and a gain in the change of fair value of contingent consideration of $165,000. Net income for the quarter ended June 30, 2022 of $612,008 includes non-cash items from depreciation and amortization of $415,547, an impairment of the right-of-use asset in the amount of $98,857, a gain in the change in fair value of contingent consideration of $670,878 and a gain in the change in fair value of warrants and a convertible note of $279,022 compared to net income for the quarter end of June 30, 2021 of $1,349,942, which included non-cash items from depreciation and amortization of $478,270, a gain in the change of fair value of contingent consideration of $165,000. A gain in the change of fair value of warrants and a convertible note of $333,974 and a net gain of $1 million stemming from the extinguishment of debt, primarily related to the Paycheck Protection Program loans. For the quarter ended June 30, 2022, $0.06 basic earnings per share is based on 9,498,266 weighted average shares and $0.04 fully diluted earnings per share is based on 9,626,143 weighted average shares compared to a basic earnings per share of $0.17 based on 7,664,000 weighted average shares and $0.13 fully diluted earnings per share based on 7,913,396 weighted average shares for the quarter ended June 30, 2021. Cash and cash equivalents were $7.2 million as of June 30, 2022, as compared to $9.3 million as of June 30, 2021. That concludes my financial remarks. I will now ask the operator to open the phone lines for Q&A. Operator, would you please poll for questions?

[Operator:]

[Operator Instructions] Thank you. Our first question is coming from Allen Klee with Maxim Group. Please go ahead.

[Allen Klee:]

Good afternoon. The revenues, can you confirm, are all the revenues in Dolphin 1.0? And if so, how should we think about the build up of 2.0 revenues in the third and fourth quarters?

[Bill O’Dowd:]

Sure. Hi, Allen, good afternoon. Yes, all the revenues are 1.0 that was all organic growth, again. And 2.0 revenues would start with really the Midnight Theatre openings in September. And so really it’ll kick into Q4, because we’re expecting a late September opening. And with the push of the NFT collections into the fall, then I’d say Q4 will be when some of them may go in September, but some in October. So I’d say Q4 will be the month that we have Dolphin 2.0 revenues really starting.

[Allen Klee:]

Okay. So likely Flower Girls and Alien Exile that those would likely be Q4 events?

[Bill O’Dowd:]

Yes, one [indiscernible]

[Allen Klee:]

Okay. And then at this point, are you assuming that the size that you’re going to be raising hopefully for those two NFTs is similar to what you were thinking in the past or has the decision made to cut back the size of those launches?

[Bill O’Dowd:]

No. We’re keeping the size the same and looking for the optimal time to go after that community. We’re seeing some signs of recovery. And again, we want to transition NFT collections to the broad consumer and we’re excited to be able to take payment by credit card, et cetera. But we can’t ignore the fact that Flower Girls sold out its first collection to the – entirely to a crypto community. And Creature Chronicles has such an appeal to the crypto community with the comic book crossover. So we want to make sure that they’re – that we’re not – it’s easy to say in the movie business, you’re shooting a movie, not a release date and we want to give it the best chance possible. So fall seems better to us than the summer given the volatility over the past couple of months.

[Allen Klee:]

So following up on NFTs. On the last earnings call, you mentioned how you were creating like an ongoing discourse community for your projects. And I was just wondering, does that have an impact – a material impact on how we should think about the overall margins of this business or how do you think about that?

[Bill O’Dowd:]

No, that’s really just a marketing tool on discord to build a community of followers, people that are excited to see an NFT collection drop. It doesn’t affect our margins. It really is just trying to find an optimal time to put the release out. And it goes some of these worlds, it goes day to day and week to week. But we are building those communities for both of those. And others, by the way, it’s not just those two, right? Bella Hadid is another one and going quite well actually. And it’s not just our collections, it’s other collections that we’re marketing are all trying to find when they have confidence that the market will be there to support them. So we’ll see a couple of go probably in the next few weeks and if they have success, we’ll see more go right after it.

[Allen Klee:]

Okay. Is there – you mentioned that there were some costs in the quarter related to the audit related issues. Is there a sense of kind of more normalized legal and professional type of expenses?

[Bill O’Dowd:]

Yes. Q1 was heavily hit by the one-time audit related charges, several hundred thousand dollars. Q2 had a little bit of left spillover as well because of course we filed the K in May – late May. So this quarter had a little bit of that as well. It’s still down from first quarter, but as you can see, it’s still up by about 30% over Q2 last year. We think we can return to normal starting with Q3.

[Allen Klee:]

And normal, what does that mean? Is that like looking at kind of last year’s type numbers, like $500,000 or so?

[Bill O’Dowd:]

I think so.

[Allen Klee:]

Okay.

[Bill O'Dowd:]

And obviously, we're pleased to report on time today and thank Grant Thornton for their work to help us do that. Get back to being current and look forward to staying that way, especially when you have good numbers, Allen, right. The same, not to be able to tell the world about them.

[Operator:]

As there appear to be no further questions in the queue. I’d like to turn it back to management for any closing remarks.

[Bill O'Dowd:]

Sure. Well, thank you. I know we just spoke again about four weeks ago, so here we are, our revenue really jumped, I know beat [Audio Dip] virtually anybody's expectations and so did our operating income. Happy to continue to believe in the forecast we gave on the last earnings hall of our revenue and positive EBITDA. And we're here in the middle of August. So Q4 is right around the corner. For midnight theater being operating in full. We expect as I mentioned, a late September opening and moving to a full entertainment schedule. With that, the restaurant's open now, the theater has been fully installed and we're starting to take private events. We just did a comedy showcase last week following up on the film screening of a week before that. So as we practice with different events, getting ready for every night of the week schedule, we're on pace. So that'll be a nice 2.0 initiative for us. The NFT collections will continue to be good for us once we get some of the bigger ones out there. And Blue Angels is off and flying, no pun intended. So by 2023, we'll have real revenue coming from all those sources of 2.0, and we continue to expect to be able to share more on our live event strategy here in 2022. And once we have that up and running, then we'll have all facets of our Dolphin 2.0 business open for business and creating revenue for us. So thank you for the long time listeners. And I'll look forward to speaking to you again with Q3, but we'll have some announcements between now and then that you should keep an eye out for, so thank you for our loyal listeners. And we'll talk soon.

[Operator:]

Sorry, if I may interrupt quickly. After I handed back to management, we had a question coming to queue if you wish to take it.

[A - Bill O'Dowd:]

Sure.

[Operator:]

Thank you. We have a question from [indiscernible].

[Q - Unidentified Analyst:]

Thank you. And Bill, good afternoon. Thank you for hosting this call. I just had one quick question for you. As you've mentioned in the first six months of the year, advertising spend across many companies from newspapers to ad agencies to Facebook have weakened as businesses watch their spending with the concern about the economy weakening. My question is this, if you look at all kind of your clients out there that your firms do business with, to what degree are these companies also possibly reducing the manpower, they have working in their marketing departments internally, so that as a result, if that's happening, they might be more dependent on the outside services from your various Dolphin 1.0 firms?

[A - Bill O'Dowd:]

Yes, that's a very astute question and thank you for it. While we certainly never root and would never want to root for layoffs, if those occur and to a degree, some of that is occurring, at our clients streaming services, as well as some of the social media platforms you mentioned, Ari, then they need to turn to their outside partners to do more. Also as an interesting, I guess, thought process is if we're in a recession or going into a recession, if companies get more nervous about their ad spend, what traditionally happens is, they'll cut back on the more expensive ad spend the paid media, right, buying the TV commercials, buying the billboards, radio ads, et cetera. Those are very costly in comparison. And they'll double down on earned media spend of PR and influencer marketing which are less costly by comparison. So we may be the beneficiary in certain circumstances of that. We certainly haven't seen a slowdown in our services as you can see by our revenue growth, all organic as I mentioned. So but we don't want to take anything for granted. And as we go into the second half of the year and as companies make their budgets for 2023, we certainly expect that the earned media will stay the same if not increase and hope for the best for our colleagues that they don't get laid off.

[Q - Unidentified Analyst:]

Got it. Great. Well, thank you very much and best of luck.

[A - Bill O'Dowd:]

Thank you very much.

[End of Q&A:]

[Operator:]

Thank you, ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time and I have a wonderful day. And we thank you for your participation.