DOLPHIN ENTERTAINMENT, INC. OVERVIEW
We are a leading independent entertainment marketing and premium content production company. Through our subsidiaries, 42West, The Door,Shore Fire , Viewpoint, Be Social and B/HI, we provide expert strategic marketing and publicity services to many of the top brands, both individual and corporate, in the entertainment, hospitality and music industries. 42West, The Door andShore Fire are each recognized global leaders in the PR services for the industries they serve. Viewpoint adds full-service creative branding and production capabilities and Be Social provides influencer marketing capabilities through its roster of highly engaged social media influencers. Dolphin's legacy content production business, founded by our Emmy-nominated Chief Executive Officer,Bill O'Dowd , has produced multiple feature films and award-winning digital series, primarily aimed at family and young adult markets. Our common stock trades on The Nasdaq Capital Market under the symbol "DLPN." We have established an acquisition strategy based on identifying and acquiring companies that complement our existing entertainment publicity and marketing services and content production businesses. We believe that complementary businesses, such as live event production, can create synergistic opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion with such targets. We have also established an investment strategy, "Dolphin 2.0," based upon identifying opportunities to develop internally owned assets, or to acquire ownership interest in others' assets, in the categories of entertainment content, live events and consumer products. We believe these categories represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various stages of internal development and outside conversations on a wide range of opportunities within Dolphin 2.0. We intend to enter into additional investments during 2022, but there is no assurance that we will be successful in doing so, whether in 2022 or at all. We operate in two reportable segments: our entertainment publicity and marketing segment and our content production segment. The entertainment publicity and marketing segment comprises 42West, The Door,Shore Fire , Viewpoint, Be Social and B/HI and provides clients with diversified services, including public relations, entertainment content marketing, strategic marketing consulting, digital marketing capabilities, creative branding and in-house production of content for marketing. The content production segment comprisesDolphin Films andDolphin Entertainment and specializes in the production and distribution of digital content and feature films. The activities of our Content Production segment also include all corporate overhead activities. Dolphin 2.0 We believe our ability to engage a broad consumer base through our best-in-class pop culture assets provides us an opportunity to make investments in products or companies which would benefit from our collective marketing power. We call these investments "Dolphin 2.0" (with "Dolphin 1.0" being the underlying businesses of each of our subsidiaries mentioned above). Simply put, we seek to own an interest in some of the assets we are marketing. Specifically, we want to own an interest in assets where our experience, industry relationships and marketing power will most influence the likelihood of success. This leads us to seek investments in the following categories of assets: 1) Content; 2) Live Events; and 3) Consumer Products. The first of our Dolphin 2.0 investments has been in the new world of Non-Fungible Tokens ("NFTs"). We see a large opportunity in this sector. Even without broad consumer adoption, the NFT market grew from an estimated$250 million in 2020 to over$40 billion in 2021, according to Bloomberg. We believe the NFT market will continue to grow for years to come, driven by the combination of 1) the ability of consumers to purchase using a credit card (and not just with cryptocurrencies); 2) consumer-friendly pricing options (previously not readily available due to large "gas fees" charged by both sellers and buyers of NFTs to offset the energy consumption required to "mint" the NFT for sale); and 3) popular entertainment and pop culture collectibles being offered. In March, 2021, we announced our intentions to enter into the production and marketing of NFTs. In August, 2021, we announced our partnership with FTX.US, a leading cryptocurrency exchange, to develop and launch NFT collections across all major entertainment industry verticals (film, television, music, gaming, etc.). In December, 2021, we unveiled our first collection, entitled "Creature Chronicles: Exiled Aliens," a generative art collection of 10,000 unique avatars. We expect to mint (or offer for sale) "Creature Chronicles" during
the third quarter of 2022. Our second Dolphin 2.0 investment was made in October, 2021, when we acquired an ownership interest inMidnight Theatre , a state-of-the-art contemporary variety theater and restaurant in the heart ofManhattan . An anchor ofBrookfield Properties' recently opened$4.5 billion Manhattan West development, theMidnight Theatre is in the final stages of construction, and expects to open inSeptember 2022 . The restaurant,Hidden Leaf , opened onJuly 6, 2022 . 23
Our third Dolphin 2.0 investment was made in December, 2021, when we acquired an ownership interest in Crafthouse Cocktails, a pioneering brand of ready-to-drink, all-natural classic cocktails.
We have also made out first content investment under Dolphin 2.0. See Note 17 above for details regarding our Collaborative Arrangement with IMAX for production and distribution of the documentary feature "The Blue Angels".
COVID Update DuringMarch 2020 , theWorld Health Organization categorized a novel coronavirus ("COVID-19") as a pandemic, and it has spread throughoutthe United States . The pandemic has had and continues to have a significant effect on economic conditions inthe United States , and continues to cause significant uncertainties in theU.S. and global economies. The extent to which the COVID-19 pandemic affects our business, operations and financial results depends, and will continue to depend, on numerous evolving factors that we may not be able to accurately predict. Since the outbreak of COVID-19 began and public and private sector measures to reduce its transmission were implemented, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, the demand for certain of the services the Company offers was adversely affected resulting in decreased revenues and cash flows. Revenues For the three and six months endedJune 30, 2022 and 2021, we derived all of our revenues from our entertainment publicity and marketing segment. The entertainment publicity and marketing segment generates its revenues from providing public relations services for celebrities, musicians and brands, entertainment and targeted content marketing for film and television series, strategic communications services for corporations, public relations, marketing services and brand strategies for hotels and restaurants and digital marketing through its roster of social media influencers. Refer to discussion under Revenues in the Results of Operations section below for further discussion on the revenues from the content production segment.
Entertainment Publicity and Marketing
Our revenue is directly impacted by the retention and spending levels of
existing clients and by our ability to win new clients. We believe that we have
a stable client base, and we have continued to grow organically through
referrals and actively soliciting new business. We earn revenues primarily from
the following sources: (i) celebrity talent services; (ii) content marketing
services under multiyear master service agreements in exchange for fixed
project-based fees; (iii) individual engagements for entertainment content
marketing services for durations of generally between three and six months; (iv)
strategic communications services; (v) engagements for marketing of special
events such as food and wine festivals; (vi) engagement for marketing of brands;
(vii) arranging strategic marketing agreements between brands and social media
influencers and (viii) content productions of marketing materials on a project
contract basis. For these revenue streams, we collect fees through either fixed
fee monthly retainer agreements, fees based on a percentage of contracts or
project-based fees.
We earn entertainment publicity and marketing revenues primarily through the
following:
? Talent - We earn fees from creating and implementing strategic
communication campaigns for performers and entertainers, including
Oscar, Tony and Emmy winning film, theater and television stars,
directors, producers, celebrity chefs and Grammy winning recording
artists. Our services in this area include ongoing strategic counsel,
media relations, studio and/or network liaison work, and event and
tour support.
? Entertainment Marketing and Brand Strategy - We earn fees from
providing marketing direction, public relations counsel and media
strategy for entertainment content (including theatrical films,
television programs, DVD and VOD releases, and online series) from
virtually all the major studios and streaming services, as well as
content producers ranging from individual filmmakers and creative
artists to production companies, film financiers, DVDdistributors,
and other entities. In addition, we provide entertainment marketing
services in connection with film festivals, food and wine festivals,
awards campaigns, event publicity and red-carpet management. As part
of our services, we offer marketing and publicity services tailored to
reach diverse audiences. We also provide marketing direction targeted
to the ideal consumer through a creative public relations and creative
brand strategy for hotel and restaurant groups. We expect that
increased digital streaming marketing budgets at several large key
clients will drive growth of revenue and profit in 42West's
Entertainment Marketing division over the next several years.
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? Strategic Communications - We earn fees by advising companies looking
to create, raise or reposition their public profiles, primarily in the
entertainment industry. We believe that growth in the Strategic
Communications division will be driven by increasing demand for these
services by traditional and non-traditional media clients who are
expanding their activities in the content production, branding, and
consumer products PR sectors. We expect that this growth trend will
continue for the next three to five years. We also help studios and
filmmakers deal with controversial movies, as well ashigh-profile
individuals address sensitive situations.
? Creative Branding and Production - We offer clients creative branding
and production services from concept creation to finaldelivery. Our
services include brand strategy, concept and creative development,
design and art direction, script and copyrighting, live action
production and photography, digital development, video editing and
composite, animation, audio mixing and engineering, project management
and technical support. We expect that our ability to offer these
services to our existing clients in the entertainment and consumer
products industries, will be accretive to our revenue.
? Digital Media Influencer Marketing Campaigns - We arrange strategic
marketing agreements between brands and social mediainfluencers, for
both organic and paid campaigns. We also offer services for social
media activations at events, as well as editorial work on behalf of
brand clients. Our services extend beyond our own captiveinfluencer
network, and we manage custom campaigns targeting specific demographics
and locations, from ideation to delivery of results reports. We expect
that our relationship with social media influencers will provide us the
ability to offer these services to our existing clients in the
entertainment and consumer products industries and will be
accretive to
our revenue.
Content Production
We have a team that dedicates a portion of its time to identifying scripts, story treatments and novels for acquisition, development and production. The scripts can be for either digital, television or motion picture productions. We have acquired the rights to certain scripts that we intend to produce and release in the future, subject to obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical distribution. We have completed development of several feature films, which means that we have completed the script and can begin pre-production once financing is obtained. We are planning to fund these projects through third-party financing arrangements, domestic distribution advances, pre-sales, and location-based tax credits, and if necessary, sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there is no assurance that we will be able to obtain the financing necessary to produce any of these feature films. InJune 2022 , we entered into an agreement with IMAX Corporation ("IMAX") to co-produce and co-finance a documentary motion picture on the flight demonstration squadron of theUnited States Navy , called the Blue Angels. IMAX and Dolphin have each agreed to fund 50% of the production budget. OnJune 29, 2022 , we made a payment in the amount of$500,000 pursuant to this agreement. Expenses Our expenses consist primarily of: (1) direct costs; (2) payroll and benefits expenses (3) selling, general and administrative expenses; (4) depreciation and amortization expense; (5) changes in the fair value of contingent consideration and (6) legal and professional fees.
(1) Direct costs include certain cost of services, as well as certain
production costs, related to our entertainment publicity and marketing
business. Included within direct costs are immaterialimpairments for
any of our content production projects.
(2) Payroll and benefits expenses include wages, stock-based compensation,
payroll taxes and employee benefits.
(3) Selling, general and administrative expenses include all overhead costs
except for payroll, depreciation and amortization and legal and
professional fees that are reported as a separate expense item.
(4) Depreciation and amortization include the depreciation of our property
and equipment and amortization of intangible assets and leasehold
improvements.
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(5) Changes in fair value of contingent consideration includes changes in
the fair value of the contingent earn-out payment obligations for the
Company' acquisitions. The fair value of the related contingent
consideration is measured at every balance sheet date and any changes
recorded on our condensed consolidated statements of operations.
(6) Legal and professional fees include fees paid to our attorneys, fees
for investor relations consultants, audit and accounting fees and fees
for general business consultants.
Other Income and Expenses
For the three and six months ended June 30, 2022 and 2021, other income and
expenses consisted primarily of: (1) gain on extinguishment of debt; (2) changes
in fair value of convertible notes and derivative liabilities; (3) changes in
fair value of warrants; (4) changes in the fair value of put rights; (5)
acquisition costs and (6) interest expense.
RESULTS OF OPERATIONS
Three and six months ended
Revenues For the three and six months endedJune 30, 2022 and 2021 revenues were as follows: For the three months ended For the six months ended June 30, June 30, 2022 2021 2022 2021 Revenues: Entertainment publicity and marketing$ 10,290,626 $ 8,643,244 $ 19,467,735 $ 15,820,361 Total revenue$ 10,290,626 $ 8,643,244 $ 19,467,735 $ 15,820,361 Revenues from entertainment publicity and marketing increased by approximately$1.6 million and$3.6 million for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year. The increase is primarily driven by increased revenues across most of our subsidiaries, as cross-selling across our subsidiaries has provided additional customers and increased demand for the service our subsidiaries provide.
We did not derive any revenues from the content production segment as we have not produced and distributed any of the projects discussed above and the projects that were produced and distributed in 2013 and 2016 have mostly completed their normal revenue cycles.
Expenses For the three and six months endedJune 30, 2022 and 2021, our expenses were as follows: For the three months ended For the six months ended June 30, June 30, 2022 2021 2022 2021 Expenses: Direct costs$ 939,389 $ 833,511 $ 2,022,279 $ 1,583,931 Payroll and benefits 6,983,804 5,622,468 13,930,426 10,892,831
Selling, general and administrative 1,519,835 1,194,704 3,039,605 2,718,658 Depreciation and amortization 415,547 478,270 832,785 960,982 Change in fair value of contingent consideration (670,878 ) (165,000 ) (1,434,778 ) 200,000 Legal and professional 613,971 457,998 1,552,186 802,606 Total expenses$ 9,801,668 $ 8,421,951 $ 19,942,503 $ 17,159,008 26 Direct costs increased by approximately$0.1 million and$0.4 million for the three and six months endedJune 30, 2022 , respectively, as compared to the three and six months endedJune 30, 2021 . The increase in direct costs is mainly driven by$0.2 million and$0.7 million of NFT production and marketing costs for the three and six months endedJune 30, 2022 , respectively, that were not present in the same periods in 2021. The increases in direct costs were offset by a$0.1 million and$0.3 million decrease in direct costs for the three and six months endedJune 30, 2022 , respectively, as compared to the three and six months endedJune 30, 2021 , primarily attributable to the decrease in Viewpoint's revenue, in comparison with the same period in the prior year, as Viewpoint incurs third party costs related to the production of marketing materials, which are included in direct costs. Payroll and benefits expenses increased by approximately$1.4 million and$3.0 million for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , primarily due to additional headcount in 2022 to support the growth of our business. Selling, general and administrative expenses increased by approximately$0.3 million for both the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , mainly due to a small increase in bad debt expense, and a$98.9 thousand impairment of an ROU asset.
Depreciation and amortization remained consistent for the three and six months
ended
Change in fair value of the contingent consideration was a$0.7 million gain and$1.4 million gain for the three and six months endedJune 30, 2022 , respectively, compared to the change in fair value of the contingent consideration of$0.2 million gain and a$0.2 million loss for the three and six months endedJune 30, 2021 , respectively. The main components of the change in fair value of contingent consideration were the following:
· The Door:
loss for the six months ended
· B/HI:
ended
for B/HI was zero as of
· Be Social:
ended
months ended
June 30, 2021 . Legal and professional fees increased by approximately$0.2 million and$0.7 million for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 due primarily to including legal, consulting and audit fees related to our restatement of theSeptember 30, 2021 Form 10-Q, revisions of the Forms 10-Q forMarch 31, 2021 andJune 30, 2021 included in our Form 10-K filed onMay 26, 2022 and fees associated with our change of auditors. Other Income and Expenses For the three months ended For the six months ended June 30, June 30, 2022 2021 2022 2021 Other Income and expenses: Gain on extinguishment of debt, net $ -$ 1,012,973 $ -$ 955,610 Loss on disposal of fixed assets - (48,461 ) - (48,461 ) Change in fair value of convertible notes 244,022 268,974 531,880 (602,475 ) Change in fair value of warrants 35,000 65,000 95,000 (2,497,877 ) Change in fair value of put rights - -
- (71,106 )
Acquisition costs - - - (22,907 )
Interest expense (125,348 ) (169,837 ) (274,737 ) (335,031 )Total other income (expenses), net$ 153,674 $ 1,128,649
$ 352,143 $ (2,622,247 )
We did not record any gain or loss on extinguishment of debt for the three and six months endedJune 30, 2022 . During the three and six months endedJune 30, 2021 , we recorded a gain on extinguishment of debt of approximately$1.1 million in connection with forgiveness of the PPP Loans of 42West, Dolphin, Viewpoint,Shore Fire and The Door offset by a loss on extinguishment of debt of$57,400 related to the exchange of certain put rights for shares of our common stock. 27 We elected the fair value option for certain convertible notes issued in 2020. The fair value of these convertible notes is remeasured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. For the three months endedJune 30, 2022 and 2021, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of gains of$0.2 million and$0.3 million , respectively. For the six months endedJune 30, 2022 and 2021, we recorded a change in the fair value of the convertible notes issued in 2020 in the amount of a gain of$0.5 million and a loss of$0.6 million , respectively. None of the decrease in the value of the convertible notes was attributable to instrument specific credit risk and as such all of the gain in the change in fair value was recorded within net income. Warrants issued with convertible notes payable issued in 2020, were initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value of each respective warrant liability recognized as other income or expense. InMarch 2021 , one of the warrant holders exercised 146,027 warrants via a cashless exercise formula. The price of our common stock on the exercise date was$19.16 per share and we recorded a change in fair value of the exercised warrants of$2.5 million on our condensed consolidated statement of operations. The fair value of the 2020 warrants that were not exercised decreased by approximately$35.0 thousand and$95.0 thousand ; therefore we recorded a change in the fair value of the warrants for the three and six months endedJune 30, 2022 for those amounts, respectively, on our condensed consolidated statement of operations. The fair value of put rights related to the 42West acquisition were recorded on our condensed consolidated balance sheet on the date of the acquisition. The fair value of the put rights are measured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. The fair value of the put rights decreased by approximately$71,000 for the six months endedJune 30, 2021 . The final put rights were settled in March of 2021 and we did not have a liability related to the put rights as ofJune 30, 2022 . Interest expense decreased by$44.5 thousand and$60.3 thousand for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year, primarily due to lower convertibles and nonconvertible notes outstanding during the six months endedJune 30, 2022 , as compared to the same periods in the prior year.
Equity in losses of unconsolidated affiliates
Equity in earnings or losses of unconsolidated affiliates includes our share of income or losses from equity investees.
For the three and six months endedJune 30, 2022 , we recorded losses of$23,400 and$43,400 , respectively, from our equity investment in Crafthouse Cocktails. The Crafthouse Cocktails investment was not present in the three and six months endedJune 30, 2021 .Midnight Theatre commenced operations at the end of the second quarter of 2022; therefore no equity gains or losses had been recorded during the three or six months endedJune 30, 2022 . Income Taxes We recorded an income tax expense of$7.2 thousand and$14.4 thousand for the three and six months endingJune 30, 2022 , which reflects the accrual of a valuation allowance in connection with the limitations of our indefinite lived tax assets to offset our indefinite lived tax liabilities. To the extent the tax assets are unable to offset the tax liabilities, we have recorded a deferred expense for the tax liability (a "naked credit"). We recorded an income tax benefit of$38.9 thousand for the six months endedJune 30, 2021 , due to a reduction of the valuation allowance, as the net deferred tax asset was reduced as a result of the deferred tax liability recorded in the B/HI acquisition. There was no income tax expense or benefit for the three months endedJune 30, 2021 . Net Income (Loss) Net income was approximately$0.6 million or$0.06 per share based on 9,498,266 weighted average shares outstanding for basic loss per share and$0.04 per share based on 9,626,143 weighted average shares on a fully diluted basis earnings per share for the three months endedJune 30, 2022 . Net income was approximately$1.3 million or$0.17 per share based on 7,664,000 weighted average shares outstanding for basic earnings per share and$0.13 per share based on 7,913,396 weighted average shares outstanding for fully diluted earnings per share, respectively, for the three months endedJune 30, 2021 . The change in net income for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 , is related to the factors discussed above. 28 Net loss was approximately$0.2 million or$(0.02) per share based on 9,113,252 weighted average shares outstanding for basic loss per share and$(0.09) per share based on 9,890,621 weighted average shares on a fully diluted basis earnings per share for the six months endedJune 30, 2022 . Net loss was approximately$3.9 million or$0.53 per share based on 7,456,360 weighted average shares outstanding for both basic and diluted loss per share for the six months endedJune 30, 2021 . The change in net loss for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , is related to the factors discussed above.
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