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 and Be Social, 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 and 2023, but there is no assurance that we will be successful in doing so, whether in 2022, 2023 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 and Be Social 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 marketing 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. OnOctober 2, 2022 , we minted (offered for sale) our first collection, "Creature Chronicles: Exiled Aliens", a generative art collection of 7,777 unique avatars designed byAnthony Francisco , formerMarvel Studio artist. The collection generated approximately13,175 SOL , equaling approximately$435,000 . 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 opened onSeptember 21, 2022 . The restaurant,Hidden Leaf ,
opened onJuly 6, 2022 . 24 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. During the third quarter of 2022, Crafthouse Cocktails began its first international operations, with distribution inLondon, United Kingdom .
We have also made our 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 The continued spread of new COVID-19 variants did not have a significant impact on our business during the quarter endedSeptember 30, 2022 . The future course of the pandemic could have adverse effects in theU.S and global economies and thus negatively impact our business and financial results. Revenues
For the three and nine months endedSeptember 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. We believe that the proliferation of content, both
traditional and on social media, will lead to an increasing number of
individuals seeking such services, which will drive growth and revenue
in our Talent departments for several years to come.
? 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.
? Strategic Communications - We earn fees by advising companies looking
to create, raise or reposition their public profiles, primarily in the
entertainment industry. We also help studios and filmmakers deal with
controversial movies, as well as high-profile individuals address
sensitive situations. We believe that growth in the Strategic
Communications division will be driven by increasing demand for these
varied services by traditional and non-traditional mediaclients who
are expanding their activities in the content production, branding,
and consumer products PR sectors.
? Creative Branding and Production - We offer clients creative branding
and production services from concept creation to final delivery. 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.
25
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 andSeptember 30, 2022 , respectively, we made payments in the amount of$500,000 and$1,000,000 pursuant to this agreement. We anticipate a final$500,000 payment to be made in Q1 2023. Expenses
Our expenses consist primarily of:
(1) Direct costs - includes certain costs 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 - includes wages, stock-based
compensation, payroll taxes and employee benefits.
(3) Selling, general and administrative expenses - includes all overhead
costs except for payroll, depreciation and amortization and legal and
professional fees that are reported as a separate expense item.
(4) Acquisition costs include professional fees incurred as part of the
acquisition of our subsidiaries.
(5) Depreciation and amortization - includes the depreciation of our
property and equipment and amortization of intangible assets and
leasehold improvements.
(6) Change 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.
(7) Legal and professional fees - includes 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 nine months ended September 30, 2022 , other income and
expenses consisted primarily of: (1) changes in fair value of convertible notes;
(2) changes in fair value of warrants; and (3) interest expense. For the three
and nine months ended September 30, 2021 , other income and expenses consisted
primarily of: (1) gain on extinguishment of debt; (2) change in fair value of
convertible notes; (3) change in fair value of warrants and (4) interest
expense. For the nine months ended September 30, 2021 , other income and expenses
also included a change in the fair value of put rights.
26
RESULTS OF OPERATIONS
Three and nine months ended
Revenues For the three and nine months endedSeptember 30, 2022 and 2021 revenues were as follows: For the three months ended For the nine months ended September 30, September 30, 2022 2021 2022 2021
Revenues:
Entertainment publicity and marketing$ 9,899,013 $ 9,399,432 $ 29,366,748 $ 25,219,793 Total revenue$ 9,899,013 $ 9,399,432 $ 29,366,748 $ 25,219,793 Revenues from entertainment publicity and marketing increased by approximately$0.5 million and$4.1 million for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in the prior year. The increase is primarily driven by increased revenues across most of our subsidiaries, as cross-selling across our subsidiaries has provided additional customers and increased demand for the service our subsidiaries provide. We did not derive any revenues from the content production segment as we have not produced and distributed any of the projects discussed above and the projects that were produced and distributed in 2013 and 2016 have mostly completed their normal revenue cycles. We expect to begin generating income in our content production segment in the second half of 2023 with the release of the Blue Angels documentary film. Expenses For the three and nine months endedSeptember 30, 2022 and 2021, our expenses were as follows: For the three months ended For the nine months ended September 30, September 30, 2022 2021 2022 2021 Expenses: Direct costs$ 837,429 $ 991,708 $ 2,941,044 $ 2,578,295 Payroll and benefits 7,030,814 5,875,755 20,947,531 16,770,091 Selling, general and administrative 1,663,288 1,519,812 4,644,264 4,234,309 Acquisition costs 315,800 - 315,800 22,907 Depreciation and amortization 415,836 475,207 1,248,621 1,436,189 Change in fair value of contingent consideration (5,000 ) 1,110,000 (1,439,778 ) 1,310,000 Legal and professional 774,613 498,661
2,317,800 1,301,267
Total expenses $ 11,032,780 $ 10,471,143 $ 30,975,282 $ 27,653,058
Direct costs decreased by approximately $0.2 million and increased by
approximately $0.4 million for the three and nine months ended September 30,
2022 , respectively, as compared to the three and nine months ended September 30,
2021 . The increase in direct costs is mainly driven by $0.9 million of NFT
production and marketing costs for the nine months ended September 30, 2022 ,
respectively, that were not present in the same period in 2021, offset by
approximately $0.5 million decrease in direct costs primarily attributable to a
decrease in Viewpoint's revenue as compared to the nine months ended September
30, 2021 . The decrease in direct costs of approximately $0.2 million for the
three months ended September 30, 2022 is 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 $1.2 million and $4.2
million for the three and nine months ended September 30, 2022 , respectively, as
compared to the three and nine months ended September 30, 2021 , primarily due to
additional headcount in 2022 to support the growth of our business and stock
compensation issued to our employees under the 2017 Plan.
Selling, general and administrative expenses increased by approximately $0.1
million and $0.4 million for the three and nine months ended September 30, 2022 ,
respectively, as compared to the three and nine months ended September 30, 2021 ,
mainly due to the fair value of the commitment shares issued as consideration
for the Lincoln Park agreement and a $98.9 thousand impairment of an ROU asset.
27
Acquisition costs for the three and nine months ended September 30, 2022 were
$0.3 million , related to our acquisition of the membership interest of Socialyte
LLC on November 14, 2022 . Acquisition costs for the three and nine months ended
September 30, 2021 were not significant, as the Company did not have any
significant acquisition activity during 2021.
Depreciation and amortization remained consistent for the three and nine months
ended
Change in fair value of the contingent consideration was a$5.0 thousand gain and$1.4 million gain for the three and nine months endedSeptember 30, 2022 , respectively, compared to the change in fair value of the contingent consideration of$1.1 million loss and a$1.3 million loss for the three and nine months endedSeptember 30, 2021 , respectively. The main components of the change in fair value of contingent consideration were the following:
· The Door: this contingent consideration was settled in
changes were recorded in the three months ended
recorded a
a
30, 2022 and 2021, respectively.
· B/HI: this contingent consideration was settled in
changes were recorded in the three months ended
recorded a
a
30, 2022 and 2021, respectively.
· Be Social:
million loss for the nine months endedSeptember 30, 2022 and 2021, respectively. Legal and professional fees increased by approximately$0.3 million and$1.0 million for the three and nine months endedSeptember 30, 2022 , as compared to the three and nine months endedSeptember 30, 2021 due primarily to: (1) entering into the2022 Lincoln Park agreement and related filing of the Registration Statement on Form S-1 during the third quarter of 2022 and (2) 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 nine months ended September 30, September 30, 2022 2021 2022 2021 Other Income and expenses: Gain on extinguishment of debt, net $ -$ 1,733,400 $ -$ 2,689,010 Loss on disposal of fixed assets - - - (48,461 )
Change in fair value of convertible note 45,642 (223,923 ) 577,522 (826,398 ) Change in fair value of warrants
10,000 (55,000 ) 105,000 (2,552,877 )
Change in fair value of put rights - - - (71,106 )
Interest expense (126,147 ) (241,115 ) (400,884 ) (576,146 )
Total other (expenses) income, net $ (70,505 ) $ 1,213,362 $ 281,638 $ (1,385,978 )
We did not record any gain or loss on extinguishment of debt for the three and nine months endedSeptember 30, 2022 . During the three and nine months endedSeptember 30, 2021 , we recorded a gain on extinguishment of debt of approximately$1.8 million and$2.7 million , respectively, in connection with forgiveness of the PPP Loans of 42West, Dolphin, Viewpoint,Shore Fire and The Door. Both periods were 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. We elected the fair value option for one convertible note issued in 2020. The fair value of this convertible note is remeasured at every balance sheet date and any changes are recorded on our condensed consolidated statements of operations. For the three months endedSeptember 30, 2022 and 2021, we recorded a change in the fair value of the convertible note issued in 2020 in the amount of a$45,642 , gain and$0.2 million loss, respectively. For the nine months endedSeptember 30, 2022 and 2021, we recorded a change in the fair value of the convertible note issued in 2020 in the amount of a gain of$0.6 million and a loss of$0.8 million , respectively. None of the decrease in the value of the convertible note was attributable to instrument specific credit risk and as such, all of the gain in the change in fair value was recorded within net (loss) income. 28 Warrants issued with the convertible note 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 statements of operations. The fair value of the 2020 warrants that were not exercised decreased by approximately$10.0 thousand and$0.1 million ; therefore, we recorded a change in the fair value of the warrants for the three and nine months endedSeptember 30, 2022 for those amounts, respectively, on our condensed consolidated statements 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 nine months endedSeptember 30, 2021 . The final put rights were settled in March of 2021; therefore we did not have a liability related to the put rights as ofSeptember 30, 2022 and no changes in fair value occurred in 2022. Interest expense decreased by$0.1 million and$0.2 million for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in the prior year, primarily due to lower convertibles and nonconvertible notes outstanding during 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 nine months endedSeptember 30, 2022 , we recorded losses of$39,437 and$82,837 , respectively, from our equity investment in Crafthouse Cocktails. The Crafthouse Cocktails investment was not present in the three and nine months endedSeptember 30, 2021 .Midnight Theatre commenced operations at the end of the second quarter of 2022; we recorded a loss of$60,786 thousand for the three months endedSeptember 30, 2022 . No equity gains or losses have been recorded prior to the third quarter of 2022. Income Taxes We recorded an income tax expense of$7,224 and$21,672 for the three and nine months endingSeptember 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$38,851 for the nine months endedSeptember 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 endedSeptember 30, 2021 . Net (Loss) Income Net loss was approximately$1.3 million or$0.14 per share based on 9,664,681 weighted average shares outstanding for basic loss per share and$0.14 per share based on 9,793,715 weighted average shares on a fully diluted basis earnings per share for the three months endedSeptember 30, 2022 . Net income was approximately$0.1 million or$0.02 per share based on 7,740,085 weighted average shares outstanding for both basic and diluted earnings per share for the three months endedSeptember 30, 2021 . The change in net income for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 , is related to the factors discussed above. Net loss was approximately$1.5 million or$0.16 per share based on 9,307,830 weighted average shares outstanding for basic loss per share and$0.23 per share based on 9,437,807 weighted average shares on a fully diluted basis earnings per share for the nine months endedSeptember 30, 2022 . Net loss was approximately$3.8 million or$0.50 per share based on 7,551,974 weighted average shares outstanding for both basic and diluted loss per share for the nine months endedSeptember 30, 2021 . The change in net loss for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , is related to the factors discussed above. 29
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