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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 Myrta 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 21A of 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 discussion of such risks, 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.
Dolphin
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-month 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 in the amount of $100,000 related to the sublease of one of Dolphin's offices, offset by a 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 supergroup, our debt reached a high of over $16 million. It has 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 and 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%, that is, in 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 filings 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 Falcon 1.0, our super group of companies helping us to grow revenue on a double-digit basis profitably, and 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, 42 West. During the second quarter, 42 West helped longtime client Tom Cruise launch the sequel to his 1986 film Top Gun. With more than $1.3 billion in global box office revenue so far, Top Gun Maverick has already surpassed Titanic to become Paramount's biggest domestic movie of all time. That's a shame for James Carbonara since he cried 12 times watching Titanic. Also, we have announced that 42 West is hard at work on 97 Emmy nomination campaigns, a truly staggering number. If 42S keeps your eyes popping, the door, our leading culinary hospitality and lifestyle PR firm, will have your mouth watering. During Q2, the door worked on campaigns ranging from Pat LaFrieda's tomahawk gift box, which includes a colossal 40-ounce prime tomahawk rib steak, alongside tender filet mignons and other grilling staples. As temperatures soared this summer, the door also rolled out a promotion for Haagen-Dazs' new City Sweets ice cream collection. Preparing for fall, the door also began promoting New York City's biggest wine and food festival, which will return October 13th through 16th, and is celebrating its 15th anniversary with over 80 events, 8-0, including a musical performance from Joseph Rev. Simmons from Run DMC. Speaking of music, Shorefire Media, Dolphin's industry-leading music PR firm itself, had an eventful quarter as it was award season. And what a season Shorefire had. I like to highlight each of our companies every so often on these earnings calls, and I think this call deserves a special shout out to Shortfire. They just had a tremendous second quarter. Really, really tremendous. Best in company history, I believe. Shortfire Musicians won seven Grammys, plus a Lifetime Achievement Award for client Bonnie Raitt, whose brand new album also topped six Billboard charts. Chance the Rapper showcased new music at the BET Awards, and Hot Gospel Act Maverick City were among the top nominees at the Billboard Music Awards. Surefire also added Canada's top music award show, The Junos, to its roster. Surefire client Steve Aoki was named Adweek's Creative Visionary of the Year. And not to be outdone, Surefire corporate clients Streaming Platform Mandolin and debate series Intelligence Squared were also winners. Named the number one most innovative music company by Fast Company, and Top Podcast Event by Adweek, respectively. Shorefire Placements also included client champ, the rapper on The Late Show with Stephen Colbert, Mandy Moore performing on The Today Show and The Tonight Show with Jimmy Fallon, Jewel appearing as musical guest on Late Night with Seth Meyers, as well as Kesha appearing on Seth Meyers to promote her new show on Discovery+, and so much more. Shorefire is killing it. Congrats to Marilyn and the team. Moving along to Dolphin's influencer marketing group, BeSocial kicked off the quarter with their spring showroom, working with brands from Lulu's to Palm Wonderful, capped off with a spring trend report before heading off to Coachella to elevate clients. Also during the quarter, BeSocial worked on projects that included Coco Chanel, a partnership with Barbie and Forever 21, and paired the hottest spring and summer styles with a timeless classic, Michael Jordan's Air Jordan brand produced by Nike. May have worn a pair of those or two in my playing days. Turning now to Viewpoint, Dolphin's respected creative agency and video production boutique, Viewpoint completed marketing videos and brand work for a wide range of clients in Q2, including A&E Networks, CBS, AAA, and PayPal. That concludes our update on Dolphin 1.0 and turning to Dolphin 2.0, where Dolphin and its shareholders have equity in projects and participate in the upside that our best-in-class marketing companies regularly enable for our clients. As a reminder for anyone new on the call, each call we have more and more new people on the call or new to the Dolphin story. We define the work of our super group under Dolphin 1.0 as the very best at marketing pop culture. And we define what we call Dolphin 2.0 as using pop culture to market assets that we own. In terms of a business model, I'll remind you that broadly speaking, there are two types of Dolphin 2.0 initiatives. One is where we develop assets. in the categories of content, consumer products, or live events, and ones where we receive ownership stakes in other people's companies that have assets in those categories. That's the core thesis behind Dolphin 2.0, taking ownership stakes and assets that we know how to market. To put more simply, we want to own some of the types of things that we know we can market better than anybody else. As a reminder, We have a couple of models for Dolphin 2.0, which include ownership stakes only and also equity plus asset development. For ownership stakes, we typically look to receive somewhere between 5% and 10% of the equity in the respective company, in addition to the monthly cash fee. Examples include Craft House Cocktails, a pioneering brand of ready-to-drink, all-natural classic cocktails that is promoted by the supergroup and led by the door to help market their reward-winning product. During the quarter, promotional activity included brand activations with Khalifa, and Craft House also went global in Q2 and is now available in London, England. With respect to the other types of Dolphin 2.0 initiatives, wherein we develop and own assets that we are excited to market, we do not receive a monthly cash fee, since we would often only be paying it to ourselves, but as a result, we take a larger ownership position in the product or venture. Examples of these types of Dolphin 2.0 investments would be Midnight Theater and the NFT marketplace we have built. Let's start with Midnight Theater. It was actually the first week in July, so just after Q2 ended, that Midnight Theater's restaurant Hidden Leaf opened. Hidden Leaf, as I mentioned on the last earnings call, is the newest restaurant concept from Brooklyn restaurateur Josh Cohen of Chez Montant, Lilia, and St. Vitus fame. It opened its doors at 75 Manhattan West Plaza. The beautiful standalone restaurant tucked inside our exciting new performance venue, Midnight Theater, features a Pan-Asian menu created by executive chef Chai Trivedi of Prana, Tamarind, Budokan, and Aventi Hotel fame. Internationally renowned bartender Ian Griffiths, co-founder of the wildly acclaimed and influential Dandelion and White Lion bars in London, is making their first permanent foray into the New York City drink scene with the opening of Hidden Leafs Bar and its street-level companion, high energy aperitivo bar midnight cafe a few weeks later midnight theater also held the first of many anticipated private events prior to its official opening this september with the premiere of kevin durant's basketball documentary nyc point gods nyc point gods profiles the highly influential 80s and 90s nyc hoop lens hoops legends that emerged out of new york city highlighting some of the most famous point guards in New York City history, including Reefer Alston, Kenny Anderson, Mark Jackson, Stefan Marbury, God Sham God, Kenny the Rocket Smith, I believe, Rod Strickland, and Dwayne Pearl Washington. We're highly encouraged at the potential for private events at Midnight Theater. Kenny the Jet Smith, that's what it was. And we're excited to share more in coming quarters, especially as the theater opens publicly this fall. As a reminder, for modeling purposes, there are 100 seats in the restaurant, and there will be 160 seats in the theater. So anyone can model out an average ticket price and a number of turns in the restaurant and do the same in the theater with an assumption of a number of shows per week. This will quickly get you to a revenue model, and you can apply a reasonable profit margin standard in the industry. Dolphin is the largest single owner within Midnight Theater, and we manage all aspects of publicity and marketing for the venue. both the restaurant and the theater, as well as facilitate talent and commercial relationships within the entertainment and culinary industries. We invested $1 million into the venture for a stake of approximately 12.5%. We also invested in options for up to another approximately 25%. And then in success, of course, we will look to add locations around the country and around the world. Now I'll turn to NFTs. In terms of the launch of two high-profile NFT collections that we have previously discussed, Flower Girls and Creature Chronicles, We have decided to push those launches from the summer to this fall. Our decision was based on the calculation that the native crypto community will be stronger in the coming months than it has been in the previous two to three months. We have high hopes for both of these collections and want to give each of them the best possible chance of success. But the postponement of the release of those two collections does not mean that our NFT teams have been idle. Far from it. As many of you know, during the second quarter, We Come in Peace, our Web3 agency, developed a full slate of metaverse-related clients and NFT projects to market for others. We Come in Peace worked on promoting a new NFT-gated community called the Venice Music Collective, built for independent music artists in partnership with music and tech industry entrepreneurs Troy Carter and Susie Ryu. We Come in Pieces has also helped bring to market a generative NFT project that reimagines a new visual language for Web3 that is made up of variations of the 26 letters in the English alphabet called the symbols. Finally, We Come in Pieces was tapped by Rebase, the first ever geominting NFT platform, to help market and promote a new metaverse and NFT initiative co-founded by Bella Hadid. The marketing campaign for Bella's collection has already started and has gained a large number of followers. Now turning to our most recent Dolphin 2.0 initiative, our multi-year co-production distribution agreement with IMAX for a slate of documentary features. The first project we have greenlit is Blue Angels, developed and co-produced with the renowned producer J.J. Abrams and his Bad Robot productions, along with Zipper Brothers Films. Blue Angels is currently in production and is expected to hit IMAX theaters in the second half of 2023. We are tremendously excited by this partnership with the IMAX team as we work together to build a slate of unforgettable documentaries that need to be seen on the big screen. And I can say, I've seen the first footage from this film and it is truly nothing short of spectacular. We will be very excited to bring this picture to market and we believe it will be a tremendous ambassador for Dolphin's aspirations to invest in content as one of the four legs of our Dolphin 2.0 stool. To remind those on the call, in summary, We're very excited about these five Dolphin 2.0 investments on top of a growing, sustainable 1.0 business that generated an operating profit here in Q2. Purely on Dolphin 1.0 alone, we are on a path to exceed $40 million in revenue this year and generate a larger EBITDA profit than last year. As I mentioned, 1.0 enables and turbocharges our opportunities with 2.0, and we're excited to keep building on that portfolio of investments for Dolphin and our fellow shareholders. Thank you for joining us on this ride and to walk through the financials. I'll now turn it over to Maritza Negreani, our CFO.
James
Thank you, Bill, and good afternoon, everyone. I will now discuss results for the quarter ended June 30th, 2022. Revenues for the quarter were approximately $10.3 million as compared to approximately $8.6 million for the quarter ended June 30th, 2021. Overall operating expenses for the quarter ended June 30th, 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 30th, 2021. The increase is primarily a result of expenses incurred in our NFT business. Payroll and benefit costs for the quarter ended June 30th, 2022 were approximately $7 million compared to $5.6 million for the quarter ended June 30th, 2021. The increase is primarily due to additional headcount in 2022 to support the growth of our business. SG&A expenses for the quarter ended June 30th, 2022 were approximately $1.5 million compared to approximately $1.2 million for the quarter ended June 30th, 2021, primarily due to an increase in our bad debt expense. Legal and professional fees were approximately $613,000 for the quarter ended June 30th, 2022 compared to approximately $458,000 for the quarter ended June 30th, 2021. The increase is primarily due to legal consulting and audit fees related to our restatement of the September 30th, 2021 Form 10-Q, revisions of the Form 10-Q for March 31st, 2021 and June 30th, 2021 included in our Form 10-K filed on May 26th, 2022, as well as fees associated with our change of auditors in June of 2022. Operating income for the quarter ended June 30th, 2022 of $488,958 includes non-cash items from depreciation, 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 a gain in the change of fair value of contingent consideration of $670,878 compared to operating income of $221,293 for the quarter ended June 30th, 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 30th, 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 ended June 30th, 2021 of $1,349,000, $942, which included non-cash items from depreciation and amortization of $478,270, a gain in the change of fair value of continued 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 17 cents based on 7,664,000 weighted average shares and 13 cents fully diluted earnings per share based on 7,913,396 weighted average shares for the quarter ended June 30th, 2021. Cash and cash equivalents were $7.2 million as of June 30th, 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 pull for questions?
Operator
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset, if listening on speakerphone, to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from Alan Clee with Maxim Group. Please go ahead.
Alan Clee
Good afternoon. The revenues, can you confirm, are all the revenues in Dolphin 1.0? And if so, how should we think about the buildup of 2.0 revenues in the third and fourth quarters?
Dolphin
Sure. Hi, Alan. 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 Theater opening in September. And so really it'll kick into Q4 because, you know, 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, you know, 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.
Alan Clee
Okay, so likely Flower Girls and Alien Exile, those would likely be Q4 events.
Dolphin
Yes, one month before September.
Alan Clee
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 a decision made to cut back the size of those launches?
Dolphin
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. Again, we want to transition NFT collections to the broad consumer. We're excited to be able to take payment by credit card, et cetera. But we can't ignore the fact that, you know, flower girls sold out its first collection to the entirely to a crypto community. Um, and creature Chronicles, uh, has such an appeal to the crypto community with the comic book crossover. So, um, we want to make sure that there, 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 of the past couple of months.
Alan Clee
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 a material impact on how we should think about the overall margins of this business? Or how do you think about that?
Dolphin
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, 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's 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 go probably in the next few weeks. And if they have success, we'll see more go right after it.
Alan Clee
Okay. 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?
Dolphin
Yes. Q1 was heavily hit by the one-time audit related charges, um, you know, several hundred thousand dollars. Q2 had a little bit of left spillover as well, uh, because of course we filed, um, the K in May, late May. So, um, this quarter had, um, a little bit of that as well. Um, it's still down from, uh, 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.
Alan Clee
And normal, what does that mean? Is that like looking at kind of the last year's type numbers, like 500,000 or so? I think so. Okay.
Dolphin
You know, 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, Alan. It's a shame not to be able to tell the world about them.
Operator
Okay. As there appear to be no further questions in the queue, I'd like to turn it back to management for any closing remarks.
Dolphin
Sure. Well, thank you. I know we just spoke again about four weeks ago. So here we are. Our revenue really jumped. I know it beat virtually anybody's expectations and so did our operating income. Happy to continue to believe in the forecast we gave on the last earnings call 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 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 longtime listeners and, um, I 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 come into queue if you wish to take it.
Alan Clee
Sure. Sure.
Operator
Thank you. We have a question from Ari Cole of Cole Capital.
Ari Cole
Great. Thank you. And Bill, good afternoon. Thank you for hosting this call. I just had one quick question for you. As you 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.
Dolphin
Yeah, 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 earlier, then they need to turn to their outside partners to do more. Also, it's 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? You know, 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 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. 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.
Ari Cole
All right. Great. Well, thank you very much and best of luck.
Dolphin
Thank you very much.
Operator
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.
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