Good day, ladies and gentlemen. And welcome to the Dolphin Entertainment Second Quarter 2021 Earnings Conference Call. All lines have been placed on listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to Mr. James Carbonara with Investor Relations.

Sir, the floor is yours..

Thank you. And once again, welcome to Dolphin Entertainment's second quarter 2021 earnings call. With me on the call are Bill O'Dowd, Chief Executive Officer; and Mirta Negrini, Chief Financial Officer. I would 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 meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Although the company believes the 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 would like to turn the call over to Bill O'Dowd, Chief Executive Officer of Dolphin Entertainment. Bill, please proceed..

content, consumer products and equity. And we are hard at work in selecting the second one in each of those three buckets for 2021. And speaking of the NFT business. Many of you saw the partnership with FTX we announced two weeks ago today.

FTX's platform and technical skills with the blockchain were the final pieces in the puzzle we felt we needed to have to launch large scale collectible businesses with major partners.

I don't think there's anyone on this call that hasn't heard of FTX, but just in case, they are the leading cryptocurrency exchange with over 1 million users and over $10 billion of average trading volume per day.

Last month, they announced the largest raise in crypto exchange history, a $900 million Series B round, valuing their company at $18 billion. And to expand their visibility in the US, FTX saw sponsorship opportunities in the sports and eSports industries, which dovetail nicely with our NFT ambitions also in those industries.

Some of FTX's sponsorship highlights include their 19 year naming right deal for FTX Arena, home of my beloved Miami Heat; their $210 million 10 year sponsorship of TSM, labeled the most valuable team in eSports by Forbes, the largest sponsorship deal in eSports history; and their groundbreaking deal to become the official cryptocurrency exchange brand of Major League Baseball, the first such agreement with one of the major sports leagues in the United States.

So in summary, we feel our goals and interests in NFT space are aligned. Now Dolphin will develop and execute the creative branding, production and marketing of these programs, alongside FTX, who will use their crypto exchange services and technical development as the backbone of the marketplaces.

Together, we will develop and program global NFT marketplaces targeting all of Dolphin's verticals, including the sports, film, television, music, gaming, eSports, culinary, lifestyle and charity industries. We see the trading of NFTs as much more than just a list of digital products.

We view our marketplace experiences as the future of fandom for internationally recognized brands and franchises in sports and entertainment. To achieve this vision, we need a seamless user experience because buying NFTs today, it's the opposite of that. To put it nicely, to buy NFTs today on the Ethereum blockchain, it's clunky.

We wanted to be able to have the wallet and the product all in one place. We wanted to be able to allow the consumer to pay with crypto, credit card or traditional currency. We wanted to have the product available on wholly owned and programmed online destinations. We want to have the same product available for purchase directly in-app.

And we also wanted to have actual customer support when necessary, all of which are enormous differentiating factors that FTX either provides now or can provide as we build larger and larger marketplaces, which we intend to do.

To put it simply, Dolphin and many, many others were waiting for the ability to sell NFTs using credit cards and for the elimination of gas fees that prohibit competitively pricing collectibles. There's simply no business rationale for selling products at $10 or $20 when it costs you $100 in gas fees to upload these product for sale.

And by the way, when it would cost the consumer another $100 to download the product after buying it. Those gas fees are why the NFT markets, primarily up until now been dominated by speculative assets like art because they can be priced at $1,000 or more, where even $100 in gas fees becomes just a fraction of the cost.

Now with FTX and the ability to take credit cards and the elimination of gas fees, we think for ourselves and honestly, for the major studios and record labels that have predominantly sat on the sidelines as well, waiting like we have been, when you can sell digital products for any price point, like $25 or less if you want to, then you can create a true market, a true cross industry ecosystem in collectibles.

We like the state of the industry and we like our position and experience within it, given that our PR firms have marketed collectibles for virtually every major studios consumer products division, as well as industry leaders like Funko and Mattel. We know how to market collectibles. And now, we can make our own and price them competitively.

Let's see what happens over the next few months. We're certainly very excited for the possibilities. And to remind everyone, NFTs only represent one of the Dolphin 2.0 initiatives we expect to announce this year. We believe each of these 2.0 initiatives, including NFTs, have the potential to be a major catalyst for our company.

Dolphin 2.0, after having identified the first initiative in content and after identifying the first initiative in equity stakes is gathering momentum and we can't wait to share more. And did I mention that we have reported positive operating income on record revenues? Yeah, I did, okay. That's good.

And how about the fact that we have a working capital surplus with more cash on the books than all remaining debt, including both long-term and the PPP loans, which we expect to be forgiven? I already said that, too, okay, great.

I just want to make sure I didn't forget to mention that we are a profitable entertainment microcap company with the working capital surplus and more cash on our books than total debt before we even start Dolphin 2.0. Okay. I'm just glad I didn't forget to say that.

I'd like to finish my prepared remarks at the same point I started them by saying the most sincere thank you to everyone who had faith in us along our journey. We are far from reaching our fullest potential, and we know that. But it's also important to celebrate successfully reaching milestones along the way.

And I would say that record revenues, positive operating income and a working capital surplus are each absolutely a reason to celebrate. So with that said, I'll now turn it over to Mirta..

Thank you, Bill. And good afternoon, everyone. I will now discuss results for the quarter ended June 30, 2021. Revenue for the quarter ended June 30, 2021, was approximately $8.6 million compared to approximately $5.2 million in the quarter ended June 30, 2020.

Overall operating expenses for the second quarter of 2021 were approximately $8.6 million compared to approximately $5.4 million in the second quarter of 2020. Operating expenses are composed of direct costs, selling, general and administrative costs, depreciation and amortization, legal and professional fees, and payable costs.

Direct costs for the second quarter of 2021 were $833,511 compared to $656,849 in the same period of the prior year. Selling, general and administrative expenses for the second quarter of 2021 were approximately $1.2 million compared to $978,527 in the second quarter of 2020.

Legal and professional fees were $457,998 in the second quarter of 2021 compared to $362,853 in the second quarter of 2020. Payroll costs were approximately $5.6 million in the second quarter of 2021 as compared to approximately $2.9 million in the second quarter of 2020.

Operating income for the quarter ended June 30, 2021, of $56,293, included non-cash items from depreciation and amortization of $478,270, as compared to an operating loss of $179,038, which included non-cash items from depreciation and amortization of $496,461 for the same period in the prior year.

Net income for the quarter ended June 30, 2021 of approximately $1.3 million, included the benefit of approximately net $1 million in non-cash items, primarily from a $1 million gain on extinguishment of debt and positive changes in the fair value of derivative liabilities, warrants and contingent consideration of $498,974, partially offset by depreciation and amortization of $478,270.

This compares to a net loss of approximately $2.9 million, which included non-cash items from depreciation and amortization of $496,461, a negative change in fair value of derivative liabilities, warrants, put [ph] rights, and contingent consideration items in the amount of $1.7 million and approximately $0.9 million from the beneficial conversion feature of a certain convertible instruments for the three months ended June 30, 2020.

For the three months ended June 30, 2021, we have basic earnings per share of $0.17 per share based on 7,664,000 weighted average shares outstanding and diluted earnings per share of $0.13 per share based on 7,913,396 weighted average shares outstanding.

For the three months ended June 30, 2020, we had basic and diluted loss per share of $0.62 per share based on 4,719,241 weighted average shares outstanding. Cash and cash equivalents were $9.9 million as of June 30, 2021, compared to $8.6 million as of December 31, 2020, including restricted cash of approximately $0.7 million in each period.

That concludes my financial remarks. I will now ask the operator to open the phone line for Q&A.

Operator, can you please poll for questions?.

Certainly, thank you. [Operator Instructions] We will go first to Allen Klee at Maxim Group. Your line is open, sir. Please go ahead..

Thank you. And congratulations, this was really an impressive quarter. A couple of things on the financials to start. The sequential increase in revenue from the first quarter, where did that come from? And any thoughts on the sustainability of it? Thank you..

Sure. Allen, thank you. Yes, this is a nice call to be on. Well, I mean, we - first, on the sustainability, we're excited about the fact that our revenues grew as they did without movies and theaters and without the restaurant business and without the live touring to the largest - to a large degree, as we talked about on our last quarter.

So really, I want to give the credit, obviously, to each of the subs because this is where having market leaders in their respective fields, they're growing even without certain recovery catalysts. And I think it was a little surprising to many that the growth we did experience from the first quarter.

I think with Q3 and through the end of this year, I am feeling that we certainly don't see anything that - there is no one time revenue or event that occurred or something that would - it was just organic growth. And we anticipate - we don't see any reason why it can't continue.

And I am not saying though that I think certain of those recovery categories will come back this year. I'm - the movies are right - as of right now, at least, as I stated in the prepared remarks, I don't think we are confident. I do not think we are confident in the music business right now, but we're hopeful.

And the restaurants, we're also waiting and seeing. So obviously, that only bodes well for 2022 because I don't think any of us think it will go beyond that. So that's just organic growth across each of the subs..

All right. Thank you. I just have a few more financial related questions. If I were to calculate the gross margin, if I took your direct costs and payroll and imagine that as cost of goods sold and came up with a gross margin, that number also improved sequentially.

So the profitability of the gross profits, and I was wondering if you could maybe point to what was behind that and thoughts on the potential for that to improve?.

Well, to a large degree, it's that we've invested to keep our very best people during a pandemic, right. And in doing so, I'm trying to look beyond the pandemic and when you've got superstars and we think we've got a whole host of them, we wanted to keep them even if they were working at 70%, 80%, 90% capacity and you're starting to see that.

I mean look at the margin growth, to your point, Allen. Quite simply the same amount of people were able to handle a little bit more work, and there it is. And we'd rather invest in the people we have and have them all at full salary and et cetera, et cetera, than some of our competitors who have been laying off people or what not.

So it worked out very well for us this quarter and, we think, going forward..

Right. I also - in the last three quarters, your SG&A has declined sequentially.

Could you explain what's going on there?.

We're pulling it up, Allen, to make sure we - sure. And that one, I don't know at the top of my head, brother..

That's all right. I can move on. So for Dolphin 2.0, where you're owning an asset.

In - big picture, not specific numbers, do you think that the margins of the businesses, in general, when you own it compared to where you're doing the PR marketing that - how do you think the margins would be for the 2.0 businesses relative to your legacy other businesses?.

Yeah. I mean in one sentence, the thought process is, of course, that when you can own the asset, you make a better margin and gross dollars, too, I might add, than servicing the asset. So I'm excited for the margins we're showing now. And thank you for pointing that out, Allen, that was a sophisticated question you asked previously.

But when we go into 2.0 with successful assets, there's just - you could service all day long, you'll never get to the margin, ever, that you could do by servicing assets you own, obviously.

So speaking as someone who's produced successful television series in the past and digital series and it just doesn't compare on a dollar for dollar investment basis.

So as we get - as our company evolves and includes more and more and more 2.0 initiatives and where we'll be in a quarter, where we'll be 3 years from now, like we - I took us on a trip down memory lane in my prepared remarks to thank those who were with us since 3 years ago, when we laid out the strategy of 3 years for the Super Group that we could get to this day.

I think 3 years after starting 2.0, the margin profile will be vastly, hopefully, even stronger than it is today because we'll have a much bigger mix of 2.0 to go with our 1.0 revenue..

That's great. And on....

And by the way, our - if I could add, our CEOs not only know that. That's why they joined Dolphin, right.

The whole point of doing Dolphin, the whole point from - and it seems timely to reminisce back to the roadshow that, as I mentioned, at LD Micro as Josh Scheinfeld and Tim Bard were listen - Tim Johnson, sorry, were listening into, then the whole vision was to get to this point so that we could own some of the assets we were marketing.

And that's why each of those private company owners joined the group because they know the margin is better. They know what can happen if you have a successful piece of content or live event or consumer product.

So I think I mentioned it on the 10-K call this year, what 2021 represented for all of us was the and is the starting line, and that's why we're so excited. And it's great to be at the starting line with where we are financially, obviously. Sorry, Allen, I know you had another question..

No, no, that's fine. Thank you. For NFTs, it seems like the FTX partnership is pretty meaningful and potentially game changing.

Could you comment on where you think that can bring this business? And kind of what we can look forward to seeing in '21?.

Yeah, sure. And I probably going to - our friends at FTX probably don't need us to share their selling points, if you will, with them. But obviously, they're a great, well recognized company and doing it very quickly with just a couple of years of existence.

But what they represent for us as we were out there looking at serving the landscape of NFTs, right, and where the business was going to go, right. I think, we, by that, I mean, people that have sold or marketed collectibles business, not an art business, the collectibles business.

Previously, in the physical world, we needed to create price points that were under $50 a product, and we needed to create price points in the $10 to $25 range, and it just wasn't possible until you could eliminate the gas fees. You needed a different blockchain than - or a workaround to the current Ethereum blockchain, where NFTs are primarily sold.

So that's point number one. And secondly, to reach all consumers and not just 1% of consumers, you needed to - you'd be able to have the consumer pay with something other than crypto.

So when we were looking for those two things, FTX not only fit those two bills and allowed us to do both of those, but they're in exchange, and their - both the US component to FTX and the international one, too.

So as we have aspirations to do global NFT marketplaces, right, in those industries and music, I mean, there's nothing more global than music, right, film, television, other industries and verticals that are global by nature, right.

Then to be able to accept payment in not just credit card, obviously, it eliminates much of it, but - and in crypto but in fiat currency too, and with an exchange that's licensed and available globally. And that is the technical partner and the blockchain partner we wanted for what our aspirations are in the collectibles business.

When you think about the promise of digital delivery, right? What's the biggest disruptor in that in our industry in our lifetime, Netflix, right? Well, what did Netflix have that traditional linear cable channels didn't? They weren't bound by national boundaries. They - they're a global service. It's digital delivery on a global scale.

Collectibles can be transformed that same way with digital delivery if you have a partner that can be global. And a reason to highlight those two or three sponsorship deals FTX did - and I'll state the obvious here, but I think it's implied. You can't just drop a check and name a major sports arena in this country, right.

If you - they named an NBA franchise's arena and they're the official partner of Major League Baseball. Altogether, either one of those deals, you're vetted six ways to Sunday, right. This is an exchange that in the US follows the KYC compliance, know your customer. They follow AML, anti-money laundering laws.

They have to be, to be endorsed and accepted by two of the four major sports leagues and the only cryptocurrency exchange by any.

So we can't feel more comfortable with our choice of partner and their technological expertise is exactly what we want in the market to seek as we got closer to this fall as we have aspirations, again, for global collectibles marketplaces. And so we're excited about the partnership.

We've enjoyed our time with them so far, and there's a lot more to come..

It seems like what FTX - and one of the other opportunities, and I think you might have - you did touch on this is - but the NFT market could potentially be transforming from more of a high end art market to more collectibles lower end.

And so we may not even know if we're looking at what's happened this year with high end, what the real opportunity is as this market is being created for a different type of product.

What do you think about that?.

Yeah. I think - I don't think we'll even need a 3 year horizon. I'd be surprised at 12 months from now. Whatever we're calling NFTs today, and maybe a branding or marketing campaign will change that, right. Whatever that is 12 months from now, will be a market that's bifurcated.

There still will probably be an art or a speculative market aspect to trading on the blockchain. I don't think it will go away. It's not something we have any particular interest in or our expertise in. But I think imagine a world in which the major studios are launching their own collectibles, from Disney to Paramount to Universal to Warner Bros.

to Sony, to the major record labels, Sony Music, Warner Music, Universal Music. That's a lot of marketing, that's a lot of firepower. That's a lot of pop culture recognition across the general consumer population. I mean, they'll be almost unavoidable that products are being offered.

And I think - and if you have custom interfaces, which we're getting to, and if you have the ability to pay with a credit card, then purchasing and an NFT is going to be indistinguishable from purchasing a mug on eBay or a product from Amazon, right. You're going to go to a custom interface website and you're going to purchase something.

So I think if that all grouped under the umbrella of what an NFT business is, great.

If it's something - if it's just seen as just more - if it's just seen as what it will be, selling consumer products and tickets to experiences and unlocking value for collectors or value for people buying these digital products in real world benefits, too, then it's going to look vastly different.

And it will be - it will - it has the potential to boom is why we're excited to be in it. I mean, the dollar amounts in the NFT space have been reported widely up until now. But if someone really wants to think about it, how many people, gross number of people in the US have bought an NFT today.

I do not believe it would have been - I don't think that number would reach 1 million people. 12 months from now, we might have 10 million, 25 million, 50 million people who have bought what we call an NFT, which is a collectible that just happened to be delivered on the blockchain.

So it's an exponential growth of the consumer base, and that's what we see coming and why we want to play in that space..

Last question.

How do you feel about the environment for producing an independent film?.

Better. I do. I don't want to get ahead of my keys on what any of our content initiatives that we may know are coming, but I would say that I do feel better, Allen. The industry is coming back.

Production insurance, while not solved completely, is getting into a place where I feel that we feel there will be more independent production starting even as early as Q4 this year, certainly Q1 of next year. And without having to take the very expensive burden of risking it on a COVID outbreak on set.

So I do feel good about production, and I'd be surprised if we aren't able to take advantage of opportunities in the filmed entertainment space in the coming months..

That's great. Congratulations. Thank you..

Thank you..

And with no other questions holding, I'll turn the conference back to Mr. O'Dowd for any additional or closing comments..

Well, thank you. I was looking forward to a second question. But, Allen, as usual, he's very thorough. So he probably took a lot of people's questions. And thank you for those. And I'm excited for what's to come.

I think by the time we speak again in this format in 13 weeks in the middle of November, I imagine we'll have quite a few hopeful additional topics to talk about than what we are free to talk about today. And maybe that's just all part of the plan. It allows today to be a celebration of those three milestones we hit.

It certainly feels great as I think you probably sensed from my prepared remarks, record revenue. Congratulations to each of the companies within Dolphin, to report positive operating income even after the depreciation and amortization, which is higher for our company than others because we've been an acquisition story up until now.

It is really a fabulous milestone since listing on NASDAQ. And of course, our working capital surplus. We've got a great balance sheet that's only going to improve. And I'm very, very thankful for those who believed in us from day one, and we picked up along the way. And this type of validation, I'm sure, is very comforting for them.

So thank you, everybody, that's been listening, and I appreciate the time. And we look forward to speaking again in the next quarter and see what we can talk about. Have a great day..

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time. And have a great day..