Dolphin (DLPN) Stock Is In Show Me Mode

After my recent article on Dolphin Entertainment (NASDAQ:DLPN) shares went on to appreciate by almost 50% only to sell off again to new 52 week lows around $2.50. While I am maintaining a long term bullish stance on the company, I do find many other opportunities more compelling in this market. In this piece, I would like to provide readers with the recent decidedly mixed developments.

As a reminder, Dolphin is a leading independent entertainment marketing and premium content development company. It consists of the supergroup of companies including 42West, Shore Fire, Viewpoint, Be Social and The Door for marketing pop culture. Additionally, there is Dolphin 2.0 where the company is using pop culture to market assets that it owns stakes in.

In my previous piece, I made the case on a sum of the parts basis that DLPN was likely undervalued:

There is major upside in every single part of the business, be it Dolphin 1.0 or the individual bets within 2.0. My conservative estimates see little downside at this price with up to 100% upside based on 2022 projections and the ownership stakes DLPN has accumulated.

Financials on the right track but uninspiring

First and foremost, DLPN has regained compliance with the SEC and NASDAQ listing requirements by publishing its 10-K and other financials. As it turns out, the company soon after dismissed and replaced its auditor BDO USA with Grant Thornton. People familiar with the auditing process told me that Grant Thornton was a much better fit for Dolphin. I am quite confident the late filings over the company’s history will be behind Dolphin now after the move to Grant Thornton.

Moreover, the company is making good progress towards profitability. I had assumed 25% revenue growth for 2022, which is roughly correct so far in H1. EBITDA was also first time positive in Q2 at around $0.5M. However, the CEO stated “we’re on pace to cross $40.0 million in annual revenue this year”, which would only represent about 15% growth and with expenses growing similarly, I cannot maintain my EBITDA projections of $3-4M for this year. A big part of that is the delay in live events and the company wants to present its strategy for 2023 by year-end.

At the LD Micro Invitational XII the company provided some more information regarding those numbers. Notably, adjusted EBITDA of around $2M for 2022 and revenue exceeding $50M in 2023. I view these as quite likely although I feel like the adjustments do some heavy lifting for 2022. Nevertheless, keeping costs on a similar trajectory adjusted EBITDA for next year could comfortably exceed $5M, which compares to the current EV of around $30M. While this alone is not inspiring, Dolphin 2.0 comes on top.

The company issued about 1.5m shares or about 18% of outstanding shares at prices between $3.47 and $5.15 with an average of about $4.20. Hopefully these funds will be put to good use because the dilution at these prices not only hurts but has certainly aggravated shareholders. In total, Dolphin is allowed to sell $25M worth of stock or about 3M shares. The company has extra modified the terms of the convertibles to keep Bill above 50% of voting control in the event they sell too many shares at too cheap a price.

Dolphin 2.0 updates

In my prior piece I listed the initiatives and ownership stakes as follows:

Fan Jolt, a platform creating memorable interactions between fans and a curated list of premier talent to support their favorite causes: 5% to 10%

Crafthouse Cocktails, a pioneering brand of ready-to-drink, all-natural classic cocktails: 5% to 10%

NFT marketplace: 10%

Flower girls, a female-led NFT collection: 30%

Midnight Theater: 13% (on $1M investment) with option to increase to 25%

I am delighted to see Midnight Theater, a state-of-the-art contemporary variety theater and restaurant in the heart of Manhattan, having its official opening week and being a success so far. It is one of the most “tangible” 2.0 initiative, especially compared to NFTs where Dolphin is developing its pipeline as well. They now have 8 collections that are wholly owned or in partnership with others. While the space has cooled substantially, there could be a wide range of outcomes for Dolphin here. Certainly $2M seems likely as a low estimate in terms of equity value to DLPN?

These 3 are fee only Dolphin 1.0 business.

These 3 are Dolphin 1.0 fee + an undisclosed % of revenue sharing in any upside.

Dolphin is a partner in this brand, with presumably a 50/50 split.

• The Flower Girls ― A Fine Art NFT Collection by Varvara Alay (flowergirlsnft.com)
• Dolphins owns 100% of the soon to be re-released Creature Chronicles.

But the Flower Girls and Creature Chronicles launches were moved from the summer to the fall. This is not a good sign so far, but hopefully management is right in assuming “that the native crypto community will be stronger in the coming months”.

Fan Jolt seems dead so far but Crafthouse seems to be going just fine. On the other hand, the most recent Dolphin 2.0 initiative is a multi-year co-production distribution agreement with IMAX for slate of documentary features. The first project is called Blue Angels, currently in production and is expected to hit IMAX theatres in the second half of 2023.

Summary

Clearly the company is making good progress in getting profitable and cleaning up the balance sheet from all forms of debt, puts and earn-out contingent considerations. Based on some rough estimates the stock is also not at all expensive on 2023 numbers and the 2.0 initiative provide additional upside. That being said, valuing these is still a challenge and until the company is in a position to disclose more details on them and has proven sustainable profitability and earnings growth, it is in “show me mode”.

Some of the initiatives just take more time to come to fruition but appear extremely promising to me, including Midnight Theater and Blue Angels. Others are more disappointing, like Fan Jolt ad NFTs.

As highlighted in my prior article, some yellow flags also remain like the Lincoln Park agreement and the fact that the company dilutes its shareholders at rock bottom prices while guaranteeing Bill’s super voting rights. The jury is still out if this will prove to be a good move or not, but so far it seems not favourable and this is why shares are close to 52 week lows.

Thus I maintain my long term bullish outlook for the company especially since Bill also mentioned on the recent call that their 1.0 business would not be suffering from economic slowdown. Nonetheless I am pairing down my excitement until I see strong operating leverage, high margin revenue from Dolphin 2.0 and operating metrics of key equity investments like Midnight Theater.