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Edited Transcript of DLPN.OQ earnings conference call or presentation 14-Nov-19 9:30pm GMT

Q3 2019 Dolphin Entertainment Inc Earnings Call

MIAMI Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Dolphin Entertainment Inc earnings conference call or presentation Thursday, November 14, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mirta A. Negrini

Dolphin Entertainment, Inc. - CFO, COO & Director

* William O'Dowd

Dolphin Entertainment, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Austin William Moldow

Canaccord Genuity Corp., Research Division - Associate

* Jack Vander Aarde

Maxim Group LLC, Research Division - TMT & Software Services Analyst

* James Carbonara

Hayden IR, LLC - Partner of IR Strategy & Operations

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Dolphin Entertainment Third Quarter 2019 Earnings Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, James Carbonara. Sir, the floor is yours.

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James Carbonara, Hayden IR, LLC - Partner of IR Strategy & Operations [2]

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Thank you. And once again, welcome to Dolphin Entertainment's Third Quarter 2019 Earnings Call. With me on the call are Bill O'Dowd, Chief Executive Officer; and Mirta 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 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 that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations or assumptions will prove to have been correct.

Actual results may differ materially from those expressed or implied in forward-looking statements due to various risks and uncertainties. For a discussion of such risks 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, those contained in subsequently filed quarterly 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, including 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 statement 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.

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [3]

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Thanks, James, and thanks, everyone, for joining today. As usual, I'll arrange my comments as follows. First, I'll highlight our financial results. Second, I'll spend some time providing operational updates. And third, I'll turn it over to Mirta to dive deeper into our financial results before having our Q&A.

On a general note, this past quarter was one of blocking and tackling, without an acquisition or big event, but we believe this work in the trenches has set us up nicely for our anticipated success here in Q4 and going forward.

So first up, the financial results. In short, we feel that we are ahead of pace. I'm happy to report that results exceeded consensus expectations for both revenues and earnings per share.

Total quarterly revenue increased 4% year-over-year, and 9-month revenue has increased 11%, and this revenue is derived almost entirely from our core segment of Entertainment Publicity and Marketing. Furthermore, our net income has improved from a loss of $900,000, and $0.06 per share in Q2 to a loss of $350,000, and $0.02 per share in Q3. On this pace, we anticipate positive net income here in Q4 and going forward, which represents a very important milestone for us. And obviously, our desire for further accretive acquisitions will only accelerate our growth in both revenues and net income.

We attribute this growth in revenues and improvement in net income to the cross-selling of services between members of our entertainment marketing, Super Group. So this seems like as good a time as any to share updates on those companies.

And speaking of cross-selling, during the quarter, 42West and The Door teamed up to work on the 45th Annual Saturn Awards, which honor the very best in science fiction, fantasy and horror entertainment and which took place in Los Angeles on Friday, September 13. Somewhat fittingly, I think. This work required the combination of 42West's expertise in talent and entertainment content public relations and The Door's experience promoting live events and providing lifestyle branding and social media services. Together, 42West and The Door led several efforts for the Saturn Awards, including public relations, social media, digital marketing, branding, design and website creation. This project is a perfect example of 2 of our companies coming together to win a high-profile piece of business because of their joint expertise.

Additionally, in the third quarter, 42West hired veteran publicist Jodie Magid Oriol as a Vice President in its New York Entertainment Marketing division. In her new role, Jodie is working closely with Leslee, Amanda and Entertainment Marketing division Presidents, Tom Piechura and Susan Ciccone.

Jodie has a fantastic client list of primarily writers and directors, which will only strengthen what we believe is the best roster in the business. Just to give a couple of examples. Jodie's clients include contenders for this year's Oscars: Marielle Heller, Director of the Mr. Rogers biopic, A Beautiful Day in the Neighborhood, starring our very own Tom Hanks; and Charles Randolph, writer of The Big Short and the current release Bombshell, starring to Nicole Kidman, Charlize Theron and Margot Robbie. Jodie has previously served as Senior Vice President, Theatrical Publicity at Lionsgate. We are thrilled to have Jodie with us and know she will be a tremendous asset to our entire organization.

For the company as a whole, 42West is in its busy season, promoting movies and television series. On the movie side, again, just to name a couple, we have director, Roland Emmerich, in his Lionsgate released, Midway, out in theaters now, which opened at #1 in the box office this past weekend, as well as The Irishman, coming soon on Netflix, directed by our signature client Martin Scorsese, fingers crossed, definitely for best picture and best director nominations for that film.

And on the television side, some high-profile work would include the second season of Jack Ryan on Amazon as well as multiple new series on Apple TV, which launched last week. You may have seen an announcement or 2 about that one.

We are particularly excited about the launch of additional streaming platforms. As many of you know, excuse me -- up until last week, there were 3 major streaming platforms in the United States: Netflix, Amazon and Hulu. Two major competitors launched in the past week, Apple TV and Disney+, and another 2 are scheduled to launch next spring, HBO Max and Peacock from NBCUniversal. That means that the streaming landscape will increase from 3 platforms to 7 in less than a year. All of the competitors will be spending billions of dollars each on original programming, in some cases, more than $10 billion, in an attempt to gain subscribers.

Of course, this strategy will only work if the potential new subscribers actually know about such new programming and which platform is showing it, which in one sentence explains the organic growth in our business. Simply put, somebody has to promote all this new, original content to the consumer. And we believe that 42West is uniquely positioned to capitalize on this arms race between the streaming platforms, as the popular press likes to describe it. It should also be noted that all this additional marketing is only just beginning.

As mentioned a moment ago, 2 new entrants only launched this past week, and 2 more don't even launch until next year. Thus, all of the revenue growth we've experienced this year has come without the benefit of these new streaming platforms operating at full throttle. We feel we have a long runway of organic growth ahead of us.

Let me switch gears now to The Door, which is doing fantastically well for us. Our big news here for the quarter is our expansion into the South Florida market with our Miami office, which is also home to Dolphin Entertainment's headquarters. As many of you know, The Door's headquarters are in New York City, and the agency also has locations across the country, in Chicago, Los Angeles and Nashville.

The Door's growing roster of clients in South Florida already includes numerous signature clients, including 2 separate restaurant groups, and the office is already profitable for us. The new office is led by Vice President, Luciana Salamé. Luciana is a Miami native, like myself, who has a decade of experience with national public relations and marketing campaigns, specializing in the hospitality industry, leading client engagements, such as the South Beach and New York City Wine and Food Festivals; James Beard Award-winning chefs, such as Vivian Howard and Kelly Fields; esteemed restaurateurs, such as Keith McNally and his restaurants Pastis, Augustine and Morandi; Flower Shop, home of the exploding sprinkle cakes; and David Chang's fast-casual fried chicken chain, Fuku, among several others. Congratulations Luciana on a fantastic launch of an important new market for us.

Moving to Viewpoint. The third quarter is the low quarter of the year, given the seasonality of their traditional television business. As we expand Viewpoint's client roster in the coming quarters to include more work outside of the traditional September to May television cycle, we will reduce the seasonality. As noted on our second quarter earnings call, our goal with Viewpoint in the next year is to move them from a client mix of 75% entertainment clients to one of only 50% pure entertainment clients. And with that sector mix, we can greatly reduce the swing in Q3 revenues that it typically experience. And we're already seeing that here in Q4. And we are launching some marketing initiatives to introduce our work on a larger scale within the consumer, biotech and medical industries, as also mentioned on our second quarter earnings call. More to come there in the coming quarters.

Moving on to the M&A front. We remain confident we'll have another acquisition done before the end of the year. As we've highlighted repeatedly on past earnings calls, our goal is to have all 6 core competency companies of the Super Group acquired within 2020. And completing the Super Group is our top priority since we believe it will accelerate revenue growth even further due to the cross-selling of services amplifying exponentially as the number of sister companies increase. In other words, instead of having 3 companies each cross-selling with 2 other companies, we will have 6 companies each cross-selling with 5 other companies. Thus, we believe that completing the Super Group is more than just doubling the number of companies we have. It is a huge revenue and operating margin accelerator. Then secondly, of course, having a complete Super Group will allow us to expand confidently in 2020 into more direct ownership of assets, which we can market, such as live events and film and television production.

Well, thank you all again for your time and attention. As you might imagine, we remain excited here at Dolphin, and it's always a good feeling to come in ahead of consensus expectations on the financial side, which seems like a good segue to turn it over to Mirta for a more in-depth review of our financials.

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Mirta A. Negrini, Dolphin Entertainment, Inc. - CFO, COO & Director [4]

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Thank you, Bill, and good afternoon. As Bill stated earlier, total revenue increased by 4% to $5,940,440 for Q3 as compared to the same period in prior year. The majority of the revenue was derived from our Entertainment Publicity and Marketing segment.

Revenues from our Content Production segment were approximately $8,000 in Q3 of 2019, and we did not have any revenues from content production in Q3 of 2018. As we have previously discussed, revenues of a film are primarily earned right after the release of the film and the decrease in revenues is part of the normal revenue cycle of a motion picture.

Overall expenses increased by approximately $1.1 million. Direct costs increased by approximately $1.2 million for the 3 months ended September 30, 2019, as compared to September 30, 2018. The increase is primarily due to an impairment of capitalized production costs related to Max Steel of approximately $700,000 and direct costs related to Viewpoint that was not included in the consolidated statement of the company in Q3 of 2018 as we acquired them in October of that year.

Payroll costs increased by approximately $300,000, primarily due to additional hires at The Door and the payroll cost at Viewpoint that were not included in the Q3 2018 numbers.

Our operating loss for the quarter of $1.4 million includes impairment costs under the caption "Direct Costs" of approximately $700,000 as discussed above -- before and noncash items from depreciation and amortization of approximately $500,000 as compared to operating loss of approximately $500,000 for the quarter ended September 30, 2018, including $600,000 of noncash items from depreciation and amortization.

Net loss for the quarter ended September 30, 2019, was $350,831 or $0.02 of basic loss per share based on 16,071,891 weighted average shares, and $0.05 diluted loss per share based on 19,847,935 weighted average shares. This compares to net income for the quarter ended September 30, 2018, of $180,145 or $0.01 for both basic and diluted earnings per share based on 14,565,766 weighted average shares outstanding.

We should note that we had an $819,451 tax benefit in Q3 of 2018 and did not have any tax expense or benefit in the current quarter.

That concludes my financial remarks. I will now ask the operator to open the phone lines for Q&A. Operator, can you please poll for questions?

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions) Our first question comes from Austin Moldow from Canaccord.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [2]

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My first one is on top line growth for the individual publicity segments. Wondering if you can just give a little context to how your 3 main divisions are growing -- 42West, The Door and Viewpoint, growing year-over-year on a pro forma basis? I know in 42West's case, in particular, I think this is the first quarter you're sort of lapping the old Talent headwinds. So if you can just talk about how that year-over-year growth is trending, and if you expect it to maybe turn around this quarter or next quarter maybe?

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [3]

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Yes, sure, and happy to. Yes, the third quarter last year continued those Talent headwinds, I guess you'd say, right, since it was throughout that entire quarter that we dealt with that issue. So we're really happy with the result of continued increased revenues as a whole given the unfavorable comparison. And we are growing with our Talent department at 42West. We're happy. We've hired in the last 12 months, effectively, 5 -- 6 new Talent publicists -- senior publicists, I should say, promoted a couple of deserving publicists as well on top of that. We feel good about it, and it will contribute to the double-digit growth we expect for next year like we have and are experiencing through 9 months of this year.

The Door is just doing fantastic. It's just great. The revenue growth there is solid. And their contribution -- well, they're already profitable, but while their contribution will just increase next year as we get the payoff of the consumer division that we've invested in heavily this year in full in 2020.

And Viewpoint, we haven't had them integrated for even a full year yet. They're doing a great job getting efficient for us. They're obviously the reason that we have so much higher direct production costs this year than we've ever had before, because of their business. But we think that as they continue to integrate into the sales process, they're going to be a valuable contributor, both top line and bottom line, next year.

And I guess I should go back on 42West as a whole, we need to talk about that Movie division, it just continues to roll great signature clients. Adding Jodie this past quarter will just continue to make it very difficult for anyone else to argue that they've got a better Movie division than we do.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [4]

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Great. And I wanted to ask if you can -- is there any way to quantify the work you're doing with new streaming services, maybe in how you did with them last year and how you're doing this year with the launch of new ones? I imagine even though the 2 new ones only launched recently, they probably had to do a little marketing in the run-up to the launches as well. If you could comment on that, that'd be great.

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [5]

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Sure. Yes, the -- that's a very prescient comment because as I put in my general comments, I think the general public understanding what the entertainment community has seen coming since, you could argue, Bob Iger in '19 -- or excuse me, in 2015 or 2016 with Disney, right, that there's going to be a real competition in the streaming space.

And as I was trying to indicate in my comments, while the general consumer's starting to feel it now, and especially in the past 7 days, where you can't escape the launch of Apple TV or Disney+, the real heavy-duty marketing for those services is only just now starting to ramp up. Those services haven't even begun to spend anywhere near what they're going to on a go-forward basis for next year or the year after and the year after that. And we're still missing even entrants in the market, a very big entrant, HBO Max and Peacock NBCUniversal. So the early part of this year, the first half of this year, we're experiencing this double-digit revenue growth organically without the help of those additional customers.

We are working with those new streaming platforms, and we'll be working with at least one of the 2 that launched next year. So I think the movie division is -- really single-handedly could generate -- help us generate double-digit revenue growth across the whole company, knock on wood, as we say that. And I think also what's important -- most people would assume this -- those services aren't launching at full rollout, meaning they're not launching 15 new series a quarter upon launch. They're going to ramp into that. And as they do, and as Netflix continues to increase its annual programming spending every year, challenging others to keep pace is -- there's just going to be a tremendous amount of new content being produced, and someone's got to promote that to make sure that the consumer knows not just that the program exists, but on which platform it exists.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [6]

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Got it. And last quick question. Your comment on positive net income. Is that dependent on M&A happening in the near future? Or is that on an organic basis?

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [7]

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We believe on -- and we expect on an organic basis.

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Operator [8]

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Our next question comes from Jack Vander Aarde with Maxim Group.

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Jack Vander Aarde, Maxim Group LLC, Research Division - TMT & Software Services Analyst [9]

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Just a few questions from me. Bill, you talked about the content or the production side of the business and where that's heading and with these new streaming player entrants, and now it's still even kind of early stage. I noticed that content production did contribute, while a small amount, it did contribute to revenue this quarter. Just curious to know, was this anything new? Or was this revenue flow-through from Max Steel in the ancillary market channels?

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [10]

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That's right. It was ancillary revenue on Max Steel?

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Jack Vander Aarde, Maxim Group LLC, Research Division - TMT & Software Services Analyst [11]

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Okay, got it. And then...

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [12]

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As we look ahead -- no, no, I'm sorry.

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Jack Vander Aarde, Maxim Group LLC, Research Division - TMT & Software Services Analyst [13]

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And then you kind of talked about how you could see production really ramping up as you go forward and maybe leading to double-digit growth for the whole company. Is there any sense of granularity you can provide on a quarterly basis for your expectation of how content production revenue could shape up as we go into 2020 on a quarterly basis?

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [14]

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Sure. And I apologize if I wasn't clear. I was commenting about the Movie division at 42West, the promotion of movies and streaming services programming, which can include original movies and series because of the organic growth we expect from, knock on wood, having access to 7 streaming services as potential clients and several of which already are clients.

As we look at our own content production in 2020, and as we want to get into that and use our collection of assets across all of our companies, we are and remain excited by that. And we've been developing towards that. And as we also look to strive to finish this -- our next acquisition as soon as possible and finish Super Group as soon as possible because it's that organic chemistry between those companies that will just set us on a great path of a long runway of continued revenue and net income growth. We're prioritizing finishing those and expect to start production, our own original productions, either commensurate with that or maybe just before we finish the Super Group. But I think our original production revenue will weight towards the second half of next year rather than the first, because we want to use our capital to complete the Super Group.

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Jack Vander Aarde, Maxim Group LLC, Research Division - TMT & Software Services Analyst [15]

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Got it. That's helpful. And thanks for the correction on what I misheard from your earlier comments. And, Mirta, you -- I want to revisit your comment on the direct costs. Did I hear correctly that those included $0.7 million of impairment from Max Steel for this quarter?

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Mirta A. Negrini, Dolphin Entertainment, Inc. - CFO, COO & Director [16]

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Yes. So what happened was we entered -- I don't know if you remember from other quarters that we had a print and advertising loan that we had taken to cover the cost of releasing the film of Max Steel, and we entered into a revenue participation agreement with the creditor of that loan in which we agreed to exchange the -- up to $900,000 of future revenues of Max Steel, for extinguishment of that loan. There's no guarantee that we will have any future revenues of Max Steel, but they will get the first $900,000. So at that point, we had to test for impairment and deferred production costs and decided to write those off. And we also got a gain on the extinguishment of about $700,000, as well.

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Jack Vander Aarde, Maxim Group LLC, Research Division - TMT & Software Services Analyst [17]

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Okay, got it. That's helpful. And then I guess, just to follow up from that. Going forward, where would you see kind of a normal run rate for what you'd expect for direct costs on -- for Q4 and then on a quarterly basis thereafter?

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Mirta A. Negrini, Dolphin Entertainment, Inc. - CFO, COO & Director [18]

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I think from the -- we won't have any -- or we'll have very little direct costs coming from the content production. So I think you can expect that on the entertainment publicity, we'll have somewhere -- in the quarter will be somewhere between, I think, $1.2 million and $1.5 million of direct costs.

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Jack Vander Aarde, Maxim Group LLC, Research Division - TMT & Software Services Analyst [19]

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Okay, got it. And then my last question, Bill. So with the Miami -- I just want to revisit The Door in the new Miami office. It sounds pretty exciting. It's impressive that you guys are already profitable, I believe you said, in that office. And does that include the 2 clients you mentioned, I think, restaurant clients? Do they -- will they be contributing to Q4? So should I see a significant -- relatively at a smaller base, a significant sequential contribution from The Door in Q4 relative to this Q3?

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [20]

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Yes, I would say so. They're just doing great and we couldn't be more proud of the team, Charlie, Lois, the whole group over there. They're just -- we have so many different growth initiatives with them and it seems like we're firing on all cylinders. Miami's launch just being one of them. I mean, common business sense tells you it usually takes time to ramp up a start-up office, right, an initial office? But in Miami, we launched it in, effectively, August and had enough clients to be profitable going into the fourth quarter. So it's exciting times for us with The Door's business.

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Operator [21]

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And that was the final question.

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William O'Dowd, Dolphin Entertainment, Inc. - Chairman, President & CEO [22]

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Okay. Well, thank you, everyone, for joining us today. Despite my froggy throat, we're very excited over here at Dolphin, and we look forward to a good fourth quarter and, fingers crossed and knocking on wood, we can continue to pursue our acquisition strategy with success. So thanks to everyone for joining with us today, and we'll talk soon.