Seven Arts Shifts focus to Larger films and improves the Balance Sheet - Analyst Blog

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Seven Arts Shifts focus to Larger films and improves the Balance Sheet

Ken Nagy, CFA

On February 21, 2011, Seven Arts Entertainment Inc. ( SAPX ) , the independent motion picture production and distribution company, reported results from operations for its second quarter and six months, ended December 31, 2011.

While second quarter results were weak, Seven Arts reported substantial progress in reducing debt and increasing its stockholder equity.

The Company's year over year revenues fell from $1.137 million for the second quarter ended December 31, 2010 down to $207,790 during the second quarter fiscal 2012.

The drop in revenues was primarily due to nearly $1 million of sales on the title "Deal" during the second quarter fiscal 2011, where the majority of income for the second quarter of fiscal 2012 were from the film "The Pool Boys".
Seven Arts' reported a net loss of $1.095 million for the three months ended December 31, 2011 compared to a net profit of $569,711 for the comparable quarter of 2010.

The increase in net loss was primarily a result of negative gross margins in fiscal 2012 and a $366,488 increase in year over year operating expenses.

Gross margin was negative for the three months ended December 31, 2011, due to the Company amortizing 100% of revenue achieved and writing off the cost of the theatrical release of "The Pool Boys".

Based on a weighted average number of diluted common shares of 15.753 million, diluted net loss per share resulted in $0.07 loss per share during the second quarter fiscal 2012.  This was a year over year drop from diluted earnings per share of $0.30 on a weighted average number of diluted shares of 1.927 million during the quarter ended December 31, 2010.

It should be noted that the increase in weighted shares outstanding was primarily a result of the issuance of unregistered shares to Seven Arts Pictures Plc., the Company's NASDAQ listing predecessor.  

For the second quarter ended December 31, 2011, year over year revenues decreased to $800,331 from $1.237 million for the six months ended December 31, 2011.
Net loss for the six months increased to a net loss of $2.078 million for the second quarter ended December 31, 2011. This compares to a net loss of $533,175 for the second quarter of fiscal 2011.
Here again, the increase in year over year net loss was primarily a result of negative gross margins in fiscal 2012 and as well as an increase in year over year operating expenses.

Based on a weighted average number of diluted shares of 15.752 million, diluted net loss per share resulted in a net loss of $0.13 per diluted share during the six months ended December 31, 2011.  This compared to a net loss per diluted share of $0.12 on a weighted average number of diluted shares of 1.762 million during the six months ended December 31, 2010.

Here again, the increase in weighted shares outstanding was primarily a result of the issuance of unregistered shares to Seven Arts Pictures Plc., the Company's NASDAQ listing predecessor.  

Still, the Company's balance sheet continued to improve.
As of December 31, 2011, the Company reported $28.729 in assets, up sequentially from $27.291 million in assets during the first quarter fiscal 2012.  

Additionally, Seven Arts' working capital deficit improved to $7.815 million for the period ended December31, 2011, down sequentially from a working capital deficit of $8.381 million during the first quarter ended September 30, 2011.

It should be noted that the large negative balances are mainly a result of film loans having to be treated as current debt.

Additionally, as a result of its continued efforts to reduce indebtedness and increase net shareholder equity, Seven Arts made progress during the quarter in reducing its debt and increasing stockholder equity.
The Company reduced film and production loans as well as reduced other liabilities by approximately $2 million to under $7.5 million.

Production debt decreased from $15.876 million at December 31, 2010 and $10.890 million at June 30, 2011 to $6,025 million at December 31, 2011.
What's more, $700,000 of existing Other Loans were paid or converted over the past twelve months.

However, it should be noted that $1 million of new convertible loans were taken out for the production of "Neuromancer" and "Winter Queen" and the launch of Seven Arts' new music division.

Still, the Company increased net shareholders' equity from $7.958 million as of June 30, 2011 and $14.633 million as of September 30, 2011 to its current level of $15.250 million, with an additional $1.46 million of stock authorized but not yet issued.

With domestic theatrical box office sales of all films reaching $10.6 billion and worldwide box office reaching as much as $29.9 billion in 2009, many successful independent motion picture companies and major studios have been reducing the number of pictures that they finance and distribute.

Consequently, these large studios and independent motion picture companies have concentrated on a limited number of higher budget films with budgets in the range of $10 million to $100 million or more.

As a result, Seven Art's business model has more recently turned its primary focus to the distribution in the post-theatrical markets for lower-cost, "genre" motion pictures.

The Company's strategy is to produce and distribute two to four $2 million to $15 million motion pictures in house per year.

Recently, Seven Arts has completed production and is anticipating the release for the theatrical showing of Radio Free Albemuth (United States) and Men Don't Lie (United Kingdom).

The Company has six motion pictures (Catwalk, Waxwork, Mortal Armor: The Legend of Galahad, Romeo Spy, The Winter Queen and Neuromancer) in development that are expected to be released within the next two to three years.

Along the same lines, the Company stated that it is in ongoing negotiations for arranging the financing and casting for the upcoming production of 'Neuromancer,' which is based on William Gibson's novel and is to be directed by Vincenzo Natali.

Likewise, the Company anticipates the release of 'Drunkboat' and 'Nine Miles Down' in the the Fourth Quarter fiscal 2012.

Similarly, Seven Arts expect its first releases from its new record subsidiary to be in the Fourth Quarter fiscal 2012.

In January the Company announced it executed a definitive agreement to acquire music industry veteran, David Michery's music assets.

Upon completion of the acquisition, David Michery will be appointed Chief Executive Officer of the Company's new music division, Seven Arts Music, which will comprise of Big Jake music and other stars including DMX.

Last, it should be reiterated that during the past fiscal year the Company received initial funding for two films that will be produced by Dark Arts, a division of Seven Arts' affiliate, Esplanade Pictures LLC.
 


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

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