Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SAPX > SEC Filings for SAPX > Form 10-Q/A on 23-May-2013All Recent SEC Filings

Show all filings for SEVEN ARTS ENTERTAINMENT INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q/A for SEVEN ARTS ENTERTAINMENT INC.


23-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements in this document might constitute "forward-looking statements". Some, but not all, forward-looking statements can be identified by the use of words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend," statements that an action or event "may," "might," "could," "should," or "will" be taken or occur, or other similar expressions. Although the Company has attempted to identify important factors that could cause actual results to differ materially from expected results, such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following risks: the need for additional financing; uncertainties and risks related to carrying on business in foreign countries; risks associated with third party infringement of copyrights and other intellectual property, especially the unauthorized duplication of motion picture DVDs and unauthorized distribution of motion pictures through the world wide web; risks associated with the lack of enforcement of applicable copyright and intellectual property laws, especially in foreign countries; risks associated with changing copyright and applicable intellectual property laws, especially in foreign countries; risks associated with changing distribution models for motion pictures, especially on the world wide web; risks associated with restrictions of motion picture content, especially in foreign countries; reliance on key personnel; the potential for conflicts of interest among certain officer, directors or promoters of the Company; the absence of dividends; currency fluctuations; competition; dilution; the volatility of the Company's ordinary share price and volume; and tax consequences to United States shareholders. Except as required by law, the Company undertakes no obligation to revise any forward-looking statements because of new information, future events or otherwise.

Company Overview:

The following discussion should be read in conjunction with the preceding financial statements and footnotes thereto contained in this report. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Our actual results may differ materially from those contained in the forward-looking statements.

We are an independent motion picture production company engaged in developing, financing, producing and licensing theatrical motion pictures with budgets in the range of $2 million to $15 million for exhibition in domestic (i.e. the United States and Canada) and foreign theatrical markets and for subsequent post-theatrical worldwide release in other forms of media, including DVD, home video, pay-per-view, and free television. Our pictures generally receive either a wide theatrical release (1,000 to 3,000 theaters in the United States) or only a limited theatrical release (50-300 theaters in the United States), or may even be released directly to post-theatrical markets, primarily DVD. Our pictures that receive limited theatrical release or post-theatrical release typically benefit from lower prints and advertising ("P & A") cost and, in turn, improved gross profit margins. We determine the size of a theatrical release in the United States based on distributor and our estimates of the commercial prospects of theatrical box office and our own evaluation of the level of expected theatrical release costs as opposed to our estimation of potential theatrical box office in the United States.

No one picture had a principal or controlling share of gross revenues or operating profits in these periods.


Table of Contents

Film Company

We license distribution rights in our motion pictures in the United States and in most foreign territories prior to and during the production or upon the acquisition of rights to distribute a picture. We share in the commissions generated by the sales of the pictures. Sale of a license to distribute a motion picture prior to its delivery is termed a "pre-sale" and may occur at any time during the development and production process. In a typical license agreement, we license a picture to a distributor before it is produced or completed for an advance from the licensee, which advance is recoverable by the distributor from our share of the revenues generated by the distribution of the picture in the licensee's territory, after deduction of the distributor's expenses and distributor fee. The advance usually is in the form of a cash deposit plus a letter of credit or "bank letter" for the balance payable 10-20% on execution (i.e., the cash deposit) and the balance on delivery (i.e., the letter of credit or "bank letter"). The license grants the distributor the right to the post-theatrical release of the picture in all or certain media in their territory for a predetermined time period. After this time, the distribution rights revert back to us and we are then free to re-license the picture. The license specifies that the distributor is entitled to recoup its advance from the revenue generated by the release of the picture in all markets in its territory, as well as its release costs and distribution fees.

After the distributor has recouped its advance, costs, and fees, any remaining revenue is shared with us according to a predetermined formula. This is known as an "overage" and can be a significant source of revenue for us from successful films. However, a film's poor reception in one market does not preclude it from achieving success in another market and generating significant additional revenue for us in the form of an "overage" in that territory. In all of our licensing arrangements, we retain ownership of our films and maintain our control of each copyright. We intend to continue the practice of retaining underlying rights to our film projects in order to continue to build our motion picture library to license or sell in the future.

We create a separate finance plan for each motion picture we produce. Accordingly, the sources of the funds for production of each motion picture vary according to each finance plan. We utilize financing based on state and foreign country tax credits (e.g. Louisiana, United Kingdom and Hungary) and direct subsidies, "mezzanine" or "gap" funds, which are senior to our equity, and senior secured financing with commercial banks or private lenders, together in certain cases with a limited investment from us, which is customarily less than 10% of the production budget. Since each finance plan is unique to each motion picture, we cannot generalize as to the amount we will utilize any of these sources of funds for a particular motion picture. We generally obtain some advances or guarantees prior to commitment to production of a motion picture project, but those amounts may not be substantial on smaller budgeted motion picture (e.g., under $10,000,000), and in certain cases we have committed to production with an insubstantial amount of advances and guarantees. Unless we can manage the risks of production through the use of these financing techniques, we will not likely commit to production of larger budget motion pictures (e.g., over $15,000,000), and we have never in the past committed to such productions, without substantial advances or guarantees from third-party distributors, or the equivalent in "non-recourse" financings.

Music Company

The Company incorporated Seven Arts Music Inc. ("SAM") in the State of Nevada on February 23, 2012, as a wholly owned subsidiary of the Company, although set-up costs had been incurred as early as September 2011. The delivery of the first of the DMX albums acquired from David Michery was released on September 11, 2012 and initial costs in creating the first album for Bone Thugs-N-Harmony are being incurred for delivery mid 2013 Several other new artists are being considered by SAM.

Post-Production Facility

As of June 30, 2012, SAFELA was transferred to the Company. SAFELA, which is 60% owned by the Company, has a 30 year lease to run a production and pot-production facility at 807 Esplanade Avenue in New Orleans, Louisiana ("807 Esplanade"). The facility commenced operations on July 1, 2012.


Table of Contents

Company Outlook

The principal factors that affected our results of operations have been the number of motion pictures delivered in a fiscal period, the distribution rights of motion pictures produced by others acquired in a fiscal period, the choice of motion pictures produced or acquired by us, management's and talents' execution of the screenplay and production plan for each picture, the distribution and market reactions to the motion pictures once completed, management's ability to obtain financing and to re-negotiate financing on beneficial terms, the performance of our third-party distributors and our ability to take advantage of tax-incentivized financing. These factors will continue to be, in our opinion, the principal factors affecting future results of operation and our future financial condition. No particular factor has had a primary or principal effect on our operations and financial condition in the periods discussed below.

Our revenues principally consist of amounts we earned from third-party distributors of our motion pictures. We recognize revenue from license fees as and when a motion picture is delivered to the territory to which the license relates if we have a contractual commitment and the term of license has begun or upon receipt of a royalty statement or other reliable information from a distributor of the amounts due to us from distribution of that picture. A motion picture is "delivered" when we have completed all aspects of production and may make playable copies of the motion picture for exhibition in a medium of exhibition such as theatrical, video, or television distribution.

We also recognize revenue beyond an initial license fee from our share of gross receipts on motion pictures which we recognize as revenue when we are notified of the amounts that are due to us. In some fiscal periods, a significant portion of our revenue is derived from sources other than motion picture distribution, including the cancellation of debt and interest income on a financing transaction.

We have also benefited significantly from our ability to raise third party film equity investments such as in tax advantaged transactions under which we transfer to third party investor's tax benefits for motion picture production and distribution. These types of investments have enabled us to substantially reduce the cost basis of our motion pictures and even to record significant fee-related revenues.

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended March 31, 2013 and 2012

We generated a net loss (after non-controlling interest) of $2,358,240 for the three months ended March 31, 2013, as compared to $1,585,789 for the three months ended March 31, 2012. A discussion of the key components of our statements of operations and material fluctuations for the three months ended March 31, 2013 and 2012 is provided below.

Revenue

A) Film revenue totalled $350,636 for the three months ended March 31, 2013, as compared to $187,793 for the three months ended March 31, 2012, an increase of $162,843, or 87%, primarily due to the factors discussed below:

? The majority of 2013 revenue consisted of $190,277 from the US and Brazilian release of "Nine Miles Down" and $227,000 from settlement of litigation with MGM over "Deal" and Sony with "Johnny Mnemonic". There were also several minor sales reversals in the period notably "The Pool Boys" and an international territory on "Nine Miles Down".

? The majority of 2012 sales included international sales royalties from movies such as "The Pool Boys," of approximately $43,000, "Deal," of approximately $21,000, "Autopsy," of approximately $10,000, "Nine Miles Down," of approximately $34,000, and "Night of the Demons," of approximately $40,000.


Table of Contents

B) No revenues were recorded for the music division for this quarter.

C) The post production facility operations continued to grow during the period recording sales of approximately $22,000 for the quarter despite on-going construction works.

There were no fee-related revenues in either period.

Cost of Sales

Cost of revenue was $564,778 for the three months ended March 31, 2013 as compared to $448,931 for the comparable period in 2012, an increase of $115,847, or 26% as a result of:

A) The costs of acquiring and producing films are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in proportion to that the current year's revenue bears to management's estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.

? An amortization charge of $357,868 was made in the three months ended March 31, 2013 which was spread over several titles, mainly "Nine Miles Down" and "The Pool Boys" in line with revenue forecasts.

? The equivalent charge during the quarter ended March 31, 2012 was $186,890 mainly related to the release of "The Pool Boys".

B) The music company assets have also been amortised in proportion to that the current year's revenue bears to management's estimates of ultimate revenue expected to be recognized from the exploitation or sale of the album. No charge was levied for the three months ended March 31, 2013 as there was no income but long term forecasts remain constant. No amortization was recorded in the previous year as the music company was acquired on February 23, 2012.

C) The leasehold improvements related to the post-production facility are being written off to costs of sales over the 30 year period of the lease, and the written-off was $42,392 for the three month ended March 31, 2013.

D) The returns provision for the DMX album has been increased by $139,406 based on information from the distributor.

Other cost of revenue in the three months ended March 31, 2013 totalling $25,312 as compared to $198,567 in the same quarter in 2012. Other cost of revenue for the three months ended March 31, 2013 mainly consisted of fees for distribution of the film "Nine Miles Down" whereas other cost of revenue for the comparable period in 2012 was inflated by the write-off of the cost of distribution of "The Pool Boys."

Administration Expenses

General and administrative expenses increased by $706,566, or 141% from $500,987 for the three months ended March 31, 2012 to $1,203,463 for the three-months ended March 31, 2013. The increase was primarily attributable to the following factors:


Table of Contents

1) The addition of the post production division resulted in an additional general and administrative cost of $48,316.

2) In the three months ended March 31, 2013, we incurred additional legal and professional costs of $959,230 as compared to the comparable quarter in 2012, among which:

a. $546,723 represents a payment of 20,000 Series B preferred stock as settlement with David Michery for cancelling the 50,000 Series B preferred stock held in escrow.

b. Approximately $45,000 represents JonesFilm costs

c. Approximately $45,000 relates to legal fees incurred in furthering the case against Content Media

d. In the quarter ended March 31, 2012, adjustments were made to capitalise approximately $356,000 of brokers fees which had been charged to Legal and Professional fees in error in prior periods.

3) Approximately $60,000 less overhead was capitalised to movies in the March 31, 2013 quarter than the comparable period in 2012.

4) There is an increase in consultancy fees as the music division staffs have been replaced by consultants since the end of 2012.

5) Salaries have decreased by $267,780 from the 2012 quarter to the 2013 quarter as the 2012 quarter included all the start-up costs for launching the music division, which is now run by consultants.

Other Expense

Interest expense in the three months ended March 31, 2013 was $1,043,944 compared to $744,469 in the same period in 2012. The 2013 interest expense includes an additional $145,129 related to SAFELA for the mortgage and construction loan not included in the 2012 equivalent quarter and a penalty of $222,400 charged against the Isaac loan.

Interest on movie and production loans was $519,377 during the third quarter ended March 31, 2013 as compared to $576,171 for the quarter ended March 31, 2012 . $55,428 was the additional interest charge levied on the settlement from MGM by Blue Rider in the quarter.

Income Tax

No tax expense was recognized in either period.

Results of Operations for the Nine Months Ended March 31, 2013 and 2012

We generated a net loss (after non-controlling interest) of $5,343,658 for the nine months ended March 31, 2013, as compared to $3,664,072 for the nine months ended March 31, 2012. A discussion of the key components of our statements of operations and material fluctuations for the nine months ended March 31, 2013 and 2012 is provided below.

Revenue

A) Film revenue totalled $744,748 for the nine months ended March 31, 2013, as compared to $987,220 for the nine months ended March 31, 2012, a decrease of $242,472, or 25%, primarily due to the factors discussed below:

? The majority of 2013 revenue consisted of $208,750 from the US and Brazilian release of "Nine Miles Down" and $183,000 from settlement of litigation with MGM over "Deal" and Sony with "Johnny Mnemonic". There were also several minor sales reversals in the period notably "The Pool Boys" and an international territory on "Nine Miles Down".

? The majority of 2012 sales included international sales royalties from movies such as "The Pool Boys," of approximately $680,000, "Deal," of approximately $65,000, "Autopsy," of approximately $30,000, "Nine Miles Down," of approximately $64,000, and "Night of the Demons," of approximately $40,000.

B) $927,645 sales were recorded for the music division for the nine months ended March 31, 2013.

C) The post production facility operations continued to grow during the period recording sales of approximately $39,700 for the quarter despite on-going construction works.

There were no fee-related revenues in either period.

Cost of Sales

Cost of revenue was $1,707,517 for the nine months ended March 31, 2013 as compared to $1,548,551 for the comparable period in 2012, an increase of $158,966, or 10% as a result of:

A) The costs of acquiring and producing films are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in proportion to that the current year's revenue bears to management's estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.

? An amortization charge of $938,569 was made in the nine months ended March 31, 2013 which was spread over several titles, mainly "Nine Miles Down" and "Deal" in line with revenue forecasts.

?  The equivalent charge during the nine months  ended March
   31, 2012 was $987,221 mainly
   related to the release of "The Pool Boys".

B) The music company assets have also been amortised in proportion to that the current year's revenue bears to management's estimates of ultimate revenue expected to be recognized from the exploitation or sale of the album. An amortization charge of $408,205 for the nine months ended March 31, 2013 was made. No amortization was recorded in the previous year as the music company was acquired on February 23, 2012.

C) The leasehold improvements related to the post-production facility are being written off to costs of sales over the 30 year period of the lease, and the written-off was $123,167 for the nine month ended March 31, 2013.

D) The returns provision for the DMX album has been increased by $370,811 based on information from the distributor.

Other cost of revenue in the nine months ended March 31, 2013 totalling $274,970 as compared to $561,330 in the same period in 2012. Other cost of revenue for the nine months ended March 31, 2013 mainly consisted of fees for distribution of the Music Company and film "Nine Miles Down" and "Drunkboat" whereas other cost of revenue for the comparable period in 2012 was inflated by the write-off of the cost of distribution of "The Pool Boys."

Administration Expenses

General and administrative expenses increased by $1,108,317, or 72% from $1,550,761 for the nine months ended March 31, 2012 to $2,659,078 for the nine-months ended March 31, 2013. The increase was primarily attributable to the following factors:

1) The addition of the post production division resulted in an additional general and administrative cost of $136,702.

2) In the nine months ended March 31, 2013, we incurred additional legal and professional costs of $1,106,979 as compared to the comparable quarter in 2012, among which:

a. $546,723 represents a payment of 20,000 Series B preferred stock as settlement with David Michery for cancelling the 50,000 Series B preferred stock held in escrow.

b. Approximately $45,000 represents JonesFilm costs

c. Approximately $45,000 relates to legal fees incurred in furthering the case against Content Media

d. In the nine months ended March 31, 2012, adjustments were made to capitalise approximately $356,000 of brokers fees which had been charged to Legal and Professional fees in error in prior periods.

3) Approximately $60,000 less overhead was capitalized to movies in the March 31, 2013 quarter than the comparable period in 2012.

4) There is an increase in consultancy fees as the music division staffs have been replaced by consultants since the end of 2012.

5) Salaries have decreased by $267,780 from the 2012 quarter to the 2013 quarter as the 2012 quarter included all the start-up costs for launching the music division, which is now run by consultants.

Other Expense

Interest expense in the nine months ended March 31, 2013 was $2,946,941 compared to $1,476,417 in the same period in 2012. The 2013 interest expense includes an additional $145,129 related to SAFELA for the mortgage and construction loan not included in the 2012 equivalent quarter and a penalty of $222,400 charged against the Isaac loan.

Interest on movie and production loans was $519,377 during the third quarter ended March 31, 2013 as compared to $576,171 for the quarter ended March 31, 2012 . $55,428 was the additional interest charge levied on the settlement from MGM by Blue Rider in the quarter ended March 31, 2013.

Income Tax

No tax expense was recognized in either period.

LIQUIDITY AND CAPITAL RESOURCES

Management assesses the Company's liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities and whether it will be sufficient to allow it to continue investing in existing businesses, consummating strategic acquisitions, paying interest and servicing debt and managing its capital structure on a short and long-term basis.

Short Term Liquidity

The Company has an accumulated deficit of $14,108,773 as of March 31, 2013. Management believes that, based on historical revenues generated from the licensing of the distribution rights on our motion pictures and the new revenues generated from the music division and post-production facility, we will have sufficient working capital to operate for the next twelve months. Fiscal 2013 will be a year of exploitation of the developed music and post-production businesses, as well as a full year of consolidated operations and having strengthened the balance sheet through conversion of debt to equity. This is still anticipated to lead to positive cash flow from operations during fiscal 2013.


Table of Contents

We currently borrow funds for the financing of each of our motion pictures from several production lenders. There can be no assurances given that the Group will be able to borrow funds to finance our motion pictures in the future.

Long Term Liquidity

The long term liquidity needs of the Company are projected to be met primarily through the cash flow provided by operations. Cash flow from operating activities is expected to become positive in fiscal 2013 due to the impact of the release of the first DMX album, the operation of the post-production facility and on-going film revenues.

Cash Flows

Operating Activities: Net cash used in operating activities for the nine months ended March 31, 2013 was $2,037,545. A decrease in other receivables from music company revenue and accounts receivable, as well as accrued interest, amortization of film costs, music assets and amortization of leasehold improvements, was offset by a provision for returns, increases in amounts due from related parties and increase in accounts payable.

Investing Activities: Net cash used in investing activities for the nine months ended March 31, 2013 was $462,891 which is attributable to cost associated with leasehold improvements for the post-production facility.

Financing Activities: Net cash provided by financing activities for the nine months ended March 31, 2013 was $2,444,470 mainly due to the proceeds from additional debt and issuance of common stock for cash.

Capital Resources

As of March 31, 2013, the Company did not have any outstanding capital commitments. As of the date of this filing, the Company had no other commitments than disclosed in the Company's financial statements and notes to the financial statements.
Working capital at March 31, 2013 was $(13,266,790), which is consistent with our position as of December 31, 2012 of ($10,248,134).

Working capital is negative due to the fact that all the loans are classified as current even with longer-term workout agreements. The receivables for the fee income from related parties will be paid out over the next four years and, accordingly, are reported long and short-term. The majority of the other loans are convertible to stock so will have little or no cash impact.

Additionally, the mortgage and construction loans on 807 Esplanade are current liabilities with corresponding leasehold improvements being recorded as non-current assets.

Stockholder's Equity at March 31, 2013 was $11,262,801 decreasing slightly from $13,449,284 as at June 30, 2012. The change was primarily due to the conversion of debt to equity through the issuance of common shares offset against the revaluation of the shares pledged to certain loans plus loss in the 2013 year.

Historically, we have successfully raised additional operating capital through . . .

  Add SAPX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SAPX - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.