Tuesday, February 21, 2012 2:57:01 PM
Quarterly Report (10-Q)
Date : 02/21/2012 @ 2:47PM
Source : Edgar (US Regulatory)
Stock : (SAPX)
Quote : 0.2842 -0.0058 (-2.00%) @ 2:55PM
- Quarterly Report (10-Q)
PrintAlert
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Dece mber 31, 2011
OR
o TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
Commission File Number 001-34250
SEVEN ARTS ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 45-3138068
(State or other jurisdiction of
incorporation or organization) (IRS Employer
Identification No.)
8439 Sunset Boulevard 4 th Floor
Los Angeles, CA 90069
(Address of principal executive offices)
(323) 372-3080
(Issuer's telephone number)
_____________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o
Indicate by check mark whether the Registrant is a large accredited filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accredited filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large Accredited Filer o Accelerated Filer o
Non-Accredited Filer o Smaller Reporting Company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of February 15, 2012 there were 30,886,342 shares of Common Stock of the issuer outstanding.
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SEVEN ARTS ENTERTAINMENT, INC.
FORM 10-Q
DECEMBER 31, 2011
INDEX
PART I - FINANCIAL INFORMATION
Item 1 – Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2011 (Unaudited) and June 30, 2011 3
Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2011 and 2010 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2011 and 2010 (Unaudited) 5
Notes to the Consolidated Financial Statements (Unaudited) 6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 4 - Controls and Procedures 30
PART II - OTHER INFORMATION
Item 6 – Exhibits 31
Signatures 32
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc)
Consolidated Balance Sheets
Aa of December 31, 2011 and June 30, 2011
December 31, 2011 June 30, 2011
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,979 $ 8,785
Accounts receivable, net of allowance for doubtful accounts of $148,862 and $195,623 393,510 431,891
Due from related parties, net 2,764,332 2,725,974
Other receivables and prepayments 2,471,772 1,620,895
Total Current Assets 5,662,593 4,787,545
NON CURRENT ASSETS:
Film costs, less accumulated amortization of $3,644,065 and $2,843,734 23,044,741 23,133,559
Property and equipment, net of accumulated depreciation of $111,232 and $106,671 21,609 24,540
TOTAL ASSETS $ 28,728,943 $ 27,945,644
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ - $ 987
Accounts payable 1,944,029 2,569,275
Accrued liabilities 1,056,560 3,860,502
Stock to be issued 1,538,957 -
Participation and residuals 488,158 503,187
Other loans 1,999,209 1,755,250
Film & production loans 6,025,508 10,890,430
Deferred income 426,080 407,763
Total Current Liabilities 13,478,501 19,987,394
TOTAL LIABILITIES $ 13,478,501 $ 19,987,394
STOCKHOLDERS' EQUITY
Convertible redeemable Series A preference shares at $10 par value $ 1,251,250 $ -
Common stock; $0.01 par value; 50,000,000 shares authorized;
22,620,288 and 2,643,131 issued and outstanding, respectively 226,203 -
Common stock; £ 0.25 par value; 20,527,360 shares authorized;
2,643,131 (2010: 1,495,460 shares) issued and outstanding - 1,121,208
Deferred stock; £ 0.45 par value; 13,184,000 shares authorized;
and 13,184,000 shares issued and outstanding - 11,636,594
Deferred stock; £1.00 par value; 2,268,120 (2010:1,495,460)
shares issued and outstanding - 3,876,745
Additional paid in capital 10,477,372 9,880,782
Convertible debentures 3,432,450 3,432,450
Accumulated deficit (2,078,283 ) (19,952,191 )
Comprehensive income 1,941,450 (2,037,338 )
Shareholders' equity 15,250,442 7,958,250
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,728,943 $ 27,945,644
The accompanying notes are an integral part of these consolidated financial statements.
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc)
Consolidated Statements of Operations
For the Three and Six Months Ended December 31, 2011 and 2010
(Unaudited)
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
Dec 31, 2011 Dec 31, 2010 Dec 31, 2011 Dec 31, 2010
Revenue:
Film revenue $ 207,790 $ 1,137,647 800,331 1,237,952
Fee related revenue - related party - 570,029 - 570,029
Total revenue 207,790 1,707,676 800,331 1,807,981
Cost of revenue
Amortization and impairment of film costs 336,527 639,257 800,331 695,620
Other cost of revenue 283,949 229,757 299,289 250,088
Cost of revenue 620,476 869,014 1,099,620 945,708
Gross profit (412,686 ) 838,662 (299,289 ) 862,273
Operating expenses:
General and administrative expenses 357,185 (12,121 ) 1,039,070 338,358
Bad debt expense (2,818 ) - (2,818 ) -
Total operating expenses 354,367 (12,121 ) 1,036,252 338,358
Income from operations (767,053 ) 850,783 (1,335,541 ) 523,915
Non-operating income(expense)
Other income - - - -
Interest expense (328,942 ) (281,440 ) (742,742 ) (702,094 )
Interest income - 368 - 368
Total non-operating income (expense) (328,942 ) (281,072 ) (742,742 ) (701,726 )
Income/(loss) before taxes (1,095,995 ) 569,711 (2,078,283 ) (177,811 )
Change in debt derivative - - - (31,454 )
(1,095,995 ) 569,711 (2,078,283 ) (209,265 )
Provision for income tax (benefit) - - - -
Net income (loss) $ (1,095,995 ) $ 569,711 (2,078,283 ) (209,265 )
Comprehensive income (loss):
Net income (loss) (1,095,995 ) 569,711 (2,078,283 ) (209,265 )
Foreign exchange translation gain (loss) (3,427 ) (323,992 ) - (323,910 )
Comprehensive income (loss) $ (1,099,422 ) $ 245,719 $ (2,078,283 ) $ (533,175 )
Weighted average number of ordinary shares used in the profit (loss) per share calculation:
Basic 15,752,775 1,762,928 15,752,775 1,762,928
Diluted 15,752,775 1,926,960 15,752,775 1,762,928
Basic profit/ (loss) per share (0.07 ) 0.32 (0.13 ) (0.12 )
Diluted profit/ (loss) per share (0.07 ) 0.30 (0.13 ) (0.12 )
The accompanying notes are an integral part of these consolidated financial statements.
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc.)
Consolidated Statements of Cash Flows
Six Months Ended December 31, 2011 and 2010
(Unaudited)
Six Months Ended December 31, 2011 Six Months Ended
December 31 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,078,283 ) $ (209,265 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 5,697 7,310
Amortization of film cost 800,331 695,620
Conversion of debt to equity 5,134,070 -
Stock for services 44,500 -
Bad debt (2,818) (24,000 )
Changes in operating assets and liabilities:
Trade receivables 35,563 545,512
Due to and due from related parties, net (38,358 ) (161,998 )
Capitalized film assets (711,513 ) (487,714 )
Receivables and prepayments (850,877 ) (744,391 )
Bank overdraft (987 ) -
Accounts payable (625,246 ) 78,497
Deferred income 18,317 -
Stock to be issued 1,538,957 -
Participation and residuals (15,029) -
Accrued liabilities (2,803,942 ) 41,185
Net cash provided /(used in) operating activities 450,382 (259,244 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,766) (2,218 )
Net cash used in investing activities (2,766) (2,218 )
CASH FLOWS FROM FINANCING ACTIVITES:
Conversion of convertible notes payable (3,615,734 ) (780,474 )
Issuance of common stock - 1,350,869
Shares of common stock issued in safisfaction of debt (1,518,336 ) -
Proceeds from notes payable 995,320 -
Payments on notes payable ` (39,654 )
Issuance of Preferred Stock 1,251,250 -
Issuance of stock for cash 400,000 -
Shares of common stock issued to PLC for assets 7,880,000 -
Stock issued in share exchange 64,866 -
Liabilities retained in PLC in share exchange (5,837,707 ) -
Net cash provided by financing activities (419,995 ) 570,395
Effect of exchange rate changes on cash (3,427 ) (323,910 )
NET CHANGE IN CASH 24,194 (14,977 )
CASH AT BEGINNING OF PERIOD 8,785 26,818
CASH AT END OF PERIOD $ 32,979 $ 11,842
Supplemental cash flow information:
Cash paid for interest $ 149,326 $ -
Shares of common stock issued to PLC for assets 7,880,000 $ -
Common and preferred stock to be issued 1,358,957 $ -
Stock issued in share exchange 64,763 $ -
Liabilities retained in PLC in share exchange (5,877,361 ) $ -
Accounts receivable applied against loan set-off - $ 1,334,561
Stock issued for services 44,500 $ -
Common stock issued in satisfaction of debt $ 5,134,070 $ -
The accompanying notes are an integral part of these consolidated financial statements.
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc.)
Notes to Consolidated Financial Statements
Dectember 31, 2011
(Unaudited)
NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Activities, History and Organization
Seven Arts Entertainment, Inc. (herein referred to as “the Company”, “Seven Arts” or “SAE,”), a Nevada Corporation, is the continuation of the business and the successor of the NASDAQ listing to Seven Arts Pictures Plc., (“PLC”) which was founded in 2002 as an independent motion picture production and distribution company engaged in the development, acquisition, financing, production, and licensing of theatrical motion pictures for exhibition in domestic (i.e., the United States and Canada) and foreign theatrical markets, and for subsequent worldwide release in other forms of media, including home video and pay and free television. The Company currently owns interests in 33 completed motion pictures, subject in certain instances to the prior financial interests of other parties.
On June 11, 2010, Seven Arts Entertainment, Inc. (“SAE”), a Nevada Corporation, was formed and became a 100% owned subsidiary of Seven Arts Pictures Plc. As of June 11, 2010, the Company entered into an Asset Transfer Agreement, as amended on January 27, 2011 and again on August 31, 2011, to transfer all of the assets with a cost basis from PLC to SAE, in exchange for assumption by SAE of certain indebtedness and for one share of common stock of SAE for each ordinary share of PLC which have been distributed to shareholders. Additionally, 2,000,000 shares of SAE were issued to PLC in order to satisfy any remaining obligations. This transfer was approved by the PLC shareholders at an Extraordinary General Meeting on June 11, 2010. The purpose of this transfer was to eliminate our status as a foreign private issuer and to assume compliance with all obligations of a domestic issuer under all applicable state and Federal securities laws. Our intention in executing this transaction was to redomicile our business with no change in the economic interests of our shareholders.
On August 31, 2011, NASDAQ approved the substitution of one share of SAE, Inc. stock for the Company's NASDAQ listing, effective at the opening of trading on September 1, 2011. On that date, each of the Company's ordinary shares were exchanged for one share of common stock of SAE, and commenced trading on NASDAQ as the successor to the Company's NASDAQ listing. This transaction was approved by the Company’s shareholders at the Company’s Extraordinary General Meeting on June 11, 2010.
SAE’s authorized capital consists of 50,000,000 shares of common stock, $.01 par value per share, of which the board of directors has allocated 25,000,000 shares as common stock. As of December 31, 2011, there were 22,620,288 shares of common stock outstanding, all of which are fully paid and non-assessable. Each outstanding share of common stock entitles the holder thereof to one vote per share on matters submitted to a vote of stockholders.
125,125 Series A preferred shares , $10.00 par value per share , were issued to one shareholder in November 2011for a transaction completed in August 2011. These shares have a conversion price to common stock of $0.15/share.
SAE is now a United States issuer and commenced regular quarterly reporting from the first quarter ended September 30, 2011.
On November 8, 2011, the Company's listing predecessor, PLC, was placed into involuntary creditors liquidation under English law (See Note 6 – Commitments and Contingencies). Certain indebtedness of PLC remained with PLC and will be subject to administration or payment in those administration proceedings. In accordance with the asset transfer agreement, PLC has been issued 2,000,000 shares of common stock of SAE in order to satisfy these obligations.
Unaudited Interim Financial Statements:
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the balance sheet, statement of operations, statement of stockholders’ equity and statement of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in the Company’s Annual Report on Form 20-F. The results of operations for the three and six months ended December 31, 2011 are not necessarily indicative of the results of operations for the full year or any other interim period. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and Financial Statements and notes thereto included in the Company’s predecessor’s June 30, 2011 Form 20-F, which was filed in December 2011. The Company’s predecessor, PLC, was considered a foreign filer as of its June 30, 2011 year-end, and therefore, required to file a Form 20-F by December 31, 2011. The results of operations for the three and six months were derived from the December 31, 2010 6-F filing, which were prepared prior to the Company’s predecessor entity filing quarterly reports.
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Significant Accounting Policies:
The Company’s management selects accounting principles generally accepted in the United States of America and adopts methods for their application. The application of accounting principles requires the estimating, matching and timing of revenue and expense. It is also necessary for management to determine, measure and allocate resources and obligations within the financial process according to those principles. The accounting policies used conform to generally accepted accounting principles which have been consistently applied in the preparation of these financial statements.
The financial statements and notes are representations of the Company’s management which is responsible for their integrity and objectivity. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Seven Arts Entertainment, Inc. (“SAE”), and its wholly owned subsidiary, Seven Arts Filmed Entertainment, Limited (“SAFE, Ltd.”).
The Company consolidates its subsidiaries in accordance with Accounting Standards Codification (“ASC”) 810, “ Business Combinations” , and specifically ASC 810-10-15-8 which states, "The usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation." The Company does not have any variable interest or special purpose entities.
The Company prepares its financial statements on the accrual basis of accounting and in accordance with Generally Accepted Accounting Principles of the United States of America (“US GAAP”). All intercompany balances and transactions are eliminated. Management believes that all adjustments necessary for a fair presentation of the results of the three and six months ended December 31, 2011 and 2010, respectively, have been made.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. The most significant estimates made by management in the preparation of the financial statements relate to ultimate revenue and costs of its films which are used in the amortization and impairment of film costs, estimates for allowances and income taxes. Accordingly, actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.
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Revenue Recognition:
The Company recognizes revenue from the sale (minimum guarantee or non-refundable advances) or licensing arrangement (Royalty agreements) of a film in accordance with ASC 605-15 “ Revenue Recognition ”. Revenue will be recognized only when all of the following criteria have been met:
a) Persuasive evidence of a sale or licensing arrangement with a customer exists.
b) The film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery. (i.e. the “notice of delivery” (“NOD”) has been sent and there is a master negative available for the customer).
c) The license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale.
d) The arrangement fee is fixed or determinable.
e) Collection of the arrangement fee is reasonably assured.
A written agreement with clients (purchase order, letter, contract, etc.), indicating the film name, territory and period is required for the recognition of revenue. Revenue is recognized when the performance criteria in the contracts have been met. The customer generally confirms agreement by their signature on the contract.
Minimum guarantee revenue (i.e., non-refundable advances) is recognized as and when the film is available for delivery to the respective territories. Cash deposits received on the signing of the contracts are recorded as deferred revenue until the film is available for delivery (as described above) at which point the deferred revenue is recognized. The Company does not recognize any revenues relating to minimum guarantee on any motion picture or amortization expenses on that picture until United States theatrical release if it has agreed with the licensees that delivery or payment of minimum guarantee will be delayed for any material period of time to permit such a theatrical release.
Royalty revenue, which equates to an agreed share of gross receipts of films, is recognized as income as and when the Company is notified of the amounts by the customers through their royalty reports. Revenue is recorded net any of sales or value added taxes charged to customers.
Fee-related revenues
Many countries make tax credits available to encourage film production in the territory. Seven Arts benefits from tax credits in:
a) the UK and several other European territories for their European productions
b) Canada for their Canadian productions
c) Louisiana for their US productions
d) Tax preferred financing deals
In the majority of circumstances these tax credits are treated as a reduction in the capitalized costs of the film assets they are financing.
Foreign Currency Transactions and Comprehensive Income
The Company’s functional currency, as well as the Company’s subsidiary, SAFE, Ltd. is the US Dollar. The functional currency of the Company’s predecessor, was the Pound Sterling (“GPB”), and some transactions which are generated in the United Kingdom are denominated in GBP.
Assets and liabilities generated in a currency other than the functional currency are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented. The cumulative translation adjustment is included in the accumulated other comprehensive gain (loss) within shareholders’ equity (deficit). Foreign currency transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.
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Where possible, the Company seeks to match GBP income with GBP expenditures. To date, the Company has not hedged any transactional currency exposure but will keep such exposures under review and where appropriate may enter into such transactions in future.
Income Taxes:
The Company has adopted ASC 740-10 “ Income Taxes ”, which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable.
Cash and Cash Equivalents:
Cash and cash equivalents includes cash in banks with original maturities of three months or less and are stated at cost which approximates market value, which in the opinion of management, are subject to an insignificant risk of loss in value. The cash and cash equivalents of the Company consisted of cash balances held on deposit with banks, including various accounts denominated in US Dollars, Pounds Sterling and Euros.
Accounts Receivable:
Accounts Receivable are carried at their face amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions, and on a history of write offs and collections. The Company’s policy is generally not to charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Write offs are recorded at a time when a customer receivable is deemed uncollectible. The Company’s allowance for doubtful accounts was $148,862 and $195,623 at December 31, 2011 and June 30, 2011, respectively. Substantially all of the trade receivables in the consolidated financial statements are pledged as security for borrowings by the Company.
Property & Equipment:
Equipment is carried at the cost of acquisition or construction and depreciated over the estimated useful lives of the assets. Costs associated with repair and maintenance are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency of our property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on dispositions of equipment are reflected in operations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, which are 3 to 5 years.
Other Receivables and Prepayments:
The Company has entered into contracts for investor relations and consulting services to assist in future fundraising activities. A portion of these services were prepaid with shares of common stock that vested immediately and will be amortized over the period the services are to be provided.
Film Costs:
Film costs include the unamortized costs of completed films which have been produced by the Company or for which the Company has acquired distribution rights, libraries acquired as part of acquisitions of companies and films in progress and in development. For films produced by the Company, capitalized costs include all direct production and financing costs, capitalized interest and production overhead.
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 the proportion that current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the films. The majority of a film's costs (approximately 80% or more) are generally amortized within three years of the picture's initial release.
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Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release. Film costs are stated at the lower of amortized cost or estimated fair value. Individual film costs are reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value of a film is less than its unamortized cost. The fair value of the film is determined using management’s future revenue and cost estimates and a discounted cash flow approach. Impairment is recorded in the amount by which the unamortized costs exceed the estimated fair value of the film. Estimates of future revenue involve measurement uncertainty, and it is therefore possible that reductions in the carrying value of investment in films may be required as a consequence of changes in management’s future revenue estimates.
Films are included in the general “library” category when initial release dates are at least three years prior to the acquisition date.
Films in progress include the accumulated costs of productions which have not yet been completed. Films in development include costs of acquiring film rights to books, stage plays or original screenplays and costs to adapt such projects. Such costs are capitalized and, upon commencement of production, are transferred to production costs. Projects in development are written off at the earlier of the date they are determined not to be recoverable or when abandoned.
Impairment of Long Lived Assets:
The Company evaluates, on a periodic basis, long-lived assets to be held and used for impairment in accordance with the reporting requirements of ASC 360-10, “ Accounting for the Impairment or Disposal of Long-Lived Assets ”. The evaluation is based on certain impairment indicators, such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If these impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, then an estimate of the discounted value of expected future operating cash flows is used to determine whether the asset is recoverable and the amount of any impairment is measured as the difference between the carrying amount of the asset and its estimated fair value. The fair value is estimated using valuation techniques such as market prices for similar assets or discounted future operating cash flows.
Earnings Per Share:
Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share include the effects of any outstanding options, warrants and other potentially dilutive securities. For the periods presented, there were no potentially dilutive securities outstanding, therefore basic earnings per share equals diluted earnings per share. Basic and diluted earnings per share (“EPS”) are based on weighted-average common shares and exclude shares that would have an anti-dilutive effect. In accordance with ASC 260-10-45-19, the Company did not consider any potential common shares in the computation of diluted EPS as of December 31, 2011 and 2010, due to the loss from continuing operations, as they would have an anti-dilutive effect on EPS.
Share Based Payments:
The Company accounts for share based payments using a fair value based method whereby compensation cost is measured at the grant date based on the value of the services received and is recognized over the service period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued. In calculating this fair value, there are certain assumptions used such as the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.
Segment Reporting:
The Company produces and acquires motion pictures for distribution in theatres, on home entertainment and/or for television viewing. The Company operates in one business segment as a motion picture producer and distributor. The Company believes that all of its businesses are functionally and financially similar.
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Fair Value Measurements :
ASC Topic 820, “ Fair Value Measurements and Disclosures ”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair value of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s credit worthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
Derivative Instruments:
The Company’s policy is not to use derivative or hedging financial instruments for trading or speculative purposes, except certain embedded derivatives derived from certain conversion features or reset provisions attached to the convertible debentures, as described in Note 7.
NOTE 2 – FILM COSTS
Film costs as December 31, 2011 and June 30, 2011 are as follows:
December 31,
2011 June 30,
2011
Film Costs, beginning of period $ 25,977,293 $ 23,808,869
Additions to film costs during the period 711,513 2,168,424
Total film costs 26,688,806 25,977,293
Less: Accumulated amortization (3,644,065 ) (2,843,734 )
Total film costs, net of accumulated amortization $ 23,044,741 $ 23,133,559
Amortization of film costs was $800,331 and $695,620 for the six months ended December 31, 2011 and 2010. The Company reviews capitalized film costs for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable or at least once per year. Determination of recoverability is based on an estimate of future cash flows resulting from the use of the asset, and its eventual disposition. Measurement of an impairment loss for the assets is based on the fair value of the asset as estimated using a discounted cash flow model.
NOTE 3 – RELATED PARTY DUE TO/DUE FROM
Seven Arts Pictures, Inc. (“SAP, Inc.”) directly or through related various Louisiana limited liability companies, have from time-to-time made non-interest bearing advances to the Company or its subsidiaries or have received advances back from the Company. The balances of these combined accounts due to the Company as of December 31, 2011 and June 30, 2011 were $2,764,332 and $2,725,974, respectively. SAP, Inc. has pledged an interest in its shares of the Company’s stock to secure certain indebtedness for which SAP, Inc. and the Company are jointly liable such as the Apollo and Armadillo debts. The stock of SAP, Inc. was transferred to the listing predecessor of SAE on September 10, 2011.
NOTE 4 – INCOME TAXES
The Company has adopted ASC 740-10, “ Income Taxes ”, which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable (deferred tax liability) or benefit (deferred tax asset). Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
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During the six months ended December 31, 2011 the Company had a net loss of $2,078,283 increasing the deferred tax asset approximately $706,616 at the statutory tax rate of 34%. Deferred tax assets at December 31, 2011 consisted of the following:
Deferred tax asset related to:
December 30,
2011
Prior Year $ -
Tax Benefit (Expense) for Current Period 706,616
Deferred Tax Asset $ 706,616
Less: Valuation Allowance (706,616 )
Net Deferred Tax Asset $ -
The net deferred tax asset generated by the loss carry forward has been fully reserved and will expire in 2019 through 2030. The realization of deferred tax benefits is contingent upon future earnings and therefore, is fully reserved at December 31, 2011.
NOTE 5 – EARNINGS PER SHARE
Basic and diluted earnings per share (“EPS”) are based on weighted-average common shares and generally exclude shares that would have an anti-dilutive effect. In accordance with ASC 260-10-45-19, the Company did not consider any potential common shares in the computation of diluted EPS as of December 31, 2011, due to the loss from continuing operations, as including them would have an anti-dilutive effect on EPS.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Acquisition of Music Assets and Big Jake Music
On December 19, 2011, the Company entered into a definitive agreement to acquire the music assets of David Michery, including two completed albums embodying the services of DMX and future albums by DMX and Bone Thugs-n-Harmony (“BTH”). the consideration of $5,000,000 of Series B convertible preferred stock (convertible at approximately $1.10 per share) will be earned and deliverable to Mr. Michery and his assigns upon delivery of two DMX albums, and an additional $5,000,000 of Series B convertible preferred stock deliverable to Mr. Michery and his assigns if two DMX albums and two BTH albums earn net earnings before interest and taxes for the next five years of $5,000,000. The closing of the sale of the Michery assets is expected to occur by February 28, 2012.
On September 29, 2011, the Company entered into a definitive agreement to acquire of all of the capital stock of Big Jake Music ("BJM"), a newly formed record and multi-media entertainment company, for $5,000,000 of convertible preferred stock, convertible into common stock at a premium to the market price at closing, and which is subject to restricted holding periods. BJM will also release soundtracks of Seven Arts films, including Night of the Demons (a film released in October 2010) and The Pool Boys (a film released in October 2011). The closing of the sale of stock of BJM is expected to occur by February 28, 2012.
Creditors Liquidation of SAP Plc.
The Company’s listing predecessor Seven Arts Pictures Plc. (‘PLC’) was placed by the English Companies Court into compulsory liquidation on November 8, 2011. The Company’s CEO, Mr. Peter Hoffman, as a director of PLC had sought an administration order but this request was denied by the Courts as a result of inter alia the opposition of Parallel Pictures LLC (‘Parallel’). The creditors are likely to be invited to appoint a licensed insolvency practitioner as liquidator. The role of a liquidator is to realize a company’s assets for the benefit of the creditors and shareholders. Mr. Hoffman expects that the liquidator and PLC will pursue its substantial claims against Parallel and its defenses to Parallel’s claims. Parallel has claimed in the proceedings in England and the United States that the Asset Transfer Agreement between the Company and PLC was ‘fraudulent’ and may seek additional compensation or guarantees from Company. Management believes that the Asset Transfer Agreement is a valid agreement for value and not subject to attack and that Parallel will not prevail in its claims. Management believes it has the support of its creditors to resist these claims by Parallel which are disputed by the Company and as a result Parallel will not obtain any relief from the courts on this issue.
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807 Esplanade Guarantee
Seven Arts Pictures Louisiana LLC, a related party and/or an affiliate of the Company, entered into a Credit Agreement with Advantage Capital Community Development Fund LLC dated October 11, 2007, for the acquisition and improvement of a production and post production facility located at 807 Esplanade Avenue in New Orleans, Louisiana for aggregate principal advances of up to $3,700,000. This agreement was guaranteed by the Company’s predecessor. Approximately $3,700,000 has been drawn under the terms of this Credit Agreement, as of June 30, 2011. The Company has also guaranteed this amount.
There is a guarantee of a $1,000,000 note plus interest due to Armadillo by the Employee Benefit Trust of the Company’s listing predecessor resulting from the purchase of Seven Arts preferred shares from Armadillo.
Fireworks Litigation
The Company prevailed in a motion for summary adjudication on February 10, 2011 in an action against CanWest Entertainment and two of its affiliates (“CanWest”) confirming the Company’s ownership of five motion pictures “Rules of Engagement”, “An American Rhapsody,” “Who Is Cletis Tout,” “Onegin,” and “The Believer”, (the “Copyrights”). The Company has filed an action in England against Content Media Corporation (“Content”) and Paramount Picture Corp. (“Paramount”) to recover the Copyrights and substantial damages for the use of the copyrighted works after their purported acquisition from CanWest. The Company may incur up to $200,000 in legal expenses to pursue this claim but expects to recover those fees from Content.
Arrowhead Target Fund
Seven Arts Future Flow I (“SFF”), a limited liability Company owned by SAP Inc., one of the Company’s controlling shareholders and a Company controlled by Mr. Hoffman, obtained financing from the Arrowhead Target Fund, Ltd. (“Arrowhead”) of approximately $8,300,000 (the “Arrowhead Loan”). SFF secured the Arrowhead Loan with liens on 12 motion pictures that generated revenues of $820,026 in the fiscal year ended June 30, 2009, $2,739,800 in the fiscal year ended March 31, 2008 and $544,478 in the three month period ended June 30, 2009. The Company’s only liability is to repay the Arrowhead Loan from the proceeds of the film assets pledged against the Arrowhead Loan. The Company is not required to repay the Arrowhead Loan from any of its other assets or revenues. SAE Inc’s subsidiary, SAFE, Ltd. was the collateral agent of the film assets.
The Arrowhead Loan became due in February 2009 and SFF has not paid the outstanding principle and interest due thereon. Arrowhead has the right to foreclose on the pledged film assets, but has not done so at the present time. SFF has received a default notice to this effect and as a result Arrowhead is now collecting directly all sums receivable by the Company with respect to these motion pictures, and has appointed a new servicing agent for these motion pictures with the result that the Company no longer controls the licensing of these motion pictures. Failure to repay or refinance the Arrowhead Loan could result in a material disposition of assets through the loss of the Company’s rights to the twelve motion pictures and related loss of revenues in amounts that are difficult to predict.
As a result of the foregoing, the Company has removed all assets accounts relating to the twelve motion pictures pledged to Arrowhead and has removed the corresponding limited recourse indebtedness from the Company’s consolidated balance sheet at fiscal year ended June 30, 2009, due to the fact that the loan was a limited recourse loan and the Company had no further obligations to Arrowhead beyond the pledged film assets.
Arrowhead filed an action on September 22, 2010 which seeks recovery from the Company of the monies which the Company has retained under its interpretation of the relevant agreements with Arrowhead. In addition, Arrowhead makes substantial additional claims against the Company, Mr. Hoffman and SAP Inc. regarding claimed breaches of the terms of the operative agreements, including failure to properly account, failure to turn over materials, failure to remit monies collected, and similar matters. The claims against the Company for these breaches of warranties for damages are $8,300,000 although Arrowhead states no basis for this amount.
The Company had moved to dismiss the action against all defendants other than Seven Arts Future Flows I LLC, which is not part of the Company. On August 9, 2011, the New York Supreme Court granted the Company’s motion and dismissed all defendants except Seven Arts Filmed Entertainment Limited in its capacity as a collateral agent, which is not a material element of Arrowhead claim. The Company continues to believe that Arrowhead’s claims against the Company are without substantial merit.
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The Company has agreed in principle to a settlement of these claims by Arrowhead and a return of all distribution rights to the affected twelve motion pictures to the Company and anticipates to complete a formal settlement agreement by March 31, 2012.
Arrowhead Capital Partners – AGC Loan
The Company’s predecessor and several affiliates were named as defendants in an action by Arrowhead Capital Partners Ltd filed in the Supreme Court of New York County of New York State purportedly served on May 24, 2010, seeking to collect $1,000,000 plus interest (the “ACG Loan”) due to Arrowhead Consulting Group LLC (“ACG”) as well as foreclosure on the collateral granted as part of the Cheyne Loan described above in Note 13 under “Production Loans”. The ACG Loan is fully subordinated to repayment of the Cheyne Loan, which has not been repaid, and a subsidiary of the Company has been assigned all Cheyne’s rights under the subordination provision of the Cheyne Loan. As a result Management does not believe that ACG has the right to maintain this action to collect any monies or to foreclose on any collateral pursuant to the Cheyne Loan. The Company intends to vigorously defend against this action.
Investigation into Claim for Tax Credits (SAPLA )
The US Attorney in New Orleans is investigating claims for Louisiana film infrastructure tax credits including such tax credits to be claimed by an affiliate of the Company, Seven Arts Pictures Louisiana LLC and has issued subpoenas for discovery of documents in the possession of the Company related to their tax credits. This investigation appears to include investigation as to whether certain expenses claimed by this affiliate were improper or fraudulent. All such claimed expenses were audited by independent auditors in Louisiana and reviewed by counsel. None of these expenses or credits have been included in the Company’s financial statements for any period. Management believes that this investigation will have no material adverse effect on the Company’s operations or the total tax credits to be received by the Company’s affiliates, but could result in charges against current or former employees of this affiliate based on prior audits, including Mr. Hoffman.
Parallel Action
On June 28, 2011, Seven Arts Pictures Plc. (“PLC”) filed an action in the High Court of England against Parallel Media LLC (“Parallel”) to collect sums due to PLC with respect to acquisition of distribution rights in Russia to four motion pictures and to confirm Parallel’s obligations under both a signed and unsigned investment agreement with respect to the motion picture project Winter Queen. On the same day Parallel filed a petition to wind up and liquidate PLC in the Companies Courts of England based on its claim of repayment of $1,000,000 of investment made by Parallel in Winter Queen. PLC is no longer part of the Company.
On September 19, 2011, Parallel filed a new action against PLC and SAE in the Superior Court of California, asserting the same claims as in the winding up petition and seeking to enjoin the proposed administration proceedings in England. A request for a preliminary injunction was denied by the Superior Court. PLC will move to dismiss this action since all the operative agreements between PLC and Parallel include a clause requiring exclusive jurisdiction of all litigation in the courts of England. PLC expects this motion to dismiss will be granted.
HMRC Investigation
On July 19, 2011 Officers of Her Majesty’s Revenue & Customs (“HMRC”) attended the offices of Seven Arts Pictures Plc. (the “Company”) in London. Documents were retained appertaining to arrangements involving the subscription for shares in a number of companies which had lost value, resulting in subscribers making claims to tax relief.
The Company’s participation in these transactions was limited to the Company’s predecessor’s transfer of rights to certain motion pictures to the investors in return for their investments in the production and release costs of those pictures and making available the provision of loans to fund a portion of those investments. The Company received no tax benefits from the transactions, which were made on arms-length terms. The Company believes that it is not a subject of the HMRC investigation.
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In connection with the transactions, the Company did not make any representations or warranties to any party, including the investors, regarding any potential tax benefits related to the transactions. Prior to the closing of the transactions the investors obtained and made available to the Company, an opinion of prominent Queen’s counsel, specializing in United Kingdom tax laws, that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws. The Company remains confident that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws.
HMRC has requested interviews with three officers of the Company to discuss whether those officers were involved in the arrangements for subscription of shares in the relevant companies, the first of which is scheduled for March 6, 2012. The Company is fully cooperating with the investigation. The Company believes there is no basis for any claim of responsibility of any of its officers or employees. Based on facts currently known by the Company, there is no need for it to record a contingent liability in its financial statements in connection with the investigation or the related transactions.
NOTE 7 – CONVERTIBLE NOTES PAYABLE
Existing Notes :
a) On August 30, 2010, the PLC issued an aggregate of $470,000 convertible debt to qualified investors (Scarborough, Sendero and Aqua Alta) that matured on February 28, 2011. This debt was transferred to the Company pursuant to the Asset Transfer Agreement dated January 27, 2011. The Convertible Debts bear interest at a rate of 15.0% per annum and could be converted into the Company’s ordinary shares beginning on the date which is one hundred twenty (120) days following the issuance of the Convertible Debt, at the conversion rate of $3.75 per share, subject to certain changes.
b) On March 2, 2011, an additional $300,000 of convertible notes were issued to Runway Investments Ltd on the same terms as above. At the same time the original notes were extended to July 31, 2011.
c) On May 24, 2011, all $770,000 of these notes were extended to September 30, 2011 and the conversion terms were changed .
d) The $225,000 of Scarborough notes were converted to 507,000 shares of PLC’s ordinary stock on July 29, 2011.
e) The $170,000 of Agua Alta notes and $75,000 Sendero notes were converted on October 19, 2011 into 1,786,374 shares of SAE common stock.
f) On January 27, 2012 , $132,645 of the Runway debt and relevant interest was converted to 1,211,219 shares and on January 31, 2012 an additional $50,000 of debt was converted to 333,333 shares. Another $50,000 was converted into 333,333 shares on February 15, 2012.
New Notes :
The following table presents convertiblenotes payable entered into during the quarter. Each of these notes is convertible into shares of the company’s common stock at the indicated fixed conversion rate.
Convertibles Start Due Date Interest Rate Principal Fixed
conversion
Rate
Hanover Holding/Magna November 16, 2011 February 16, 2012 12% $ 95,320 $ 0.25
Dover Management November 28, 2011 March 31, 2012 18% $ 100,000 $ 0.20
FireRocks December 12, 2011 June 12, 2012 12% $ 300,000 $ 0.25
Aegis – Tripod December 15, 2011 June 30, 2012 12% $ 33,334 $ 0.27
Aegis – CMS December 15, 2011 June 30, 2012 12% $ 33,333 $ 0.27
Aegis – Rachel December 15, /2011 June 30, 2012 12% $ 33,333 $ 0.27
Beauvoir Capital Ltd April 14, 2011 October 14, 2011 10% $ 50,000 $ 0.20
Hanover Holding/Magna October 19, 2011 May 18, 2012 10% $ 153,002 $ 0.28
The Company has evaluated these convertible notes for embedded derivative features and has determined that no derivative liability exists. Assuming all notes are settled via common stock, the number of shares to be issued to satisfy approximately $800,000 of debt plus accrued interest is approximately 3,412,310 shares of the company’s common stock
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NOTE 8 – LOANS PAYABLE
The Company has the following indebtedness as of December 31, 2011:
Applicable
Amount Interest
Lender Outstanding Rate Status
Existing Loans
Palm Finance $ 3,762,175 18% Forebearance agreement
Palm Finance 1,195,654 18% Forebearance agreement
Blue Rider Finance Inc 774,087 Due on demand
120db Film Finance LLC 76,481 Non stated Due on demand
Cold Fusion Media Group LLC 601,111 10% Due on demand
Pledged shares (384,000 )
Film and Product Loans $ 6,025,508
Trafalgar Capital (in liquidation) 514,708 9% Due on demand **
TCA Capital Fund 121,574 10% Due October 2011 **
Sendero/Scarborough interest 25,006 15% Due September 2011**
Runway 326,621 15% Due September 2011 **
Existing Corporate loans $ 987,909
Sub-total - Existing Loans $ 7 ,013,417
New Loans
Beauvoir Capital Ltd convertible $ 53,575 10% Due October 2011**
Hanover Holding convertible 96,730 12% Due Feb 2012
Briarwood 203,671 10% Due April 2012
Dover Management convertible 101,923 12% Due May 2012
Hanover Holdings 153,002 10% Due May 2012
Firerocks convertible 301,874 12% Due June 2012
Aegis – Tripod convertible 33,509 12% Due June 2012
Aegis – CMS convertible 33,508 12% Due June 2012
Aegis – Rachel convertible 33,508 12% Due June 2012
Sub-total - New Loans $ 1,011,300
TOTAL LOANS $ 8,024,717
__________
** not in default as converted to shares of common stock in January and February 2012.
The Company converted $2,963,028 of the film and production loans into 5,989,349 shares of common stock during the three months ended September 30, 2011 and a further $906,000 of film and production loans for 3,490,385 shares of common stock in the quarter to December 31, 2011.
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NOTE 9 – EQUITY TRANSACTIONS
First quarter 2011/12
On August 31, 2011, NASDAQ approved the substitution of one share of SAE, Inc. stock for the Company's NASDAQ listing, effective at the opening of trading on September 1, 2011. On that date, each of the Company's ordinary shares were exchanged for one share of common stock of SAE, and commenced trading on NASDAQ as the successor to the Company's NASDAQ listing. This transaction was approved by the Company’s shareholders at the Company’s Extraordinary General Meeting on June 11, 2010.
The Company is authorized to issue 50,000,000 common shares at a par value of $0.01 per share. These shares have full voting rights. At September 30, 2011 and June 30, 2011, there were 11,149,480 and 2,643,131 respectively, common shares outstanding. The Company’s predecessor, PLC, had a 1:5 reverse stock split on May 9, 2011.
During the three months ending September 30, 2011, Company issued 6,496,349 shares in satisfaction of $3,188,028 of outstanding loans payable and accrued interest, consisting of $225,000 of convertible notes payable and $2,963,028 of film and production loans. The conversions were done at contractual share prices ranging from $.20 to $2.00 per share.
In July 2011, the Company also issued 10,000 shares for investor relations services valued at approximately $10,000.
The Company did not assume the deferred stock of the listing predecessor which was outstanding at June 30, 2011. Deferred stock is subordinated to all other classes of stock.
As of September 30, 2011, $1,986,722 of stock was fully paid but still to be issued, consisting of $1,251,250 of Series A preferred stock and $735,472 of debt that was being converted to equity.
11,149,480 shares were outstanding as of September 30, 2011.
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Second Quarter 2011/12
Between October 1, 2011 and December 31, 2011 the Company issued 11,470,808 shares : The total number of shares outstanding on December 31, 2011 was, therefore, 22,620,288.
4,639,049 common shares were issued in satisfaction of the $612,336 of convertible debt sharesat an average conversion price of $0.13/share .
2,851,374 common shares were issued on the conversion of the Agua Alta , Sendero and Isaac convertible notes totalling $427,706 at an average conversion price of $0.15/ share.
3,490,385 common shares were issued in satisfaction of $906,000 of corporate loans at anaverage conversion price of $0.26/share.
400,000 common shares were issued as restricted stock for cash, $250,000 to Fletcher and $150,000 to Goldstrand at $1.00/share
75,000 common restricted shares were issued for investor relations services at $0.36/share
15,000 common restricted shares were issued to a director in lieu of compensation at $0.50/share
11,470,808
Each of the directors was awarded 100,000 options during the period. These options to purchase the Company’s common stock have a five year term, 50,000 have a strike price (equal to the closing price of the Company’s stock price as of the date of issue), of $0.44 (October 14, 2011) and 50,000 have a strike price of $0.39 (December 6 2011) 50% of the options vest on December 31, 2011 and 50% vest on December 31, 2012.
(See Subsequent Events Note 13 for stock issuances subsequent to December 31, 2011.).
125,125 shares of Series A Cumulative Convertible $10.00 Stated Value Preferred Stock with a dividend rate of 8% (payable quarterly) were issued in November 2011. The conversion price into common stock of the Company is $0.15/share. An additional $115,000 was invested for another 11,500 Series A preferred stock which has not yet been issued. This amount is included in the shares to be issued number on the balance sheet as of December 31, 2011.
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company’s Chief Executive Officer, Peter Hoffman, controls several companies, including Seven Arts Pictures, Inc. (“SAP, Inc.”) that are not part of the Company but from which it obtains or transfers distribution rights or other assets related to the business and which control production of the motion pictures. The agreements with Mr. Hoffman, and the companies controlled by him, provide that all revenues related to the Company’s business payable to Mr. Hoffman or any of these related party companies is due to the Company, except Mr. Hoffman’s salary, bonus and stock ownership. None of these affiliates are variable interest or special purpose entities.
Pursuant to a related party agreement, SAP, Inc. holds ownership of limited liability corporations in the United States, with all distribution rights and profits thereof being due to SAFE, Ltd. In addition, they have also provided other services for Seven Arts Pictures Plc. and SAFE, Ltd. And SAE, Inc. at no fee other than Mr. Hoffman’s salary and the direct third party costs of the Los Angeles office, all of which are reflected in the financial statements of SAFE, Ltd. These other services are any reasonable requests of the management of the Company including accounting services, audits of distribution statements, collection of accounts receivable, supervision of production of motion pictures and similar day-to-day aspects of the Company’s business. Effective January 1, 2012, no further such transactions are intended.
The Company has made and received advances from and to SAP Inc.and various Louisiana limited liability companies referred to above, where the advances from and to these related parties do not bear interest. The balances of these combined accounts were $2,764,322 and $2,725,974 as of December 31, 2011 and June 30, 2011, respectively.
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NOTE 11 – FAIR VALUE MEASUREMENTS
Cash, accounts receivable, accounts payable and other accrued expenses and other current assets and liabilities are carried at amounts which reasonably approximate their fair values because of the relatively short maturity of those instruments.
ASC 820, “ Fair Value Measurements and Disclosures ”, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described as follows:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 - Inputs to the valuation methodology include:
- quoted prices for similar assets or liabilities in active markets;
- quoted prices for identical or similar assets or liabilities in inactive markets;
- inputs other than quoted prices that are observable for the asset or liability;
- inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The preceding method described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. As of December 31, 2011 and June 30, 2011, all of the Company’s assets and liabilities were considered current and due to the short maturity the carrying amounts are considered to approximate fair value.
NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued guidance intended to achieve common fair value measurements and related disclosures between U.S. GAAP and international accounting standards. The amendments primarily clarify existing fair value guidance and are not intended to change the application of existing fair value measurement guidance. However, the amendments include certain instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This guidance is effective for the periods beginning after December 15, 2011, and early application is prohibited. The Company will adopt these amendments on January 1, 2012; however, the requirements are not expected to have a material effect.
In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “ Comprehensive Income — Presentation of Comprehensive Income .” ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. It requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, “ Comprehensive Income — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, ” to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact that the adoption will have on their consolidated financial statements.
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In December 2011, the FASB issued ASU No. 2011-11, “ Balance Sheet — Disclosures about Offsetting Assets and Liabilities .” ASU 2011-11 requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments and will be applied retrospectively for all comparative periods presented. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company currently believes that this ASU will have no significant impact on its consolidated financial statements.
NOTE 13 – SUBSEQUENT EVENTS
The Company issued the following shares of common stock subsequent to December 31, 2011:
New Stock Issues
Issued to Value No of shares
10/01/2012 Magna $ 34,736.00 173,680 Debt conversion
11/01/2012 120 db (5) $ 125,000.00 125,000 Debt conversion
17/01/2012 Magna $ 25,000.00 125,000 Debt conversion
17/01/2012 Safron $ 45,395.86 226,979 Debt conversion
20/01/2012 Magna $ 35,000.00 175,000 Debt conversion
24/01/2012 Magna $ 30,000.00 150,000 Debt conversion
25/01/2012 Tripod Group $ 51,692.07 231,803 Debt conversion
26/01/2012 Old Capital $ 212,000.00 1,630,769 Debt conversion
27/01/2012 Runway $ 82,645.00 877,885 Convertible
27/01/2012 Isaac - conversion of Runway (1/4) $ 50,000.00 333,334 Convertible
31/01/2012 Isaac - conversion of Runway (2/4) $ 50,000.00 333,333 Convertible
07/02/2012 Isaac - conversion of Runway (3/4) $ 50,000.00 333,333 Convertible
08/02/2012 Website designer $ 6,000.00 20,000 S-8 payment
09/02/2012 Safron – Kismet (3) $ 200,000.00 992,733 Debt conversion
10/02/2012 Michael Garstin - loan $ 130,000.00 637,500 Debt conversion
13/02/2012 Safron – Kismet (3) $ 200,000.00 992,733 Debt conversion
14/02/2012 120 db (6) $ 125,000.00 125,000 Debt conversion
14/02/2012 Tripod conversion (1) $ 18,000.00 80,000 Debt conversion
15/02/2012 Isaac - conversion of Runway (4/4) $ 50,000.00 333,333 Convertible
15/02/2012 Consultancy salary - S-8 $ 60,000.00 200,000 S-8 payment
15/02/2012 Michael Briskin (2) $ 20,000.00 88,889 Debt conversion
8,186,304
Total shares outstanding as of February 15, 2012 was 30,886,342.
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Additionally, the Company had the following aged debt acquired, which will be converted to equity, subsequent to December 31, 2012:
(1) $150,000 of aged debt was acquired on February 1, 2012 by Tripod for conversion at $0.225
(2) $200,000 of aged debt was acquired on February 3, 2012 by Michael Briskin for conversion at $0.225
(3) $400,000 of aged debt was acquired on February 7 2012, by Safron Capital for conversion at $0.225
New Convertibles Start Close Rate Principal
Amount Fixed
Conversion Price
Tripod January 16, 2012 January 19, 2013 12% $ 50,000 $ 0.24
Safron Capital Corp(1) February 1, 2012 January 31, /2013 10% $ 475,000 $ 0.23
Tripod February 1, 2012 January 19, /2013 12% $ 150,000 $ 0.24
Michael Briskin February 3, /2012 January 19, /2013 12% $ 100,000 $ 0.23
_____________
(1) $400,000 has already been converted as of the date of this filing.
Acquisition of Michery Music Assets Big Jake Music
On December 19, 2011, the Company entered into a definitive agreement to acquire the music assets of David Michery, including two completed albums embodying the services of DMX and future albums by DMX and Bone Thugs-n-Harmony (“BTH”). for $5,000,000 of Series B convertible preferred stock (convertible at approximately $1.10 per share) to Mr. Michery and his assigns upon the delivery of the two DMX albums. An additional $5,000,000 of Series B convertible preferred stock will be due to Mr. Michery and his assigns if two DMX albums and two BTH albums earned net income before interest and taxes for the next five years of $5,000,000. The closing of the acquisition of the Michery assets is expected to occur by February 28, 2012.
On September 29, 2011, the Company entered into a definitive agreement to acquire of all of the capital stock of Big Jake Music ("BJM"), a newly formed record and multi-media entertainment company, for $5,000,000 of convertible preferred stock, convertible into common stock at a premium to the market price at closing, and which is subject to restricted holding periods. BJM will also release soundtracks of Seven Arts films, including Night of the Demons (a film released in October 2010) and The Pool Boys (a film released in October 2011). The closing of the sale of stock of BJM is expected to occur by February 28, 2012.
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Creditors Liquidation of SAP Plc.
The Company’s listing predecessor Seven Arts Pictures Plc. (‘PLC’) was placed by the English Companies Court into compulsory liquidation on November 8, 2011. The Company’s CEO, Mr. Peter Hoffman, as a director of PLC had sought an administration order but this request was denied by the Courts as a result of inter alia the opposition of Parallel Pictures LLC (‘Parallel’). The creditors are likely to be invited to appoint a licensed insolvency practitioner as liquidator. The role of a liquidator is to realize a company’s assets for the benefit of the creditors and shareholders. Mr. Hoffman expects that the liquidator and PLC will pursue its substantial claims against Parallel and its defenses to Parallel’s claims. Parallel has claimed in the proceedings in England and the United States that the Asset Transfer Agreement between the Company and PLC was ‘fraudulent’ and may seek additional compensation or guarantees from Company. Management believes that the Asset Transfer Agreement is a valid agreement for value and not subject to attack and that Parallel will not prevail in its claims. Management believes it has the support of its creditors to resist these claims by Parallel which are disputed by the Company and as a result Parallel will not obtain any relief from the courts on this issue.
Certain indebtedness of PLC remained with PLC under the asset transfer agreement and will be subject to liquidation or payment in these liquidation proceedings. PLC has been issued 2,000,000 shares of common stock of the Company in order to satisfy these obligations.
Filing of S-8
In January 2012, the Company filed a registration statement on Form S-8 in connection with the registration under the Securities Act of 1933, as amended, of 5,000,000 shares of the Company’s common stock under the Company’s 2012 Stock Incentive Plan.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
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
Our common stock is traded on NASDAQ under the symbol “SAPX”.
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.
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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.
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 its 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.
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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 for the Three-Month Period Ended December 31, 2011 vs. 2010
We generated a net loss of $1,095,995 for the three months ended December 31, 2011, compared to net income of $569,711 for the three months ended December 31, 2010. A discussion of the key components of our statements of operations and material fluctuations for the three months ended December 31, 2011 and 2010 is provided below.
Film revenues totalled $207,790 for the three months ended December 31, 2011, compared to $1,137,647 for the three months ended December 31, 2010. A comparison of the 2011 and 2010 sales is as follows:
The majority of 2011 sales came from the US digital release of the movie “The Pool Boys” in September 2011.
The majority of 2010 sales came from the US release of the movie “Deal”.
In December 31, 2010, there was fee-related revenue of $570,029 for additional producers fees associated with films produced in Louisiana.There was no fee income in the three months to December 31, 2011.
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 bear’s to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.
An amortization charge of $336,527 was made in the period to December 31, 2011 mainly against the title “The Pool Boys” in line with revenue forecasts.
The equivalent amortization charge in December 31, 2010 was $639,257 mainly against the title “Deal”.
l Other costs of revenue in the period totalling $283,949 versus $229,757 in the same quarter in 2010. The charge in the current period was due to the write-off of the costs of distribution of “The PoolBoys” whilst that in the 2010 period related to the write-off of distribution costs on “Deal”
General and administrative expenses increased from ($12,121) for the three months ended December 31, 2011 to $354,367 for the three months ended December 31, 2010. The net increase is primarily due to the following:
$228,661 of additional legal and professional costs related to:
HMRC investigations of $130,000
Set-up of SAE Inc of $20,000
Investor Relation fees of $60,000
Transfer agent, HMRC fines and edgarising fees of $90,000
Content Media,Parallel Media and Nine Miles Down actions of $60,000
Payroll has increased from ($41,809) for the three months ended December 31, 2010 to $326,746 in the three months to December 31, 2011 which is due to the reversal of an accrual in December 31, 2010, prior to quarterly reporting. We were not required to do quarterly filings in 2010 due to our status as a foreign filer at that time.
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Interest charges have marginally increased from $281,440 in the three months to December 31, 2010 to $ 328,942 in the three months to December 31, 2011 due mainly to 50% of the loan interest being capitalized in 2010 as PoolBoys had not yet been released by December 2010.
No tax expense was recognized in either period.
Results of Operations for the Six-Month Period Ended December 31, 2011 vs. 2010
We generated a net loss of $2,078,283 for the six months ended December 31, 2011, compared to a net loss of ($209,265) for the six months ended December 31, 2010. A discussion of the key components of our statements of operations and material fluctuations for the six months ended December 31, 2011 and 2010 is provided below.
Revenue
1) Film revenues totaled $800,331 for the six months ended December 31, 2011, compared to $1,237,952 for the six months ended December 31, 2010. A comparison of the 2011 and 2010 revenue is as follows:
· The majority of 2011 sales came from the US digital release of the movie “The Pool Boys” in September 2011. Significant sales to third party distributors were also made on the title in Canada and Australia during the period. $150,000 of royalty income spread over several titles but mainly continuing income from “Deal” was received during the period.
· 2010 sales were mainly distribution income earned from third parties on the film “Deal” in overseas television markets and a small amount of sales agency fees.
2) In the six months to December 31, 2010, there was fee-related revenue of $570,029 being additional producers fees associated with films produced in Louisiana. No fee-related income was received in the six months to December 31, 2011.
Cost of Revenue
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 bear’s to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.
· An amortization charge of $800,331 was made in the period to December 31, 2011 mainly against the title “The Pool Boys” in line with revenue forecasts.
· The equivalent charge in December 31, 2010 was $695,620, this was mainly against the title “Deal”.
Other costs of sales in the period totalled $299,289 versus $250,088 in the same period in 2010. The charge in the current period was due the distribution costs for the release of “The PoolBoys” whilst the 2010 charge generally related to the on-going distribution of “Deal”.
General and administrative Costs
General and administrative expenses increased from $338,358 for the six months ended December 31, 2010 to $1,036,252 for the six months ended December 31, 2011. The net increase is primarily due to the following:
· $362,115 of additional legal and professional costs mainly related to
HMRC investigations of $130,000
Set-up of SAE Inc of $20,000
Investor Relation fees of $60,000
Transfer agent,HMRC fines and edgarising fees of $90,000
Content Media, Parallel Media and Nine Miles Down actions of $60,000
· Payroll for directors has increased by $399,000 in the 2011 period compared to the 2010 period due to a director moving from a consultancy arrangement to payroll expense and the removal of the accrual for one executive director in 2010.
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Interest expense
Interest expense has increased from $702,094 in the six months to December 31, 2010 to $742,742 in the six months to December 31, 2011 due to the increase in corporate loans along with the full charge for Poolboys loan interest which was capitalised in the 2010 period, set off against the reduction in interest on the Palm Finance films due to the debt/equity swaps.
No tax expense was recognized in either period.
Employees
As of December 31, 2011, Seven Arts had 10 employees and independent contractors, providing full time services. Our affiliates employ many part time employees for production of our motion pictures, but we do not engage temporary employees on any regular or material basis. We are not signatory to any labor union collective bargaining agreements, but our affiliates in the United States are signatory to the current Writer’s Guild of America, Directors Guild of America and IATSE Low Budget Agreements and have in the past been signatory to the Screen Actors Guild Agreement. Our employees have ranged from a low of six to a high of fourteen over the last three fiscal years.
Liquidity
As of December 31, 2011, our assets totaled $28,728,943, which included, among other items, cash balances totaling $32,979, receivables totaling $393,510, amounts due from related parties totaling $2,764,332, and prepayments of $2,471,772. Our working capital as of December 31, 2011 was ($7,815,908), compared to ($15,199,849) as of June 30, 2011. The large negative balances are mainly due to film loans having to be treated as current debt. We have reduced our outstanding film debt from $10,890,430 as at June 30, 2011 to $6,025,508 as at December 31,2011 due to a series of debt for equity swaps and the maturity and exercise of convertible debt.
Historically, we have successfully raised additional operating capital through private equity funding sources or loans from affiliates. However, no assurances can be given that we will be able to obtain sufficient working capital through the sale of common stock and/or borrowing or that the development and implementation of our business plan will generate sufficient future revenues to sustain ongoing operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Litigation
Fireworks Litigation
The Company prevailed in a motion for summary adjudication on February 10, 2011 in an action against CanWest Entertainment and two of its affiliates (“CanWest”) confirming the Company’s ownership of five motion pictures “Rules of Engagement”, “An American Rhapsody,” “Who Is Cletis Tout,” “Onegin,” and “The Believer”, (the “Copyrights”). The Company has filed an action in England against Content Media Corporation (“Content”) and Paramount Picture Corp. (“Paramount”) to recover the Copyrights and substantial damages for the use of the copyrighted works after their purported acquisition from CanWest. The Company may incur up to $200,000 in legal expenses to pursue this claim but expects to recover those fees from Content.
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Jones Film
Seven Arts Pictures plc, its then subsidiary SAFE, Ltd. and Seven Arts Pictures Inc. (“SAP”), were the subject of two arbitration awards of attorney fees totalling approximately $900,000, with interest and charges, both of which were reduced to judgment. The Company’s listing predecessor, PLC, has accrued a provisional liability in the amount of $800,000 including approximately $100,000 of accrued interest at June 30, 2011. The Company paid approximately $525,000, the amount of the first arbitration award plus interest and charges, in November, 2011. The remaining interest, costs and fees have been guaranteed by SAP.
Arrowhead Target Fund
Seven Arts Future Flow I (“SFF”), a limited liability Company owned by SAP Inc., a Company controlled by Mr. Hoffman, obtained financing from the Arrowhead Target Fund, Ltd. (“Arrowhead”) of approximately $8,300,000 (the “Arrowhead Loan”). SFF secured the Arrowhead Loan with liens on 12 motion pictures that generated revenues of $820,026 in the Fiscal Year Ended June 30, 2009, $2,739,800 in the Fiscal Year Ended March 31, 2008 and $544,478 in the three month period ended June 30, 2009. The Company’s only liability is to repay the Arrowhead Loan from the proceeds of the film assets pledged against the Arrowhead Loan. The Company is not required to repay the Arrowhead Loan from any of its other assets or revenues. SAE’s subsidiary, SAFE, Ltd. was the collateral agent of the film assets.
The Arrowhead Loan became due in February 2009 and SFF has not paid the outstanding principle and interest due thereon. Arrowhead has the right to foreclose on the pledged film assets, but has not done so at the present time. SFF has received a default notice to this effect and as a result Arrowhead is now collecting directly all sums receivable by the Company with respect to these motion pictures, and has appointed a new servicing agent for these motion pictures with the result that the Company no longer controls the licensing of these motion pictures. Failure to repay or refinance the Arrowhead Loan could result in a material disposition of assets through the loss of the Company’s rights to the twelve motion pictures and related loss of revenues in amounts that are difficult to predict.
As a result of the foregoing, the Company has removed all assets accounts relating to the twelve motion pictures pledged to Arrowhead and has removed the corresponding limited recourse indebtedness from the Company’s consolidated balance sheet at fiscal year ended June 30, 2009, due to the fact that the loan was a limited recourse loan and the Company had no further obligations to Arrowhead beyond the pledged film assets.
Arrowhead filed an action on September 22, 2010 which seeks recovery from the Company of the monies which the Company has retained under its interpretation of the relevant agreements with Arrowhead. In addition, Arrowhead makes substantial additional claims against the Company, Mr. Hoffman and SAP Inc. regarding claimed breaches of the terms of the operative agreements, including failure to properly account, failure to turn over materials, failure to remit monies collected, and similar matters. The claims against the Company for these breaches of warranties for damages are $8,300,000 although Arrowhead states no basis for this amount.
The Company had moved to dismiss the action against all defendants other than Seven Arts Future Flows I LLC, which is not part of the Company. On August 9, 2011, the New York Supreme Court granted the Company’s motion and dismissed all defendants except Seven Arts Filmed Entertainment Limited in its capacity as a collateral agent, which is not a material element of Arrowhead claim. The Company continues to believe that Arrowhead’s claims against the Company are without substantial merit.
The Company has agreed in principle to a settlement of these claims by Arrowhead and a return of all distribution rights to the affected twelve motion pictures and anticipates to complete a formal settlement agreement by March 31, 2012.
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Arrowhead Capital Partners – AGC Loan
The Company’s predecessor and several affiliates were named as defendants in an action by Arrowhead Capital Partners Ltd filed in the Supreme Court of New York County of New York State purportedly served on May 24, 2010, seeking to collect $1,000,000 plus interest (the “ACG Loan”) due to Arrowhead Consulting Group LLC (“ACG”) as well as foreclosure on the collateral granted as part of the Cheyne Loan described above in Note 13 under “Production Loans”. The ACG Loan is fully subordinated to repayment of the Cheyne Loan, which has not been repaid, and a subsidiary of the Company has been assigned all Cheyne’s rights under the subordination provision of the Cheyne Loan. As a result Management does not believe that ACG has the right to maintain this action to collect any monies or to foreclose on any collateral pursuant to the Cheyne Loan. The Company intends to vigorously defend against this action and has filed a motion for summary judgement to dismiss this action.
Investigation into Claim for Tax Credits (SAPLA)
The US Attorney in New Orleans is investigating claims for Louisiana film infrastructure tax credits including such tax credits to be claimed by an affiliate of the Company, Seven Arts Pictures Louisiana LLC and has issued subpoenas for discovery of documents in the possession of the Company related to their tax credits.
This investigation appears to include investigation as to whether certain expenses claimed by this affiliate were improper or fraudulent. All such claimed expenses were audited by independent auditors in Louisiana and reviewed by counsel. None of these expenses or credits have been included in the Company’s financial statements for any period. Management believes that this investigation will have no material adverse effect on the Company’s operations or the total tax credits to be received by the Company’s affiliates, but could result in charges against current or former employees of this affiliate based on prior audits, including Mr. Hoffman.
Parallel Action
On June 28, 2011, Seven Arts Pictures Plc. (“PLC”) filed an action in the High Court of England against Parallel Media LLC (“Parallel”) to collect sums due to PLC with respect to acquisition of distribution rights in Russia to four motion pictures and to confirm Parallel’s obligations under both a signed and unsigned investment agreement with respect to the motion picture project Winter Queen. On the same day Parallel filed a petition to wind up and liquidate PLC in the Companies Courts of England based on its claim of repayment of $1,000,000 of investment made by Parallel in Winter Queen. PLC is no longer part of the Company. On September 19, 2011, Parallel filed a new action against PLC and SAE in the Superior Court of California, asserting the same claims as in the winding up petition and seeking to enjoin the proposed administration proceedings in England. A request for a preliminary injunction was denied by the Superior Court. PLC will move to dismiss this action since all the operative agreements between PLC and Parallel include a clause requiring exclusive jurisdiction of all litigation in the courts of England. PLC expects this motion to dismiss will be granted.
HMRC Investigation
On July 19, 2011 Officers of Her Majesty’s Revenue & Customs (“HMRC”) attended the offices of Seven Arts Pictures Plc. (the “Company”) in London. Documents were retained appertaining to arrangements involving the subscription for shares in a number of companies which had lost value, resulting in subscribers making claims to tax relief.
The Company’s participation in these transactions was limited to the Company’s predecessor’s transfer of rights to certain motion pictures to the investors in return for their investments in the production and release costs of those pictures and making available the provision of loans to fund a portion of those investments. The Company received no tax benefits from the transactions, which were made on arms-length terms. The Company believes that it is not a subject of the HMRC investigation.
In connection with the transactions, the Company did not make any representations or warranties to any party, including the investors, regarding any potential tax benefits related to the transactions. Prior to the closing of the transactions the investors obtained and made available to the Company, an opinion of prominent Queen’s counsel, specializing in United Kingdom tax laws, that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws. The Company remains confident that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws.
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HMRC has requested interviews with three officers of the Company to discuss whether those officers were involved in the arrangements for subscription of shares in the relevant companies, the first of which is scheduled for March 6, 2012. The Company is fully cooperating with the investigation. The Company believes there is no basis for any claim of responsibility of any of its officers or employees. Based on facts currently known by the Company, there is no need for it to record a contingent liability in its financial statements in connection with the investigation or the related transactions.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to Smaller Reporting Companies
ITEM 4T: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2011. This evaluation was accomplished under the supervision and with the participation of our chief executive officer /principal executive officer, and chief financial officer/principal financial officer who concluded that our disclosure controls and procedures are not effective.
Based upon an evaluation conducted for the period ended December 31, 2011, our Chief Executive and Chief Financial Officer as of December 31, 2011 and as of the date of this Report, has concluded that as of the end of the periods covered by this report, we have identified the following material weakness of our internal controls:
? Lack of sufficient accounting staff which results in a lack of segregation of duties necessary for a good system of internal control and financial statement presentation.
Changes in Internal Controls over Financial Reporting
We have not yet made any changes in our internal controls over financial reporting that occurred during the period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Items No. 1, 3, 4, 5 - Not Applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) During the three months ended December 31, 2011 and subsequent to September 30, 2011, the Company filed Form 8-Ks:
· On November 3, 2011
(b) Exhibits
Exhibit Number
31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEVEN ARTS PICTURES, INC.
Date: February 21, 2011 By: /s/ Peter Hoffman
Peter Hoffman, CEO
32
Seven Arts Entertainment, Inc. (MM) (NASDAQ:SAPX)
Historical Stock Chart
1 Year : February 2011 to February 2012
Seven Arts Entertainment, Inc. (MM) (NASDAQ:SAPX)
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Today : Tuesday 21 February 2012
More SAPX MessagesLatest Seven Arts Entertainment, Inc, SAPX MessagesREMEMBER...BUY THE STOCK WHEN NO ONE WANTS IT
armo • Tue Feb 21, 2012 1:27 PM (1 hour ago)72354307
Set your GTC sale order at $1 :D
Mo Ism • Tue Feb 21, 2012 1:02 PM (1 hour ago)72352784
ACCUMULATION...followed by LAVA EXPLOSION...believe it or not MM's
armo • Tue Feb 21, 2012 12:42 PM (2 hours ago)72351485
anything is possible
lovethatgreen • Tue Feb 21, 2012 12:15 PM (2 hours ago)72349626
You may be right at .25. Ya
CaptainFreon • Tue Feb 21, 2012 12:13 PM (2 hours ago)72349534
Wow... what crap today! Disappointed again!
nhden • Tue Feb 21, 2012 12:06 PM (2 hours ago)72349012
Then you simply haven't looked.
wEaReLeGiOn • Tue Feb 21, 2012 11:26 AM (3 hours ago)72346200
LOL, We asked you for proof that the
pipedreamz76 • Tue Feb 21, 2012 11:23 AM (3 hours ago)72346026
And? http://www.google.com/cse ?q=BlueWave+Advisors+%22seven+arts %22&sa=Search
wEaReLeGiOn • Tue Feb 21, 2012 10:52 AM (4 hours ago)72343532
It a paid advertisement of a radio interview,
bassilious • Tue Feb 21, 2012 10:50 AM (4 hours ago)72343348
lmao- That's as far as you looked? Hahaha
wEaReLeGiOn • Tue Feb 21, 2012 10:48 AM (4 hours ago)72343246
lmao the announcement of a radio interview is
bassilious • Tue Feb 21, 2012 10:47 AM (4 hours ago)72343147
StockPreacher Disclaimer
wEaReLeGiOn • Tue Feb 21, 2012 10:42 AM (4 hours ago)72342791
Back in here Friday and today loading up.
keekee • Tue Feb 21, 2012 10:09 AM (4 hours ago)72340080
buy low and sell very very high...watch!
armo • Tue Feb 21, 2012 10:06 AM (4 hours ago)72339864
No one wants em.....
Anthony1983 • Tue Feb 21, 2012 10:05 AM (4 hours ago)72339741
SAPX ...I'll buy it all when no one
armo • Tue Feb 21, 2012 10:03 AM (4 hours ago)72339564
I had posted this in one of my
sbc357 • Tue Feb 21, 2012 9:35 AM (5 hours ago)72336927
No, he didn't.
sbc357 • Tue Feb 21, 2012 9:33 AM (5 hours ago)72336738
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Mo Ism • Tue Feb 21, 2012 9:25 AM (5 hours ago)72336167Bookmark With :
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${sspl}${SSPL}
Date : 02/21/2012 @ 2:47PM
Source : Edgar (US Regulatory)
Stock : (SAPX)
Quote : 0.2842 -0.0058 (-2.00%) @ 2:55PM
- Quarterly Report (10-Q)
PrintAlert
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Dece mber 31, 2011
OR
o TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
Commission File Number 001-34250
SEVEN ARTS ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 45-3138068
(State or other jurisdiction of
incorporation or organization) (IRS Employer
Identification No.)
8439 Sunset Boulevard 4 th Floor
Los Angeles, CA 90069
(Address of principal executive offices)
(323) 372-3080
(Issuer's telephone number)
_____________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o
Indicate by check mark whether the Registrant is a large accredited filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accredited filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large Accredited Filer o Accelerated Filer o
Non-Accredited Filer o Smaller Reporting Company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of February 15, 2012 there were 30,886,342 shares of Common Stock of the issuer outstanding.
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SEVEN ARTS ENTERTAINMENT, INC.
FORM 10-Q
DECEMBER 31, 2011
INDEX
PART I - FINANCIAL INFORMATION
Item 1 – Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2011 (Unaudited) and June 30, 2011 3
Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2011 and 2010 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2011 and 2010 (Unaudited) 5
Notes to the Consolidated Financial Statements (Unaudited) 6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 4 - Controls and Procedures 30
PART II - OTHER INFORMATION
Item 6 – Exhibits 31
Signatures 32
2
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc)
Consolidated Balance Sheets
Aa of December 31, 2011 and June 30, 2011
December 31, 2011 June 30, 2011
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,979 $ 8,785
Accounts receivable, net of allowance for doubtful accounts of $148,862 and $195,623 393,510 431,891
Due from related parties, net 2,764,332 2,725,974
Other receivables and prepayments 2,471,772 1,620,895
Total Current Assets 5,662,593 4,787,545
NON CURRENT ASSETS:
Film costs, less accumulated amortization of $3,644,065 and $2,843,734 23,044,741 23,133,559
Property and equipment, net of accumulated depreciation of $111,232 and $106,671 21,609 24,540
TOTAL ASSETS $ 28,728,943 $ 27,945,644
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ - $ 987
Accounts payable 1,944,029 2,569,275
Accrued liabilities 1,056,560 3,860,502
Stock to be issued 1,538,957 -
Participation and residuals 488,158 503,187
Other loans 1,999,209 1,755,250
Film & production loans 6,025,508 10,890,430
Deferred income 426,080 407,763
Total Current Liabilities 13,478,501 19,987,394
TOTAL LIABILITIES $ 13,478,501 $ 19,987,394
STOCKHOLDERS' EQUITY
Convertible redeemable Series A preference shares at $10 par value $ 1,251,250 $ -
Common stock; $0.01 par value; 50,000,000 shares authorized;
22,620,288 and 2,643,131 issued and outstanding, respectively 226,203 -
Common stock; £ 0.25 par value; 20,527,360 shares authorized;
2,643,131 (2010: 1,495,460 shares) issued and outstanding - 1,121,208
Deferred stock; £ 0.45 par value; 13,184,000 shares authorized;
and 13,184,000 shares issued and outstanding - 11,636,594
Deferred stock; £1.00 par value; 2,268,120 (2010:1,495,460)
shares issued and outstanding - 3,876,745
Additional paid in capital 10,477,372 9,880,782
Convertible debentures 3,432,450 3,432,450
Accumulated deficit (2,078,283 ) (19,952,191 )
Comprehensive income 1,941,450 (2,037,338 )
Shareholders' equity 15,250,442 7,958,250
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,728,943 $ 27,945,644
The accompanying notes are an integral part of these consolidated financial statements.
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc)
Consolidated Statements of Operations
For the Three and Six Months Ended December 31, 2011 and 2010
(Unaudited)
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
Dec 31, 2011 Dec 31, 2010 Dec 31, 2011 Dec 31, 2010
Revenue:
Film revenue $ 207,790 $ 1,137,647 800,331 1,237,952
Fee related revenue - related party - 570,029 - 570,029
Total revenue 207,790 1,707,676 800,331 1,807,981
Cost of revenue
Amortization and impairment of film costs 336,527 639,257 800,331 695,620
Other cost of revenue 283,949 229,757 299,289 250,088
Cost of revenue 620,476 869,014 1,099,620 945,708
Gross profit (412,686 ) 838,662 (299,289 ) 862,273
Operating expenses:
General and administrative expenses 357,185 (12,121 ) 1,039,070 338,358
Bad debt expense (2,818 ) - (2,818 ) -
Total operating expenses 354,367 (12,121 ) 1,036,252 338,358
Income from operations (767,053 ) 850,783 (1,335,541 ) 523,915
Non-operating income(expense)
Other income - - - -
Interest expense (328,942 ) (281,440 ) (742,742 ) (702,094 )
Interest income - 368 - 368
Total non-operating income (expense) (328,942 ) (281,072 ) (742,742 ) (701,726 )
Income/(loss) before taxes (1,095,995 ) 569,711 (2,078,283 ) (177,811 )
Change in debt derivative - - - (31,454 )
(1,095,995 ) 569,711 (2,078,283 ) (209,265 )
Provision for income tax (benefit) - - - -
Net income (loss) $ (1,095,995 ) $ 569,711 (2,078,283 ) (209,265 )
Comprehensive income (loss):
Net income (loss) (1,095,995 ) 569,711 (2,078,283 ) (209,265 )
Foreign exchange translation gain (loss) (3,427 ) (323,992 ) - (323,910 )
Comprehensive income (loss) $ (1,099,422 ) $ 245,719 $ (2,078,283 ) $ (533,175 )
Weighted average number of ordinary shares used in the profit (loss) per share calculation:
Basic 15,752,775 1,762,928 15,752,775 1,762,928
Diluted 15,752,775 1,926,960 15,752,775 1,762,928
Basic profit/ (loss) per share (0.07 ) 0.32 (0.13 ) (0.12 )
Diluted profit/ (loss) per share (0.07 ) 0.30 (0.13 ) (0.12 )
The accompanying notes are an integral part of these consolidated financial statements.
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc.)
Consolidated Statements of Cash Flows
Six Months Ended December 31, 2011 and 2010
(Unaudited)
Six Months Ended December 31, 2011 Six Months Ended
December 31 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,078,283 ) $ (209,265 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 5,697 7,310
Amortization of film cost 800,331 695,620
Conversion of debt to equity 5,134,070 -
Stock for services 44,500 -
Bad debt (2,818) (24,000 )
Changes in operating assets and liabilities:
Trade receivables 35,563 545,512
Due to and due from related parties, net (38,358 ) (161,998 )
Capitalized film assets (711,513 ) (487,714 )
Receivables and prepayments (850,877 ) (744,391 )
Bank overdraft (987 ) -
Accounts payable (625,246 ) 78,497
Deferred income 18,317 -
Stock to be issued 1,538,957 -
Participation and residuals (15,029) -
Accrued liabilities (2,803,942 ) 41,185
Net cash provided /(used in) operating activities 450,382 (259,244 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,766) (2,218 )
Net cash used in investing activities (2,766) (2,218 )
CASH FLOWS FROM FINANCING ACTIVITES:
Conversion of convertible notes payable (3,615,734 ) (780,474 )
Issuance of common stock - 1,350,869
Shares of common stock issued in safisfaction of debt (1,518,336 ) -
Proceeds from notes payable 995,320 -
Payments on notes payable ` (39,654 )
Issuance of Preferred Stock 1,251,250 -
Issuance of stock for cash 400,000 -
Shares of common stock issued to PLC for assets 7,880,000 -
Stock issued in share exchange 64,866 -
Liabilities retained in PLC in share exchange (5,837,707 ) -
Net cash provided by financing activities (419,995 ) 570,395
Effect of exchange rate changes on cash (3,427 ) (323,910 )
NET CHANGE IN CASH 24,194 (14,977 )
CASH AT BEGINNING OF PERIOD 8,785 26,818
CASH AT END OF PERIOD $ 32,979 $ 11,842
Supplemental cash flow information:
Cash paid for interest $ 149,326 $ -
Shares of common stock issued to PLC for assets 7,880,000 $ -
Common and preferred stock to be issued 1,358,957 $ -
Stock issued in share exchange 64,763 $ -
Liabilities retained in PLC in share exchange (5,877,361 ) $ -
Accounts receivable applied against loan set-off - $ 1,334,561
Stock issued for services 44,500 $ -
Common stock issued in satisfaction of debt $ 5,134,070 $ -
The accompanying notes are an integral part of these consolidated financial statements.
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Seven Arts Entertainment, Inc.
(Formerly Seven Arts Pictures, Plc.)
Notes to Consolidated Financial Statements
Dectember 31, 2011
(Unaudited)
NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Activities, History and Organization
Seven Arts Entertainment, Inc. (herein referred to as “the Company”, “Seven Arts” or “SAE,”), a Nevada Corporation, is the continuation of the business and the successor of the NASDAQ listing to Seven Arts Pictures Plc., (“PLC”) which was founded in 2002 as an independent motion picture production and distribution company engaged in the development, acquisition, financing, production, and licensing of theatrical motion pictures for exhibition in domestic (i.e., the United States and Canada) and foreign theatrical markets, and for subsequent worldwide release in other forms of media, including home video and pay and free television. The Company currently owns interests in 33 completed motion pictures, subject in certain instances to the prior financial interests of other parties.
On June 11, 2010, Seven Arts Entertainment, Inc. (“SAE”), a Nevada Corporation, was formed and became a 100% owned subsidiary of Seven Arts Pictures Plc. As of June 11, 2010, the Company entered into an Asset Transfer Agreement, as amended on January 27, 2011 and again on August 31, 2011, to transfer all of the assets with a cost basis from PLC to SAE, in exchange for assumption by SAE of certain indebtedness and for one share of common stock of SAE for each ordinary share of PLC which have been distributed to shareholders. Additionally, 2,000,000 shares of SAE were issued to PLC in order to satisfy any remaining obligations. This transfer was approved by the PLC shareholders at an Extraordinary General Meeting on June 11, 2010. The purpose of this transfer was to eliminate our status as a foreign private issuer and to assume compliance with all obligations of a domestic issuer under all applicable state and Federal securities laws. Our intention in executing this transaction was to redomicile our business with no change in the economic interests of our shareholders.
On August 31, 2011, NASDAQ approved the substitution of one share of SAE, Inc. stock for the Company's NASDAQ listing, effective at the opening of trading on September 1, 2011. On that date, each of the Company's ordinary shares were exchanged for one share of common stock of SAE, and commenced trading on NASDAQ as the successor to the Company's NASDAQ listing. This transaction was approved by the Company’s shareholders at the Company’s Extraordinary General Meeting on June 11, 2010.
SAE’s authorized capital consists of 50,000,000 shares of common stock, $.01 par value per share, of which the board of directors has allocated 25,000,000 shares as common stock. As of December 31, 2011, there were 22,620,288 shares of common stock outstanding, all of which are fully paid and non-assessable. Each outstanding share of common stock entitles the holder thereof to one vote per share on matters submitted to a vote of stockholders.
125,125 Series A preferred shares , $10.00 par value per share , were issued to one shareholder in November 2011for a transaction completed in August 2011. These shares have a conversion price to common stock of $0.15/share.
SAE is now a United States issuer and commenced regular quarterly reporting from the first quarter ended September 30, 2011.
On November 8, 2011, the Company's listing predecessor, PLC, was placed into involuntary creditors liquidation under English law (See Note 6 – Commitments and Contingencies). Certain indebtedness of PLC remained with PLC and will be subject to administration or payment in those administration proceedings. In accordance with the asset transfer agreement, PLC has been issued 2,000,000 shares of common stock of SAE in order to satisfy these obligations.
Unaudited Interim Financial Statements:
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the balance sheet, statement of operations, statement of stockholders’ equity and statement of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in the Company’s Annual Report on Form 20-F. The results of operations for the three and six months ended December 31, 2011 are not necessarily indicative of the results of operations for the full year or any other interim period. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and Financial Statements and notes thereto included in the Company’s predecessor’s June 30, 2011 Form 20-F, which was filed in December 2011. The Company’s predecessor, PLC, was considered a foreign filer as of its June 30, 2011 year-end, and therefore, required to file a Form 20-F by December 31, 2011. The results of operations for the three and six months were derived from the December 31, 2010 6-F filing, which were prepared prior to the Company’s predecessor entity filing quarterly reports.
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Significant Accounting Policies:
The Company’s management selects accounting principles generally accepted in the United States of America and adopts methods for their application. The application of accounting principles requires the estimating, matching and timing of revenue and expense. It is also necessary for management to determine, measure and allocate resources and obligations within the financial process according to those principles. The accounting policies used conform to generally accepted accounting principles which have been consistently applied in the preparation of these financial statements.
The financial statements and notes are representations of the Company’s management which is responsible for their integrity and objectivity. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Seven Arts Entertainment, Inc. (“SAE”), and its wholly owned subsidiary, Seven Arts Filmed Entertainment, Limited (“SAFE, Ltd.”).
The Company consolidates its subsidiaries in accordance with Accounting Standards Codification (“ASC”) 810, “ Business Combinations” , and specifically ASC 810-10-15-8 which states, "The usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation." The Company does not have any variable interest or special purpose entities.
The Company prepares its financial statements on the accrual basis of accounting and in accordance with Generally Accepted Accounting Principles of the United States of America (“US GAAP”). All intercompany balances and transactions are eliminated. Management believes that all adjustments necessary for a fair presentation of the results of the three and six months ended December 31, 2011 and 2010, respectively, have been made.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. The most significant estimates made by management in the preparation of the financial statements relate to ultimate revenue and costs of its films which are used in the amortization and impairment of film costs, estimates for allowances and income taxes. Accordingly, actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.
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Revenue Recognition:
The Company recognizes revenue from the sale (minimum guarantee or non-refundable advances) or licensing arrangement (Royalty agreements) of a film in accordance with ASC 605-15 “ Revenue Recognition ”. Revenue will be recognized only when all of the following criteria have been met:
a) Persuasive evidence of a sale or licensing arrangement with a customer exists.
b) The film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery. (i.e. the “notice of delivery” (“NOD”) has been sent and there is a master negative available for the customer).
c) The license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale.
d) The arrangement fee is fixed or determinable.
e) Collection of the arrangement fee is reasonably assured.
A written agreement with clients (purchase order, letter, contract, etc.), indicating the film name, territory and period is required for the recognition of revenue. Revenue is recognized when the performance criteria in the contracts have been met. The customer generally confirms agreement by their signature on the contract.
Minimum guarantee revenue (i.e., non-refundable advances) is recognized as and when the film is available for delivery to the respective territories. Cash deposits received on the signing of the contracts are recorded as deferred revenue until the film is available for delivery (as described above) at which point the deferred revenue is recognized. The Company does not recognize any revenues relating to minimum guarantee on any motion picture or amortization expenses on that picture until United States theatrical release if it has agreed with the licensees that delivery or payment of minimum guarantee will be delayed for any material period of time to permit such a theatrical release.
Royalty revenue, which equates to an agreed share of gross receipts of films, is recognized as income as and when the Company is notified of the amounts by the customers through their royalty reports. Revenue is recorded net any of sales or value added taxes charged to customers.
Fee-related revenues
Many countries make tax credits available to encourage film production in the territory. Seven Arts benefits from tax credits in:
a) the UK and several other European territories for their European productions
b) Canada for their Canadian productions
c) Louisiana for their US productions
d) Tax preferred financing deals
In the majority of circumstances these tax credits are treated as a reduction in the capitalized costs of the film assets they are financing.
Foreign Currency Transactions and Comprehensive Income
The Company’s functional currency, as well as the Company’s subsidiary, SAFE, Ltd. is the US Dollar. The functional currency of the Company’s predecessor, was the Pound Sterling (“GPB”), and some transactions which are generated in the United Kingdom are denominated in GBP.
Assets and liabilities generated in a currency other than the functional currency are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented. The cumulative translation adjustment is included in the accumulated other comprehensive gain (loss) within shareholders’ equity (deficit). Foreign currency transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.
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Where possible, the Company seeks to match GBP income with GBP expenditures. To date, the Company has not hedged any transactional currency exposure but will keep such exposures under review and where appropriate may enter into such transactions in future.
Income Taxes:
The Company has adopted ASC 740-10 “ Income Taxes ”, which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable.
Cash and Cash Equivalents:
Cash and cash equivalents includes cash in banks with original maturities of three months or less and are stated at cost which approximates market value, which in the opinion of management, are subject to an insignificant risk of loss in value. The cash and cash equivalents of the Company consisted of cash balances held on deposit with banks, including various accounts denominated in US Dollars, Pounds Sterling and Euros.
Accounts Receivable:
Accounts Receivable are carried at their face amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions, and on a history of write offs and collections. The Company’s policy is generally not to charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Write offs are recorded at a time when a customer receivable is deemed uncollectible. The Company’s allowance for doubtful accounts was $148,862 and $195,623 at December 31, 2011 and June 30, 2011, respectively. Substantially all of the trade receivables in the consolidated financial statements are pledged as security for borrowings by the Company.
Property & Equipment:
Equipment is carried at the cost of acquisition or construction and depreciated over the estimated useful lives of the assets. Costs associated with repair and maintenance are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency of our property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on dispositions of equipment are reflected in operations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, which are 3 to 5 years.
Other Receivables and Prepayments:
The Company has entered into contracts for investor relations and consulting services to assist in future fundraising activities. A portion of these services were prepaid with shares of common stock that vested immediately and will be amortized over the period the services are to be provided.
Film Costs:
Film costs include the unamortized costs of completed films which have been produced by the Company or for which the Company has acquired distribution rights, libraries acquired as part of acquisitions of companies and films in progress and in development. For films produced by the Company, capitalized costs include all direct production and financing costs, capitalized interest and production overhead.
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 the proportion that current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the films. The majority of a film's costs (approximately 80% or more) are generally amortized within three years of the picture's initial release.
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Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release. Film costs are stated at the lower of amortized cost or estimated fair value. Individual film costs are reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value of a film is less than its unamortized cost. The fair value of the film is determined using management’s future revenue and cost estimates and a discounted cash flow approach. Impairment is recorded in the amount by which the unamortized costs exceed the estimated fair value of the film. Estimates of future revenue involve measurement uncertainty, and it is therefore possible that reductions in the carrying value of investment in films may be required as a consequence of changes in management’s future revenue estimates.
Films are included in the general “library” category when initial release dates are at least three years prior to the acquisition date.
Films in progress include the accumulated costs of productions which have not yet been completed. Films in development include costs of acquiring film rights to books, stage plays or original screenplays and costs to adapt such projects. Such costs are capitalized and, upon commencement of production, are transferred to production costs. Projects in development are written off at the earlier of the date they are determined not to be recoverable or when abandoned.
Impairment of Long Lived Assets:
The Company evaluates, on a periodic basis, long-lived assets to be held and used for impairment in accordance with the reporting requirements of ASC 360-10, “ Accounting for the Impairment or Disposal of Long-Lived Assets ”. The evaluation is based on certain impairment indicators, such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If these impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, then an estimate of the discounted value of expected future operating cash flows is used to determine whether the asset is recoverable and the amount of any impairment is measured as the difference between the carrying amount of the asset and its estimated fair value. The fair value is estimated using valuation techniques such as market prices for similar assets or discounted future operating cash flows.
Earnings Per Share:
Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share include the effects of any outstanding options, warrants and other potentially dilutive securities. For the periods presented, there were no potentially dilutive securities outstanding, therefore basic earnings per share equals diluted earnings per share. Basic and diluted earnings per share (“EPS”) are based on weighted-average common shares and exclude shares that would have an anti-dilutive effect. In accordance with ASC 260-10-45-19, the Company did not consider any potential common shares in the computation of diluted EPS as of December 31, 2011 and 2010, due to the loss from continuing operations, as they would have an anti-dilutive effect on EPS.
Share Based Payments:
The Company accounts for share based payments using a fair value based method whereby compensation cost is measured at the grant date based on the value of the services received and is recognized over the service period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued. In calculating this fair value, there are certain assumptions used such as the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.
Segment Reporting:
The Company produces and acquires motion pictures for distribution in theatres, on home entertainment and/or for television viewing. The Company operates in one business segment as a motion picture producer and distributor. The Company believes that all of its businesses are functionally and financially similar.
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Fair Value Measurements :
ASC Topic 820, “ Fair Value Measurements and Disclosures ”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair value of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s credit worthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
Derivative Instruments:
The Company’s policy is not to use derivative or hedging financial instruments for trading or speculative purposes, except certain embedded derivatives derived from certain conversion features or reset provisions attached to the convertible debentures, as described in Note 7.
NOTE 2 – FILM COSTS
Film costs as December 31, 2011 and June 30, 2011 are as follows:
December 31,
2011 June 30,
2011
Film Costs, beginning of period $ 25,977,293 $ 23,808,869
Additions to film costs during the period 711,513 2,168,424
Total film costs 26,688,806 25,977,293
Less: Accumulated amortization (3,644,065 ) (2,843,734 )
Total film costs, net of accumulated amortization $ 23,044,741 $ 23,133,559
Amortization of film costs was $800,331 and $695,620 for the six months ended December 31, 2011 and 2010. The Company reviews capitalized film costs for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable or at least once per year. Determination of recoverability is based on an estimate of future cash flows resulting from the use of the asset, and its eventual disposition. Measurement of an impairment loss for the assets is based on the fair value of the asset as estimated using a discounted cash flow model.
NOTE 3 – RELATED PARTY DUE TO/DUE FROM
Seven Arts Pictures, Inc. (“SAP, Inc.”) directly or through related various Louisiana limited liability companies, have from time-to-time made non-interest bearing advances to the Company or its subsidiaries or have received advances back from the Company. The balances of these combined accounts due to the Company as of December 31, 2011 and June 30, 2011 were $2,764,332 and $2,725,974, respectively. SAP, Inc. has pledged an interest in its shares of the Company’s stock to secure certain indebtedness for which SAP, Inc. and the Company are jointly liable such as the Apollo and Armadillo debts. The stock of SAP, Inc. was transferred to the listing predecessor of SAE on September 10, 2011.
NOTE 4 – INCOME TAXES
The Company has adopted ASC 740-10, “ Income Taxes ”, which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable (deferred tax liability) or benefit (deferred tax asset). Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
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During the six months ended December 31, 2011 the Company had a net loss of $2,078,283 increasing the deferred tax asset approximately $706,616 at the statutory tax rate of 34%. Deferred tax assets at December 31, 2011 consisted of the following:
Deferred tax asset related to:
December 30,
2011
Prior Year $ -
Tax Benefit (Expense) for Current Period 706,616
Deferred Tax Asset $ 706,616
Less: Valuation Allowance (706,616 )
Net Deferred Tax Asset $ -
The net deferred tax asset generated by the loss carry forward has been fully reserved and will expire in 2019 through 2030. The realization of deferred tax benefits is contingent upon future earnings and therefore, is fully reserved at December 31, 2011.
NOTE 5 – EARNINGS PER SHARE
Basic and diluted earnings per share (“EPS”) are based on weighted-average common shares and generally exclude shares that would have an anti-dilutive effect. In accordance with ASC 260-10-45-19, the Company did not consider any potential common shares in the computation of diluted EPS as of December 31, 2011, due to the loss from continuing operations, as including them would have an anti-dilutive effect on EPS.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Acquisition of Music Assets and Big Jake Music
On December 19, 2011, the Company entered into a definitive agreement to acquire the music assets of David Michery, including two completed albums embodying the services of DMX and future albums by DMX and Bone Thugs-n-Harmony (“BTH”). the consideration of $5,000,000 of Series B convertible preferred stock (convertible at approximately $1.10 per share) will be earned and deliverable to Mr. Michery and his assigns upon delivery of two DMX albums, and an additional $5,000,000 of Series B convertible preferred stock deliverable to Mr. Michery and his assigns if two DMX albums and two BTH albums earn net earnings before interest and taxes for the next five years of $5,000,000. The closing of the sale of the Michery assets is expected to occur by February 28, 2012.
On September 29, 2011, the Company entered into a definitive agreement to acquire of all of the capital stock of Big Jake Music ("BJM"), a newly formed record and multi-media entertainment company, for $5,000,000 of convertible preferred stock, convertible into common stock at a premium to the market price at closing, and which is subject to restricted holding periods. BJM will also release soundtracks of Seven Arts films, including Night of the Demons (a film released in October 2010) and The Pool Boys (a film released in October 2011). The closing of the sale of stock of BJM is expected to occur by February 28, 2012.
Creditors Liquidation of SAP Plc.
The Company’s listing predecessor Seven Arts Pictures Plc. (‘PLC’) was placed by the English Companies Court into compulsory liquidation on November 8, 2011. The Company’s CEO, Mr. Peter Hoffman, as a director of PLC had sought an administration order but this request was denied by the Courts as a result of inter alia the opposition of Parallel Pictures LLC (‘Parallel’). The creditors are likely to be invited to appoint a licensed insolvency practitioner as liquidator. The role of a liquidator is to realize a company’s assets for the benefit of the creditors and shareholders. Mr. Hoffman expects that the liquidator and PLC will pursue its substantial claims against Parallel and its defenses to Parallel’s claims. Parallel has claimed in the proceedings in England and the United States that the Asset Transfer Agreement between the Company and PLC was ‘fraudulent’ and may seek additional compensation or guarantees from Company. Management believes that the Asset Transfer Agreement is a valid agreement for value and not subject to attack and that Parallel will not prevail in its claims. Management believes it has the support of its creditors to resist these claims by Parallel which are disputed by the Company and as a result Parallel will not obtain any relief from the courts on this issue.
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807 Esplanade Guarantee
Seven Arts Pictures Louisiana LLC, a related party and/or an affiliate of the Company, entered into a Credit Agreement with Advantage Capital Community Development Fund LLC dated October 11, 2007, for the acquisition and improvement of a production and post production facility located at 807 Esplanade Avenue in New Orleans, Louisiana for aggregate principal advances of up to $3,700,000. This agreement was guaranteed by the Company’s predecessor. Approximately $3,700,000 has been drawn under the terms of this Credit Agreement, as of June 30, 2011. The Company has also guaranteed this amount.
There is a guarantee of a $1,000,000 note plus interest due to Armadillo by the Employee Benefit Trust of the Company’s listing predecessor resulting from the purchase of Seven Arts preferred shares from Armadillo.
Fireworks Litigation
The Company prevailed in a motion for summary adjudication on February 10, 2011 in an action against CanWest Entertainment and two of its affiliates (“CanWest”) confirming the Company’s ownership of five motion pictures “Rules of Engagement”, “An American Rhapsody,” “Who Is Cletis Tout,” “Onegin,” and “The Believer”, (the “Copyrights”). The Company has filed an action in England against Content Media Corporation (“Content”) and Paramount Picture Corp. (“Paramount”) to recover the Copyrights and substantial damages for the use of the copyrighted works after their purported acquisition from CanWest. The Company may incur up to $200,000 in legal expenses to pursue this claim but expects to recover those fees from Content.
Arrowhead Target Fund
Seven Arts Future Flow I (“SFF”), a limited liability Company owned by SAP Inc., one of the Company’s controlling shareholders and a Company controlled by Mr. Hoffman, obtained financing from the Arrowhead Target Fund, Ltd. (“Arrowhead”) of approximately $8,300,000 (the “Arrowhead Loan”). SFF secured the Arrowhead Loan with liens on 12 motion pictures that generated revenues of $820,026 in the fiscal year ended June 30, 2009, $2,739,800 in the fiscal year ended March 31, 2008 and $544,478 in the three month period ended June 30, 2009. The Company’s only liability is to repay the Arrowhead Loan from the proceeds of the film assets pledged against the Arrowhead Loan. The Company is not required to repay the Arrowhead Loan from any of its other assets or revenues. SAE Inc’s subsidiary, SAFE, Ltd. was the collateral agent of the film assets.
The Arrowhead Loan became due in February 2009 and SFF has not paid the outstanding principle and interest due thereon. Arrowhead has the right to foreclose on the pledged film assets, but has not done so at the present time. SFF has received a default notice to this effect and as a result Arrowhead is now collecting directly all sums receivable by the Company with respect to these motion pictures, and has appointed a new servicing agent for these motion pictures with the result that the Company no longer controls the licensing of these motion pictures. Failure to repay or refinance the Arrowhead Loan could result in a material disposition of assets through the loss of the Company’s rights to the twelve motion pictures and related loss of revenues in amounts that are difficult to predict.
As a result of the foregoing, the Company has removed all assets accounts relating to the twelve motion pictures pledged to Arrowhead and has removed the corresponding limited recourse indebtedness from the Company’s consolidated balance sheet at fiscal year ended June 30, 2009, due to the fact that the loan was a limited recourse loan and the Company had no further obligations to Arrowhead beyond the pledged film assets.
Arrowhead filed an action on September 22, 2010 which seeks recovery from the Company of the monies which the Company has retained under its interpretation of the relevant agreements with Arrowhead. In addition, Arrowhead makes substantial additional claims against the Company, Mr. Hoffman and SAP Inc. regarding claimed breaches of the terms of the operative agreements, including failure to properly account, failure to turn over materials, failure to remit monies collected, and similar matters. The claims against the Company for these breaches of warranties for damages are $8,300,000 although Arrowhead states no basis for this amount.
The Company had moved to dismiss the action against all defendants other than Seven Arts Future Flows I LLC, which is not part of the Company. On August 9, 2011, the New York Supreme Court granted the Company’s motion and dismissed all defendants except Seven Arts Filmed Entertainment Limited in its capacity as a collateral agent, which is not a material element of Arrowhead claim. The Company continues to believe that Arrowhead’s claims against the Company are without substantial merit.
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The Company has agreed in principle to a settlement of these claims by Arrowhead and a return of all distribution rights to the affected twelve motion pictures to the Company and anticipates to complete a formal settlement agreement by March 31, 2012.
Arrowhead Capital Partners – AGC Loan
The Company’s predecessor and several affiliates were named as defendants in an action by Arrowhead Capital Partners Ltd filed in the Supreme Court of New York County of New York State purportedly served on May 24, 2010, seeking to collect $1,000,000 plus interest (the “ACG Loan”) due to Arrowhead Consulting Group LLC (“ACG”) as well as foreclosure on the collateral granted as part of the Cheyne Loan described above in Note 13 under “Production Loans”. The ACG Loan is fully subordinated to repayment of the Cheyne Loan, which has not been repaid, and a subsidiary of the Company has been assigned all Cheyne’s rights under the subordination provision of the Cheyne Loan. As a result Management does not believe that ACG has the right to maintain this action to collect any monies or to foreclose on any collateral pursuant to the Cheyne Loan. The Company intends to vigorously defend against this action.
Investigation into Claim for Tax Credits (SAPLA )
The US Attorney in New Orleans is investigating claims for Louisiana film infrastructure tax credits including such tax credits to be claimed by an affiliate of the Company, Seven Arts Pictures Louisiana LLC and has issued subpoenas for discovery of documents in the possession of the Company related to their tax credits. This investigation appears to include investigation as to whether certain expenses claimed by this affiliate were improper or fraudulent. All such claimed expenses were audited by independent auditors in Louisiana and reviewed by counsel. None of these expenses or credits have been included in the Company’s financial statements for any period. Management believes that this investigation will have no material adverse effect on the Company’s operations or the total tax credits to be received by the Company’s affiliates, but could result in charges against current or former employees of this affiliate based on prior audits, including Mr. Hoffman.
Parallel Action
On June 28, 2011, Seven Arts Pictures Plc. (“PLC”) filed an action in the High Court of England against Parallel Media LLC (“Parallel”) to collect sums due to PLC with respect to acquisition of distribution rights in Russia to four motion pictures and to confirm Parallel’s obligations under both a signed and unsigned investment agreement with respect to the motion picture project Winter Queen. On the same day Parallel filed a petition to wind up and liquidate PLC in the Companies Courts of England based on its claim of repayment of $1,000,000 of investment made by Parallel in Winter Queen. PLC is no longer part of the Company.
On September 19, 2011, Parallel filed a new action against PLC and SAE in the Superior Court of California, asserting the same claims as in the winding up petition and seeking to enjoin the proposed administration proceedings in England. A request for a preliminary injunction was denied by the Superior Court. PLC will move to dismiss this action since all the operative agreements between PLC and Parallel include a clause requiring exclusive jurisdiction of all litigation in the courts of England. PLC expects this motion to dismiss will be granted.
HMRC Investigation
On July 19, 2011 Officers of Her Majesty’s Revenue & Customs (“HMRC”) attended the offices of Seven Arts Pictures Plc. (the “Company”) in London. Documents were retained appertaining to arrangements involving the subscription for shares in a number of companies which had lost value, resulting in subscribers making claims to tax relief.
The Company’s participation in these transactions was limited to the Company’s predecessor’s transfer of rights to certain motion pictures to the investors in return for their investments in the production and release costs of those pictures and making available the provision of loans to fund a portion of those investments. The Company received no tax benefits from the transactions, which were made on arms-length terms. The Company believes that it is not a subject of the HMRC investigation.
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In connection with the transactions, the Company did not make any representations or warranties to any party, including the investors, regarding any potential tax benefits related to the transactions. Prior to the closing of the transactions the investors obtained and made available to the Company, an opinion of prominent Queen’s counsel, specializing in United Kingdom tax laws, that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws. The Company remains confident that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws.
HMRC has requested interviews with three officers of the Company to discuss whether those officers were involved in the arrangements for subscription of shares in the relevant companies, the first of which is scheduled for March 6, 2012. The Company is fully cooperating with the investigation. The Company believes there is no basis for any claim of responsibility of any of its officers or employees. Based on facts currently known by the Company, there is no need for it to record a contingent liability in its financial statements in connection with the investigation or the related transactions.
NOTE 7 – CONVERTIBLE NOTES PAYABLE
Existing Notes :
a) On August 30, 2010, the PLC issued an aggregate of $470,000 convertible debt to qualified investors (Scarborough, Sendero and Aqua Alta) that matured on February 28, 2011. This debt was transferred to the Company pursuant to the Asset Transfer Agreement dated January 27, 2011. The Convertible Debts bear interest at a rate of 15.0% per annum and could be converted into the Company’s ordinary shares beginning on the date which is one hundred twenty (120) days following the issuance of the Convertible Debt, at the conversion rate of $3.75 per share, subject to certain changes.
b) On March 2, 2011, an additional $300,000 of convertible notes were issued to Runway Investments Ltd on the same terms as above. At the same time the original notes were extended to July 31, 2011.
c) On May 24, 2011, all $770,000 of these notes were extended to September 30, 2011 and the conversion terms were changed .
d) The $225,000 of Scarborough notes were converted to 507,000 shares of PLC’s ordinary stock on July 29, 2011.
e) The $170,000 of Agua Alta notes and $75,000 Sendero notes were converted on October 19, 2011 into 1,786,374 shares of SAE common stock.
f) On January 27, 2012 , $132,645 of the Runway debt and relevant interest was converted to 1,211,219 shares and on January 31, 2012 an additional $50,000 of debt was converted to 333,333 shares. Another $50,000 was converted into 333,333 shares on February 15, 2012.
New Notes :
The following table presents convertiblenotes payable entered into during the quarter. Each of these notes is convertible into shares of the company’s common stock at the indicated fixed conversion rate.
Convertibles Start Due Date Interest Rate Principal Fixed
conversion
Rate
Hanover Holding/Magna November 16, 2011 February 16, 2012 12% $ 95,320 $ 0.25
Dover Management November 28, 2011 March 31, 2012 18% $ 100,000 $ 0.20
FireRocks December 12, 2011 June 12, 2012 12% $ 300,000 $ 0.25
Aegis – Tripod December 15, 2011 June 30, 2012 12% $ 33,334 $ 0.27
Aegis – CMS December 15, 2011 June 30, 2012 12% $ 33,333 $ 0.27
Aegis – Rachel December 15, /2011 June 30, 2012 12% $ 33,333 $ 0.27
Beauvoir Capital Ltd April 14, 2011 October 14, 2011 10% $ 50,000 $ 0.20
Hanover Holding/Magna October 19, 2011 May 18, 2012 10% $ 153,002 $ 0.28
The Company has evaluated these convertible notes for embedded derivative features and has determined that no derivative liability exists. Assuming all notes are settled via common stock, the number of shares to be issued to satisfy approximately $800,000 of debt plus accrued interest is approximately 3,412,310 shares of the company’s common stock
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NOTE 8 – LOANS PAYABLE
The Company has the following indebtedness as of December 31, 2011:
Applicable
Amount Interest
Lender Outstanding Rate Status
Existing Loans
Palm Finance $ 3,762,175 18% Forebearance agreement
Palm Finance 1,195,654 18% Forebearance agreement
Blue Rider Finance Inc 774,087 Due on demand
120db Film Finance LLC 76,481 Non stated Due on demand
Cold Fusion Media Group LLC 601,111 10% Due on demand
Pledged shares (384,000 )
Film and Product Loans $ 6,025,508
Trafalgar Capital (in liquidation) 514,708 9% Due on demand **
TCA Capital Fund 121,574 10% Due October 2011 **
Sendero/Scarborough interest 25,006 15% Due September 2011**
Runway 326,621 15% Due September 2011 **
Existing Corporate loans $ 987,909
Sub-total - Existing Loans $ 7 ,013,417
New Loans
Beauvoir Capital Ltd convertible $ 53,575 10% Due October 2011**
Hanover Holding convertible 96,730 12% Due Feb 2012
Briarwood 203,671 10% Due April 2012
Dover Management convertible 101,923 12% Due May 2012
Hanover Holdings 153,002 10% Due May 2012
Firerocks convertible 301,874 12% Due June 2012
Aegis – Tripod convertible 33,509 12% Due June 2012
Aegis – CMS convertible 33,508 12% Due June 2012
Aegis – Rachel convertible 33,508 12% Due June 2012
Sub-total - New Loans $ 1,011,300
TOTAL LOANS $ 8,024,717
__________
** not in default as converted to shares of common stock in January and February 2012.
The Company converted $2,963,028 of the film and production loans into 5,989,349 shares of common stock during the three months ended September 30, 2011 and a further $906,000 of film and production loans for 3,490,385 shares of common stock in the quarter to December 31, 2011.
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NOTE 9 – EQUITY TRANSACTIONS
First quarter 2011/12
On August 31, 2011, NASDAQ approved the substitution of one share of SAE, Inc. stock for the Company's NASDAQ listing, effective at the opening of trading on September 1, 2011. On that date, each of the Company's ordinary shares were exchanged for one share of common stock of SAE, and commenced trading on NASDAQ as the successor to the Company's NASDAQ listing. This transaction was approved by the Company’s shareholders at the Company’s Extraordinary General Meeting on June 11, 2010.
The Company is authorized to issue 50,000,000 common shares at a par value of $0.01 per share. These shares have full voting rights. At September 30, 2011 and June 30, 2011, there were 11,149,480 and 2,643,131 respectively, common shares outstanding. The Company’s predecessor, PLC, had a 1:5 reverse stock split on May 9, 2011.
During the three months ending September 30, 2011, Company issued 6,496,349 shares in satisfaction of $3,188,028 of outstanding loans payable and accrued interest, consisting of $225,000 of convertible notes payable and $2,963,028 of film and production loans. The conversions were done at contractual share prices ranging from $.20 to $2.00 per share.
In July 2011, the Company also issued 10,000 shares for investor relations services valued at approximately $10,000.
The Company did not assume the deferred stock of the listing predecessor which was outstanding at June 30, 2011. Deferred stock is subordinated to all other classes of stock.
As of September 30, 2011, $1,986,722 of stock was fully paid but still to be issued, consisting of $1,251,250 of Series A preferred stock and $735,472 of debt that was being converted to equity.
11,149,480 shares were outstanding as of September 30, 2011.
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Second Quarter 2011/12
Between October 1, 2011 and December 31, 2011 the Company issued 11,470,808 shares : The total number of shares outstanding on December 31, 2011 was, therefore, 22,620,288.
4,639,049 common shares were issued in satisfaction of the $612,336 of convertible debt sharesat an average conversion price of $0.13/share .
2,851,374 common shares were issued on the conversion of the Agua Alta , Sendero and Isaac convertible notes totalling $427,706 at an average conversion price of $0.15/ share.
3,490,385 common shares were issued in satisfaction of $906,000 of corporate loans at anaverage conversion price of $0.26/share.
400,000 common shares were issued as restricted stock for cash, $250,000 to Fletcher and $150,000 to Goldstrand at $1.00/share
75,000 common restricted shares were issued for investor relations services at $0.36/share
15,000 common restricted shares were issued to a director in lieu of compensation at $0.50/share
11,470,808
Each of the directors was awarded 100,000 options during the period. These options to purchase the Company’s common stock have a five year term, 50,000 have a strike price (equal to the closing price of the Company’s stock price as of the date of issue), of $0.44 (October 14, 2011) and 50,000 have a strike price of $0.39 (December 6 2011) 50% of the options vest on December 31, 2011 and 50% vest on December 31, 2012.
(See Subsequent Events Note 13 for stock issuances subsequent to December 31, 2011.).
125,125 shares of Series A Cumulative Convertible $10.00 Stated Value Preferred Stock with a dividend rate of 8% (payable quarterly) were issued in November 2011. The conversion price into common stock of the Company is $0.15/share. An additional $115,000 was invested for another 11,500 Series A preferred stock which has not yet been issued. This amount is included in the shares to be issued number on the balance sheet as of December 31, 2011.
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company’s Chief Executive Officer, Peter Hoffman, controls several companies, including Seven Arts Pictures, Inc. (“SAP, Inc.”) that are not part of the Company but from which it obtains or transfers distribution rights or other assets related to the business and which control production of the motion pictures. The agreements with Mr. Hoffman, and the companies controlled by him, provide that all revenues related to the Company’s business payable to Mr. Hoffman or any of these related party companies is due to the Company, except Mr. Hoffman’s salary, bonus and stock ownership. None of these affiliates are variable interest or special purpose entities.
Pursuant to a related party agreement, SAP, Inc. holds ownership of limited liability corporations in the United States, with all distribution rights and profits thereof being due to SAFE, Ltd. In addition, they have also provided other services for Seven Arts Pictures Plc. and SAFE, Ltd. And SAE, Inc. at no fee other than Mr. Hoffman’s salary and the direct third party costs of the Los Angeles office, all of which are reflected in the financial statements of SAFE, Ltd. These other services are any reasonable requests of the management of the Company including accounting services, audits of distribution statements, collection of accounts receivable, supervision of production of motion pictures and similar day-to-day aspects of the Company’s business. Effective January 1, 2012, no further such transactions are intended.
The Company has made and received advances from and to SAP Inc.and various Louisiana limited liability companies referred to above, where the advances from and to these related parties do not bear interest. The balances of these combined accounts were $2,764,322 and $2,725,974 as of December 31, 2011 and June 30, 2011, respectively.
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NOTE 11 – FAIR VALUE MEASUREMENTS
Cash, accounts receivable, accounts payable and other accrued expenses and other current assets and liabilities are carried at amounts which reasonably approximate their fair values because of the relatively short maturity of those instruments.
ASC 820, “ Fair Value Measurements and Disclosures ”, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described as follows:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 - Inputs to the valuation methodology include:
- quoted prices for similar assets or liabilities in active markets;
- quoted prices for identical or similar assets or liabilities in inactive markets;
- inputs other than quoted prices that are observable for the asset or liability;
- inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The preceding method described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. As of December 31, 2011 and June 30, 2011, all of the Company’s assets and liabilities were considered current and due to the short maturity the carrying amounts are considered to approximate fair value.
NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued guidance intended to achieve common fair value measurements and related disclosures between U.S. GAAP and international accounting standards. The amendments primarily clarify existing fair value guidance and are not intended to change the application of existing fair value measurement guidance. However, the amendments include certain instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This guidance is effective for the periods beginning after December 15, 2011, and early application is prohibited. The Company will adopt these amendments on January 1, 2012; however, the requirements are not expected to have a material effect.
In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “ Comprehensive Income — Presentation of Comprehensive Income .” ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. It requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, “ Comprehensive Income — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, ” to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact that the adoption will have on their consolidated financial statements.
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In December 2011, the FASB issued ASU No. 2011-11, “ Balance Sheet — Disclosures about Offsetting Assets and Liabilities .” ASU 2011-11 requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments and will be applied retrospectively for all comparative periods presented. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company currently believes that this ASU will have no significant impact on its consolidated financial statements.
NOTE 13 – SUBSEQUENT EVENTS
The Company issued the following shares of common stock subsequent to December 31, 2011:
New Stock Issues
Issued to Value No of shares
10/01/2012 Magna $ 34,736.00 173,680 Debt conversion
11/01/2012 120 db (5) $ 125,000.00 125,000 Debt conversion
17/01/2012 Magna $ 25,000.00 125,000 Debt conversion
17/01/2012 Safron $ 45,395.86 226,979 Debt conversion
20/01/2012 Magna $ 35,000.00 175,000 Debt conversion
24/01/2012 Magna $ 30,000.00 150,000 Debt conversion
25/01/2012 Tripod Group $ 51,692.07 231,803 Debt conversion
26/01/2012 Old Capital $ 212,000.00 1,630,769 Debt conversion
27/01/2012 Runway $ 82,645.00 877,885 Convertible
27/01/2012 Isaac - conversion of Runway (1/4) $ 50,000.00 333,334 Convertible
31/01/2012 Isaac - conversion of Runway (2/4) $ 50,000.00 333,333 Convertible
07/02/2012 Isaac - conversion of Runway (3/4) $ 50,000.00 333,333 Convertible
08/02/2012 Website designer $ 6,000.00 20,000 S-8 payment
09/02/2012 Safron – Kismet (3) $ 200,000.00 992,733 Debt conversion
10/02/2012 Michael Garstin - loan $ 130,000.00 637,500 Debt conversion
13/02/2012 Safron – Kismet (3) $ 200,000.00 992,733 Debt conversion
14/02/2012 120 db (6) $ 125,000.00 125,000 Debt conversion
14/02/2012 Tripod conversion (1) $ 18,000.00 80,000 Debt conversion
15/02/2012 Isaac - conversion of Runway (4/4) $ 50,000.00 333,333 Convertible
15/02/2012 Consultancy salary - S-8 $ 60,000.00 200,000 S-8 payment
15/02/2012 Michael Briskin (2) $ 20,000.00 88,889 Debt conversion
8,186,304
Total shares outstanding as of February 15, 2012 was 30,886,342.
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Additionally, the Company had the following aged debt acquired, which will be converted to equity, subsequent to December 31, 2012:
(1) $150,000 of aged debt was acquired on February 1, 2012 by Tripod for conversion at $0.225
(2) $200,000 of aged debt was acquired on February 3, 2012 by Michael Briskin for conversion at $0.225
(3) $400,000 of aged debt was acquired on February 7 2012, by Safron Capital for conversion at $0.225
New Convertibles Start Close Rate Principal
Amount Fixed
Conversion Price
Tripod January 16, 2012 January 19, 2013 12% $ 50,000 $ 0.24
Safron Capital Corp(1) February 1, 2012 January 31, /2013 10% $ 475,000 $ 0.23
Tripod February 1, 2012 January 19, /2013 12% $ 150,000 $ 0.24
Michael Briskin February 3, /2012 January 19, /2013 12% $ 100,000 $ 0.23
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(1) $400,000 has already been converted as of the date of this filing.
Acquisition of Michery Music Assets Big Jake Music
On December 19, 2011, the Company entered into a definitive agreement to acquire the music assets of David Michery, including two completed albums embodying the services of DMX and future albums by DMX and Bone Thugs-n-Harmony (“BTH”). for $5,000,000 of Series B convertible preferred stock (convertible at approximately $1.10 per share) to Mr. Michery and his assigns upon the delivery of the two DMX albums. An additional $5,000,000 of Series B convertible preferred stock will be due to Mr. Michery and his assigns if two DMX albums and two BTH albums earned net income before interest and taxes for the next five years of $5,000,000. The closing of the acquisition of the Michery assets is expected to occur by February 28, 2012.
On September 29, 2011, the Company entered into a definitive agreement to acquire of all of the capital stock of Big Jake Music ("BJM"), a newly formed record and multi-media entertainment company, for $5,000,000 of convertible preferred stock, convertible into common stock at a premium to the market price at closing, and which is subject to restricted holding periods. BJM will also release soundtracks of Seven Arts films, including Night of the Demons (a film released in October 2010) and The Pool Boys (a film released in October 2011). The closing of the sale of stock of BJM is expected to occur by February 28, 2012.
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Creditors Liquidation of SAP Plc.
The Company’s listing predecessor Seven Arts Pictures Plc. (‘PLC’) was placed by the English Companies Court into compulsory liquidation on November 8, 2011. The Company’s CEO, Mr. Peter Hoffman, as a director of PLC had sought an administration order but this request was denied by the Courts as a result of inter alia the opposition of Parallel Pictures LLC (‘Parallel’). The creditors are likely to be invited to appoint a licensed insolvency practitioner as liquidator. The role of a liquidator is to realize a company’s assets for the benefit of the creditors and shareholders. Mr. Hoffman expects that the liquidator and PLC will pursue its substantial claims against Parallel and its defenses to Parallel’s claims. Parallel has claimed in the proceedings in England and the United States that the Asset Transfer Agreement between the Company and PLC was ‘fraudulent’ and may seek additional compensation or guarantees from Company. Management believes that the Asset Transfer Agreement is a valid agreement for value and not subject to attack and that Parallel will not prevail in its claims. Management believes it has the support of its creditors to resist these claims by Parallel which are disputed by the Company and as a result Parallel will not obtain any relief from the courts on this issue.
Certain indebtedness of PLC remained with PLC under the asset transfer agreement and will be subject to liquidation or payment in these liquidation proceedings. PLC has been issued 2,000,000 shares of common stock of the Company in order to satisfy these obligations.
Filing of S-8
In January 2012, the Company filed a registration statement on Form S-8 in connection with the registration under the Securities Act of 1933, as amended, of 5,000,000 shares of the Company’s common stock under the Company’s 2012 Stock Incentive Plan.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
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
Our common stock is traded on NASDAQ under the symbol “SAPX”.
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.
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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.
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 its 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.
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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 for the Three-Month Period Ended December 31, 2011 vs. 2010
We generated a net loss of $1,095,995 for the three months ended December 31, 2011, compared to net income of $569,711 for the three months ended December 31, 2010. A discussion of the key components of our statements of operations and material fluctuations for the three months ended December 31, 2011 and 2010 is provided below.
Film revenues totalled $207,790 for the three months ended December 31, 2011, compared to $1,137,647 for the three months ended December 31, 2010. A comparison of the 2011 and 2010 sales is as follows:
The majority of 2011 sales came from the US digital release of the movie “The Pool Boys” in September 2011.
The majority of 2010 sales came from the US release of the movie “Deal”.
In December 31, 2010, there was fee-related revenue of $570,029 for additional producers fees associated with films produced in Louisiana.There was no fee income in the three months to December 31, 2011.
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 bear’s to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.
An amortization charge of $336,527 was made in the period to December 31, 2011 mainly against the title “The Pool Boys” in line with revenue forecasts.
The equivalent amortization charge in December 31, 2010 was $639,257 mainly against the title “Deal”.
l Other costs of revenue in the period totalling $283,949 versus $229,757 in the same quarter in 2010. The charge in the current period was due to the write-off of the costs of distribution of “The PoolBoys” whilst that in the 2010 period related to the write-off of distribution costs on “Deal”
General and administrative expenses increased from ($12,121) for the three months ended December 31, 2011 to $354,367 for the three months ended December 31, 2010. The net increase is primarily due to the following:
$228,661 of additional legal and professional costs related to:
HMRC investigations of $130,000
Set-up of SAE Inc of $20,000
Investor Relation fees of $60,000
Transfer agent, HMRC fines and edgarising fees of $90,000
Content Media,Parallel Media and Nine Miles Down actions of $60,000
Payroll has increased from ($41,809) for the three months ended December 31, 2010 to $326,746 in the three months to December 31, 2011 which is due to the reversal of an accrual in December 31, 2010, prior to quarterly reporting. We were not required to do quarterly filings in 2010 due to our status as a foreign filer at that time.
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Interest charges have marginally increased from $281,440 in the three months to December 31, 2010 to $ 328,942 in the three months to December 31, 2011 due mainly to 50% of the loan interest being capitalized in 2010 as PoolBoys had not yet been released by December 2010.
No tax expense was recognized in either period.
Results of Operations for the Six-Month Period Ended December 31, 2011 vs. 2010
We generated a net loss of $2,078,283 for the six months ended December 31, 2011, compared to a net loss of ($209,265) for the six months ended December 31, 2010. A discussion of the key components of our statements of operations and material fluctuations for the six months ended December 31, 2011 and 2010 is provided below.
Revenue
1) Film revenues totaled $800,331 for the six months ended December 31, 2011, compared to $1,237,952 for the six months ended December 31, 2010. A comparison of the 2011 and 2010 revenue is as follows:
· The majority of 2011 sales came from the US digital release of the movie “The Pool Boys” in September 2011. Significant sales to third party distributors were also made on the title in Canada and Australia during the period. $150,000 of royalty income spread over several titles but mainly continuing income from “Deal” was received during the period.
· 2010 sales were mainly distribution income earned from third parties on the film “Deal” in overseas television markets and a small amount of sales agency fees.
2) In the six months to December 31, 2010, there was fee-related revenue of $570,029 being additional producers fees associated with films produced in Louisiana. No fee-related income was received in the six months to December 31, 2011.
Cost of Revenue
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 bear’s to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.
· An amortization charge of $800,331 was made in the period to December 31, 2011 mainly against the title “The Pool Boys” in line with revenue forecasts.
· The equivalent charge in December 31, 2010 was $695,620, this was mainly against the title “Deal”.
Other costs of sales in the period totalled $299,289 versus $250,088 in the same period in 2010. The charge in the current period was due the distribution costs for the release of “The PoolBoys” whilst the 2010 charge generally related to the on-going distribution of “Deal”.
General and administrative Costs
General and administrative expenses increased from $338,358 for the six months ended December 31, 2010 to $1,036,252 for the six months ended December 31, 2011. The net increase is primarily due to the following:
· $362,115 of additional legal and professional costs mainly related to
HMRC investigations of $130,000
Set-up of SAE Inc of $20,000
Investor Relation fees of $60,000
Transfer agent,HMRC fines and edgarising fees of $90,000
Content Media, Parallel Media and Nine Miles Down actions of $60,000
· Payroll for directors has increased by $399,000 in the 2011 period compared to the 2010 period due to a director moving from a consultancy arrangement to payroll expense and the removal of the accrual for one executive director in 2010.
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Interest expense
Interest expense has increased from $702,094 in the six months to December 31, 2010 to $742,742 in the six months to December 31, 2011 due to the increase in corporate loans along with the full charge for Poolboys loan interest which was capitalised in the 2010 period, set off against the reduction in interest on the Palm Finance films due to the debt/equity swaps.
No tax expense was recognized in either period.
Employees
As of December 31, 2011, Seven Arts had 10 employees and independent contractors, providing full time services. Our affiliates employ many part time employees for production of our motion pictures, but we do not engage temporary employees on any regular or material basis. We are not signatory to any labor union collective bargaining agreements, but our affiliates in the United States are signatory to the current Writer’s Guild of America, Directors Guild of America and IATSE Low Budget Agreements and have in the past been signatory to the Screen Actors Guild Agreement. Our employees have ranged from a low of six to a high of fourteen over the last three fiscal years.
Liquidity
As of December 31, 2011, our assets totaled $28,728,943, which included, among other items, cash balances totaling $32,979, receivables totaling $393,510, amounts due from related parties totaling $2,764,332, and prepayments of $2,471,772. Our working capital as of December 31, 2011 was ($7,815,908), compared to ($15,199,849) as of June 30, 2011. The large negative balances are mainly due to film loans having to be treated as current debt. We have reduced our outstanding film debt from $10,890,430 as at June 30, 2011 to $6,025,508 as at December 31,2011 due to a series of debt for equity swaps and the maturity and exercise of convertible debt.
Historically, we have successfully raised additional operating capital through private equity funding sources or loans from affiliates. However, no assurances can be given that we will be able to obtain sufficient working capital through the sale of common stock and/or borrowing or that the development and implementation of our business plan will generate sufficient future revenues to sustain ongoing operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Litigation
Fireworks Litigation
The Company prevailed in a motion for summary adjudication on February 10, 2011 in an action against CanWest Entertainment and two of its affiliates (“CanWest”) confirming the Company’s ownership of five motion pictures “Rules of Engagement”, “An American Rhapsody,” “Who Is Cletis Tout,” “Onegin,” and “The Believer”, (the “Copyrights”). The Company has filed an action in England against Content Media Corporation (“Content”) and Paramount Picture Corp. (“Paramount”) to recover the Copyrights and substantial damages for the use of the copyrighted works after their purported acquisition from CanWest. The Company may incur up to $200,000 in legal expenses to pursue this claim but expects to recover those fees from Content.
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Jones Film
Seven Arts Pictures plc, its then subsidiary SAFE, Ltd. and Seven Arts Pictures Inc. (“SAP”), were the subject of two arbitration awards of attorney fees totalling approximately $900,000, with interest and charges, both of which were reduced to judgment. The Company’s listing predecessor, PLC, has accrued a provisional liability in the amount of $800,000 including approximately $100,000 of accrued interest at June 30, 2011. The Company paid approximately $525,000, the amount of the first arbitration award plus interest and charges, in November, 2011. The remaining interest, costs and fees have been guaranteed by SAP.
Arrowhead Target Fund
Seven Arts Future Flow I (“SFF”), a limited liability Company owned by SAP Inc., a Company controlled by Mr. Hoffman, obtained financing from the Arrowhead Target Fund, Ltd. (“Arrowhead”) of approximately $8,300,000 (the “Arrowhead Loan”). SFF secured the Arrowhead Loan with liens on 12 motion pictures that generated revenues of $820,026 in the Fiscal Year Ended June 30, 2009, $2,739,800 in the Fiscal Year Ended March 31, 2008 and $544,478 in the three month period ended June 30, 2009. The Company’s only liability is to repay the Arrowhead Loan from the proceeds of the film assets pledged against the Arrowhead Loan. The Company is not required to repay the Arrowhead Loan from any of its other assets or revenues. SAE’s subsidiary, SAFE, Ltd. was the collateral agent of the film assets.
The Arrowhead Loan became due in February 2009 and SFF has not paid the outstanding principle and interest due thereon. Arrowhead has the right to foreclose on the pledged film assets, but has not done so at the present time. SFF has received a default notice to this effect and as a result Arrowhead is now collecting directly all sums receivable by the Company with respect to these motion pictures, and has appointed a new servicing agent for these motion pictures with the result that the Company no longer controls the licensing of these motion pictures. Failure to repay or refinance the Arrowhead Loan could result in a material disposition of assets through the loss of the Company’s rights to the twelve motion pictures and related loss of revenues in amounts that are difficult to predict.
As a result of the foregoing, the Company has removed all assets accounts relating to the twelve motion pictures pledged to Arrowhead and has removed the corresponding limited recourse indebtedness from the Company’s consolidated balance sheet at fiscal year ended June 30, 2009, due to the fact that the loan was a limited recourse loan and the Company had no further obligations to Arrowhead beyond the pledged film assets.
Arrowhead filed an action on September 22, 2010 which seeks recovery from the Company of the monies which the Company has retained under its interpretation of the relevant agreements with Arrowhead. In addition, Arrowhead makes substantial additional claims against the Company, Mr. Hoffman and SAP Inc. regarding claimed breaches of the terms of the operative agreements, including failure to properly account, failure to turn over materials, failure to remit monies collected, and similar matters. The claims against the Company for these breaches of warranties for damages are $8,300,000 although Arrowhead states no basis for this amount.
The Company had moved to dismiss the action against all defendants other than Seven Arts Future Flows I LLC, which is not part of the Company. On August 9, 2011, the New York Supreme Court granted the Company’s motion and dismissed all defendants except Seven Arts Filmed Entertainment Limited in its capacity as a collateral agent, which is not a material element of Arrowhead claim. The Company continues to believe that Arrowhead’s claims against the Company are without substantial merit.
The Company has agreed in principle to a settlement of these claims by Arrowhead and a return of all distribution rights to the affected twelve motion pictures and anticipates to complete a formal settlement agreement by March 31, 2012.
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Arrowhead Capital Partners – AGC Loan
The Company’s predecessor and several affiliates were named as defendants in an action by Arrowhead Capital Partners Ltd filed in the Supreme Court of New York County of New York State purportedly served on May 24, 2010, seeking to collect $1,000,000 plus interest (the “ACG Loan”) due to Arrowhead Consulting Group LLC (“ACG”) as well as foreclosure on the collateral granted as part of the Cheyne Loan described above in Note 13 under “Production Loans”. The ACG Loan is fully subordinated to repayment of the Cheyne Loan, which has not been repaid, and a subsidiary of the Company has been assigned all Cheyne’s rights under the subordination provision of the Cheyne Loan. As a result Management does not believe that ACG has the right to maintain this action to collect any monies or to foreclose on any collateral pursuant to the Cheyne Loan. The Company intends to vigorously defend against this action and has filed a motion for summary judgement to dismiss this action.
Investigation into Claim for Tax Credits (SAPLA)
The US Attorney in New Orleans is investigating claims for Louisiana film infrastructure tax credits including such tax credits to be claimed by an affiliate of the Company, Seven Arts Pictures Louisiana LLC and has issued subpoenas for discovery of documents in the possession of the Company related to their tax credits.
This investigation appears to include investigation as to whether certain expenses claimed by this affiliate were improper or fraudulent. All such claimed expenses were audited by independent auditors in Louisiana and reviewed by counsel. None of these expenses or credits have been included in the Company’s financial statements for any period. Management believes that this investigation will have no material adverse effect on the Company’s operations or the total tax credits to be received by the Company’s affiliates, but could result in charges against current or former employees of this affiliate based on prior audits, including Mr. Hoffman.
Parallel Action
On June 28, 2011, Seven Arts Pictures Plc. (“PLC”) filed an action in the High Court of England against Parallel Media LLC (“Parallel”) to collect sums due to PLC with respect to acquisition of distribution rights in Russia to four motion pictures and to confirm Parallel’s obligations under both a signed and unsigned investment agreement with respect to the motion picture project Winter Queen. On the same day Parallel filed a petition to wind up and liquidate PLC in the Companies Courts of England based on its claim of repayment of $1,000,000 of investment made by Parallel in Winter Queen. PLC is no longer part of the Company. On September 19, 2011, Parallel filed a new action against PLC and SAE in the Superior Court of California, asserting the same claims as in the winding up petition and seeking to enjoin the proposed administration proceedings in England. A request for a preliminary injunction was denied by the Superior Court. PLC will move to dismiss this action since all the operative agreements between PLC and Parallel include a clause requiring exclusive jurisdiction of all litigation in the courts of England. PLC expects this motion to dismiss will be granted.
HMRC Investigation
On July 19, 2011 Officers of Her Majesty’s Revenue & Customs (“HMRC”) attended the offices of Seven Arts Pictures Plc. (the “Company”) in London. Documents were retained appertaining to arrangements involving the subscription for shares in a number of companies which had lost value, resulting in subscribers making claims to tax relief.
The Company’s participation in these transactions was limited to the Company’s predecessor’s transfer of rights to certain motion pictures to the investors in return for their investments in the production and release costs of those pictures and making available the provision of loans to fund a portion of those investments. The Company received no tax benefits from the transactions, which were made on arms-length terms. The Company believes that it is not a subject of the HMRC investigation.
In connection with the transactions, the Company did not make any representations or warranties to any party, including the investors, regarding any potential tax benefits related to the transactions. Prior to the closing of the transactions the investors obtained and made available to the Company, an opinion of prominent Queen’s counsel, specializing in United Kingdom tax laws, that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws. The Company remains confident that the transactions were permitted and acceptable under the terms of the applicable United Kingdom revenue laws.
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HMRC has requested interviews with three officers of the Company to discuss whether those officers were involved in the arrangements for subscription of shares in the relevant companies, the first of which is scheduled for March 6, 2012. The Company is fully cooperating with the investigation. The Company believes there is no basis for any claim of responsibility of any of its officers or employees. Based on facts currently known by the Company, there is no need for it to record a contingent liability in its financial statements in connection with the investigation or the related transactions.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to Smaller Reporting Companies
ITEM 4T: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2011. This evaluation was accomplished under the supervision and with the participation of our chief executive officer /principal executive officer, and chief financial officer/principal financial officer who concluded that our disclosure controls and procedures are not effective.
Based upon an evaluation conducted for the period ended December 31, 2011, our Chief Executive and Chief Financial Officer as of December 31, 2011 and as of the date of this Report, has concluded that as of the end of the periods covered by this report, we have identified the following material weakness of our internal controls:
? Lack of sufficient accounting staff which results in a lack of segregation of duties necessary for a good system of internal control and financial statement presentation.
Changes in Internal Controls over Financial Reporting
We have not yet made any changes in our internal controls over financial reporting that occurred during the period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Items No. 1, 3, 4, 5 - Not Applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) During the three months ended December 31, 2011 and subsequent to September 30, 2011, the Company filed Form 8-Ks:
· On November 3, 2011
(b) Exhibits
Exhibit Number
31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEVEN ARTS PICTURES, INC.
Date: February 21, 2011 By: /s/ Peter Hoffman
Peter Hoffman, CEO
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Seven Arts Entertainment, Inc. (MM) (NASDAQ:SAPX)
Historical Stock Chart
1 Year : February 2011 to February 2012
Seven Arts Entertainment, Inc. (MM) (NASDAQ:SAPX)
Intraday Stock Chart
Today : Tuesday 21 February 2012
More SAPX MessagesLatest Seven Arts Entertainment, Inc, SAPX MessagesREMEMBER...BUY THE STOCK WHEN NO ONE WANTS IT
armo • Tue Feb 21, 2012 1:27 PM (1 hour ago)72354307
Set your GTC sale order at $1 :D
Mo Ism • Tue Feb 21, 2012 1:02 PM (1 hour ago)72352784
ACCUMULATION...followed by LAVA EXPLOSION...believe it or not MM's
armo • Tue Feb 21, 2012 12:42 PM (2 hours ago)72351485
anything is possible
lovethatgreen • Tue Feb 21, 2012 12:15 PM (2 hours ago)72349626
You may be right at .25. Ya
CaptainFreon • Tue Feb 21, 2012 12:13 PM (2 hours ago)72349534
Wow... what crap today! Disappointed again!
nhden • Tue Feb 21, 2012 12:06 PM (2 hours ago)72349012
Then you simply haven't looked.
wEaReLeGiOn • Tue Feb 21, 2012 11:26 AM (3 hours ago)72346200
LOL, We asked you for proof that the
pipedreamz76 • Tue Feb 21, 2012 11:23 AM (3 hours ago)72346026
And? http://www.google.com/cse ?q=BlueWave+Advisors+%22seven+arts %22&sa=Search
wEaReLeGiOn • Tue Feb 21, 2012 10:52 AM (4 hours ago)72343532
It a paid advertisement of a radio interview,
bassilious • Tue Feb 21, 2012 10:50 AM (4 hours ago)72343348
lmao- That's as far as you looked? Hahaha
wEaReLeGiOn • Tue Feb 21, 2012 10:48 AM (4 hours ago)72343246
lmao the announcement of a radio interview is
bassilious • Tue Feb 21, 2012 10:47 AM (4 hours ago)72343147
StockPreacher Disclaimer
wEaReLeGiOn • Tue Feb 21, 2012 10:42 AM (4 hours ago)72342791
Back in here Friday and today loading up.
keekee • Tue Feb 21, 2012 10:09 AM (4 hours ago)72340080
buy low and sell very very high...watch!
armo • Tue Feb 21, 2012 10:06 AM (4 hours ago)72339864
No one wants em.....
Anthony1983 • Tue Feb 21, 2012 10:05 AM (4 hours ago)72339741
SAPX ...I'll buy it all when no one
armo • Tue Feb 21, 2012 10:03 AM (4 hours ago)72339564
I had posted this in one of my
sbc357 • Tue Feb 21, 2012 9:35 AM (5 hours ago)72336927
No, he didn't.
sbc357 • Tue Feb 21, 2012 9:33 AM (5 hours ago)72336738
Oh really? Thank you for sharing this information.
Mo Ism • Tue Feb 21, 2012 9:25 AM (5 hours ago)72336167Bookmark With :
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