I e-mailed Peter this morning asking him if the company plans on a pr release Monday 09/12/11 and his reply was We will be able to tell you more next week. Have you seen the Beaufort Securities report on the company? I e-mailed him back & I said I wasn't aware of the report & if he could give the website or e-mail me the info. Here's the report he e-mailed to me.
Seven Arts Entertainment Inc. (NASDAQ:SAPX)
Corporate Research Update 7th September 2011
Recommendation: BUY
Current Price: US$0.59, Price Target US$4.50
Opportunity in a Digital World
Grappling with the consumer’s changing viewing habits is now the motion picture industry’s most pressing challenge. Such uncertainty, of course, routinely tends to be over discounted by the markets and often creates important buying opportunities. Seven Arts Entertainment’s (‘7Arts’ or ‘SAE’) ability to react quickly to industry changes, together with a concentration on higher margin, lower risk production packaged together with innovative financing deals, ideally positions the shares at a time when dramatic underperformance already more than discounts a worst case scenario.
Half Year Results Summary Full Year Forecast Summary
Half Year to 31 December
2009
2010
Revenues (US$m)
2.98
1.81
Net Profits (US$m)
0.52
-0.25
Estimated EPS (cents)
0.39
-0.13
Undiluted Weighted Average no. of shares (m), adjusted for May 2011 5-for-1 consolidation
1.39
1.59
Source: Seven Arts Entertainment Inc., Beaufort
Yr. to June (US$m) – IFRS Accounting
2009
2010
2011E
Revenue
10.23
6.42
3.25
Gross Profit
5.57
4.02
0.25
Net Profit
4.74
-0.48
2.50**
EPS (cents)
3.91
-0.34
1.14
P/E
15.1
-
51.8
Total Debt
17.8
18.3
12.5
Undiluted WA no. of shares (m, non-diluted)*
1.21
1.41
2.20*
*Basic, adj. for 5-for-1 share consolidation, non-diluted, E=Estimated
**Adjusted to include anticipated debt forgiveness for period
Despite ongoing trials faced by the independent film industry, 7Arts still managed to produce a positive gross contribution on sharply reduced revenues for the six months to December 2010. Being heavily second-half weighted, Beaufort forecasts a modest 2010/11 full year net profit contribution while anticipating progress on both the revenue and profit lines the following year.
Having re-appointed Elaine New as Group CFO and completed a 1-for-5 reverse stock split during 2010/11, the new fiscal year will undertake an action first proposed in June 2010 to‘re-domesticate’ the Group. The transfer of the 7Arts’ assets into a newly formed Nevada corporation, without changing shareholder’s economic interest in the Group became effective from 1st September 2011. Having achieved the status of ‘domestic issuer’, management has withdrawn its F-1 Registration Statement and should be expected seek to raise new funds for 7Arts’ shares through the release of a Form S-1 shortly.
In sourcing its revenue streams through highly established multiple distribution networks, for both its own productions and acquired rights, 7Arts has historically avoided the risk of relying on ‘blockbuster’ receipts from first-run theatrical releases inherent to the major studios. Whilst this remains the Group’s core strategy, a fall in number and quality of new releases due to the collapse of DVD sales, has opened a unique opportunity to secure wider theatrical releases for larger budget pictures.
The first such opportunity has been secured through a new agreement with Prodigy Pictures. Typical of the innovative financing agreements that characterize 7Arts, joint production of the highly anticipated sci-fi picture, Neuromancer, is expected to attract investors for a budgeted US$60m. The opportunity being for a much wider theatrical release, franchising, gaming and merchandising, which suggests a revenue-take for 7Arts of, perhaps, 5-times what is typical of its lower budget genre pictures. First fees are expected to accrue in 2011/12 followed by a larger take in 2012/13.
For any motion picture company, the ability to compete depends, in part, upon successful protection of its intellectual property and contractual rights with financing/operational partners. As such, 7Arts considers itself well positioned to pursue legal claims against Fletcher Asset Management (seeking US$1.5m) and Content Media (seeking some US$10 for copyright infringement).
For 2011, a greater reliance on film distribution revenues, rather than tax or producer fee income is anticipated to knock the revenue line, while particularly conservative accounting policies may be reflected through hefty amortization charges. Efficiencies driven through during the year, however, saw head-office expenses cut back substantially, while debt-for-equity swaps and interest forgiveness should see the balance sheet end the year in slightly better shape than in 2010.
While capitalizing on its excellent relationships with ‘key talent’, a focus on expanding distribution in both the theatrical and post-theatrical international markets, ‘presales’ and ‘soft’ financing, 7Arts is expected to continue to generate both revenue growth and gross margin at a premium to its peer group. The Group presently services total debt similar to its market capitalisation; this could possibly be seen to limit the scale of 7Arts more ambitious projects over the next couple of years, although the management may yet consider various options available to strengthen the balance sheet.
THIS RESEARCH REPORT IS A “MARKETING COMMUNICATION”
This non- independent research report has not been prepared in accordance with the FSA Conduct of Business Sourcebook Rules concerning the promotion of research independence and is not subject to any prohibition on dealing ahead of the dissemination of research, although as a matter of policy Beaufort International Associates Ltd requires its directors and staff not to deal ahead of the dissemination of research. Please see the “Important Information” section on page 7 for further information.
The Entertainment Industry – Changing the Business Model
America’s biggest cultural export, the motion picture, is being threatened by the digital revolution. While contribution from theatrical distribution remains a key with first release of big budget movies still accounting for a large proportion of gross lifetime receipts, all out war has been declared in the world of home entertainment. In the internet world, power has been wrested from the studios and placed firmly in the hands of the consumer. Without the ability to secure and predict revenues from private viewings, the industry’s business model is in disarray. Putting the scale of the problem into context, for 2008 the industry association shows Hollywood generating a trade surplus of US$11.7bn which, for example, was larger than from insurance and telecommunications. The problem appears two fold, firstly in the respect that the studios have failed to recognize changing consumer attitudes and, secondly, an inability to adequately respond to the ravages of piracy.
A business model dependent on sales of physical discs is now found wanting. For 7Arts, this is particularly relevant given that the majority of its output has only limited theatrical release or go direct-to-DVD. Indeed, the failure to replace high margin DVD (or replacement format) retail sales with lower margin rental, is being blamed for members of the Motion Picture Association of America releasing just 141 films in 2010, compared with 204 four years earlier. Reflecting consumers increasing preference for rental rather than ownership, leads HIS Screen Digest research to predict internet video-on-demand (iVOD) revenue will rise to exceed that of electronic sell-through by 2013. Selling an electronic format should offer potential for greater profitability given the near absence of manufacturing and distribution costs but, of course, illegal websites have and continue to successfully target and seduce the online viewer.
Source: IHS Screen Digest
In 2005, copyright theft was said to be costing Hollywood alone over US$6bn in lost revenues. In 2011, industry analysts have estimated the global cost to be as much as 5 times this. The growth of broadband has made piracy almost impossible to contain; efforts to prosecute illegal web and file sharing sites are generally wasted time, as one is closed down its clone opens next door. Sites trafficking pirated film and television content receive nearly 150m visits in a typical day and Creative America, an entertainment industry action group, considers content theft threatens over 20 million jobs across the USA.
Technological solutions are now urgently being sought; both to return the consumer to making outright purchases and to provide a format to either wean them off or inhibit illegal sites. This autumn, Ultraviolet, a project sponsored by Paramount, Sony, Universal, and Warner is due to be launched. Supported by major retailers and major IT groups, this a cloud-based authentication and
system designed to provide the user with a ‘rights locker’ in which to store and access a wide mix of older and new titles in any device of their choosing, be it mobile, desk top or internet-enabled TV whilst sharing with selected friends/family. Studios believe this will encourage the consumer to return to making online purchases and collecting libraries. The success of Ultraviolet or its derivatives may well depend on a keener pricing and incentive policy, as well as exclusive offering of new releases for sale for specified periods before making available for rental. Winding in established streaming operators like Netflix and cooperating with retailers like Apple and Disney should give the initiative a fighting chance.
If 7Arts and its peer group have a tiny advantage, it is that motion pictures is not the first industry to be caught napping in the face of technological change. The music industry has been through the same pain and now various alternatives may offer a way through. The iCloud suite, part of Apple iTunes Match, for example sources both legal and illegal music from the internet libraries, for an annual fee and reimbursing the label and artist on each play. Learning from this, initiatives from the motion picture industry to be tested in the coming months and shape their business plan accordingly.
Seven Arts Entertainment <NASDAQ:SAPX> - Current Strategy
To finance, produce and distribute two to four motion pictures in-house per year with budgets between $2 million and $15 million each. As previously stated, 7Arts expect that certain of these pictures will receive only a limited theatrical release, while others will be released more widely.
To supplement core strategy by producing an occasional higher cost motion picture (production budgets of $30 - $50 million). 7Arts will, in all likelihood, seek to co-produce such projects with a major studio to guarantee a studio-wide release and obtain a commitment to cover a portion or all of P&A costs.
To opportunistically acquire distribution rights to an additional two to five motion pictures produced by others, each year, for distribution in theatrical, video and television markets, as an agent, for a 15%-20% fee.
To maximize current use of tax-preferred financing structures around the world to fund our motion picture productions.
To continue to reduce our financial risk on motion pictures produced by licensing certain rights to distributors prior to and during production, although it is recognized that, particularly in the last two years, the licensing market has become more difficult to access as a film financing device.
To enter into partnerships with theatrical and video distributors, to gain more control over and increase share of revenue from the distribution of motion pictures.
To scale business over time by modestly increasing the number of pictures developed and produced in-house as well as by more aggressively seeking to acquire for distribution motion pictures produced by third parties.
7Arts believes that this is a particularly opportune time to be producing and distributing moderately priced motion pictures as, according to their public announcements, the major studios plan to reduce the number of pictures that they finance and distribute, to concentrate instead resources on a limited number of high-priced, “franchise” productions. In addition, the Group believes that certain of the most successful independent motion picture companies have either been acquired or are focusing on higher budget films. These factors should make available exceptional levels of both talent and projects for lower budget motion pictures and independent film companies such as Seven Arts. That said, 7Arts does not yet have firm commitment for the financing and production of the six motion picture projects described.
Company Background
7Arts is an independent motion picture production company engaged in developing, financing, producing and licensing theatrical motion pictures with budgets in the range of $2 million to $15 million for exhibition in domestic (i.e., the United States and Canada) and foreign theatrical markets and for subsequent post- theatrical worldwide release in other forms of media, including DVD, home video, iVOD, pay-per-view, and free television.
It endeavors to release many motion pictures into wide-theatrical exhibition initially; however, certain motion pictures will either receive only a limited theatrical release, or may even be released directly to post theatrical markets, primarily DVD sale and rental. Those pictures that receive either a limited theatrical release or a post theatrical release typically benefit from lower prints and advertising costs and, in turn, may enjoy greater gross profit margins.
Recent domestic theatrical releases include Deal (April 2008), Noise (May 2008) and Autopsy (January 2009) and Night of the Demons (October 2010), all of which received limited US theatrical releases. 7Arts has also completed the production of and expect to release for domestic theatrical exhibition two additional motion pictures in the summer of 2011, notably The Pool Boys and Nine Miles Down. We currently have six motion pictures in development that we anticipate will be released within the next two to three years (i.e., 2011 – 2013) Catwalk, Waxwork, Mortal Armor:
The Legend of Galahad , Romeo Spy , The Winter Queen and Neuromancer. 7Arts may supplement these motion pictures releases with certain lower cost pictures not yet fully developed, as well as with selected third party acquisitions.
The Group currently controls copyright interests directly or through affiliates for 21 completed motion pictures. An additional twelve motion pictures for which 7Arts own distribution rights are now controlled by Arrowhead Target Fund Ltd., a former hedge fund investor, which receives all of the revenues from these pictures until recoupment of current indebtedness. A substantial portion of 7Arts library revenues are derived from only a few of our library titles.
Through a combination of new productions and selected acquisitions, current planning includes an increase in its film library to 50 to 75 pictures over the next five years. 7Arts’ recent business model has focused on distribution in the post-theatrical markets for lower-cost, "genre" motion pictures. These pictures have enjoyed only a very limited theatrical release. The Group expects to continue production of such pictures, but its goal is to obtain a wider theatrical release for the majority of the pictures intended for to release over the next two to three years.
Corporate Organization Chart of Seven Arts Entertainments Inc.
(correct as of June 2011)
Source: Seven Arts Entertainment Inc.
Asset Transfer Agreement – Move to Nevada effective from 1st September 2011
Until 1st September 2011, 7Arts was a corporation organized under the laws of England and Wales. On July 1, 2010, however, the Group agreed in an Asset Transfer Agreement of that date to transfer the assets of Seven Arts Pictures Plc. (including ownership of all subsidiaries) to Seven Arts Entertainment Inc., a newly formed Nevada corporation (which became a wholly owned subsidiary of the Group effective January 27, 2011), in exchange for assumption by 7Arts of certain indebtedness and for one share of common stock of 7Arts for each ordinary share of PLC to be distributed subject to a future Registration Statement to be filed by the Group. This transfer was agreed to by shareholders at an Extraordinary General Meeting on June 11, 2010. The purpose of this transfer being to eliminate the Group’s status as a foreign private issuer and replace it with domestic issuer obligations under applicable state and Federal securities laws. This action became effective on 1st September 2011, with the ‘re-domestication’ of 7Arts’ business being achieved without change to the economic interests of its shareholders. Pursuant to Rule 477(a) of the Securities Act, has filed a request to withdraw its Registration Statement on Form F-1 that was originally lodged with the SEC on 15 June; no securities were issued under this filing.
7Arts' new CUSIP number is 81783N102 and its trading symbol will remain SAPX and DTCC will continue electronic transfer of 7Arts common stock as it has of the Company's ordinary shares.
Group Capitalization
Indebtedness (Figures shown in US$) As of June 30, 2010 As of December 30, 2010 As Adjusted (1)
Bank and other production loans 16,766,689 15,876,640 [--]
Corporate Loans (2) 1,534,591 1,644,166 [--]
Shareholders’ Equity (3) 2,200,474 3,018,168 [--]
1. Retained Earnings (21,413,746) (21,623,011)
2. Langley Debenture 3,432,450 3,432,450
3. Paid-in Capital 9,248,415 9,965,034
Ordinary Shares
Total Shares Issued and Outstanding (4) 1,495,460 1,762,928
Source: Seven Arts Entertainment Inc
The “as adjusted” column does not assume the exercise of any of the representative’s warrants. Equity, assuming that the number of shares offered by us as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions payable to the underwriters and the estimated offering expenses payable by 7Arts.
A portion of the loan due to Trafalgar Capital Special Investment Fund was advanced by 7Arts to the Seven Arts Employee Benefit Trust (“EBT”) for the partial acquisition of the Preference Shares owned by Armadillo Investments plc (“Armadillo”). The loan to Trafalgar came due on June 30, 2009 and 7Arts have made a partial payment of $1,000,000 on September 2, 2009. On June 22, 2010 7Arts entered into an amended agreement with Trafalgar for an extension of the due date of the convertible debentures to December 31, 2010 and the issuance of 68,000 shares in July 2010. This agreement has been further extended, in January 2011, to March 31, 2011 for the issuance of another 85,000 shares against the loan principal.
As of June 30, 2010, Shareholders’ Equity includes the balance of the Langley Convertible Subordinated Debenture which has no redemption date. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources” for a discussion of the Langley Convertible Subordinated Debenture.
Includes 80,000 ordinary shares issued to the EBT in exchange for 500,000 preference shares and 68,000 ordinary shares issued to Trafalgar as a result of a partial conversion of its remaining debenture, both occurring in May of 2010.
This “as adjusted” data assumes the return to us of 140,000 ordinary shares issued to SAP and thereafter pledged to ApolloMedia upon repayment of indebtedness and the return to 7Arts of 200,000 of their ordinary shares pledged to Armadillo. See “Use of Proceeds” and “Certain Transactions” contained in the Group’s Form F-1 for a description of the ApolloMedia transaction.
Tax Preferred Financing
7Arts expertise in structuring tax-preferred financings in jurisdictions where such are made available. “Tax preferred financings” include refundable or transferable income tax credits available by statute in territories including Louisiana, the United Kingdom, Canada and Hungary, as well as other general tax benefits associated with motion pictures production or distribution in these nations or states.
Summary Financial Data
(in US$ 000’s, except per share data)
Summary Profit and Loss Statement (1) Six Months ended
Dec-31 2010 Six Months ended
Dec-31 2009 Fiscal Year ended
Jun-30 2010 Fiscal Year ended
Jun-30 2009 Fiscal Year ended
Jun-30 2008 Three Months ended
Jun-30 2008
Total Revenues (2) 1,808 2,983 6,417 10,232 3,266 2,793
Gross Profit/(Loss) 862 2,180 4,018 5,569 (822) 1,491
Net Profit/(Loss) (209) 537 (476) 4,737 (3) (4,557) 357
Basic (in 000’s) converted at 5:1 1,591.6 1,387.0 1,402.8 1,210.3 935.3 974.2
Diluted (in 000’s) converted at 5:1 1,591.6 1,620.2 1,402.8 1,629.4 935.3 1,651.2
Earnings (loss) Per Share – Basic at 5:1 (0.13) (0.39) (0.34) 3.91 (4.85) 0.35
Earnings (loss) Per Share – Diluted at 5:1 (0.13) (0.33) (0.35) 2.90 (4.85) 0.22
Summary Balance Sheet
Total Loans 17,521 17,137 18,301 17,828 261,656 (5) 248,716 (5)
Total Assets 28,782 29,014 28,625 27,387 302,388 (5) 400,853 (5)
Shareholders’ Equity (6) 3,018 2,217 2,200 1,717 410 832
Source: Seven Arts Entertainment Inc.
Notes to the accounts:
7Arts changed the fiscal year-end from March 31 to June 30 during the period ending June 30, 2008.
Revenues in the most recent audited period June 30, 2010 included $2,650,794 in net fee income derived from a structured film and distribution cost financing with UK investors and additional producer fee of $1,792,125 associated with films produced in Louisiana.
Net Profit includes other income of $5,601,683 recorded in the period ending June 30, 2009 reflecting cancellation of indebtedness arising from the decision of a lender to Seven Arts Future Flow 1 ("SFF"), a limited liability Group owned by SAP Inc., to take control of twelve motion pictures owned by SFF and pledged to secure an $8,300,000 loan to Arrowhead Target Fund Ltd. ("Arrowhead") Since 7Arts no longer control the licensing of these motion pictures, they have removed all investment in and receivables relating to the pictures pledged to Arrowhead as assets, and have removed all limited recourse indebtedness and accrued interest related to the Arrowhead loan as liabilities from our balance sheet, resulting in a net gain in the above amount. (See Management’s Discussion and Analysis of Results and Operation - Legal Proceedings)
The attached audited Consolidated Financial Statements for the fiscal years ended June 30, 2010, 2009 and March 31, 2008, and the three month period ended June 30, 2008, prepared under IFRS and unaudited interim accounts for the period ended December 31, 2010 show income per share figures calculated using the weighted average number of shares outstanding in each period. A 5-for-1 reverse stock split occurred on December 31, 2008 and May 12, 2011. The income per share figures in the table above have been adjusted from the figures shown in prior financial statements to show the effect of the 5-for-1 reverse stock split as if it had occurred on the first day of the fiscal year ended March 31, 2008.
In May 2008, 7Arts completed a transaction with Zeus Partners LLP that raised capital for investment into the production and distribution costs of our existing and future motion picture productions and acquisitions. The total investment raised was approximately $268,000,000. $10,917,087 of the $16,002,766 that we retained in net proceeds from the transaction was accounted for as a reduction in the carrying value of our film costs on the balance sheet, while the balance of $5,085,679 was recorded as fee income in the fiscal year ended June 30, 2009.
Convertible Debentures with no redemption date owned by Langley Park Investment Trust PLC (“Langley”) are treated as Shareholders’ Equity under IFRS and as Shareholders’ Funds under UK GAAP. As of June 30, 2010, the value of such debentures outstanding was approximately $3,432,000, as it was in all periods, Langley converted 1,250,000 of the 3,000,000 Debentures into 200,000 ordinary shares on March 15, 2007.
Robert Kaiser Joins the Board of Directors
The Board of Directors of 7Arts comprises the existing six members of the Board of Directors of the Company, plus the addition of Robert Kaiser as a Board Member and Chairman of SAE's Audit Committee from 1st September. 7Arts will have four members of its Board who are independent as defined by NASDAQ. Mr. Kaiser is currently, and has been since 2007, Chairman and Chief Executive Officer of CLST Holdings, the remaining public company of Cellstar Inc., whose assets were sold in 2007. Mr. Kaiser held several executive positions, including chairman and chief executive officer of Cellstar from 2002 to 2007, an international logistics and distribution company in the communication industry with sales in excess of $2 billion. From 1996 to 2001, Mr. Kaiser was the Chief Executive Officer of Mobile Star and SkyTel/Worldcom. Mr. Kaiser was also the Chief Financial Officer of Southwestern Bell Mobile Systems from 1986 to 1996.
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Analyst Certification
I, Barry Gibb, Director at Beaufort International Associates Ltd hereby certify that the views expressed in this report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendations in this report.
Relevant Disclosures
Company Code Relevant Disclosures
Seven Arts Pictures Plc
SAPX 3, 6
Within the past twelve months Beaufort has managed or co-managed a public offering for this company, for which it receives fees or the promise of fees
Beaufort acts as corporate broker to this company
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Beaufort holds more than 5% of the securities of this company
The company holds more than 5% of Beaufort
Beaufort may currently be providing, expects to provide within the next three months, or may have provided within the previous twelve months, investment banking services to this company, which have given rise to payment or the promise of payment
The author and/or an individual responsible for production of this has direct ownership of stock in this company
The author and/or an individual responsible for production of this report received or purchased shares in the issuer prior to a public offering of shares
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