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Progress at Seven Arts

Zacks Equity Research

Progress at Seven Arts

Ken Nagy, CFA

On November 22, 2011, Seven Arts Entertainment Inc. (SAPX), the independent motion picture production and distribution company, reported results from operations for its first quarter, ended September 30, 2011.

Seven Arts reported solid results with substantial progress in reducing its loans payable and increasing its stockholder equity.

The Company’s year over year revenues jumped from $100,305 for the first quarter ended September 30, 2010 up to $592,541 during the first quarter fiscal 2012.

The growth in revenues was primarily due to the US digital release of the movie “The Pool Boys” in September 2011.

Still, Seven Arts’ reported a net loss of $983,291 for the three months ended September 30, 2011 compared to a net loss of $747,440 for the comparable quarter of 2010.The increase in net loss was primarily a result of lower margins and an increase in operating expenses.

Gross margin during the quarter dropped to 19.1 percent for the three months ended September 30, 2011. This compared to gross margin of 23.5 percent during the first quarter ended September 30. 2010.

Based on a weighted average number of basic and diluted common shares of 7.016 million, basic and diluted net loss per share resulted in $0.14 loss per share during the first quarter fiscal 2012.  This was a year over year improvement from a basic and diluted net loss per share of $0.48 on a weighted average number of basic and diluted shares of 1.555 million during the quarter ended September 30, 2010.

Similarly, Seven Arts reported that its number of total shares outstanding increased to 15.700 million from the recently announced 12.500 million. The increase in weighted shares outstanding was primarily a result of the issuance of unregistered shares to Seven Arts Pictures Plc., the Company's NASDAQ listing predecessor.  Still, it should be noted that these unregistered shares are not freely tradable and will not be included in the current public float.

As of September 30, 2011, the Company reported $27.291 million in assets and a working capital deficit of $8.381 million.

Still, Seven Arts’ working capital deficit improved to its current level from $15.199 million at June 30, 2011. Furthermore, the large negative balances are mainly a result of film loans having to be treated as current debt.

Additionally, as a result of its continued efforts to reduce indebtedness and increase net shareholder equity, Seven Arts made substantial progress during the quarter in reducing its loans payable and increasing stockholder equity.

During the three months, the Company reduced its total loans payable by $4.689 million and nearly doubled shareholder equity.

Seven Arts reduced its loans payable to $7.957 million for the quarter ended September 30, 2011 from $12.646 million at the end of fiscal 2011, ended June 30, 2011.

Similarly, the Company increased net shareholders' equity from $7.958 million as of June 30, 2011 to $14.633 million as of September 30, 2011.

With domestic theatrical box office sales of all films reaching $10.6 billion and worldwide box office reaching as much as $29.9 billion in 2009, many successful independent motion picture companies and major studios have been reducing the number of pictures that they finance and distribute. Consequently, these large studios and independent motion picture companies have concentrated on a limited number of higher budget films with budgets in the range of $10 million to $100 million or more.

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

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

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

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

Along the same lines, the Company stated that it has made substantial progress in arranging the financing for the upcoming production of ‘Neuromancer,’ which is based on William Gibson's novel and is to be directed by Vincenzo Natali.


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