How Much Longer Can Seven Arts Entertainment Inc. (NASDAQ: SAPX) Rely on Future Films to Appease Shareholders?
Shareholders of Seven Arts Entertainment Inc. (NASDAQ: SAPX) would appear to have a legitimate cause for concern as the independent motion picture and distribution company continues to struggle with realizing significant revenue from their operations. While SAPX announced on Tuesday that they had licensed United States pay television rights to its film “The Pool Boys” to HBO and is licensing the English pay television rights to the film to BSkyB there are few investors who believe these deals will amount to anything substantial despite company CEO Peter Hoffman’s contention that “We continue to build the digital and television licensing of our films, directly and through our distributors. We believe this revenue will be an important contribution to our financial results in future periods.”
With shares currently trading around the 0.11 level SAPX remains in danger of a NASDAQ delisting, something they have skirted for some time now. Back in March the company announced that they had received a letter from The NASDAQ Stock Market LLC approving their request for a 180-day extension of time to regain compliance with the NASDAQ bid price requirement by demonstrating a closing bid price for its common stock of $1 or more for at least ten consecutive trading days. That approval gives SAPX until September 20, 2012 to regain compliance but there has been little indication that such an event would take place without existing shareholders paying a price.
SAPX has insisted they have no plans for a reverse stock split yet they did leave the option on the table as a method to protect their NASDAQ listing. According to their April 16, 2012 press release “Management does not currently believe a reverse split will be necessary in light of the prospects of the Company’s business, including the release of DMX’s new album “Undisputed” and production of “Neuromancer.” This confidence may be difficult for shareholders to swallow given the fact that last May they implemented a 5:1 reverse stock split to regain compliance with their NASDAQ listing.
While that move pushed shares of SAPX above the minimum bid price for a couple of months the company’s share price hasn’t been above that mark since August 2011. In that same April 16, 2012 press release SAPX announced that they had terminated negotiations for a $3,000,000 convertible debenture, the proceeds of which were to have been used for reacquisition of approximately twelve of the Company’s motion pictures controlled by an existing lender. The company reasoned that such a deal would have “resulted in an unacceptable level of dilution to the Company’s common shareholders.”
That sounds awfully noble of SAPX yet the reality is dilution appears to be an inevitable fate for shareholders. SAPX may point to the release of a new album from DMX and the production of “Neuromancer” as cause for stability but it is unlikely that these events will right the ship by September, especially given the fact that shooting for the $60 million budget feature “Neuromancer” isn’t scheduled until later this year with distribution slated for autumn 2013.
Certainly SAPX is putting a lot of weight on “Neuromancer” as they have been pumping the production of the film, based on the best-selling novel of the same name by William Gibson, for some time. Of course SAPX was also pumping the release of “The Pool Boys” and that film did little in the way of revenue for the company.
It is SAPX’s hope that their recent agreement with di Bonaventura Pictures for the services of Lorenzo di Bonaventura will put “Neuromancer” over the top. SAPX points to di Bonaventura’s work on “The Matrix” and “Harry Potter” series of films as cause for celebration but asking shareholders to believe the success of those films could be replicated with this film is a stretch.
Unquestionably SAPX is in desperate need of a successful film given their most recent quarterly report, a report that showed film revenues for the second quarter to be $207,790 as compared with $1,137,647 for the same period one year earlier. The company reported negative gross profit for the frame and acknowledged that “higher than normal legal costs” had taken a toll on the company’s results.
There is simply no way to look at SAPX without concluding that the company will likely opt for a reverse stock split come September. They are in far worse shape than they were last May when shares were trading in the 0.35 – 0.37 range and knowing this shareholders should be prepared to stomach yet another split that will result in further dilution.