U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark One)





þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2013





OR





oTRANSITION 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 ofincorporation or organization)

(IRS EmployerIdentification No.)





8439 Sunset Boulevard 4thFloor


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 þNo o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þNo 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
oNon-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 oNo þ





As of  May 17, 2013, there were 4,703,978 shares of Common Stock of the issuer outstanding.













SEVEN ARTS ENTERTAINMENT, INC.


FORM 10-Q


MARCH 31, 2013


INDEX





PART I – FINANCIAL INFORMATIONItem 1
Consolidated Financial Statements (Unaudited)

3Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and June 30, 2012


3Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2013 and 2012 (Unaudited)


4Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2013 and 2012 (Unaudited)


5Notes to the Consolidated Financial Statements (Unaudited)


6Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations


33Item 3
Quantitative and Qualitative Disclosures About Market Risk


39Item 4
Controls and Procedures


39PART II – OTHER INFORMATIONItem 1
Legal Proceedings


40Item 1A
Risk Factors


42Item 2
Unregistered Sales of Equity Securities and Use of Proceeds


42Item 3
Defaults Upon Senior Securities


42Item 4
Mine Safety Disclosures


42Item 5
Other Information


42Item 6 –
Exhibits


43Signatures


44





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PART I – FINANCIAL INFORMATIONITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




Seven Arts Entertainment, Inc.Consolidated Balance Sheets  March 31,

2013


June 30,

2012(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
64,691


$
120,658Accounts receivable, net of allowance for doubtful accounts of $39062 and $171,062


189,576



192,035Due from related parties


2,094,409



2,116,538Fee income receivable from related parties


5,896,970



5,896,970Other receivables and prepayments


1,552,458



849,845Total Current Assets


9,798,103



9,176,046Long term receivable from related parties


1,643,928



1,643,928Film costs, less accumulated amortization of $19,125,730 and $18,953,035


14,912,185



14,612,609Music assets, less amortization of $408,205 and $0


3,122,043



2,923,474Leasehold Improvements, less amortization of $80,775 and $0


4,890,994



4,551,270Property and equipment, net of accumulated depreciation of $112,364 and $106,671


10,441



16,137TOTAL ASSETS

$
34,377,695


$
32,923,464LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
1,757,367


$
1,152,977Accrued liabilities


3,047,080



2,758,844Due to related parties


2,005,233



1,060,905Shares to be issued


92,207



200,000Participation and residuals


116,332



114,215Convertible debt


4,252,951



4,162,460Mortgage and construction loans


3,588,450



3,001,271Film & production loans


7,282,094



6,124,428Deferred income


923,180



849,080Total Current Liabilities


23,064,894



19,424,180Provision for earn-out


50,000



50,000TOTAL LIABILITIES

$
23,114,894


$
19,474,180
 SHAREHOLDERS' EQUITYConvertible redeemable Series A preferred stock at $10 par value, 125,125 and 125,125 authorized and outstanding

$
1,251,250


$
1,251,250Convertible redeemable Series B preferred stock at $100 par value, 200,000 authorized, 43,850 and 180,000 outstanding


1,124,770



4,762,952Convertible redeemable Series B shares held in escrow


-



(3,163,636
)Common stock; $0.01 par value; 35,667,840 authorized, 29,506,536 and 1,739,900 issued and outstanding


2,071,325



17,399Additional paid in capital


21,156,887



18,866,060Treasury stock


(180,000
)


-Shares held as collateral for legal settlement


(275,246
)Accumulated deficit


(14,108,773
)


(8,284,741
)Warrants to be distributed


480,371



-Total Seven Arts Entertainment Inc. equity


11,520,584



13,449,284Non-controlling interest


257,783



-Total Shareholders' equity


11,262,801



13,449,284TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
34,377,695


$
32,923,464
 The accompanying notes are an integral part of these consolidated financial statements.
  3
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  Seven Arts Entertainment, Inc.Consolidated Statements of Operations and Comprehensive Loss
  3 Months Ended


9 Months EndedMarch 31,


March 31,2013


2012


2013


2012$


$


$



$Revenue:Film revenue


350,636


$
187,793



744,748



987,220Music revenue


-



-



927645.33



-Post production revenue


21,624



-



39,702



-Total revenue


372,260


$
187,793



1,712,095



987,220Cost of revenue:Amortization and impairment of film costs and music assets


357,668



186,890



938,569



987,221Amortization of leasehold improvements


42,392



-



123,167



-Provision for returns


139,406



-



370,811



-Other cost of revenue


25,312



262,041



274,970



561,330Cost of revenue


564,778



448,931



1,707,517



1,548,551Gross profit (loss)


(192,518
)


(261,138
)


4,578



(561,331
)Operating expenses:General and administrative expenses


1,207,463



500,897



2,659,078



1,550,761Bad debt expense


-



109,481



-



106,663Total operating expenses


1,207,463



610,378



2,659,078



1,657,424Loss from operations


(1,399,982
)


(871,516
)


(2,654,500
)


(2,218,755
)Non-operating income(expense)Other income


-



30,196







31,100Interest expense


(1,043,944
)


(744,469
)


(2,946,941
)


(1,476,417
)Interest income


-



-Total non-operating income (expense)


(1,043,944
)


(714,273
)


(2,946,941
)


(1,445,317
)Loss before taxes


(2,443,926
)


(1,585,789
)


(5,601,441
)


(3,664,072
)Provision for income tax


-



-



-



-Net loss


(2,443,926
)


(1,585,789
)


(5,601,441
)


(3,664,072
)Less:  Net loss attributable to non-controlling interests


(85,685
)


-



(257,783
)


-Net loss attributable to Seven Arts Entertainment, Inc.

$
(2,358,240
)

$
(1,585,789
)

$
(5,343,658
)

$
(3,664,072
)Comprehensive loss:Net loss


(2,443,926
)


(1,585,789
)


(5,601,441
)


(3,664,072
)Other Comprehensive income/loss


-



-



-



-Comprehensive loss


(2,443,926
)


(1,585,789
)


(5,601,441
)


(3,664,072
)Less:  Comprehensive loss attributable to non-controlling interests


(85,685
)


-



(257,783
)


-Comprehensive loss attributable to Seven Arts Entertainment, Inc.

$
(2,358,240
)

$
(1,585,789
)

$
(5,343,658
)

$
(3,664,072
)Weighted average shares of common stock outstanding:Basic


387,551



608,426



4,142,653



353,304Diluted


387,551



608,426



4,142,653



353,304Basic profit/ (loss) per share

$
(6.08
)

$
(2.61
)

$
(1.29
)

$
(10.37
)Diluted profit/ (loss) per share

$
(6.08
)

$
(2.61
)

$
(1.35
)

$
(10.37
)
 The accompanying notes are an integral part of these consolidated financial statements.
  4
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 Seven Arts Entertainment, Inc.


Consolidated Statements of Cash Flows




























5
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Seven Arts Entertainment, Inc.


Notes to Consolidated Financial Statements


March 31, 2013


(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 of 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, SAE, was formed and became a wholly owned subsidiary of 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 certain 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, 571 shares (2,000,000 shares as adjusted for the 1:70 and 1:50 reverse stock splits discussed herein) 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.   On August 31, 2012, the Company announced a 1:70 reverse stock split, which was effective immediately.  All share references herein have been adjusted to reflect this split.




On November 8, 2011, the Company's listing predecessor, PLC, was placed into involuntary creditors liquidation under English law (See Note 10 – 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 million (pre-split)/28,571 post-split shares of common stock of SAE in order to satisfy these obligations.




As discussed herein, in late February 2012, the Company formed Seven Arts Music, Inc. (“SAM”) and acquired 52 completed sound recordings of the recording artist DMX from David Michery (“Mr. Michery”) with the rights to additional albums and acquired 100% of the stock of Big Jake Music (“BJM”). As a result, the Company is also in the business of producing and distributing recorded music.




On June 30, 2012, Seven Arts Filmed Entertainment LLC (“SAFELA”) was transferred to the Company. SAFELA, which is now 60% owned by the Company, has a 30 year lease to operate a film production and post-production facility at 807 Esplanade in New Orleans, Louisiana. The post production facility commenced operations on July 1, 2012.




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In connection with the acquisition of the music assets of Mr. Michery, the Company issued 100,000 shares of the Company’s Series B convertible preferred stock, par value $100, convertible at approximately $1.10 per share, to Mr. Michery and his assigns, with 50,000 being delivered at the time of execution and the additional 50,000 shares of the Company’s Series B convertible preferred stock to be held in escrow against two DMX albums and two Bone Thugs-N-Harmony albums generating an aggregate of net earnings before interest and taxes of $5,000,000 during the next five fiscal years. Mr. Michery is the Chief Executive Officer of SAM.




During the quarter ended December 31, 2012, Mr. Michery converted and sold 37,000 of the 50,000 shares of Series B that he and his assigns hold. The Company and Mr. Michery have agreed the remaining 50,000 shares of Series B in escrow will be disposed of by release of 20,000 shares of the Series B convertible preferred stock to Mr. Michery in full satisfaction of any claims he may have against the Company and the balance of the 30,000 shares of Series B will be cancelled. The release of the 20,000 shares has been recognized as services in the accompanying financial statements.  As of March 31, 2013, Mr. Michery or his assigns hold 33,000 shares of Series B convertible preferred stock.




In connection with the acquisition of the stock of BJM, the Company issued 80,000 shares of the Company’s Series B convertible preferred stock, par value $100, convertible at approximately $1.10 per share, to Jake Shapiro and his assigns, with 10,000 shares being delivered to him at time of execution and the additional 70,000 shares to be held in escrow until such time as certain specific terms are met. 40,000 of the shares were subject to proving valuation and usage of certain advertising credits and 30,000 shares were subject to an earn-out over a two year period.




The Company entered into a settlement agreement with Mr. Shapiro on February 27, 2013 and all shares of Series B preferred stock held in escrow for him and persons associated with him have been cancelled, with Mr. Shapiro and his assigns still holding 10,000 shares of Series B convertible preferred stock as of March 31, 2013. The name and the website of Big Jake Music were also reassigned to Mr. Shapiro as part of the settlement agreement.




Seven Arts Pictures Louisiana LLC, (“SAPLA”), a related party 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 the production and post-production facility located at 807 Esplanade Avenue in New Orleans, Louisiana (“807 Esplanade”) for aggregate principal advances of up to $3,700,000.  This agreement was guaranteed by the Company’s predecessor. Approximately $3,700,000 plus interest has been drawn under the terms of this Credit Agreement, as of June 30, 2012. The Company has now assumed the liability for $1,000,000 plus interest of this amount plus a contingent sum of $750,000 (contingent on receipt of the tax credit revenues) due to an agreement with the now mortgagor Palm Finance. A construction loan of $1,850,000 previously guaranteed by the Company has now also been assumed by the Company, through SAFELA, for the grant of a 30 year lease on the property 807 Esplanade to operate a film production and post-production facility.




On August 31, 2012, the Company announced a 1-for-70 reverse split of its common stock effective as of 4:01p.m. EDT. By virtue of the reverse split, every 70 shares of the outstanding common stock were combined and converted into one share of new common stock with resulting fractional shares rounded up to the next whole share. The Company also announced that it will proportionately reduce the number of its authorized shares of common stock.




Trading of the Company’s common stock on The NASDAQ Capital Market was suspended at the opening of business on September 14, 2012, due to the fact that the Company did not meet the $1 minimum bid price stock listing requirement of NASDAQ for ten trading days prior to September 20, 2012, the expiration date on the Company’s six-month extension to meet this listing requirement.




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On September 14, 2012, the Company’s common stock began trading on the OTC Market’s OTCQB marketplace. The Company’s common stock is quoted under the symbol “SAPX.” The Company is applying to trade on the highest OTC marketplace, OTCQX, but is quoted on the OTCQB tier until the Company is eligible to be quoted on the OTCQX.




On January 28, 2013, at a shareholders’ meeting, an increase in the number of authorized shares of the Company’s shares to 250,000,000 was approved, with 1,000,000 designated for preferred shares, and 249,000,000 as common shares.





The Board of Directors was also authorized to increase the number of shares of the Company’s common stock issuable in the Company’s 2012 Stock Incentive Plan from 71,429 to 15,000,000.





On May 2, 2013, the Company announced a 1-for-50 reverse split of its common stock effective as of 4:01p.m. EDT. By virtue of the reverse split, every 50 shares of the outstanding common stock were combined and converted into one share of new common stock with resulting fractional shares rounded up to the next whole share. The Company has also reduced the number of authorized shares of its common stock using the same 1-for-50 ratio, while the total authorized shares of its capital stock remained unchanged. The Board of Directors has designated the resulting shares of Seven Arts' unallocated capital stock as authorized common stock. This increases the aggregate authorized shares of common stock to 249 million.




On April 9 2013 Seven Arts Music and Television LLC was incorporated in Nevada. . The division will broaden the Company’s activities into the television and technology sectors.




Subsidiaries




Seven Arts Filmed Entertainment Limited is the main film operating company of the Group. It is a United Kingdom registered private limited company established for the production and licensing of motion picture rights, It 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, pay-per-view, and free television.




Seven Arts Music Inc. (“SAM”) and Big Jake Music (collectively the music division) became wholly owned subsidiaries of the Company on February 23, 2012, although start -up costs had been incurred as early as September 2011. The delivery of the first of the DMX albums acquired from David Michery was released on September 11, 2012 and initial costs in creating the first album for Bone Thugs-N-Harmony are being incurred for delivery in February, 2013. Several other new artists are being considered by SAM .




The agreements under which SAM acquired its music assets were effective as of September 29, 2011 (Big Jake Music) and December 19, 2011 (Michery Assets) publicly announced and business activities commenced on those dates, but definitive agreements were not executed until February 23, 2012 .




With the BJM transaction the Company, gained control of BJM by issuing Series B Preferred Stock as consideration. BJM although not operational, had inputs, in the form of intangible assets, including access to artists and customers and distribution channels and were pursuing a plan to produce outputs (the recordings and CDs or digital downloads).




At the time of acquisition the only assets were the intangibles, and certain media credits, which could not be precisely valued. BJM’s common shares were not publically traded, Per the guidelines for acquisition accounting, as the only asset was the intangible assets we have categorized as “music assets”, all the consideration was allocated to the fair value of the music assets.




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Seven Arts Music and Television




On April 9 2013 Seven Arts Music and Television LLC was incorporated in Nevada. . The division will broaden the Company’s activities into the television and technology sectors.




Emerging Growth Company Critical Accounting Policy Disclosure:




The Company qualifies as an “emerging growth company” under the 2012 JOBS Act.  Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.  As an emerging grown company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.The Company may elect to take advantage of the benefits of this extended transition period in the future.




Capital Structure:




On August 31, 2012, the Board of Directors approved a 1:70 reverse split, but to do so had to reduce the authorized common stock to 35,667,840 shares.




On January 28, 2013, at a shareholders’ meeting, an increase in the number of authorized shares of the Company’s shares to 250,000,000 was approved, with 1,000,000 designated for preferred shares, and 249,000,000 as common shares.





The Board of Directors was also authorized to increase the number of shares of the Company’s common stock issuable in the Company’s 2012 Stock Incentive Plan from 71,429 to 20,000,000.





On May 2, 2013, the Company announced a 1-for-50 reverse split of its common stock effective as of 4:01p.m. EDT. By virtue of the reverse split, every 50 shares of the outstanding common stock were combined and converted into one share of new common stock with resulting fractional shares rounded up to the next whole share. The Company has also reduced the number of authorized shares of its common stock using the same 1-for-50 ratio, while the total authorized shares of its capital stock remained unchanged. The Board of Directors has designated the resulting shares of Seven Arts' unallocated capital stock as authorized common stock. This increases the aggregate authorized shares of common stock to 249 million.




All amounts of common stock presented in these financial statements have been restated for all historical periods to reflect these reverse stock splits.




Unaudited Financial Statements:




The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three and nine months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013. Events occurring subsequent to March 31, 2013 have been evaluated for potential recognition or disclosure in the unaudited consolidated financial statements for the three and nine months ended March 31, 2013.




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The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the Securities and Exchange Commission (the “SEC”) on October 15, 2012.




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 subsidiaries:




●
Seven Arts Filmed Entertainment, Limited (“SAFE, Ltd.”) (100% owned)●
Seven Arts Music, Inc. (“SAM”) (100% owned) and●
Big Jake Music, Inc. (“BJM”) (100% owned)●
Seven Arts Filmed Entertainment Louisiana LLC (“SAFELA”) (As of June 30, 2012) (60% owned by SAE, 40% owned by Palm Finance)




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." All material intercompany balances and transactions are eliminated. The Company does not have any variable interest or special purpose entities.   The Company presents Palm Finance’s 40% share of SAFELA’s profit or loss as a non-controlling interest.   For the nine months ended March 31, 2032, SAFELA’s net loss was $644,457.




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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.




Revenue Recognition:




FILMS




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 as revenue. The Company does not recognize any revenues relating to minimum guarantee on any motion picture or related amortization expense 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 of any sales or value added taxes charged to customers.




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MUSIC




Revenue, which equates to an agreed share of gross receipts, is recognized as income when the Company is notified of the amounts by the distribution agent through their distribution reports.




Revenue is recorded:




a)
net of any sales or value added taxes charged to customersb)
net of discounts agreed with customersc)
net of returns provision agreed with the distributor andd)
grossed up for the distribution fee charged by the distribution agent.





Revenue from digital distribution will be reported by the various digital platforms such as iTunes in their periodic reports and posted as received.




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 productionsb)
Canada for their Canadian productionsc)
Louisiana for their US productionsd)
Tax preferred financing deals





These tax credits may be treated as a reduction in the capitalized costs of the film assets they are financing or as producer fees to us if the tax credits are earned and owned by a company in the Group and paid to us as overhead or producer fees.




SAPLA REVENUE SHARING FEES





Revenue in the form of fee income is due to the Company from related party, SAPLA (owned by the wife of Peter Hoffman, the Company’s CEO) in the amount of the net proceeds from the disposition of the tax credits by SAPLA. In accordance with an intercompany agreement between SAE and SAPLA, all revenues earned by SAPLA are due to SAE.




Foreign Currency Transactions and Comprehensive Income:




The Company’s functional currency, as well as that of all the Company’s subsidiaries, 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.




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.




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 (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.




12
 Table of Contents




The Company accounts for uncertain tax positions according to the provisions of ASC 740. ASC 740 contains a two-step approach for recognizing and measuring uncertain tax positions. Tax positions are evaluated for recognition by determining if the weight of available evidence indicates that it is probable that the position will be sustained on audit, including resolution of related appeals or litigation. Tax benefits are then measured as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. No material changes have occurred in the Company’s tax positions taken as of June 30, 2012 and in the three and nine months ended March 31, 2013.




The Company has provided a valuation allowance against all existing and newly created deferred tax assets as of March 31, 2013, as it is more likely than not that its deferred tax assets are not currently realizable due to the net operating losses incurred by the Company.




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 $39, 062 and $171,062 at March 31, 2013 and June 30, 2012 respectively. Substantially all of the trade receivables in the consolidated financial statements are pledged as security for borrowings by the Company.




Due To/Due From Related Parties




In September 2004, the Company’s predecessor entered into an agreement with SAP under which SAP provided the services of Mr. Peter Hoffman for the amount of his contracted salary and the Los Angeles office and staff of SAP to the Company’s predecessor at cost.  Pursuant to two inter Company agreements, SAP also from time-to-time owned limited liability companies in the United States which distributed the Company’s motion pictures for a fee, with all profits ensuing to the benefit of the Company. These companies also provided other services to the Company at no fee other than Mr. Hoffman’s salary and the direct third-party costs of SAP’s Los Angeles office, all of which were reflected in the Company’s financial statements. Portions of Mr. Hoffman’s salary have not been paid to him and have been reflected as Due To Related Party. During the nine months ended March 31, 2013, 147,143 (post split) shares were issued in satisfaction of $2,091,227 of this liability.  These shares are being held as collateral against certain loans and will be returned to the Company, if not called as collateral, when the related loans are paid or converted.




These other services may include 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.  SAP assigned to the Company any proceeds arising from services performed by SAP on its behalf. SAP was granted the power and authority to enter into agreements on the Company’s behalf. These agreements have terminated as of December 31, 2011.




13
 Table of Contents




SAP 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, and have paid expenses on each other’s behalf.




Fee Income Receivable from Related Party -- Current and Long Term Receivable




Income due from SAPLA under the terms of an intercompany agreement with SAE whereby any revenue earned by SAPLA is due to SAE Inc.  Any fees due later than twelve months are classified as Long Term Receivable.




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.   Additionally, the Company has approximately $200,000 and $125,000 in revenue to be received from digital platforms on the films, The Pool Boys and Drunkboat, respectively, which has been earned but not received as of March 31, 2013.  Also included in other receivables is approximately $150,000 receivable from the Company’s distributor of the DMX album.  The Company released the album and shipped approximately 110,000 units during the quarter ended September 30, 2012.  The receivable is net of a customary allowance for returns.




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.




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 therefore it is 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.




14
 Table of Contents




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.





Music Assets:





The initial material assets that were acquired comprise 52 completed sound recordings including two completed albums with “DMX”, up to two additional albums from “DMX” and up to five albums from “Bone Thugs-N-Harmony”.




Music assets include the unamortized costs of completed albums, singles and videos which have been produced by the Company or for which the Company has acquired distribution rights, libraries acquired as part of acquisitions and albums in progress and in development.  For albums produced by the Company, capitalized costs include all direct production and financing costs, capitalized interest and production overhead.




Costs of acquiring and producing music assets will be amortized using the individual-album-forecast method, whereby these costs are amortized 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 or sale of the music.





Leasehold Improvements:




On June 30, 2012, the Company acquired SAFELA, which was previously a related party company. SAFELA owns, in its capacity, a 30 year lease on 807 Esplanade, New Orleans, Louisiana, which was constructed as a production and post-production facility for the Company’s use. Additionally, SAFELA owns the capitalized leasehold improvements in 807 Esplanade and the related debt which financed the construction. Through this acquisition, the Company has capitalized the leasehold improvements and assumed the debt related. As the leasehold improvements and the debt are booked at the same amounts, no net assets were transferred into the Company and no additional consideration has been paid.





The post production facility commenced operations on July 1, 2012.  The leasehold improvements are being amortized over the useful life of the lease.




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.




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.




15
 Table of Contents




Deferred Income:




Any income received from customers before a film is delivered for release (such as deposits on distribution contracts) is recorded as a deferred income until all of the criteria for the Company’s revenue recognition policy have been met.




Provision for Earn-Out for David Michery/Big Jake Music:




The Company’s Asset Purchase Agreement with David Michery provided for 50,000 of the Company’s $100 par, Convertible Redeemable Series B Preferred Shares, be held in Escrow until the Net EBIT (as defined in the agreement) from distribution of the DMX Albums and two albums embodying the performance of Bone Thugs-n-Harmony exceeds $5,000,000, as confirmed by the Company’s independent auditor.   At the end of five years, should the Net EBIT be less than $5,000,000, the shares will be released on a fractional basis, as defined in the agreement.  The Company has determined the current estimate of fair value of the earn-out to be $0.




In connection with the acquisition of the stock of BJM, the Company issued 80,000 shares of the Company’s Series B convertible preferred stock, par value $100, convertible at approximately $1.10 per share, to Jake Shapiro and his assigns, with 10,000 being delivered to him at time of execution and the additional 70,000 shares to be held in escrow until such time as certain specific terms are met. 40,000 of the shares are subject to proving valuation and usage of certain advertising credits and 30,000 shares are subject to an earn-out over a two year period.




The Company has determined the fair value of the earn-out with regard to the proving of the media credits is $50,000, as of March 31, 2013 and June 30, 2012 which the Board believes is the value of an equivalent public relations campaign for the two projects for which the credits have been used. Mr. Sharpiro does have the right to seek an independent valuation.




Asset Transfer Agreement:




On June 11, 2010, Seven Arts Entertainment, Inc. (“SAE”), a Nevada Corporation, was formed and became a wholly 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, 28,571 (2,000,000 pre-split) 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.




The assets and certain of the liabilities of PLC were brought across at net book value. All related party balances of PLC were left in the original company as were the shares in SAFE(UK) Ltd and Cinematic Finance Ltd. All disputed debts were left with the PLC. The “price” paid for the asset transfer was a one for one share issue in SAE and an issuance of n additional pre-split 2,000,000 (28,571 post-split) shares in SAE .  The issuance of the 2,000,000 shares was booked at the closing market price on August 31 2011, which was $0.66/share.




16
 Table of Contents




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. 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 March 31, 2013 and 2011, 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-Merton 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 now operates in three business segments as a motion picture producer and distributor; as a music label managing the assets of David Michery and Big Jake Music and as a provider of both production and post-production services at its facility at 807 Esplanade in New Orleans. The Company believes that its businesses should be reported as three business segments (See Note 2 - Segment Information).




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 is 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 to not 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 9.




Reclassification:




Certain prior year balances were reclassified to conform with current year presentation.




17
 Table of Contents




NOTE 2 – SEGMENT INFORMATION




In accordance with ASC 280 “Segment Reporting”, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance.  Our chief decision maker, as defined under the FASB’s guidance, is a combination of the Chief Executive Officer and the Chief Financial Officer.




In the quarter ended March 31, 2012, the Company formed a new subsidiary, Seven Arts Music, and acquired music assets from David Michery and purchased the stock of Big Jake Music.  This was a new line of business for the Company.  All music company sales relate to the release of the first DMX “Undisputed” album.




On June 30, 2012, the Company acquired SAFELA, which was previously a related party company. SAFELA owns, in its capacity, a 30 year lease on 807 Esplanade, New Orleans, Louisiana, which was constructed as a production and post-production facility for the Company’s use.  The post production facility commenced operations on July 1, 2012.  This is also a new line of business for the Company.




The table below presents the financial information for the three reportable segments for the three and nine months ended March 31, 2013:




Three Months EndedMarch 31, 2013Film


Music


Post- Production(SAFE)


(SAM)


(SAFELA)


TotalRevenue

$
350,636


$
0


$
21,624


$
372,260Cost of revenue

$
(382,980
)

$
(139,406
)

$
(42,392
)


(564,778
)Gross profit/(loss)


(32,344
)


(139,405
)


(20,768
)


(192,518
)Operating expenses


(185,120
)


(128,244
)


(48,316
)


(361,681
)Loss from operations

$
(217,464
)

$
(267,650
)

$
(69,085
)


(554,199
)SAE Inc.














(833,300
)Total Operating Loss













$
(1,387,499
)
  Nine Months EndedMarch 31, 2013Film


Music


Post- Production(SAFE)


(SAM)


(SAFELA)


TotalRevenue

$
744,748


$
927,645


$
39,702


$
1,712,095Cost of revenue


(581,733
)


(986,804
)


(123,167
)


(1,691,704
)Gross profit/(loss)


163,015



(59,158
)


(83,465
)


20,391Operating expenses


(967,701
)


(373,989
)


(136,702
)


(1,478,393
)Loss from operations

$
(804,686
)

$
(433,148
)

$
(220,168
)


(1,458,002
)SAE Inc.














(1,184,016
)Total Operating Loss













$
(2,642,018
)
  Assets
  March 31,

2013


June 30,

2012Film assets

$
14,912,185


$
14,612,609Music assets


3,122,043



2,923,474Post-production assets


4,890,994



4,551,270
 
 18
 Table of Contents


NOTE 3 – RELATED PARTY DUE TO/DUE FROM




SAP, Inc. directly or through various related 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 March 31, 2013 and June 30, 2012 were $89,176 and $1,055,633, respectively.




As of March 31, 2013 :

SAE


SAFE


SAFELA


CONSOLIDATED BALANCEDue From:-SAP Inc.

$
1,796,583


$
-


$
-


$
1,796,583SAP LOU


164,386



-



-



164,386SAP PLC


133,337



-



-



133,337Peter Hoffman


-



-



103



103Total

$
2,094,306


$
-


$
103


$
2,094,409Due to:-SAP Inc.

$
-


$
(21,150
)

$
-


$
(21,150
)Peter Hoffman


(1,644,825
)


(264,330
)


-



(1,909,155
)SAFE (UK)


-



(13,556
)


-



(13,556
)SAP PLC


-



(61,372
)


-



(61,372
)$
(1,644,825
)

$
(360,408
)

$



$
(2,005,233
)





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. (previously owned by Peter Hoffman) was transferred to the listing predecessor of SAE on September 1, 2011.





SAP Inc. and Louisiana Companies:





The Company’s Chief Executive Officer, Peter Hoffman, controls several companies, including (prior to September 10, 2011) 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 PLC, 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 include 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.




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 Table of Contents
  Peter Hoffman:
  In September 2004, the Company’s predecessor entered into an agreement with SAP under which SAP provided the services of Mr. Peter Hoffman for the amount of his contracted salary and the Los Angeles office and staff of SAP Inc. to the Company’s predecessor at cost.  Pursuant to two inter Company agreements, SAP also from time-to-time owned limited liability companies in the United States which distributed the Company’s motion pictures for a fee, with all profits ensuing to the benefit of the Company. These companies also provided other services to the Company at no fee other than Mr. Hoffman’s salary and the direct third-party costs of SAP’s Los Angeles office, all of which were reflected in the Company’s financial statements.  Portions of Mr. Hoffman’s salary have not been paid to him and have been reflected as Due To Related Party.




During the nine months ended March 31, 2013, 7,143 (25,000,000 pre-split) and 140,000 (7,000,000 pre-split) shares were issued in exchange for $914,786, and $1,190,000, respectively, of the Due to related party balance.  The 7,143 shares have been pledged to JMJ Financial in connection with a $500,000 convertible debenture, as collateral against repayment of the note. The 140,000 shares have been pledged to Tonaquint Inc, in connection with a total of $590,000 in convertible debentures, under the terms of an amendment dated October 5, 2012, as collateral against repayment of the note. (Note 8) In the event of a default on either of the notes the holder may transfer and sell the pledged shares and apply the proceeds against the outstanding amounts on the notes. Per agreements between the Company and Mr. Hoffman in respect to the pledged shares, if the pledged shares are sold and applied to the note balance, or if the shares are not utilized by the pledges and returned to the Company, Mr. Hoffman’s Due to related party balance as of the date of the agreements, will be reinstated. Due to the future obligation to in substance repurchase the shares and reinstate the Due to related party balance, the shares have been treated as if issued for no consideration, and a liability for $2,104,786 was recognized included in the Due to related party balance for the obligation to repurchase the pledged shares.




807 Esplanade Guarantee:





Seven Arts Pictures Louisiana LLC, (“SAPLA”) a related party 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 the 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 plus interest has been drawn under the terms of this Credit Agreement, as of December 31, 2012. As of June 30, 2012, the Company assumed the liability for $1,000,000 of this amount plus a contingent sum of $750,000 due to Advantage Capital (contingent on receipt of tax credit revenues) due to an agreement with the now mortgagor Palm Finance.





A construction loan of $1,850,000 previously guaranteed by the Company has now been assumed by the Company for 807 Esplanade.





807 Esplanade Advances:





On February 28, 2012, the Company took out a convertible loan of $200,000 from Rowett Capital Ltd. These have been loaned to 807 Esplanade to cover outstanding interest payments due on the construction loan on 807 Esplanade previously guaranteed by the Company.  Three additional convertible loans were taken out totaling $600,000 and then loaned onto SAPLA to pay down the construction loan on the property 807 Esplanade, as to not further delay the construction and opening of the facility, for which the Company will have a 30 year lease to operate a post-production facility. 
 NOTE 4 – FEE INCOME RECEIVABLE FROM RELATED PARTY
 
 Under the terms of the related party agreement between SAPLA and SAE  all income generated by SAPLA is due to SAE as fee income.    SAPLA is due to receive approximately $9,447,544 from disposition of Louisiana and Federal historic rehabilitation and film infrastructure tax credits for the restoration and the establishment of a post-production facility at 807 Esplanade.
 
 SAPLA will pay the proceeds from disposition of such tax credits to SAE as fee income.   The Company has provided a reserve of $1,906,646 against this receipt to allow for cost of disposing the credits and a further reserve against potential disallowance of any expenditures by Louisiana or Federal taxing authorities, which is not anticipated by Management.




20
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 SAPLA has filed for historical rehabilitation tax credits available from the United States (26%) and Louisiana (25%) on approximately $9,500,000 of historical rehabilitation expenses paid in connection with the renovation of  the building and property at 807 Esplanade Avenue in New Orleans, Louisiana (the “Property”) and reflected in a compilation of expenses by an independent accounting firm. SAPLA has filed the Part I application for historic rehabilitation credits and has received the Part II and Part III approvals from the United States Department of Parks with respect to the Property.  SAPLA have allocated the Federal historic rehabilitation credits to investors in its lessee, 807 Esplanade Ave. MT LLC (“MT”), who have completed the necessary documentation for the transfer to take place.  We expect the credits will be received upon the filing of the investor’s amended tax return for 2011 and 2012.  There is nothing further that needs to be done on this matter to assure the collection of these sums.  Upon filing the tax returns and utilizing the credits,  the investor will reduce our  indebtedness to them as a result of such allocation.
  SAPLA will assign the Louisiana historic rehabilitation for cash.   All creative and historic approvals have been given with respect to these credits.  The State has not yet issued its certification of the amounts after review of the required audit. Per discussions management has had with the Inspector General’s office, the Company believes the issue to be resolved shortly.
  SAPLA has also filed for Louisiana film infrastructure tax credits (40%) on all of its investment of approximately $11,500,000 in connection with the Property to date, as reflected in an audit report of an independent accounting firm (which also includes audits of all rehabilitation expenses). SAPLA has approval from Louisiana that the Property is a certified state film infrastructure project and SAFELA, as lessee of MT, is now operating a production and post-production facility at the Property.
  Louisiana has certified approximately $6,500,000 of film infrastructure expenditure, the tax credits accruing on which SAPLA will assign for cash, with the remaining expenses remaining under consideration by the Louisiana Department of Economic Development (“LED”).   SAPLA has received no objections to any of its film rehabilitation expenses from LED as reflected in the audit report submitted to LEDF on July 2, 2012.   Under a published Opinion of the Attorney General of Louisiana, the Louisiana tax credits vest upon certification as a film infrastructure project which occurred in 2008.   Revenue is not recognized until the required audit or compilation is complete and available to be submitted to the appropriate agency.    The reserve established by the Company against the revenue to be received from SAPLA from disposition of the tax credits reflects potential discounts on the assignment of credits for cash and any potential reduction in the amount of expenses that may be subject to credits by objection of any Federal or Louisiana agency, even though the Company has at present no reason to believe there will be any such reductions.
  As of December 31, 2012, the current director of LED has toured 807 Esplanade and seemed satisfied with his review.  He requested the building get a permanent business license and to confirm that the equipment in the building is permanent.  The permanent business license was obtained on April 1 and the permanency of the equipment was confirmed by that date as well. The Company is not aware of any other issues with respect to the State Film Infrastructure Credits, which have already been confirmed in a letter in September of 2012.  The only issue appears to be whether or not the building has actually been “placed in service” to the satisfaction of LED.
 
 NOTE 5 – FILM COSTS
  Film costs as of March 31, 2013 and June 30, 2012 are as follows:
  March 31, 2013


June 30, 2012Film Costs, beginning of period

$
14,612,609


$
23,133,559Additions to film costs during the period


829,941



1,934,873Total film costs


15,442,547



25,068,432Less:  Amortization and impairment of film costs


(530,363
)


(3,996,576
)Less: Impairment of film costs obtained in asset transfer


-



(6,459,247
)Total film costs, net of accumulated amortization

$
14,912,185


$
14,612,609
  21
 Table of Contents
 
 Amortization of film costs was $530,363 and $357,668 for the nine and three months ended March 31, 2013. 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.  The Company recognized an impairment of $6,459,247 related to film costs during the year ended June 30, 2012.
  Analysis of film costs
  NBV as at 03/31/13


% amortized inCompleted




Next 12 months


Next 3 yearsNew releasesThe Pool Boys

$
1,494,924



100
%


100
%Nine Miles Down


1,045,267



100
%


100
%Night of the Demons


430,587



55
%


100
%$
2,970,779Library titlesTotal Library

$
3,912,032



56
%


82
%Total Completed Films

$
6,882,811Development

$
7,854,452March 31, 2013

$
14,737,263
  NOTE 6 – MUSIC ASSETS
  Music assets as of March 31, 2013 and June 30, 2012 are as follows:
  22
 Table of Contents
  March 31,2013


June 30,2012Music assets, as July 1 2012

$
2,923,474


$
-Additions to music assets  during the period


606,774



2,923,474Total music assets


3,530,248



2,923,474Less: Accumulated amortization


(408,205
)


-Total music assets, net of accumulated amortization

$
3,122,043


$
2,923,474
  The initial material assets that were acquired comprise 52 completed sound recordings including  two completed albums with “DMX”, up to two additional albums from “DMX” and up to five albums from “Bone Thugs-N-Harmony”(“BTH”).
  The music assets were initially recorded at the value of the preferred stock issued, and capitalized costs incurred in the production of the current DMX album and related videos.
  Due to the decline in the common stock price, the Company reviewed the redemption value of the Preferred Stock to common on the contractually agreed conversion date and, as agreed by the Board of Directors, revalued the Preferred Stock at the 10 day volume weighted closing bid price of the Company’s common stock on September 29, 2012 ($0.29/share), as if all shares of Series B Preferred Stock issued and not in escrow were converted in common stock at the conversion price of $1.10 per share.   No earnout provision has been made for any shares of Preferred Stock not now issued, as management does not believe the conditions for release of such shares will be met.
  The Company reviews capitalized music assets 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.    For the three and nine months ended March 31, 2013, amortization and impairment of $0 and $408,205 has been recognized.
  The $408,205 was the amortization charge based on sales of the DMX “Undisputed” album compared to current forecast sales for the assets acquired. No impairment has been booked as management believes it is too early in the asset cycle. The second single from the “Undisputed” album has not yet been officially released but is currently available for download on iTunes, which management are hopeful will lead to increased sales of the album.
  NOTE 7 – LEASEHOLD IMPROVEMENTS
  On June 30, 2012, the Company acquired SAFELA, which was previously a related party company.  SAFELA owns, in its capacity, a 30 year lease on 807 Esplanade, New Orleans, Louisiana, which was constructed as a production and post-production facility for the Company’s use.  Additionally, SAFELA owns the capitalized leasehold improvements in 807 Esplanade and the related debt which financed the construction.  Through this acquisition, the Company has capitalized the leasehold improvements and assumed the debt related.  As the leasehold improvements and the debt are booked at the same amounts, no net assets were transferred into the Company and no additional consideration has been paid.
  The post production facility commenced operations on July 1, 2012. The leasehold improvements will be amortized over the useful life of the lease.  For the three and nine months ended March 31, 2013, amortization expense of $42,392 and $123,167 has been recognized.
 
 23
 Table of Contents
  NOTE 8 – LOANS PAYABLE
  The Company has the following indebtedness as of March 31, 2013:
 
 Lender

Balance including accrued interest


Interest Rate

Issuance DateFilm and Production Loans:Palm Finance Corporation

$
5,111,077



18
%




Forebearance agreement /workout agreement number 6Palm Finance Corporation


2,039,898



18
%




Forebearance agreement /workout agreement number 6120db Film Finance LLC


4,425


Not stated


8/25/2008

Due on demandSafron Capital Corp


20,700



10
%
10/31/2012

3/31/2013

Due on demandPalm Finance Corporation


105,996



10
%
7/30/2012



Due on demand or on settlement of the Content litigationTotal Film and Production Loans

$
7,282,096Other Loans:Trafalgar Capital

$
603,197



9
%
10/15/2008

08/31/2009

Due on demandJMJ Financial


458,739



10
%
06/29/2012

10/27/2012

Due on demandGHP


137,573



18
%
01/21/2011

04/30/2012

Due on demandLotusCapital


103,219



5
%
8/8/2012

12/7/2012

Due on demandTonaquint


476,793



8
%
08/22/2012

7/2/2013

Due on demand1,779,521ConvertiblesAgua Alta (Cold Fusion)


109,139



12
%
06/25/2012

06/25/2013Beaufort Ventures PLC


54,554



12
%
06/26/2012

06/26/2013Beaufort Ventures PLC


160,192



10
%
07/26/2012

02/25/2013

Due on demandBeaufort Ventures PLC


234,647



10
%
07/31/2012

08/30/2012

Due on demandBeaufort Ventures PLC


11,679



12
%
11/30/2012

11/30/2013Beaufort Ventures, PLC


80,424



12
%
6/4/2012

4/5/2013

Due on demandBeaufort Ventures, PLC


80,240



10
%
07/19/2012

07/19/2012

Due on demandBeaufort Ventures, PLC


53,493



10
%
7/19/2012

07/19/2013Beaufort Ventures, PLC


26,568



10
%
08/14/2012

8/2/2013Beaufort Ventures, PLC


76,677



12
%
1/22/2013

7/22/2013Old Capital Ltd


274,904



12
%
05/31/2012

05/30/2013Runway Investments, LTD


149,818



12
%
11/1/2012

09/30/2012

Due on demandSendero Capital Ltd


285,424



12
%
01/24/2012

9/30/2012

Due on demandCMS Capital


38,495



12
%
12/15/2011

06/30/2012

Due on demandRachel Cohen Skydell


38,495



12
%
12/15/2011

06/30/2012

Due on demandDominion Capital LLC


35,993



10
%
10/24/2012

02/18/2013

Due on demandDominion Capital LLC


61,032



10
%
10/24/2012

02/18/2012

Due on demandHanover Holdings LLC


288,714



10
%
02/23/2012

08/23/2012

Due on demandIsaac Capital Group LLC


230,475



12
%
01/20/2012

06/30/2012

Due on demandFirerock Capital Inc


33,419



10
%
06/21/2012

12/21/2012

Due on demandSafron Capital Corp.


3,270



10
%
7/5/2012

7/12/2012

Due on demandTangiers Investment Group, LLC


24,999



10
%
8/8/2012

8/8/2013Tripod Group, LLC


120,776



12
%
1/2/2012

1/2/2013

Due on demand$
2,473,427807 EsplanadePalm Finance Corporation- mortgage and construction loan

$
3,588,450



15
%$
3,588,450
 
 *The Company does not agree with interest charged by Palm on the 2011 forgiven interest on these two film loans and believes the dispute will be resolved once the loans are repaid.
  24
 Table of Contents
  The loan balances include accrued interest of $5,533,459 at March 31, 2013.  Interest expense on all the loans for the three and nine months ended March 31, 2013 was $527,234 and $2,035,923, respectively.  During the nine months ended March 31, 2013, the Company entered into several new loans, included in the above schedule (unless fully converted).
  Substantially all of these loans were in exchange for existing loans or other debt of the Company, under assignment agreements between the original noteholder and the new noteholder.  The exchanges were evaluated for any gains or losses to be recognized upon extinguishment of the original debt, and it was determined there were no gains or losses to be recognized.
  The Company has evaluated their convertible notes for embedded derivative features and has determined that no derivative liability is necessary to recognize. Convertible debts are all convertible to common stock at the option of the holder. They all bear interest at varying rates and convert at different times and conversion  prices according to the contract.  The conversion features were evaluated for any beneficial aspect and determined that no beneficial conversion feature is necessary to recognize.  During the three months ended March 31, 2013 the majority of convertible notes assigned to new noteholders were immediately converted, and do not remain outstanding as of the end of the period.
  Tonaquint
  On August 22, 2012, the Company entered into a purchase agreement for several convertible debentures (or “notes”) with Tonaquint, Inc.  (“Tonaquint”), in the principal amounts of $310,000, $255,000 and $125,000,   The first convertible debenture under the agreement was issued on August 22, 2012 for $310,000, less a discount of $60,000 and $10,000 in expenses.  On October 5, 2012, due to a delisting default, an amendment was entered into which called for one of the  additional convertible debentures to be issued in the principle amount of $155,000 (less a $25,000 discount and $5,000 in fees) and the second in the principal amount of $125,000, to be issued in the future.  This note has not been funded as of March 31, 2013.  The debt discounts have been immediately expensed, based upon the short term nature of the notes, and the insignificance of the amount as compared to the total Convertible Debenture amount and to interest expense over the term of the note.
  The convertible debentures are convertible at $0.20, which is above the market value of the Company’s common stock on issuance date, so there is no beneficial element recognized.  As a condition of the amendment the outstanding balance of the first note was increased to $412,990 (to be reduced by $50,000 if the note is paid on its maturity date).  The notes are payable on certain installment dates, to be satisfied by conversion of the installment amount, or cash, at the option of the Company (provided no equity failure conditions, as defined in the agreement, exist, in which cash the installment payment must be in cash.)  As part of the amendment, Tonaquint entered into a Pledge Agreement with Peter Hoffman, for 140,000 post split/7,000,000 pre split shares of the Company’s common stock as collateral against repayment of the note.  In the event of a default on the notes the holder may transfer and sell the pledged shares and apply the proceeds against the outstanding amounts on the notes. (Note 3)
  The Company converted $2,028,390 of the film and production loans (including 807 Esplanade building loans) into 2,630,392 (post 1:50 split) shares of common stock during the nine months ended March 31, 2013.
  NOTE 9 – EQUITY TRANSACTIONS
  Third Quarter ended March 31, 2013: (all figures quoted reflect the 1:50 reverse split on May 2, 2013)
  Between January 1, 2013 and March 31, 2013, the Company issued  3,552,522 common shares at an average price of $0.40  per share.   The total number of shares outstanding on May 17 , 2013 was 4,703,978.
  25
 Table of Contents
  2,450,293

common shares were issued in satisfaction of film and production debt totalling $844,707 converted at an average conversion price of $0.34 per share.612,350

common shares were issued in satisfaction of various expenses  totalling $173,075  converted at an average conversion price of $0.28 per share.145,588

common shares of S-8 common stock were issued for consulting services totalling $134,994 at $0.93 per share20,000

common shares were issued at $0.25 per share upon conversion of $5,000 in partial settlement of a music contract324,292

shares were issued as collateral in settlement of an outstanding judgement  related to Nine Miles Down UK Ltd at $0.85 per share in satisfaction of a debt of $275,2463,552,522

Total shares issued in the quarter
 
 The shares issued as collateral arose out of a suit brought against Nine Miles Down UK Ltd, the original entity under which the film 9 Miles Down was being produced, as well as Seven Arts, among others.  The suit put the entity into liquidation, and rather than delay the production of the film, or harm the chain of title on the film, Seven Arts determined to settle the case.  As part of the settlement the Company is to pay £25,000 over a specified period of time, with restricted shares equal to the amount issued as collateral.  Additionally the settlement called for £150,000 restricted shares to be issued as collateral against the liquidation proceeds in favour of the creditors.  The restricted shares shall be released to cover any shortfall not realized upon liquidation.  As the Company has determined that it is unlikely for the liquidation to realize significant proceeds, it is considered to be probable that the shares will be released to cover the shortfall.  Therefore, as of March 31, 2013, the Company has recognized the fair value of the shares held as collateral, or $275,246, as well as the shares already released, as film costs.
  Second Quarter Ended December 31, 2012:
  Between October 1, 2012 and December 31, 2012, the Company issued 506,797 common shares at an average price of $5.73  per share.
  153,777

common shares were issued in satisfaction of film debt totalling $403,809, with an average conversion price of $2.63 per share.140,000

common shares were issued to Peter Hoffman, based on a market share price of $8.50 per share in exchange for debt of $1,190,000.  As the shares will be in substance repurchased and the debt reinstated at a point in the future, the shares were accounted for as if issued for no consideration (Note 3).69,091

common shares were issued at $14.50 per share upon conversion of 38,000 Series B preferred shares60,564

common shares were issued in satisfaction of various convertible loans totalling $133,537  at an average conversion price of $2.20 per share.35,456

common shares were issued at $1.20 per share in satisfaction of $42,723 of 807 Esplanade loans34,075

common shares were issued at $0.92 per share in satisfaction of $31,232 of expenses7,833

S-8 common shares were issued for consulting services totalling $82,500 at $10.53 per share6,000

common shares were issued to David Furth, a director,  at a price of $3.00 per share506,796

Total shares issued in the quarter
  Warrants and Options
  On December 17, 2012, the Company declared a warrant dividend to those persons beneficially owning its common stock as of the close of the markets on August 31, 2012. For every ten pre-reverse split shares of common stock held as of such date and time, the holders thereof will be entitled to receive one warrant as a dividend, exercisable at $1.50 per post-reverse split share (a “Warrant Share”), which expire on June 30, 2014. The warrants fair value was determined using the Black Scholes Merton Model.  The fair value of $480,371 has been recognized on the accompanying financial statement in Accumulated Deficit and Warrant Dividend to be distributed.
  26
 Table of Contents
  First Quarter Ended September 30, 2012:
  On August 31, 2011, NASDAQ approved the substitution of one share of SAE 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.
  During the three months ended September 30, 2012, Company issued 48,534 sharesat anaverage price of $56.58 per share in satisfaction of $2,446,219 of outstanding loans payable and accrued interest and 171 shares for $300,000 cash.
  5,161

common shares were issued in partial payment of the Palm debt to the value of $133,500 at an average conversion price of  $25.87 per share.21,161

common shares were issued in satisfaction of the Schism debt of $646,374 at an  average conversion price of $30.55 per share9,654

common shares were issued in satisfaction of various convertible loans totaling $586,114 converted at an average conversion price of $60.71 per share.1,814

common shares were issued for expenses totalling $179,800 for the music company  at $99.12 per share894

S-8 common shares were issued for consulting services totalling $54,200 at $60.63 per share4,883

common shares were issued for general expenses totalling $357,232 provided under the 3a9 authority at $73.16 per share.1,514

common shares were issued to lenders as fees for loan arrangements of $159,000 at $105.02 per share1,714

common shares were issued as collateral for a loan totalling $180,000 at $105.02 per share171

common shares were issued for $300,000 cash at $1,754.39 per share1,612

common shares were issued to cover 807 Esplanade construction fees totalling $150,000 at $93.05 per share-44

adjustment for reverse split shares48,534

Total shares issued in the quarter
  NOTE 10 – COMMITMENTS AND CONTINGENCIES
  With the exception of items, as noted below, there has been no significant changes to this litigation this period.
  Creditors Liquidation of SAP Plc.
  The Company’s listing predecessor 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”).   PLC’s principal creditors have appointed a liquidator for the orderly winding up of its remaining assets not transferred to the Company pursuant to the Asset Transfer Agreement, effective January 27, 2011. Based on discussions with the liquidator, our management believes this liquidation proceeding will have no material effect on the cost, business or market value of common stock.
  27
 Table of Contents
  Further Share Issue to SAE
  On June 11, 2010SAE, a Nevada Corporation, was formed and became a 100% owned subsidiary of 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 (pre-split/571 post split) of SAE were issued to PLC in order to satisfy any remaining obligations.  SAE Inc. may issue more shares of its common stock to resolve any claim made on the liquidation of PLC. The 2,000,000 pre-split shares were originally booked on January 27, 2012 at the market price on the day the SEC approved the transaction which was $3.94/share. Management now believe the shares should be booked at the August 31, 2012 market price of $0.66/share (pre-split) which is the date from which the shares in SAE were tradeable.
  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 the  production and post-production facility located at 807 Esplanade Avenue in New Orleans, Louisiana (“807 Esplanade”)  for aggregate principal advances of up to $3,700,000.   This agreement was guaranteed by the Company’s predecessor.   Approximately $3,700,000 plus interest has been drawn under the terms of this Credit Agreement, as of  June 30, 2012. The Company has now assumed the liability for $1,000,000 of this amount plus a contingent sum of $750,000 due to Advantage Capital (contingent on receipt of the tax credit revenues) due to an agreement with the now mortgagor Palm Finance.   A construction loan of $1,850,000 previously guaranteed by the Company has now been assumed by the Company. The Company has a 30 year lease on the property to operate a production and post-production facility.
  Armadillo
  The Company has guaranteed 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 stock from Armadillo.
  Fireworks Litigation
 
 The Company obtained summary judgment on February 10, 2011 in an action in Ontario Superior Court, Canada, 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 the High Court of England and Wales on September 7, 2011 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.  The Company’s motion for summary judgment against Content in the United Kingdom was demurred on March 18, 2013, but the dismissal did not reach the merits of the Company’s claims. The Company has also filed on May 27, 2011 an action in United States District Court in Los Angeles, California against Paramount Pictures for infringement of the Copyrights.  This action was dismissed by the District Court based on a claimed application of the statute of limitation and we have appealed to the Ninth Circuit.
 
 Jonesfilm
 
 Seven Arts Pictures plc (“PLC”), the Company’s listing predecessor, its then-subsidiary Seven Arts Filmed Entertainment Limited (“SAFE”) and Seven Arts Pictures Inc. (“SAP”), were the subject of an arbitration award of attorney fees totalling approximately $ 246 ,000, with interest and charges, both of which were reduced to judgment in favor of Jonesfilm (“JF ”) in a judgment dated June 19, 2007 entered by United States District Court in Los Angeles, California (“Judgment”).   Management believes the Company has no further liability in this matter.  JF asserts that the Company is liable as the “successor in interest” to PLC, which the Company denies.   JF has sought to enforce the Judgment against SAFE, Mr. Hoffman and SAP in proceedings filed on July 28, 2009 in United States District Court in New Orleans, Louisiana, in Case Nos. 09-4814715.  Therefore, Jonesfilm filed claims purportedly equal to the separate property of Mr. Hoffman’s wife in Case Nos. 11-1994 and 12-0535.  Mrs. Hoffman filed action against Jonesfilm in Case Nos. 11-2678 and Case No. [ ] to seek relief (from Jonesfilm’s actions against her and has separate property.  All proceedings are still pending.  SAFE and Mr. Hoffman’s appeal to the Fifth Circuit of the District Court’s finding that permits jurisdiction in Louisiana and denied Leeway Properties Inc., controlled by Mr. Hoffman, and SAFE have appealed to the Fifth Circuit (No. 11-311 24) an order of garnishment against Leeway and penalties and legal fees awarded in connection with that order of garnishment.
  28
 Table of Contents
  Arrowhead Target Fund
 
 Seven Arts Future Flow I (“SFF”), a limited liability company owned by SAP Inc., a company previously 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. 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.
 
 Arrowhead filed an action on September 22, 2010 in New York Supreme Court, New York, New York, 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.
 
 Arrowhead has purported to refile its claim against the Company and the other defendants. The Company will seek dismissal of these claims on the same grounds. The Company is presently in settlement discussions with Arrowhead, and continues to believe that Arrowhead’s claims against the Company are without substantial merit.
 
 Arrowhead Capital Partners – AGC Loan
 
 PLC, SAP and SAFE, and several special purpose companies formed by SAP 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 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.  ACG and he Company filed our motion for summary judgment which resulted in summary judgment in favor of ACG against SAFE, SAP and the special purpose companies.  That summary judgment is on appeal to the New York Court of Appeals .
  29
 Table of Contents
 
 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 Seven Arts Pictures Louisiana LLC (“SAPLA”) and has issued subpoenas for discovery of documents in the possession of the Company related to these tax credits.  The Company has complied with that subpoena on March 15, 2012.
 
 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. 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.   Parallel in California has been stayed by reason of the “Recognition Order” described in “Liquidation of Seven Arts Pictures plc.”   Parallel was permitted to pursue its remedies in the Los Angeles Superior Court proceedings based on actions of the liquidator.  Parallel’s motion for summary judgment has been denied. The Company believes that a favorable decision by the liquidator as discussed above will resolve this action in the Company’s favor.
 
 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.
 
 HMRC has requested interviews with three officers of PLC to discuss whether those officers were involved in the arrangements for subscription of shares in the relevant companies, the first of which with Ms. Elaine New, CFO, occurred in April 2012 and a second in May 2012. HMRC is now requesting to conduct the interview with Peter Hoffman.  PLC is fully cooperating with the investigation. PLC believes there is no basis for any claim of responsibility of any of its officers or employees. Based on facts currently known by PLC, there is no need for it to record a contingent liability in its financial statements in connection with the investigation or the related transactions.
  30
 Table of Contents
  NOTE 11 – NON-CONTROLLING INTEREST
  The Company’s subsidiary SAFELA is owned 60 % by the Company and 40% by another party. Accordingly, the subsidiary is included in the consolidated financial position and results of operations of the Company, with recognition of the non-controlling interest separately in the Statement of Operations and from the equity of the Company’s shareholders on the balance sheet.
  The activity of the non-controlling interest as of March 31, 2013 is as follows:
  Initial balance recognized at July 1, 2012

$
-Non-controlling interest's proportionate share of Net loss for the nine months ended March 31, 2013


257,783Non-controlling interest at March 31, 2013

$
257,783
 
 NOTE 12 – 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 March 31, 2013 and June 30, 2012, all of the Company’s financial assets and liabilities were considered current and due to the short maturity the carrying amounts are considered to approximate fair value.
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  NOTE 13 – SUBSEQUENT EVENTS
  On May 2, 2013, the Company announced a 1-for-50 reverse split of its common stock effective as of 4:01p.m. EDT. By virtue of the reverse split, every 50 shares of the  outstanding common stock were combined and converted into one share of new common stock with resulting fractional shares rounded up to the next whole share.  The Company has also reduced the number of authorized shares of its common stock using the same 1-for-50 ratio.  All share amounts in the accompanying financial statements have been restated to reflect this reverse stock split.
  Subsequent stock issuances:
  The Company issued the following shares of common stock subsequent to March 31, 2013:
  Between April 1, 2013 and May 17, 2013, the Company issued 401,286 common shares at an average price of $0.18 per share.   The total number of shares outstanding on May 17, 2013 was 4,703,978.
  160,000

common shares were issued in satisfaction of film debt  totalling $36,900 converted at an average conversion price of $0.23 per share.241,286

S-8 common shares were issued for consulting services totalling $33,780  at $0.14per share39

common shares were issued as adjustment for reverse split shares401,325
 
 Sixteen19:
 
 In October of 2012, SAFELA began negotiations with Sixteen19, a post production and digital production facility with offices in New York, Los Angeles and London, to run the operations of the production facility located at 807 Esplanade Avenue on New Orleans.  As of this date the parties have not completed a formal agreement.  It is not contemplated that there will be a new company formed for this joint venture, but rather a contracted partnership between SAFELA and Sixteen19. The name of the facility has been agreed to be French Quarter Film Center.
  The basic terms of the agreement to run the facility were agreed in early December as follows: SAFELA and Sixteen19 agreed to joint operational control of the facility. For any business which utilized residential or office space at the facility, SAFELA will earn 80% of the gross revenue and pay Sixteen19 a 20% commission. For any business which was considered editorial or digital daily work, Sixteen19 will earn 80% of the gross revenue and pay SAFELA a 20% commission. There was an agreed set of “base rates” and any deviation below the agreed level of base rates for any new business will have to be mutually agreed by Kate Hoffman on behalf of SAFELA and Pete Conlin on behalf of Sixteen19. In addition, SAFELA agreed to pay 100% of the costs associated with the running of the building, including but not limited to all utilities, cleaning, gardening, sundry supplies and repairs to any damage to the facility that did not included technical issues. Sixteen19 agreed to pay 100% of the equipment and personnel costs associated with the editorial and digital daily business. In addition, SAFELA and Sixtyeen19 agreed to split the salary of a facility manager 50/50.
  During the quarter ended March 31, 2013 the joint venture did contract some work with CBS Sports which was purely editorial and digital daily work performed at the facility.  As such, SAFELA is entitled to a twenty percent commission of the gross revenue paid by CBS Sports to Sixteen19.
  Form S-1:
  The Company is currently in the process of responding to SEC comments on the registration statement on Form S-1 which was filed with the SEC on January 22, 2013.
  Appointment of new Chairman and President
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  ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
 
 Certain statements in this document might constitute “forward-looking statements”. Some, but not all, forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” and “intend,” statements that an action or event “may,” “might,” “could,” “should,” or “will” be taken or occur, or other similar expressions. Although the Company has attempted to identify important factors that could cause actual results to differ materially from expected results, such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following risks: the need for additional financing; uncertainties and risks related to carrying on business in foreign countries; risks associated with third party infringement of copyrights and other intellectual property, especially the unauthorized duplication of motion picture DVDs and unauthorized distribution of motion pictures through the world wide web; risks associated with the lack of enforcement of applicable copyright and intellectual property laws, especially in foreign countries; risks associated with changing copyright and applicable intellectual property laws, especially in foreign countries; risks associated with changing distribution models for motion pictures, especially on the world wide web; risks associated with restrictions of motion picture content, especially in foreign countries; reliance on key personnel; the potential for conflicts of interest among certain officer, directors or promoters of the Company; the absence of dividends; currency fluctuations; competition; dilution; the volatility of the Company’s ordinary share price and volume; and tax consequences to United States shareholders. Except as required by law, the Company undertakes no obligation to revise any forward-looking statements because of new information, future events or otherwise.
 
 Company Overview:
 
 The following discussion should be read in conjunction with the preceding financial statements and footnotes thereto contained in this report. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Our actual results may differ materially from those contained in the forward-looking statements.
  We are an independent motion picture production company engaged in developing, financing, producing and licensing theatrical motion pictures with budgets in the range of $2 million to $15 million for exhibition in domestic (i.e. the United States and Canada) and foreign theatrical markets and for subsequent post-theatrical worldwide release in other forms of media, including DVD, home video, pay-per-view, and free television. Our pictures generally receive either a wide theatrical release (1,000 to 3,000 theaters in the United States) or only a limited theatrical release (50-300 theaters in the United States), or may even be released directly to post-theatrical markets, primarily DVD. Our pictures that receive limited theatrical release or post-theatrical release typically benefit from lower prints and advertising (“P & A”) cost and, in turn, improved gross profit margins. We determine the size of a theatrical release in the United States based on distributor and our estimates of the commercialprospects oftheatrical box office and our own evaluation of the level of expected theatrical release costs as opposed to our estimation of potential theatrical box office in the United States.
  No one picture had a principal or controlling share of gross revenues or operating profits in these periods.
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  Film Company
  We license distribution rights in our motion pictures in the United States and in most foreign territories prior to and during the production or upon the acquisition of rights to distribute a picture. We share in the commissions generated by the sales of the pictures. Sale of a license to distribute a motion picture prior to its delivery is termed a “pre-sale” and may occur at any time during the development and production process. In a typical license agreement, we license a picture to a distributor before it is produced or completed for an advance from the licensee, which advance is recoverable by the distributor from our share of the revenues generated by the distribution of the picture in the licensee’s territory, after deduction of the distributor’s expenses and distributor fee. The advance usually is in the form of a cash deposit plus a letter of credit or “bank letter” for the balance payable 10-20% on execution (i.e., the cash deposit) and the balance on delivery (i.e., the letter of credit or “bank letter”). The license grants the distributor the right to the post-theatrical release of the picture in all or certain media in their territory for a predetermined time period. After this time, the distribution rights revert back to us and we are then free to re-license the picture. The license specifies that the distributor is entitled to recoup its advance from the revenue generated by the release of the picture in all markets in its territory, as well as its release costs and distribution fees.
  After the distributor has recouped its advance, costs, and fees, any remaining revenue is shared with us according to a predetermined formula. This is known as an “overage” and can be a significant source of revenue for us from successful films. However, a film’s poor reception in one market does not preclude it from achieving success in another market and generating significant additional revenue for us in the form of an “overage” in that territory. In all of our licensing arrangements, we retain ownership of our films and maintain our control of each copyright. We intend to continue the practice of retaining underlying rights to our film projects in order to continue to build our motion picture library to license or sell in the future.
  We create a separate finance plan for each motion picture we produce. Accordingly, the sources of the funds for production of each motion picture vary according to each finance plan. We utilize financing based on state and foreign country tax credits (e.g. Louisiana, United Kingdom and Hungary) and direct subsidies, "mezzanine" or "gap" funds, which are senior to our equity, and senior secured financing with commercial banks or private lenders, together in certain cases with a limited investment from us, which is customarily less than 10% of the production budget. Since each finance plan is unique to each motion picture, we cannot generalize as to the amount we will utilize any of these sources of funds for a particular motion picture. We generally obtain some advances or guarantees prior to commitment to production of a motion picture project, but those amounts may not be substantial on smaller budgeted motion picture (e.g., under $10,000,000), and in certain cases we have committed to production with an insubstantial amount of advances and guarantees. Unless we can manage the risks of production through the use of these financing techniques, we will not likely commit to production of larger budget motion pictures (e.g., over $15,000,000), and we have never in the past committed to such productions, without substantial advances or guarantees from third-party distributors, or the equivalent in "non-recourse" financings.
  Music Company
  The Company incorporated Seven Arts Music Inc. (“SAM”) in the State of  Nevada on February 23, 2012, as a wholly owned subsidiary of the Company, although set-up costs had been incurred as early as September 2011.  The delivery of the first of the DMX albums acquired from David Michery was released on September 11, 2012 and initial costs in creating the first album for Bone Thugs-N-Harmony are being incurred for delivery mid 2013    Several other new artists are being considered by SAM.
  Post-Production Facility
  As of June 30, 2012, SAFELA was transferred to the Company.   SAFELA, which is 60% owned by the Company,  has a 30 year lease to run a production and pot-production facility at 807 Esplanade Avenue in New Orleans, Louisiana  (“807 Esplanade”). The facility commenced operations on July 1, 2012.
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  Company Outlook
  The principal factors that affected our results of operations have been the number of motion pictures delivered in a fiscal period, the distribution rights of motion pictures produced by others acquired in a fiscal period, the choice of motion pictures produced or acquired by us, management’s and talents' execution of the screenplay and production plan for each picture, the distribution and market reactions to the motion pictures once completed, management's ability to obtain financing and to re-negotiate financing on beneficial terms, the performance of our third-party distributors and our ability to take advantage of tax-incentivized financing. These factors will continue to be, in our opinion, the principal factors affecting future results of operation and our future financial condition. No particular factor has had a primary or principal effect on our operations and financial condition in the periods discussed below.
  Our revenues principally consist of amounts we earned from third-party distributors of our motion pictures. We recognize revenue from license fees as and when a motion picture is delivered to the territory to which the license relates if we have a contractual commitment and the term of license has begun or upon receipt of a royalty statement or other reliable information from a distributor of the amounts due to us from distribution of that picture. A motion picture is “delivered” when we have completed all aspects of production and may make playable copies of the motion picture for exhibition in a medium of exhibition such as theatrical, video, or television distribution.
  We also recognize revenue beyond an initial license fee from our share of gross receipts on motion pictures which we recognize as revenue when we are notified of the amounts that are due to us. In some fiscal periods, a significant portion of our revenue is derived from sources other than motion picture distribution, including the cancellation of debt and interest income on a financing transaction.
  We have also benefited significantly from our ability to raise third party film equity investments such as in tax advantaged transactions under which we transfer to third party investor’s tax benefits for motion picture production and distribution. These types of investments have enabled us to substantially reduce the cost basis of our motion pictures and even to record significant fee-related revenues.
  RESULTS OF OPERATIONS
  Results of Operations for the Three Months Ended March 31, 2013 and 2012
 
 We generated a net loss (after non-controlling interest) of $2,358,240  for the three months ended March 31, 2013, as compared to $1,585,789 for the three months ended March 31, 2012. A discussion of the key components of our statements of operations and material fluctuations for the three months ended March 31, 2013 and 2012 is provided below.
 
 Revenue
 
 A)
Film revenue totalled $350,636 for the three months ended March 31, 2013, as compared to $187,793 for the three months ended March 31, 2012, an increase of $162,843, or 87%, primarily due to the factors discussed below:
 
 ●
The majority of 2013 revenue consisted of $190,277 from the US and Brazilian  release of “Nine Miles Down” and $227,000 from settlement of litigation with MGM over “Deal” and Sony with “Johnny Mnemonic”. There were also several minor sales reversals in the period notably “The Pool Boys” and an international territory on “Nine Miles Down”.
 
 ●
The majority of 2012 sales included international sales royalties from movies such as “The Pool Boys,” of approximately $43,000,“Deal,” approximately $21,000“Autopsyapproximately $10,000,” “Nine Miles Down, approximately $34,000 ,” and “Night of the Demons.”, approximately $40,000.
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 B)
No revenues were recorded for the music division for this quarter.
 
 C)
The post production facility operations continued to grow during the period recording sales of approximately $22,000 for the quarter despite on-going construction works.
 There were no fee-related revenues in either period.
 
 Cost of Sales
 
 Cost of revenue was $564,778 for the three months ended March 31, 2013 as compared to $448,931 for the comparable period in 2012, an increase of $115,847, or 26% as a result of:
 
 A)
The costs of acquiring and producing films are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in proportion to that the current year’s revenue bears to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.
 
 ●
An amortization charge of $357,868 was made in the three months ended March 31, 2013 which was spread over several titles, mainly “Nine Miles Down” and “The Pool Boys”” in line with revenue forecasts.
 
 ●
The equivalent charge during the quarter ended March 31, 2012 was $186,890 mainlyrelated to the release of “The Pool Boys”.
  B)
The music company assets have also been amortised in proportion to that the current year’s revenue bears to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the album. No charge was levied for the three months ended March 31, 2013 as there was no income but long term forecasts remain constant.  No amortization was recorded in the previous year as the music company was acquired on February 23, 2012.
 
 C)
The leasehold improvements related to the post-production facility are being written off to costs of sales over the 30 year period of the lease, and the written-off was $42,392 for the three month ended March 31, 2013.
  D)
The returns provision for the DMX album has been increased by $139,406 based on information from the distributor.
 
 Other cost of revenue in the three months ended March 31, 2013 totalling $25,312 as compared to $198,567 in the same quarter in 2012. Other cost of revenue for the three months ended March 31, 2013 mainly consisted of fees for distribution of the film “Nine Miles Down” whereas other cost of revenue for the comparable period in 2012 was inflated by the write-off of the cost of distribution of “The Pool Boys.”
 
 Administration Expenses
 
 General and administrative expenses increased by $706,566, or 141% from $500,987 for the three months ended March 31, 2012 to $1,203,463 for the three-months ended March 31, 2013. The increase was primarily attributable to the following factors:
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  1)
The addition of the post production division resulted in an additional general and administrative cost of $48,316.
 2)
In the three months ended March 31, 2013, we incurred additional legal and professional costs of $959,230  as compared to the comparable quarter in 2012, among which:
 a.
$546,723 represents a payment of 20,000 Series B preferred stock as settlement with David Michery for cancelling the 50,000 Series B preferred stock held in escrow.
 b.
Approximately $45,000 represents JonesFilm costs
 c.
Approximately $45,000 relates to legal fees incurred in furthering the case against Content Media
 d.
In the quarter ended March 31, 2012, adjustments were made to capitalise approximately $356,000 of brokers fees which had been charged to Legal and Professional fees in error in prior periods.
 3)
Approximately $60,000 less overhead was capitalised to movies in the March 31, 2013 quarter than the comparable period in 2012.
 4)
There is an increase in consultancy fees as the music division staffs have been replaced by consultants since the end of 2012.
 5)
Salaries have decreased by $267,780 from the 2012 quarter to the 2013 quarter as the 2012 quarter included all the start-up costs for launching the music division, which is now run by consultants.
 
 Other Expense
 
 Interest expense in the three months ended March 31, 2013 was $1,043,944 compared to $744,469 in the same period in 2012.   The 2013 interest expense includes an additional $145,129 related to SAFELA for the mortgage and construction loan not included in the 2012 equivalent quarter and a penalty of $222,400 charged against the Isaac loan.
 
 Interest on movie and production loans was $519,377 during the third quarter ended March 31, 2013 as compared to $576,171 for the quarter ended March 31, 2012 . $55,428 was the additional interest charge levied on the settlement from MGM by Blue Rider in the quarter.
 
 Income Tax
 
 No tax expense was recognized in either period.
 
 Results of Operations for the Nine Months Ended March 31, 2013 and 2012
 We generated a net loss (after non-controlling interest) of $5,343,658  for the nine months ended March 31, 2013, as compared to $3,664,072 for the nine months ended March 31, 2012. A discussion of the key components of our statements of operations and material fluctuations for the nine months ended March 31, 2013 and 2012 is provided below.
 
 Revenue
 
 A)
Film revenue totalled $744,748 for the nine months ended March 31, 2013, as compared to $987,220 for the nine months ended March 31, 2012, a decrease of $242,472, or 25%, primarily due to the factors discussed below:
 
 ·
The majority of 2013 revenue consisted of $208,750 from the US and Brazilian  release of “Nine Miles Down” and $183,000 from settlement of litigation with MGM over “Deal” and Sony with “Johnny Mnemonic”. There were also several minor sales reversals in the period notably “The Pool Boys” and an international territory on “Nine Miles Down”.
 
 ·
The majority of 2012 sales included international sales royalties from movies such as “The Pool Boys,” of approximately $680,000,“Deal,” approximately $65,000“Autopsy approximately $30,000,” “Nine Miles Down, approximately $64,000 ,” and “Night of the Demons.”, approximately $40,000.
 
 B)
$927,645 sales were recorded for the music division for the nine months ended March 31, 2013.
 
 C)
The post production facility operations continued to grow during the period recording sales of approximately $39,700 for the quarter despite on-going construction works.
 
 There were no fee-related revenues in either period.
 
 Cost of Sales
 
 Cost of revenue was $1,707,517 for the nine months ended March 31, 2013 as compared to $1,548,551 for the comparable period in 2012, an increase of $158,966, or 10% as a result of:
 
 A)
The costs of acquiring and producing films are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in proportion to that the current year’s revenue bears to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the films.
 
 ●
An amortization charge of $938,569 was made in the nine months ended March 31, 2013 which was spread over several titles, mainly “Nine Miles Down” and “Deal”” in line with revenue forecasts.
 
 ·
The equivalent charge during the nine months  ended March 31, 2012 was $987,221 mainly

related to the release of “The Pool Boys”.
  B)
The music company assets have also been amortised in proportion to that the current year’s revenue bears to management’s estimates of ultimate revenue expected to be recognized from the exploitation or sale of the album. An amortization charge of $408,205 for the nine months ended March 31, 2013 was made.  No amortization was recorded in the previous year as the music company was acquired on February 23, 2012.
 
 C)
The leasehold improvements related to the post-production facility are being written off to costs of sales over the 30 year period of the lease, and the written-off was $123,167 for the nine month ended March 31, 2013.
 
  D)
The returns provision for the DMX album has been increased by $370,811 based on information from the distributor.
 
 Other cost of revenue in the nine months ended March 31, 2013 totalling $274,970 as compared to $561,330 in the same period in 2012. Other cost of revenue for the nine months ended March 31, 2013 mainly consisted of fees for distribution of the Music Company and  film “Nine Miles Down” and  “Drunkboat” whereas other cost of revenue for the comparable period in 2012 was inflated by the write-off of the cost of distribution of “The Pool Boys.”
 
 Administration Expenses
 
 General and administrative expenses increased by $1,108,317, or 72% from $1,550,761 for the nine months ended March 31, 2012 to $2,659,078 for the nine-months ended March 31, 2013. The increase was primarily attributable to the following factors:
  1)
The addition of the post production division resulted in an additional general and administrative cost of $136,702.
 2)
In the nine months ended March 31, 2013, we incurred additional legal and professional costs of $1,106,979  as compared to the comparable quarter in 2012, among which:
 a.
$546,723 represents a payment of 20,000 Series B preferred stock as settlement with David Michery for cancelling the 50,000 Series B preferred stock held in escrow.
 b.
Approximately $45,000 represents JonesFilm costs
 c.
Approximately $45,000 relates to legal fees incurred in furthering the case against Content Media
 d.
In the nine months ended March 31, 2012, adjustments were made to capitalise approximately $356,000 of brokers fees which had been charged to Legal and Professional fees in error in prior periods.
 3)
Approximately $60,000 less overhead was capitalized to movies in the March 31, 2013 quarter than the comparable period in 2012.
 4)
There is an increase in consultancy fees as the music division staffs have been replaced by consultants since the end of 2012.
 5)
Salaries have decreased by $267,780 from the 2012 quarter to the 2013 quarter as the 2012 quarter included all the start-up costs for launching the music division, which is now run by consultants.
 
 Other Expense
  Interest expense in the nine months ended March 31, 2013 was $2,946,941 compared to $1,476,417 in the same period in 2012.   The 2013 interest expense includes an additional $145,129 related to SAFELA for the mortgage and construction loan not included in the 2012 equivalent quarter and a penalty of $222,400 charged against the Isaac loan.
 
 Interest on movie and production loans was $519,377 during the third quarter ended March 31, 2013 as compared to $576,171 for the quarter ended March 31, 2012 . $55,428 was the additional interest charge levied on the settlement from MGM by Blue Rider in the quarter ended March 31, 2013.
 
 Income Tax
 
 No tax expense was recognized in either period.
 LIQUIDITY AND CAPITAL RESOURCES
  Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities and whether it will be sufficient to allow it to continue investing in existing businesses, consummating strategic acquisitions, paying interest and servicing debt and managing its capital structure on a short and long-term basis.
  Short Term Liquidity
  The Company has an accumulated deficit of $14,108,773 as of March 31, 2013.  Management believes that, based on historical revenues generated from the licensing of the distribution rights on our motion pictures and the new revenues generated from the music division and post-production facility, we will have sufficient working capital to operate for the next twelve months.   Fiscal 2013 will be a year of exploitation of the developed music and post-production businesses, as well as a full year of consolidated operations and having strengthened the balance sheet through conversion of debt to equity. This is still anticipated to lead to positive cash flow from operations during fiscal 2013.
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  We currently borrow funds for the financing of each of our motion pictures from several production lenders. There can be no assurances given that the Group will be able to borrow funds to finance our motion pictures in the future.
  Long Term Liquidity
  The long term liquidity needs of the Company are projected to be met primarily through the cash flow provided by operations.   Cash flow from operating activities is expected to become positive in fiscal 2013 due to the impact of the release of the first DMX album, the operation of the post-production facility and on-going film revenues.
 Cash Flows
 
 Operating Activities: Net cash used in operating activities for the nine months ended March 31, 2013 was $2,037,545.   A decrease in other receivables from music company revenue and accounts receivable, as well as accrued interest, amortization of film costs, music assets and  amortization of leasehold improvements, was offset by a provision for returns, increases in amounts due from related parties and increase in accounts payable.
 
 Investing Activities:  Net cash used in investing activities for the nine months ended March 31, 2013 was $462,891 which is attributable to cost associated with leasehold improvements for the post-production facility.
 
 Financing Activities: Net cash provided by financing activities for the nine months ended March 31, 2013 was $2,444,470 mainly due to the proceeds from additional debt and issuance of common stock for cash.
 
 Capital Resources
 
 As of March 31, 2013, the Company did not have any outstanding capital commitments.    As of the date of this filing, the Company had no other commitments than disclosed in the Company’s financial statements and notes to the financial statements.
 Working capital at March 31, 2013 was $(13,266,790), which is consistent with our position as of December 31, 2012 of ($10,248,134).
 
 Working capital is negative due to the fact that all the loans are classified as current even with longer-term workout agreements.    The receivables for the fee income from related parties will be paid out over the next four years and, accordingly, are reported long and short-term. The majority of the other loans are convertible to stock so will have little or no cash impact.
 
 Additionally, the mortgage and construction loans on 807 Esplanade are current liabilities with corresponding leasehold improvements being recorded as non-current assets.
 
 Stockholder’s Equity at March 31, 2013 was $11,262,801 decreasing slightly from $13,449,284 as at June 30, 2012.    The change was primarily due to the conversion of debt to equity through the issuance of common shares offset against the revaluation of the shares pledged to certain loans plus loss in the 2013 year.
 
 Historically, we have successfully raised additional operating capital through 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 on-going operations.
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 Off-Balance Sheet Arrangements
 
 We have no off-balance sheet arrangements.
 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Not applicable.
 
 ITEM 4: CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure Controls and Procedures
 
 Under the supervision and participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of March 31, 2013, our disclosure controls and procedures were effective.
 
 Changes in Internal Control over Financial Reporting
 
 We have now made significant changes in our internal control over financial reporting: We will be closing our London accounts office as of the end of May 2013 and we have already employed a new qualified CPA as controller in the LA office and we have brought in additional external accounting resource at the SEC reporting level. All entries will now be booked at source in the LA office.
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 PART II OTHER INFORMATION
 
 ITEM 1.  LEGAL PROCEEDINGS.
 
 There have been no significant changes to this litigation this period, with the exception of Parallel, as discussed herein.
 
 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.
 
 Jones Film
 
 Seven Arts Pictures plc (“PLC”), the Company’s listing predecessor, its then subsidiary Seven Arts Filmed Entertainment Limited (“SAFE”) 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 in favour of Jonesfilm (“JF”). 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, Management believes the Company has no further liability in this matter. JF asserts that the Company is liable as the “successor in interest” to PLC, which the Company denies.
  Arrowhead Target Fund
 
 Seven Arts Future Flow I (“SFF”), a limited liability Company owned by SAP Inc., a Company previously 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 September 30, 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 principal 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.
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 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.
 
 Arrowhead has purported to refile its claim against the Company and the other defendants. The Company will seek dismissal of these claims on the same grounds. The Company is presently in settlement discussions with Arrowhead, and continues to believe that Arrowhead’s claims against the Company are without substantial merit.
 
 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 has 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. Parallel in California has been stayed by reason of the “Recognition Order” described in “Liquidation of Seven Arts Pictures plc.” Parallel was permitted to pursue its remedies in the Los Angeles Superior Court proceedings based on actions of the liquidator.  Parallel’s motion for summary judgment has been denied. The Company believes that a favorable decision by the liquidator as discussed above will resolve this action in the Company’s favor.
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  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.
 
 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 1A. RISK FACTORS
  Not applicable.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
 None.
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
 
 None.
 
 ITEM 4. MINE SAFETY DISCLOSURES.
 
 Not applicable.
 
 ITEM 5. OTHER INFORMATION.
 
 Not applicable.
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 ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  Exhibit No.

Description2.1

Asset Acquisition Agreement dated as of July 1, 2010 between Seven Arts Entertainment Inc. and Seven Arts Pictures Plc (1)2.1.1

Amendment to Asset Transfer Agreement dated January 27, 2011 (2)2.1.2

Second amendment to Asset Transfer Agreement (2)3.1.

Articles of Incorporation of Seven Arts Entertainment Inc.(1)3.1.1

Amendment to Articles of Incorporation of Seven Arts Entertainment Inc. *3.2.

By-Laws of Seven Arts Entertainment Inc.(1)3.2.1.

Amended By-Laws of Seven Arts Entertainment Inc. (2)3.3

Certificate of designation of Series A preferred stock (2)3.4

Certificate of designation of Series B preferred stock (revised) (2)3.4.1

Amendment to the Certificate of Designation of Series B preferred stock (2)4.1

Specimen Common Stock Certificate (1)10.1*

Revised 2012 Stock Incentive Plan (3)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 2002.32.1***

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 2002.101.INS**

XBRL Instance Document.101.SCH**

XBRL Taxonomy Extension Schema Document.101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document.101.LAB**

XBRL Taxonomy Extension Label Linkbase Document.101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document.
 * Indicates management contract or compensatory plan or arrangement.
 ** Filed herewith.
 *** Furnished herewith.
 (1)
Filed as an exhibit to Amendment No. 4 to Registration Statement on Form F-1 filed on September 27, 2010 and incorporated herein by reference.(2)
Filed as an exhibit to Registration Statement on Form S-3 filed on August 20, 2012 and incorporated herein by reference.(3)
Filed as an exhibit to Definitive Proxy Statement on Schedule 14A on January 17, 2013 and incorporated herein by reference.
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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: May 20, 2013
By:
/s/ Peter HoffmanPeter Hoffman, CEO
  Date: May 20, 2013
By:
/s/ Elaine NewElaine NewChief Financial Officer
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