One of the hardest things for an investor in penny stocks is determining how far apart a company’s stated goals are from reality. Lofty projections are often what drive a small cap company’s share price higher but a closer look at their financial condition and the current state of the industry that they operate usually reveal those plans to be little more than empty promises. On Wednesday Writers Group Film Corp. (OTCQB: WRIT) saw trading volume explode, passing the 229 million mark following a Tuesday that saw just over 5.8 million shares trade hands and a Monday in which 662,000 shares moved. Such a spike is almost always a clear indicator that a company is part of a stock promotion and while that doesn’t negate their potential it certainly casts doubt on their ability to generate interest on their own merit.
Most of the attention has been on WRIT’s wholly owned subsidiary Front Row Networks, a live concert production and distribution company which produces live concerts in 3D for initial digital broadcast into movie theaters in North America and following those runs will then license the 3D concerts to TV broadcasters and DVD retailers. They have also announced their intentions to sell merchandising and sponsorship specific to each artist in the concert, in theaters where the concert will be showing.
Projections, assumptions, and intentions can be a dangerous model to base an investment and it’s important that an investor actually track the previous statements made by a company. In mid-March WRIT stated their intention “to produce twelve 3D concerts in 2011, and increase this number by two concerts in each of the following years, for a total of 20 concerts by the fifth year.” WRIT carefully breaks down the value of this endeavor, figuring approximately $1.5 million from the theatrical showing and an additional $2 million in revenue per concert through the TV, DVD, merchandising, and sponsorship markets.
In their March 10, 2011 press release WRIT then states “Based on these assumptions, the company projects gross profits (before artist split) in excess of $35 million based upon twelve performances.” That $35 million may sound impressive but there are a lot of factors that are left out of the scenario; the musician that is featured in the concert, the cost of the 3D production, the “artist split,” etc. Just these factors alone could take a significant chunk out of the projected gross profit.
To assume that a 3D concert featuring an artist that is no longer relevant will command the same kind of attention as today’s biggest names doesn’t exactly make sense. That’s not to say that the musicians Front Row has projected for their 2011 lineup aren’t today’s biggest stars, the problem is the investor has no idea because they are not displaying their projects on their Web site, not exactly a confidence booster.
Even the concert video footage that WRIT has acquired is far from generating revenue at this point. On March 22, 2011 the company announced they had “several hours of unique Metallica 3D & 2D concert video footage for distribution” with plans to implement “state of the art technology to convert existing 2D 1080p footage into 3D for additional distribution.” Getting hold of video footage of perhaps one of the biggest rock bands in the world is nothing to turn your back on but the reality is it’s just the first step. They still need to secure “all applicable distribution rights,” essentially surrender a significant portion of those “gross profits” to get the green light from the band.
So much was made about this acquisition of Metallica video footage and doubt surrounding the validity of the claim that WRIT actually released a statement two days later to back their claim and state “Front Row Networks has been in contact with Metallica’s staff and has made representations that no footage of any kind will be released, distributed, or exploited without the express written consent of Metallica, their Legal department and any other authority necessary.” That release came following a statement from Metallica’s attorney warning fans about the “project,” saying ““Metallica owns and controls its recorded performances and Creeping Death Music owns the vast majority of any music embodied in Metallica Recordings. Pretty much any legitimate business would have contacted us to see how Metallica felt about it. Maybe these guys just forgot.” Bottom line, the ball is in Metallica’s court and they appear to have the upper hand in negotiations.
Put that aside and what does Front Row have? It’s really difficult to determine because they don’t seem to be in favor of being specific about anything. In April they said they were beginning the process of converting their “existing 2D catalogue of music concert video footage into 3D format.” There was no mention of what that catalogue included and no real timeframe for the project to be completed because they simply said they were in “negotiations to partner with one of the leading 3D post-production services companies to provide the conversion services.”
Front Row Networks has done a good job in putting proven names on their management team, announcing back in March that Eric Mitchell was joining the company as head of finance and distribution and earlier this month announcing that Bob Johnston had been named Executive Vice President of Business Development and 3D Producer. Both of these men have solid backgrounds with Mitchell working on acquisition deals for Sony Pictures’ Tri-Star division and Johnston having his hand in producing 3D projects that have included live action feature programming for IMAX, Disney, Lionsgate, Nu Image and Technicolor.
While the names are there the doubts still remain concerning the company’s ability to take a project through all the necessary steps. The Metallica issue should be of concern to investors because these kinds of problems could turn into legal battles and for a company that doesn’t have the financial stability to fight they could end up holding onto video footage that never generates revenue.
As it stands WRIT has no real revenue stream to speak of and as a growth company it could be some time before they actually, if ever, become a player in the 3D industry. To become that player they will need money and right now the only way they can get that is through registered offerings or private placements, moves that will obviously dilute any shares that currently exist.
After Wednesday’s massive trading volume day and shares climbing as high as 0.07 things have slowed on Thursday with trading volume still a solid 44 million by mid-day yet shares have fallen more than 8% down to 0.0565 and it’s hard to see those climbing until the next promotion takes place.