Comic Book Publishing Follies

Tue, September 25th, 2007 at 12:00am PDT

Comic Books
Todd Allen, Columnist

If you ever want to know something about a company, and that company is proposing to sell stock to the public, taking a look at their Securities & Exchange Commission filings will tell you quite a bit. A comics-related company has recently filed such paperwork: Platinum Studios, Inc. What say we take a look behind the curtain at Platinum and see what makes them tick?

Before we do that though, let's get a little legalese involving comments on an IPO out of the way: This is not investment advice. I am not a broker, nor do I give individual consultations. I have not taken a position in Platinum Studios stock. We're just taking a look at the company from an industry perspective.

Most notes will reference pages in Platinum's FORM SB-2 REGISTRATION STATEMENT found here

So, what does Platinum officially do? From page 6:

"We are an entertainment company that works with independent comic book creators and small publishers to form one of the world's largest independent libraries of comic book characters which it adapts and produces for all forms of media.

"We are focused on adding titles and expanding its already substantial library with the primary goal of creating new franchise properties and characters. In addition to in-house development and further acquisitions, we are developing content with the talent and star power of professionals outside the realm of comic books. We have teamed up with top screenwriters, producers, directors, movie stars, and novelists to develop entertainment content and potential new franchise properties. Our core brand offers a broader range of storylines and genres than the traditional superhero-centric genre. Management believes this approach is maintained with Hollywood in mind, as the storylines offer the film industry fresh, high-concept brandable content as a complimentary alternative to traditional super hero storylines.

"Over the next several years, we are working to become the leading independent comic book commercialization producer for the entertainment industry across all platforms including film, television, direct-to-home, publishing, and digital media, creating merchandising vehicles through all retail product lines. This will allow us to maximize the potential and value of its owned content/content creator relationships and acquisitions, story development and character/franchise brand-building capabilities while keeping required capital investment relatively low."

Platinum, put in simplified terms, is an Intellectual Property holding company that seeks to license and develop both brands-developed in-house (hello, Drunk Duck) and other peoples' properties (notably Top Cow). Please note that publishing and digital media are near the bottom of the list. Film and television are where the priorities and money are right now. If you thought that many of Marvel's priorities were starting to go in this direction, I probably wouldn't argue much. This is roughly the same model Walt Disney built out: taking some intellectual properties, popularizing it in film (and later television) and then building out the merchandise.

When I read about newbie creators having a fit because they didn't read their contract signed away their rights to Platinum, this is why I shake my head. Acquiring I.P. is what Platinum does.

So you might be asking yourself why Platinum is getting into the stock market. There are usually two reasons a company goes public: either they need additional investment to continue (or expand) operations or it's an exit strategy. In the case of an exit strategy, sometimes the people who built the company just want to cash out and it's easier to sell stock than sell the company in one lump. Sometimes investors use the stock as their means of extracting money out of the company without an outright sale.

In the case of Platinum, there's been no discussion I'm aware of, as to whether Scott Rosenberg, Platinum's Chairman, is looking to cash out and move on. It is, however, obvious from the filing that Platinum has been burning through money quickly and needs a cash influx to continue operating as normal, never mind expanding their business channels.

From page 20:

"NET LOSS BEFORE INCOME TAXES– As a result of the factors described above, we reported a net loss before income taxes of $1,757,869 for the six months ended June 30, 2006 compared to a loss of $1,484,673 for the six months ended June 30, 2007, an improvement of $273,196."

That's right, they burned through almost $1.5 million dollars in the first half of 2007 and it was over a quarter of million dollars better than the first half of 2006. And where, you might ask, is the revenue coming from? Thank the SEC, for there are some numbers in filing.

Also from page 20:

"Total Revenue increased by $1,646,300 from $30,500 for the six months ended June 30, 2006 to $1,676,800 for the six months ended June 30, 2007. This increase is primarily due to a $1,000,000 option fee and a $450,000 first-look agreement realized in the first six months of 2007."

Option fees and first-look agreements are things that are a little hard to project. You aren't necessarily going to have one every fiscal quarter. If you take out that $1,450,000 of option and first-look fees, you're left with only $226,800 in revenue. Mind you, that's a huge increase from the $30,500 in the first half of 2006, but it also is indicative of how volatile a market entertainment can be, especially in film.

How much are they looking to raise? Page 2 of the filing indicates 66,255,825 shares at a "PROPOSED MAXIMUM OFFERING PRICE PER SHARE" of $0.10 for a "PROPOSED MAXIMUM AGGREGATE OFFERING PRICE" of $6,625,583. So we're talking ballpark figures of $5M-$6M, depending on how much stock gets sold and when. Based on a burn rate of a little around $2.8M/year, if we are to take the most recent burn rate as representative, this stock offering, in full, could buy them 3 years to increase revenues and, perhaps, reduce some costs.

How badly do they need a cash influx? From Page 22: "As of June 30, 2007, we had working capital of $487,905 with a cash balance of $423,256." That same page puts their net cash for operating activities at $2,359,879 for the first half of 2006. Some of that will be associated with their building out new products, such as the digital wing, but you can see the cash balance is dwarfed from the operating costs.

What kind of revenue streams are they talking about? Platinum marches out all the usual cross-media licensing plays. This part of the filing almost reads like a check list of possibilities, including, but not limited to print comics, digital comics (including expanding to a network of comics websites to build community traffic, an application of Metcalfe's Law of Connectivity), video games (including ad-supported games on their website), t-shirts, license/options on properties and even privately financed film productions based on their properties.

Sounding like Marvel again? Well, with the exception of digital comics initiatives, which Marvel/Dan Buckley announced intention of at February's New York Comic Con, but has never announced implementation or format, yeah, its ball park. Marvel's doing it with in-house characters, while Platinum's doing it with a combination of the internal properties and placing outside properties like Top Cow's IP. First glance suggests they may be having more activity on the outside properties, but they've been doing that longer.

Going back to the print comic side of the business, it becomes apparent that Platinum's distribution arrangement with Image is really an arrangement with Top Cow.

Page 28:

"Currently, we have a distribution agreement with Top Cow Productions to list our titles in Diamond's wholesale catalog for retail comic book stores. By capitalizing on Top Cow Production's long-standing relationship with Diamond, we have been able to procure better placement in this wholesale catalog. To date this has been our primary distribution chain; however, as an adjunct to our Top Cow Productions arrangement, we have also recently established a direct contractual relationship with Diamond for the listing of our properties, giving us more flexibility regarding the types and number of products we offer to this direct market."

In a way, this actually creates another risk. While Platinum currently benefits from enhanced placement in the Diamond catalog, were anything to happen to their relationship with Top Cow, it seems likely their comics would be banished to the back of the catalog with the rest of the independents and small press. Very interesting, that they were able to piggy back off representing Top Cow for film, into better catalog placement.

They do, however, slightly overestimate Diamond in this filing however.

Page 27:

"After a successful launch of our inaugural graphic novel, Cowboys & Aliens, in December, 2006, we have established a steady schedule of 23 books with an additional 20 titles to be published before the end of 2007. These titles have are all published under the Platinum Studios Comics banner and they are sold directly to comic book stores through the industry's sole distributor, Diamond Distribution. The writers and artists of these titles are hired on a work-for-hire basis."

Since when did Diamond become the sole distributor for comic book stores? I'll grant you "primary" in a heartbeat, but that's leaving out Cold Cut and all the incursions by "mainstream" book distributors like Baker & Taylor and Ingram, whom shop owners are starting to use for graphic novels and manga. I mean, if Diamond were the sole distributor, that would make them a monopoly and we know the lawyers have already determined they aren't.

Speaking of hyperbole, our old friend, the ever-controversial "Cowboys & Aliens" pops up in that quote, but that's not the only place it pops. Its mention is warranted, as it was optioned in June, but let's have a look at the language in its first mention in the filing:

Page 26:

"We currently have film and television development deals with several major film producers and in 2007, we successfully sold one property, Unique, to Disney Studios, with the anticipation that it will go into production in early 2008. Additionally, in June, 2007, we entered into negotiations on a 2-year option agreement with Dreamworks, Universal Studios, Paramount Pictures, and Imagine Entertainment to acquire the film production rights to our property Cowboys & Aliens, the #1-ordered graphic novel in the U.S. in 2006 (Entertainment Weekly, January, 2007) with the goal to produce a feature film. This film's production schedule has not been officially set yet but it is anticipated to begin pre-production sometime within the next 24 months."

Ah, yes, that would be the same "Cowboys & Aliens" that ran an alleged "co-op" marketing program that had the functionality of reimbursing stores for the cost of ordering it through Diamond. And virtually the same tag line about orders that was removed from their website when the controversy hit earlier in the year.

In a letter from Thom Geier, Senior Editor, "Entertainment Weekly," reprinted over at Publisher's Weekly/The Beat, Geier explained that "Cowboys & Aliens" was pulled off the Midtown Comics web site sales chart as a best seller and commented: "There's been much discussion about the fact that two of the titles on the list we published - Cowboys & Aliens and Dark Tower [Sketchbook] - were free giveaways and listed as such on the Midtown Comics site. I'm puzzled about why a retailer would list a free product on its 'top sellers' chart, but no matter. We regret that we did not note this distinction in print, and plan to publish a clarification in our Jan. 26 issue, due on newsstands Jan. 19."

Was the hype from "Entertainment Weekly" part of what sold the option? Perhaps. It does look as though they're using it to sell the stock.

While it has nothing to do with the use of that contested "Entertainment Weekly" citation, it will doubtless amuse many message board dwellers to note the following from Page 36 of the filing: "We have not adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-B of the Securities Exchange Act of 1934."

Another interesting aspect of this filing is the issue of compensation for management, on Page 37, it states CEO Scott Rosenberg is drawing a rock-bottom salary of $34,616 and President/COO Brian Altourian is making slightly more at $46,154. Really, those salaries are much less than you'd expect. This would make you think there will be significant stock compensation, something not at all unusual in start-ups.

Page 12 possibly addresses this:

"CONSIDERATION PAID TO MANAGEMENT WAS NOT DETERMINED BASED ON ARMS LENGTH NEGOTIATION.

"The Common Stock and cash consideration being paid to management have not been determined based on arms length negotiation. We may grant net profits interests to certain of our executive officers in addition to stock options, which may further dilute your ownership. While management believes that the consideration paid to our executive officers is fair for the work being performed, there can be no assurance that the consideration to management reflects the true market value of their services."

Also along this line is page 13:

"OUR PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS WILL OWN A CONTROLLING INTEREST IN OUR VOTING STOCK AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.

"Our principal stockholders, officers and directors, in the aggregate, beneficially own approximately 67.08% of our outstanding common stock. Our Chairman, Scott Rosenberg and President and Chief Operating Officer, Brian Altounian own approximately 128,250,000 and 6,750,000 shares of our outstanding common stock, respectively. As a result, our principal stockholders, officers and directors, acting together, have the ability to control substantially all matters submitted to our stockholders for approval, including:

  • election of our board of directors;

  • removal of any of our directors;

  • amendment of our certificate of incorporation or bylaws; and

  • adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.

As a result of their ownership and positions, our principal stockholders, directors and executive officers collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our principal stockholders, directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Their stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price."

All this is interesting, as it underscores what you see in the prospectus is very preliminary and the only voices being heard concerning business decisions will likely be Rosenberg and Altounian. Best to get these things out in front. They could, effectively, grant themselves more options, bonuses and raises if the business does well. Not an uncommon occurrence, but perhaps with a bit less oversight here than in other scenarios involving publicly traded firms.

Of interest would also be a bit on Rosenberg's other company from Page 40:

"Our President, Scott Mitchell Rosenberg also provides production consulting services to our customers (production companies) through Scott Mitchell Rosenberg Productions, which is wholly owned by our President, Scott Mitchell Rosenberg. At the time we enter into a purchase agreement with a production company, a separate contract may be entered into between Scott Mitchell Rosenberg Productions and the production company. In addition, consulting services regarding development of characters and storylines may also be provided to us by Scott Mitchell Rosenberg Productions by the production company."

So it seems Rosenberg would have a separate income stream based on side deals to help implement the licenses? It would seem to me that this is a bit of a grey area and with very little detail about how this works, whether it functions as a bundle and whether these services are something that might normally be expected to come from the licensee as part of the package.

It's interesting to look behind the curtain now and again. What I see here is an under funded company that's seen some large checks come their way, while spending much more on start-up costs than they're bringing in. Remember, these are penny stocks initially priced at a dime or less. If it moves up to 11 cents, that would be at least a 10% jump. The small denominations make such stocks capable of great rewards and great losses. Were Platinum to have a particularly good quarter and two or three of those million dollar option checks, there might well be a spike. On the other hand, if those option checks don't come for a six-month period, they could burn through a lot of money awfully fast and the stock might sink. This is not a business for the risk-averse.

An interesting question would be what happens if Rosenberg and Altounian do see a stock spike and decide to cash in their chips. If both of them were to walk away, particularly Rosenberg, there's a legitimate question as to how much of a company would be left.

Or, to quote their filing:

"IF WE DO NOT MAINTAIN THE CONTINUED SERVICE OF OUR EXECUTIVE OFFICERS, OUR BUSINESS OPERATIONS MAY BE AFFECTED.

"Our success is substantially dependent on the performance of our executive officers and key employees. Given our early stage of development, we are dependent on our ability to retain and motivate high quality personnel. Although we believe we will be able to engage qualified personnel for such purposes, an inability to do so could materially adversely affect our ability to market, sell, and enhance our products. The loss of one or more of our key employees or our inability to hire and retain other qualified employees, including but not limited to development staff, business development staff, digital publishing staff and corporate office support staff, could have a material adverse effect on our business."

With a bit of hype and Marvel/Disney-esque playbook, it's easy to see what Platinum is trying to do. To really succeed as a fully realized cross-media entity, Platinum needs to foster a wider following for its internal library, which may be very large, but is also relatively unknown in comparison to their licensed clientele.

Todd Allen is the author of "The Economics of Webcomics, 2nd Edition." He consults on media and technology issues and is an adjunct professor with the Arts, Entertainment and Media Management Department at Columbia College Chicago. For more information, see http://www.BusinessOfContent.com. Todd even did a webcomic. Sort of.

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