This summer, after cartoonist D.J. Coffman complained publicly that Platinum Studios had fallen behind in paying him for work on the comic Hero by Night, Brian Altounian, Platinum's president and chief operating officer, wrote a letter to the company's creators apologizing for late payments and stressing that Platinum was "NOT 'going under.'"

Months prior to that exchange, however, an independent auditor raised serious concerns about Platinum's future in the company's annual 10-K filing to the U.S. Securities and Exchange Commission. An auditor with HJ Associates & Consultants, LLP, wrote that Platinum "has incurred significant losses which have resulted in an accumulated deficit of $9,465,595 as of December 31, 2007. The Company plans to seek additional financing in order to execute its business plan, but there is no assurance the Company will be able to obtain such financing on terms favorable to the Company or at all. These items raise substantial doubt about the Company's ability to continue as a going concern."

Auditors are required by the Statement on Auditing Standards to give going-concern warnings if they find recurring operating losses or other problems in a company's financial statements. According to SEC filings, Platinum had a net loss of $5.2 million in 2007, $4.3 million in 2006 and $2.1 million in 2005. At the end of last year, Platinum was down to $4,445 in cash balances.

"Until we have made further progress on our business plan, we will most likely continue to have [going-concern warnings] in all of our filings," Altounian said in an exclusive interview with Publishers Weekly. "You have to understand that in these post-Sarbanes-Oxley days, there are so many mandatory disclosure items for public companies that a significant number of SEC filings are filled with risk factors and going concern clauses and every kind of contingency to alert the average investor to every possible thing that can go wrong with a company. It’s really not an issue of whether or not I agree with the assessment -- if the auditors have some criteria for determining whether or not a company is a going concern, they are required by law to include the clause."

The Sarbanes-Oxley Act, which responded to accounting scandals including that at Enron, was passed in 2002. More than a year later, an article in the CPA Journal noticed no increase in auditor warnings, but rather a "dearth of going-concern modifications."

Joe Hovorka, a financial analyst and senior vice president at Raymond James & Associates, Inc., said of going-concern opinions, "You don't see them often. ...An auditor giving a qualified opinion is not to be taken lightly. It's a red flag."

Altounian acknowledged the company's struggles but said it comes from the company's strategy of building its intellectual property library, and more recently through "publishing comic books and graphic novels, moving into the Web comic space, exploring licensing and merchandising partnerships and aggressively going after film and television opportunities. According to SEC fillings, the Platinum library includes about 5,600 characters across all the comics properties that it controls.

"This transition from what basically was an R&D phase into a commercialization phase has required building out infrastructure and product development that has increased our operating expenses significantly over the last two years," Altounian said. "We do believe it has been worth it, though, as we just received an independent valuation of our library that takes our projected revenue streams into consideration, and it is about $150 million. So we are proud that all of our hard work has added value to the company." Altounian said Platinum also will be "aggressively pursuing" outside financing options.

That valuation came from Sanli Pastore & Hill, Inc., and considered potential earnings of Platinum's properties, with most of that projected from the potential licensing of Platinum's characters and books for movies or video games. Two Platinum properties are currently under option for films: Unique at Disney and Cowboys & Aliens at Dreamworks.

A financial analyst speaking generally about publishers said movie and video game deals are typically seen as one-time windfalls, not a bankable business strategy. And the auditor's going-concern warning took into account Platinum's future business plans.

Much of Platinum's financial challenges owes to the company's spending, which one former employee called "outrageous." The company's costs and expenses, including the lease on a floor of a Los Angeles executive office building, rose to $6.6 million last year, up from $1.6 million in 2005. So even though Platinum increased its earnings from $180,500 in 2006 to $1.9 million in 2007, it still lost more than $5 million.

In the first quarter of 2008, that trend has continued. A look at the 1st quarter report finds higher cash ($150,527) than at the end of the year, but also a higher accumulated deficit of $14.1 million. Platinum listed $4.8 million in total costs and expenses, compared to $179,382 in net revenue, for a net loss of more than $4.6 million, according to an SEC filing.

The company's lack of cash led Altounian and Platinum CEO Scott Rosenberg to defer their $300,000 salaries last year, according to SEC filings, which Altounian said showed "we have both put our money where our mouths are."

But even with those cuts, Platinum couldn't keep up payments to its creators, including D.J. Coffman. After winning Platinum's inaugural Comic Book Challenge—an annual contest held by Platinum for aspiring comics creators, with Platinum publishing the winning entry—with his Hero by Night entry, Coffman said he treated his work-for-hire position "as a real job," putting in more than 12 hours a day on the series. But then the checks that were supposed to arrive in a week started coming in after a month, and then not at all, he said.

"I was left with the reality of, well, it looks like I might have to find another job to pay the bills on time here," Coffman said. "I was staring at a lot of late mortgage payments and probably facing foreclosure if I would have just waited things out and kept quiet about it, or didn't look for other paying work. Things were looking pretty bleak there for a spell."

Coffman said he also saw signs of distress inside Platinum, increasingly within the past six months. He said when he asked Altounian about the late checks, Altounian said the company should have been out of business two years earlier. Another Platinum employee called the company's strategy "nuts," Coffman said. "It was the 'lottery' approach, where they buy a bunch of lottery tickets (intellectual property) and throw them at the Hollywood wall and see what sticks ... hoping for that big Hollywood payout, hoping for that next Men in Black."

Rosenberg helped turn the Men in Black comic book into a pair of movies, which brought in a combined box office gross of nearly $1 billion.

Altounian said Platinum had a "love for the property and for the talent of the creative team" and said Coffman was paid up to date in June. "We are not currently behind payment on any creators," Altounian said.

After chastising Coffman for breaking the non-disclosure clause in his contract with Platinum and revealing "inside information," Altounian immediately detailed the financial history of Hero by Night, including what Coffman earned from the project. Altounian said the company had spent hundreds of thousands of dollars on the property and has seen less than a 15 percent return.

After Coffman went public with his lack of payment, he received a final check from Platinum, then walked away from Hero by Night, which he had sold to the company as part of the Comic Book Challenge agreement.

Platinum, meanwhile, pushes forward. Just last week the company announced the top 50 entrants in this year's Comic Book Challenge.