Quarterly Report (10-q)

Date : 11/14/2018 @ 11:16AM
Source : Edgar (US Regulatory)
Stock : Globe Photos, Inc. (GBPT)
Quote : 7.0  0.0 (0.00%) @ 2:30PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

   
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the quarterly period ended September 30, 2018
   
[  ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
   
For the transition period from __________ to__________
   
Commission File Number: 000-55370  

 

Globe Photos, Inc.

(Exact name of registrant as specified in its charter)

   
Delaware 27-0746744
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
 

6445 South Tenaya Way, B-130

Las Vegas, Nevada 89113

(Address of principal executive offices)
 
702-722-6113
(Registrant’s telephone number)

 

_______________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. 

[X] Yes [ ] No

 

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).  [X] Yes [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.

   
[  ] Large accelerated filer [  ] Accelerated filer
[  ] Non-accelerated filer [X] Smaller reporting company
[X] Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

[  ] Yes [X] No

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 326,428,584   common shares as of November 12, 2018  

 

   

   

 

 

 

 

 

TABLE OF CONTENTS
    Page

 

PART I – FINANCIAL INFORMATION

 

Item 1: Financial Statements 3
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
Item 3: Quantitative and Qualitative Disclosures About Market Risk 9
Item 4: Controls and Procedures 9

 

PART II – OTHER INFORMATION

 

Item 1: Legal Proceedings 10
Item 1A: Risk Factors 10
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 10
Item 3: Defaults Upon Senior Securities 10
Item 4: Mine Safety Disclosures 10
Item 5: Other Information 10
Item 6: Exhibits 11

 

  2  

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Our unaudited consolidated financial statements included in this Form 10-Q are as follows:

 

F-1 Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 (unaudited);
F-2 Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited);
F-3 Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited); and
F-4 Notes to Consolidated Financial Statements (unaudited).

 

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2018 are not necessarily indicative of the results that can be expected for the full year.

 

  3  

 

GLOBE PHOTOS, INC.

(Formerly CAPITAL ART, INC.) 

CONSOLIDATED BALANCE SHEETS

(Unaudited) 

 

      September 30, 2018       December 31, 2017
Assets              
               
Current Assets              
Cash   $ 988,535     $ 1,297
Accounts receivable, net     42,199       44,548
Inventory, net     56,500       56,500
Prepaid expenses     42,727       12,765
  Total Current Assets     1,129,961       115,110
               
Deposit on acquisition     865,000       —  
Property and equipment, net     2,196,572       2,493,224
Security deposit     6,356       6,356
Intangible Assets, net     293,625       326,250
               
Total Assets   $ 4,491,514     $ 2,940,940
               
Liabilities and Stockholders' Equity              
               
Current Liabilities              
Accounts payable and accrued liabilities   $ 655,347     $ 540,947
Payable to Globe Photo, Inc.     10,000       10,000
Due to related parties     287,455       147,113
Notes payable - related parties     639,415       456,235
Notes payable, net of debt discount     185,000       417,500
Deferred revenue     17,772       75,000
Derivative liability     —         9,195
Loans payable, net of unamortized discounts     568,669       738,805
Convertible notes, net of debt discount and issuance costs     430,983       —  
Convertible notes - related party, net of debt discount     87,549       —  
Total Current Liabilities     2,882,190       2,394,795
               
Total Liabilities     2,882,190       2,394,795
               
Stockholders' Equity              
               
Preferred stock, $0.0001 par value, 50,000,000 shares authorized; none issued and outstanding at September 30, 2018 and December 31, 2017.     —         —  
               
Common stock par value $0.0001: 450,000,000 shares authorized; 326,218,583 and 325,570,524 issued and outstanding as of  September 30, 2018 and December 31, 2017     32,622       32,557
Additional paid in capital     6,666,466       4,124,243
Treasury stock; 0 and 258,823 shares as of September 30, 2018 and December 31, 2017.     —         (88,000)
Accumulated deficit     (5,089,764 )     (3,522,655)
Stockholders' Equity     1,609,324       546,145
               
Total Liabilities and Stockholders' Equity   $ 4,491,514     $ 2,940,940

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

  F- 1  

 

GLOBE PHOTOS, INC.

( Formerly CAPITAL ART, INC.) 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) 

 

     For the three months ended   For the nine months ended
    September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017
                 
License revenue   $ 50,693     $ 39,947     $ 365,286     $ 141,489
Image revenue     146,814       434,474       586,474       790,976
Total revenue     197,507       474,421       951,760       932,465
                               
Cost of revenue     206,957       300,933       693,429       595,498
                               
Gross margin     (9,450 )     173,488       258,331       336,967
                               
Operating expenses                              
Product development, sales and marketing     100,840       57,252       214,004       150,611
General and administrative     291,533       151,075       657,232       451,628
Depreciation and amortization     9,022       8,025       26,957       23,571
                               
Total operating expenses     401,395       216,352       898,193       625,810
                               
                               
Loss from operations     (410,845 )     (42,864 )     (639,862 )     (288,843)
                               
Other income (expenses)                              
Loss of settlement of accrued liabilities     —         —         (208,322 )     —  
Interest expense     (564,041 )     (23,324 )     (728,120 )     (87,347)
Gain on sale of property and equipment     —         50,000       —         50,000
Change in fair value of derivative liabilities     —         3,418       9,195       14,081
      —         —         —         —  
Other income (expenses)     (564,041 )     30,094       (927,247 )     (23,266)
                               
Net loss     (974,886 )     (12,770 )     (1,567,109 )     (312,109)
                               
Per-share data                              
Basic and diluted loss per share   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00)
                               
Weighted average number of common shares outstanding     326,001,192       325,382,292       325,528,121       325,382,292

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

  F- 2  

 

GLOBE PHOTOS, INC.

( Formerly CAPITAL ART, INC.) 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

    For the nine months ended
    September 30, 2018   September 30, 2017
         
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net loss   $ (1,567,109 )   $ (312,109)
Adjustments to reconcile net loss to net cash used in operating activities:              
Depreciation and amortization     342,200       340,098
Amortization of debt discount     517,075       30,123
Options issued for services     14,999       —  
Loss of settlement of accrued liabilities     208,322       —  
Change in fair value of embedded derivative     (9,195 )     (14,081)
Gain on sale of property and equipment     —         (50,000)
Changes in operating assets and liabilities:              
Accounts receivable     2,349       81,988
Prepaid expenses     (29,962 )     (38,339)
Inventory     —         (2,500)
Deferred revenue     (232,228 )      
Accounts payable and accrued liabilities     218,567       (165,898)
         Net Cash Used In Operating Activities     (534,982 )     (130,718)
               
CASH FLOWS FROM INVESTING ACTIVITIES:              
Purchase of archival images, property and equipment     (12,923 )     (124,407)
Deposit on acquisition     (865,000 )     —  
Proceeds from sale of property and equipment     —         50,000
        Net Cash Used In Investing Activities     (877,923 )     (74,407)
               
CASH FLOWS FROM FINANCING ACTIVITIES:              
Proceeds from loans payable     —         200,000
Repayment of loans payable     (5,303 )     (11,863)
Proceeds from related party advances     140,342       164,725
Repayment of related party advances     —         (44,725)
Proceeds from notes payable     150,000       25,000
Repayment of note payable     (170,000 )     (85,000)
Repayment of note payable - related party     (29,320 )     (11,309)
Proceeds from convertible notes payable, net     1,821,424       —  
Proceeds from convertible notes payable, net  - related party     500,000       —  
Proceeds from the sale of common stock     25,000       —  
Purchase of treasury stock     (32,000 )     (64,000)
        Net Cash Provided By Financing Activities     2,400,143       172,828
               
Net Change in Cash     987,238       (32,297)
               
Cash - Beginning of Period     1,297       54,034
               
Cash - End of Period   $ 988,535     $ 21,737
               
SUPPLEMENTARY CASH FLOW INFORMATION:              
Cash Paid During the Period for:              
    Interest   $ 13,762     $ 16,882
               
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:              
Purchase of third party notes by related party   $ 212,500     $ —  
Options issued to settle accrued liabilities   $ 104,157     $ —  
Beneficial conversion feature on convertible debt   $ 2,309,800     $ —  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

  F- 3  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

1. ORGANIZATION AND BUSINESS OPERATIONS

 

Globe Photos, Inc. (“we”, “our”, the “Company”) sells and manages classic and contemporary, limited edition photographic images and reproductions, with a focus on iconic celebrity images. The Company also makes available its images for publications and merchandizing. The Company aims to become a leading global photography marketing and distribution company by acquiring rights and ownership to collections of rare iconic negatives and photographs, and to establish worldwide wholesale and retail sales channels.

 

On June 6, 2018, we filed a Certificate of Merger with the Secretary of State of Delaware in order to effectuate a merger with our wholly-owned subsidiary, Globe Photos, Inc. Shareholder approval was not required pursuant to the Delaware General Corporation Law. As part of the merger, our board of directors authorized a change in our name to “Globe Photos, Inc.” and our Certificate of Incorporation has been amended to reflect this name change.

  

Going Concern

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

 

Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of September 30, 2018, the Company had $988,535 cash on hand. At September 30, 2018 the Company has an accumulated deficit of $5,089,764. For the nine months ended September 30, 2018, the Company had a net loss of $1,567,109 and cash used in operations of $534,982. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company intends to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications

 

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in the consolidated financial statements for the nine months ended September 30, 2018 should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form 10-K for the Company’s fiscal year ended December 31, 2017, as filed with the SEC.

 

The consolidated balance sheet as of December 31, 2017, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

 

  F- 4  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the year ending December 31, 2018.

 

The accompanying unaudited consolidated financial statements represent the results of operations, financial position and cash flows of Globe Photos, Inc., and its 100% owned subsidiaries Capital Art, LLC and Globe Photos, LLC for the three and nine months ended September 30, 2018 and 2017. All inter-company balances and transactions have been eliminated.

 

Use of Estimates 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Inventory

 

The Company’s inventory is comprised of rare photos of movie stars and other famous people and is stated at the lower of cost or net realizable value. Direct labor and raw material costs associated with the process of making the photos available for sale are also included in inventory at cost. These costs are expensed to cost of sales pro-ratably as sold.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. 

 

We did not have a cumulative impact as of January 1, 2018 due to the adoption of Topic 606 and there was not an impact to our consolidated statements of operations for the three and nine months ended September 30, 2018 as a result of applying Topic 606.

 

The Company recognizes revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer as required by ASC 605 – Revenue Recognition. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reporting date. On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

 

The Company’s other revenue represent payments based on net sales from brand licensees for content reproduction rights. These license agreements are held in conjunction with third parties that are responsible for collecting fees due and remitting to the Company its share after expenses. Revenue from licensed products is recognized when realized or realizable based on royalty reporting received from licensees. Revenues from royalties as of September 30, 2018 and 2017 were insignificant or realizable based on royalty reporting received from licensees. Revenues from royalties as of September 30, 2018 and 2017 were insignificant.

 

Recent Accounting Pronouncements

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. Management evaluated ASU 2016-18 and determined that the adoption of this new accounting standard did not have a material impact on the Company’s consolidated financial statements.

 

  F- 5  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s derivative liability measured at fair value on a recurring basis was determined using the following inputs:

 

    Fair Value Measurements at September 30, 2018
          Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs     Significant Unobservable Inputs
    Total     (Level 1)     (Level 2)     (Level 3)
                               
Put option derivative liability   $ —       $ —       $ —       $ —  

 

 

 

    Fair Value Measurements at December 31, 2017
          Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs     Significant Unobservable Inputs
    Total     (Level 1)     (Level 2)     (Level 3)
                               
Put option derivative liability   $ 9,195     $ —       $   —       $ 9,195

 

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:

 

    Fair Value Measurements Using
    Significant Unobservable Inputs
    (Level 3)
      Embedded Derivative Liability
      September 30,       December 31,
      2018       2017
Balance beginning of period   $ 9,195     $ 57,922
Change in fair market value of derivative liability     (9,195)       (48,727)
Balance end of period   $ -     $ 9,195

 

 

The Company’s derivative instruments were valued using the Black-Scholes option pricing model. Assumptions used in the valuation include the following: a) market value of stock on measurement date of $0.17; b) risk-free rate of 1.63%; c) volatility factor of 276%; d) dividend yield of 0% and e) remaining term of 0.14 years. During the nine months ended September 30, 2018, all derivative instruments were settled by the Company.

 

4. GLOBE PHOTO ASSET PURCHASE AGREEMENT

 

 

On July 22, 2015, the Company entered into an Asset Purchase Agreement with Globe Photos, Inc. (“Globe”), a New York corporation, to purchase of substantially all of the assets of Globe, which principally comprises of photographer contracts granting the Company the right to exploit copyrights, digital and tangible photographs, and related copyrights and trademarks, of Globe Photo ( Globe Photo Assets) for total purchase price of $400,000 payable in $250,000 cash and $150,000 payable in the common stock of the Company.

 

Per the agreement, $180,000 in cash was held in reserve by the Company against Globe’s full performance and compliance with all terms of the agreement. This amount is to be released to Globe at the rate of $10,000 per month beginning August 22, 2015. As of September 30, 2018 and December 31, 2017, the total reserve payable to Globe Photos, Inc. is $10,000.

 

  F- 6  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

The Agreement called for the Common stock to be transferred to Globe sixty (60) days after closing subject to satisfaction of successful termination of certain subagent agreements by Globe. Globe retained these certain subagent agreements but was not able to successfully terminate these agreements. As such, the amount payable in common stock of the Company was reduced by $30,000, thereby reducing the total purchase price of the assets acquired from $400,000 to $370,000. Under the terms of the Agreement the Company issued 352,941 shares of its common stock based on the closing price of the Company’s common shares as traded on the OTC market on the measurement date July 22, 2015 of $0.34 per share for a total of $120,000.

 

The Company evaluated the Asset Purchase Agreement in accordance with ASC 805 – Business Combinations which notes the threshold requirements of a business combination that includes the expanded definition of a “business” and defines elements that are to be present to be determined whether an acquisition of a business occurred. No “activities” of Globe were acquired. Instead, the Company obtained control of a set of inputs (the acquired assets). Thus, the Company determined agreement is an acquisition of assets, not an acquisition of a business in accordance with ASC 805. The total purchase price of $370,000 in connection with the assets acquired is included in archival images, and property and equipment, net, in the consolidated balance sheets.

 

As a form of liquidity protection, Globe shall have limited put options in connection with the common stock beginning eighteen (18) months after the closing date, whereas the Company shall have up to fifteen (15) successive monthly options, with no less than thirty (30) days’ notice for each, which requires the Company to repurchase from Globe up to 1/15th of the shares of common stock in Globe’s possession that were granted in connection with the agreement, at a price per share equity to the market price per share ($0.34) on the effective date of the original share transfer to Globe. The exercise of any put option is not conditioned upon exercise of any prior put option. Beginning in January 2017, Globe exercised its option and elected to sell 1/15th of the shares of common stock for $8,000 per month. As of September 30, 2018, the Company has repurchased 352,941 shares from Globe for cash payments of $120,000.

 

5. PHOTOFILE ASSET PURCHASE AGREEMENT

 

On October 11, 2018, the Company entered into an Asset Purchase Agreement with Photo File, Inc., a New York corporation, along with its related company Sportphotos.com (collectively, the “Seller”) and Charles Singer, its CEO and principal shareholder. (See Note 13).

 

In connection with the above agreement, the Company has advanced $865,000 to the Seller as of September 30, 2018 toward the purchase price of the Asset Purchase Agreement. The advance is reported as a deposit on acquisition as of September 30, 2018 in the consolidated balance sheet.

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment as of September 30, 2018 and December 31, 2017 comprise of the following:

 

    September 30, 2018   December 31, 2017   Estimated Useful Lives
Frank Worth Collection   $ 2,770,000     $ 2,770,000     10 years
Other archival images     952,265       939,343     10 years
Leasehold improvements     12,446       12,446     7 years
Computer and other equipment     72,687       72,687     3 – 5 years
Furniture and fixtures     83,666       83,666     7 years
      3,891,064       3,878,142      
Less accumulated deprecation     (1,694,492 )     (1,384,918 )    
Total archival images, property and equipment, net   $ 2,196,572     $ 2,493,224      

 

Depreciation expense was $309,575, and $307,473 for the nine months ended September 30, 2018 and 2017, respectively, of which $282,618 and $283,902 are reported in cost of revenue, respectively.

 

  F- 7  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

7. INTANGIBLE ASSETS, NET

 

Identifiable intangible assets comprise of the following at September 30, 2018 and December 31, 2017:

 

    September 30, 2018       December 31, 2017    
    Gross Carrying Amount   Accumulated Amortization   Net book value   Gross Carrying Amount   Accumulated Amortization   Net book value
Intangible assets with determinable lives:                                              
                                               
Content provider and photographic agreements   $ 400,000     $ 130,000     $ 270,000     $ 400,000     $ 100,000     $ 300,000
Copyrights     35,000       11,375     $ 23,625       35,000       8,750     $ 26,250
Total   $ 435,000     $ 141,375     $ 293,625     $ 435,000     $ 108,750     $ 326,250

 

Amortization expense in connection with the photographic agreements and copyrights for the nine months ended September 30, 2018 and 2017 was $32,625 and is included in cost of revenue in the consolidated statements of operations. Estimated amortization expense over the next five years is $43,500 per year.

 

  8. NOTES PAYABLE

 

On September 28, 2015, the Company entered into a promissory note agreement for working capital purposes with an unrelated party for total proceeds of $150,000. Interest accrues at the rate of 10% per annum and is payable monthly beginning October 28, 2015. The note matured on September 28, 2016. Effective September 28, 2016, the note was extended to March 31, 2017 and is secured by approximately 240,000 vintage photographs. The note was further extended to July 31, 2017 and then to December 31, 2017. Effective March 30, 2018, the note was extended to June 30, 2018. Effective June 30, 2018 the note was extended to August 31, 2018. During the nine months ended September 30, 2018, the Company made a payment of $150,000 to settle principal balance of the note.

 

On April 1, 2016, the Company entered into an unsecured promissory note agreement with unrelated parties for working capital purposes for total proceeds of $25,000. The promissory notes matured on December 1, 2017 and on March 30, 2018 was extended through June 30, 2018 and on June 30, 2018 was further extended to December 31, 2018 and bear interest at the rate of 6% per annum. Accrued interest payable due under the unsecured note agreement was $3,380 and $2,630 as of September 30, 2018 and December 31, 2017, respectively.

 

On April 7, 2016, an unrelated party advanced the Company $75,000 plus an original issue discount of $25,000 for the purchase of a Marilyn Monroe archive. The advance is secured by the archive for which it was used and is to be repaid on or before April 7, 2017. As of May 3, 2017, the note was extended to December 31, 2017; on March 28, 2018, the note was extended to June 30, 2018; and on June 30, 2018, the note was further extended to September 30, 2018. The Company has agreed to pay 50% of the proceeds derived from the Marilyn Monroe archives up to a guaranteed total of $100,000. Once the $100,000 is paid, the Company has no further obligations. As of September 30, 2018, and December 31, 2017, a balance of $0 and $20,000 remains outstanding, respectively.

 

On December 20, 2017, the Company entered into an on demand unsecured note with an unrelated party for working capital purposes for total proceeds of $10,000. As of September 30, 2018, the note was still outstanding.

 

On April 13, 2018, the Company entered into an unsecured promissory note agreement with an unrelated party for total proceeds of $150,000. The note is due upon demand and carried an interest rate of 15% and is guaranteed by a shareholder and director of the Company. Accrued interest payable due under the unsecured note agreement was $22,500 and $0 as of September 30, 2018 and December 31, 2017, respectively.

 

The Company evaluated the modification of the notes resulting from the extensions in maturity dates under ASC 470-50 and determined that the modifications were not considered substantial and would not qualify for extinguishment accounting under such guidance.

 

  F- 8  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

9. CONVERTIBLE NOTES

 

From July 2018 to September 30, 2018, we issued convertible promissory notes in the aggregate principal amount of $2,069,800 to several accredited investors through a private placement. The convertible notes bear interest at a rate of 10% per annum, mature on April 30, 2019 and are secured by certain archival images owned by the Company. The notes and accrued interest are convertible at the option of the noteholder into our common stock at $0.10 per share but will mandatorily convert to common stock at the same price upon an up list to a national exchange and will have piggyback registration rights to register the shares of common stock underlying the conversion of the notes.

 

The Company evaluated the convertible debentures under ASC 470-20 and recognized a debt discount of $1,809,800 related to the beneficial conversion feature (“BCF”) with a corresponding credit to additional paid-in capital. The debt discount is being accreted to interest expense over the term of the notes.

 

As part of the private placement, the Company paid a consultant financing fees equivalent to 12% of the gross proceeds received from the issuance of convertible notes or $248,376 which was recorded as a debt discount and accreted to interest expense over the term of the notes. The Company is also required to issue an equity fee in the form of warrants with an exercise price of $0.10 per share equivalent to 10% of amounts raised. Likewise, upon receipt of $1.5 million proceeds from the financing, the Company is also required to issue 1 million warrants with an exercise price of $0.10 per share as a milestone bonus. As of September 30, 2018, the warrants related to the equity fee and milestone bonus have not been issued.

During the nine months ended September 30, 2018, the Company recorded interest expense of $452,261 of which $419,359 was related to the accretion of the debt discount and financing cost. As of September 30, 2018, the convertible notes are shown net of unamortized debt discount and financing cost of $1,638,817.

 

10. RELATED PARTY TRANSACTIONS

 

Notes payable to related parties

 

In December 2015, the Company entered into a secured promissory note agreement with an unrelated party for working capital purposes for total proceeds of $120,000. The note bears interest at the rate of 10% per annum and is payable on the 1st day of each month commencing in February 2016. On February 15, 2016, the Company entered into an additional promissory note agreement with the same unrelated party for additional proceeds of $62,500 and under the same terms as the first note. As of September 30, 2018, and December 31, 2017, the balance of $162,500 remains outstanding. Both notes are secured by certain inventory and archival images of the Company in the amount of up to $200,000. Accrued interest payable due under the unsecured note agreement was $46,599 and $34,412 as of September 30, 2018 and December 31, 2017, respectively. The notes matured on December 31, 2017; however, on January 22, 2018, the outstanding balance on the notes was purchased by a related party (ICONZ Art, LLC, beneficial interest shareholder) and the notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. All the accrued interest through the December 31, 2017, was still due to the original noteholder.

 

 On April 5, 2016, the Company entered into an unsecured promissory note agreement with unrelated parties for working capital purposes for total proceeds of $50,000. The promissory notes matured in December 2017 and bear interest at the rate of 6% per annum. However, on January 22, 2018, the outstanding balance on the notes was purchased by a related party and the notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Accrued interest payable due under the unsecured note agreement was $7,477 and $5,227 as of September 30, 2018 and December 31, 2017, respectively. All the accrued interest through the December 31, 2017, was still due to the original noteholder.

 

On August 1, 2013 the Company entered into an unsecured promissory note agreement with a related party Dino Satallante for $100,000. The loan bears interest at the rate of 5% per annum. During the nine months ended September 30, 2018, the Company made payment of $11,220. As of September 30, 2018, and December 31, 2017, $49,915 and $61,135 was outstanding under the unsecured promissory note agreement, respectively. Interest expense for the nine months ended September 30, 2018 and 2017 was $1,872 and $2,433 respectively. The loan matured on July 14, 2014 and was extended to July 31, 2016. Effective March 30, 2018, the note agreement was extended to June 30, 2018 and on June 30, 2018, the note was further extended to December 31, 2018.

  F- 9  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

Effective September 11, 2014 the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties, Dreamstar an entity owned and controlled by Sam Battistone, a Company officer and director and a principal shareholder, and Dino Satallante, a beneficial interest shareholder of the Company, for working capital purposes. The loans bear interest at the rate of 6% per annum. The loans matured on September 10, 2015 and were extended to December 31, 2016. In December 2016, both loans were extended to December 31, 2017 and on March 30, 2018, the notes were extended to June 30, 2018 and on June 30, 2018, one of the note was further extended to December 31, 2018. The outstanding balance on the note issued to Dreamstar was fully paid during the nine months ended September 30, 2018. As of September 30, 2018, $20,500 and $0 was outstanding to Dino Satallante and Dreamstar, respectively. At December 31, 2017, $20,500 and $18,100 was outstanding to Dino Satallante and Dreamstar, respectively. Aggregate interest expense in connection with the two unsecured promissory note agreements for the nine months ended September 30, 2018 and 2017 was $941 and 1,737.

 

Effective July 21, 2015, the Company entered into a promissory note agreement with a related party Dino Satallante, a beneficial interest shareholder of the Company, for total proceeds of $160,000. The Company utilized $80,000 of the proceeds for payments due in connection with the Globe Photo assets acquired. The remainder of the proceeds were used for working capital purposes. The note matured on July 20, 2016, with monthly interest only payments commencing July 22, 2015. Interest accrues at the rate of 12% per annum. The note is secured by the Globe Photo Assets. Total interest expense in connection with the secured promissory note agreement for the nine months ended September 30, 2018 and 2017 was $14,400. Per the terms of the agreement the Company incurred loan fees totaling $8,000 which was fully amortized in 2016. Effective March 30, 2018 the note was extended to June 30, 2018, and on June 30, 2018, the note was further extended to December 31, 2018.

 

On April 4, 2016 the Company entered into a secured promissory note agreement with Premier Collectibles, a beneficial interest shareholder for total proceeds of $65,000 to be used for acquisition of archive agreement. The promissory note bears interest at the rate of 8% per annum, is secured by the archive collection which the proceeds were used and matured on April 1, 2017. On March 30, 2018, the note was extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Interest expense on the note was $3,900 for the nine months ended September 30, 2018 and 2017.

 

On April 15, 2016, the Company entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds of $50,000. The promissory note bears interest at the rate of 6% per annum and matures on December 15, 2017, however, on January 22, 2018, the outstanding balance on the notes was purchased by another related party (ICONZ Art, LLC, beneficial interest shareholder) and the notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Interest expense was $2,250 for the nine months ended September 30, 2018 and 2017, respectively. All the accrued interest through the December 31, 2017, was still due to the original noteholder.

 

On October 3, 2016, the Company entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds of $50,000. The promissory note bears interest at the rate of 6% per annum and matures on December 31, 2017, however, on January 22, 2018, the outstanding balance on the notes was purchased by another related party (ICONZ Art, LLC, beneficial interest shareholder) and the notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Interest expense was $2,250 for the nine months ended September 30, 2018 and 2017.

 

On December 2, 2016, the Company entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds of $31,500. The promissory note bears interest at the rate of 6% per annum and matures on December 31, 2017, however, on January 22, 2018, the outstanding balance on the notes was purchased by another related party (ICONZ Art, LLC, beneficial interest shareholder) and the notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Interest expense was $1,418 for the nine months ended September 30, 2018 and 2017, respectively.

 

The Company evaluated the modification of the notes resulting from the extensions in maturity dates under ASC 470-50 and determined that the modifications were not considered substantial and would not qualify for extinguishment accounting under such guidance.

 

  F- 10  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

On August 16, 2018, we issued a convertible promissory note with a principal amount of $500,000 to a company managed by one of our directors. The note bear interest at a rate of 10% per annum, mature on April 30, 2019 and is secured by certain archival images owned by the Company. The note and accrued interest are convertible at the option of the noteholder into our common stock at $0.10 per share but will mandatorily convert to common stock at the same price upon an up list to a national exchange and will have piggyback registration rights to register the shares of common stock underlying the conversion of the notes.

The Company evaluated the convertible debentures under ASC 470-20 and recognized a debt discount of $500,000 related to the BCF with a corresponding credit to additional paid-in capital. The debt discount is being accreted to interest expense over the term of the note.

During the nine months ended September 30, 2018, the Company recorded interest expense of $93,713 of which $87,549 was related to the accretion of the debt discount. As of September 30, 2018, the convertible note is shown net of unamortized discount of $412,451.

Due to Related Parties

The following table summarizes amounts due to the Company from related parties related to contractual agreements and amounts due to related parties for expenses paid for on the behalf of the Company as of September 30, 2018 and December 31, 2017. The amounts due are non-interest bearing and due upon demand. These amounts have been included in the consolidated balance sheets as current assets due from related parties and current liabilities due to related parties, respectively.

 

    September 30, 2018   December 31, 2017
         
Due to related parties:            
ICONZ ART, LLC, beneficial interest shareholder   $ 259,423     119,081
MSN Holding Co., beneficial interest shareholder     12,947     12,947
Premier Collectibles, beneficial interest shareholder     15,085     15,085
     Total due to related parties   $ 287,455     147,113

 

 

11. COMMITMENTS AND CONTINGENCIES

 

Proceeds from Auctions of Royalty Rights

On March 8, 2016, the Company entered into a Listing Agreement with Royalty Network, LLC, doing business as Royalty Exchange for auction of a 50% ownership of photographic copyrights of certain celebrity archival images owned by the Company. In addition, the sale also assigns the winning bidder the right to receive 50% of the future share of income derived from the assigned images.

 

During 2016, the Company received gross proceeds of $396,000, less 12.5% auction broker fee, from five separate auctions of these rights. The Company retains all exclusive licensing authority over the images and may exercise a buyback option to buy back the 50% ownership of the rights for two times the original auction proceeds over a period ranging from 1 to 2 years.

The Company accounted for the 50% profit consideration for the above agreement in accordance with ASC 470-10-25 and 470-10-35 which requires amounts recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. The Company determined an effective interest rate based on future expected cash flows to be paid to the loan holders. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the loan holders and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions about future revenues and such estimates are subject to significant variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the related loans.

Accordingly, the Company has estimated the cash flows associated with the images and determined a discount of $151,316 which is being accounted as interest expense over a 10-year estimated life of the asset based on expected future revenue streams. For the nine months ended September 30, 2018 and 2017, interest expense related to these loans amounted to $10,167 and $16,958, respectively, which has been included in interest expense and a corresponding increase in loans payable. During the nine months ended September 30, 2018 and 2017, the Company made payments of $5,303 and $9,489 to the loan holders, respectively. As of September 30, 2018, loan payable net of unamortized debt discount amounted $368,669.

  F- 11  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

Asset purchase agreements

On March 3, 2017, the Company entered into an agreement to sell 20% of its ownership in a certain photographic archive asset for $200,000. As part of the agreement the buyer received preferential distributions of their entire purchase price of the asset. If, however the entire purchase price is not paid back after 24 months then all net revenues from the Company will be paid to the buyer until the full purchase price has been paid. On March 30, 2018, the Company entered into an addendum to the agreement to remove the preferential distributions clause from the agreement. Additionally, on May 1, 2018, the Company entered into a second addendum to the agreement whereby the Company agreed to repay the seller the total purchase price of $200,000 and 1,000,000 shares of common stock within 120 days of the effective date of the agreement. The Company valued the 1,000,000 shares at $100,000 as of the agreement date and recorded the value as interest expense during the nine months ended September 30, 2018.

 

The Company accounted for the above transaction as debt and recognized the amount received as a loan payable. As of September 30, 2018, other debt, net of unamortized debt discount amounted to $200,000.

 

On July 21, 2017, the Company entered into an agreement to sell 25% of its ownership in a certain photographic archive asset for $175,000. As part of the agreement the buyer received preferential distributions of their entire purchase price of the asset plus a 30% return. If, however the entire purchase price is not paid back after 24 months then all net revenues from the Company will be paid to the buyer until the full purchase price plus a 30% return has been paid. During the nine months ended September 30, 2018, the Company entered into an addendum to the agreement to remove the preferential distributions clause from the agreement. As such, the Company has reclassified the debt to revenue for the nine months ended September 30, 2018.

 

License Agreements

 

Effective June 1, 2016 the Company entered into three separate non-exclusive license agreements use of licensed images and trademarks through December 31, 2019. Under the terms of the agreements, the Company is required to pay royalties of 10% on net sales. The agreements call for combined annual guaranteed minimum royalties per year of $150,000 based on combined minimum sales of $1,500,000 per year. As of September 30, 2018, the Company has paid $62,500 toward the guaranteed royalties. 

 

Operating Lease Agreements

 

On September 6, 2012 the Company entered into a 25-month operating lease agreement for approximately 4,606 square foot warehouse and office facilities located in Las Vegas, NV. Monthly base rent due under the agreement is $3,270, plus common area maintenance fees. The agreement calls for 3% annual increase in base rental payments. On October 10, 2014, the Company entered into a First Amendment to Lease agreement extending the lease term for 60-months, beginning November 1, 2014. All other terms of the agreement remain unchanged.

 

Future minimum lease payments are below:

 

2018   $ 10,935  
2019     36,807  
Total   $ 47,742  

 

The Company leases various corporate housing from unrelated third parties for terms that range from month-to-month to one year. The Company also rents office space on a month-to-month basis in New York at rate of $850 per month.

 

Total rent expense for nine months ended September 30, 2018 and 2017 was $40,930 and $40,406, respectively, in connection with the operating lease agreements.

 

  F- 12  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

12. SHAREHOLDERS’ EQUITY

 

Preferred Stock

 

The Company is authorized to issue up to 50,000,000 shares of preferred stock authorized with a par value of $0.0001. The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by the Company’s stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by the board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, and conversion rights. As of September 30, 2018, there were no shares of Preferred Stock issued and outstanding.

 

Common Stock

 

The Company is authorized to issue up to 450,000,000 shares of common stock with a par value of $0.0001. As of September 30, 2018, and December 31, 2017, there were 326,218,583 and 325,570,524 shares of common stock issued and outstanding, respectively.

 

During the nine months ended September 30, 2018, the Company repurchased 94,118 shares of common stock for $32,000 related to the Globe Photo Asset Purchase Agreement entered on July 22, 2015.

 

As of September 30, 2018, the Company has repurchased 352,941 shares from Globe for cash payments of $120,000

 

During the nine months ended September 30, 2018, the Company in connection with a consulting agreement issued 1,000,000 shares of common stock for $25,000. Additionally, as an inducement for hitting capital milestones of $1,000,000, $2,000,000 , and $3,000,000, the consultant will receive 200,000, 300,000, and 300,000 warrants respectively. The warrants will have term of 5 years and an exercise price of $0.10.

 

As of September 30, 2018, the consultant has not met any of the milestones and no warrants have been granted under this agreement.

 

STOCK OPTIONS

  

The following is a summary of stock option activity during nine months ended September 30, 2018. 

 

On June 1, 2018, the Company granted 2,183,333, 10-year stock options of which 2,083,333 was in lieu of common stock with exercise prices of $0.01 valued at $327,488 for services and settlement of $104,167 in accrued liabilities. The difference between the fair value of the options and accrued liability was recorded as a loss on settlement of accrued liability in the amount of $208,322 during the nine months ended September 30, 2018. The options were valued using the Black-Scholes option pricing model. Assumptions used in the valuation include the following: a) market value of stock on measurement date of $0.15; b) risk-free rate of 2.89%; c) volatility factor of 238%; d) dividend yield of 0% 

 

Summary of option activity as of September 30, 2018 is presented below:

 

    Number of Shares   Weighted Average Exercise Price
Balance, December 31, 2017     100,000   $ $0.10
Options granted and assumed                    2,183,333   $ $0.01
Options expired     —       —  
Options canceled     —       —  
Options exercised     —       —  
Balance outstanding, September 30, 2018     2,283,333   $ $0.01
Balance exercisable, September 30, 2018     2,283,333   $ $0.01

  

 

Exercise    Shares    Shares    Weighted Contractual Life    Weighted Average 
Price Range Outstanding Exercisable   Remaining (in Years)     Exercise Price
$ 0.010       2,183,333       2,183,333       9.67     $ 0.01
$ 0.100       100,000       100,000       1.28     $ 0.10

 

The aggregate intrinsic value of $995,667 represents the total pre-tax value (the difference between our closing stock price on the last trading day of the third quarter of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on September 30, 2018. This amount will change based on the fair market value of our stock.

 

  F- 13  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

(Unaudited)

 

13. SUBSEQUENT EVENTS

  

On October 24, 2018, the private placement disclosed in Note 9 closed and the Company issued additional convertible notes to accredited investors totaling to $587,250. The notes matured on April 30, 2019, bear interest at the rate of 10% per annum, and are convertible along with accrued interest at $0.10 per share at the option of the note holders. As part of the private placement, the Company paid a consultant financing fees of $54,870.

 

Subsequent to September 30, 2018, the Company appointed Mark Lanier as an independent member of the Board of Directors and Shamar Tobias as interim Chief Financial Officer. Scott Black resigned as Chief Financial Officer and was appointed Chief Legal Officer.

 

Subsequent to September 30, 2018, the Company issued 210,000 shares of common stock for the settlement of consulting fees.

 

As disclosed in Note 5, on October 11, 2018, the Company entered into an Asset Purchase Agreement with Photo File, Inc., a New York corporation, along with its related company Sportphotos.com (collectively, the “Seller”) and Charles Singer, its CEO and principal shareholder.  

 

Pursuant to the Purchase Agreement, the Seller received the following consideration:

 

  • $2,000,000 cash consideration as follows: $865,000 was advanced at the execution of the Purchase Agreement, which was secured through a pledge of 40% of the outstanding shares of the Seller; $650,000 was paid on the execution and closing of the Agreement; and a $500,000 contingency payment shall be paid to Seller within 72 hours of receiving written consent from the major sports leagues.
  • A 10% interest in the Nevada subsidiary that we have formed to house the assets; and
  • A royalty to Seller that commences upon the initial $6,000,000 in sales from the Nevada subsidiary with a cap of $500,000 annually and $5,000,000 in total. The royalty is calculated on annual sales beginning with the date of closing and will restart each year with no carry forward from one year to the next.

 

Additionally, the seller has the endeavor to sell its Vintage Photographic Collection over time after Closing. If at the completion of the sale of the Vintage Photographic Collection, proceeds from net sales but before any expenses other than commissions are less than $2,000,000, the Company will pay the difference between the proceeds and $2,000,000 within 30 days. Any proceeds above $2,000,000 will be divided equally between Seller and the Company with the Seller will remitting 50% of the net proceeds after expenses of those sales within 30 days of their receipt.

 

The following table shows the preliminary allocation of the purchase price consideration to the acquired identifiable assets and liabilities assumed. The final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities. Accordingly, the below tables are preliminary and have been made solely for illustrative purposes.  

 

Total Purchase Price   $ 2,000,000
       
Accounts Receivable     313,047
Inventory     165,939
Property and equipment, net     36,679
Other assets     101,931
Intangible assets     2,925,794
     Total Identifiable assets     3,543,390
       
Accounts payable and accrued liabilities   $ (1,543,390)
     Total liabilities assumed   $ (1,543,390)
Total goodwill   $ —  

 

  F- 14  

 

The following tables show the unaudited condensed preliminary pro-forma results of operations for the nine months ended September 30, 2018 and 2017, respectively, assuming the acquisition occurred on January 1, 2017.:

 

   

For the nine months ended

September 30, 2018

Pro-forma Combined

Total revenue   $ 6,097,190
Cost of revenue     3,169,817
Gross margin     2,927,373
Total operating expenses     (4,227,788)
Other income (expenses)     (950,937)
Net loss   $ (2,251,352)

 

   

For the nine months ended

September 30, 2017

Pro-forma Combined

Total revenue   $ 5,290,188
Cost of revenue     2,764,427
Gross margin     2,525,761
Total operating expenses     (4,068,589)
Other income (expenses)     (50,218)
Net loss   $ (1,593,046)

  F- 15  

 

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

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Overview and History  

 

We were originally incorporated on September 20, 2004, in the State of Delaware under the name “Blog8.” Since incorporation, we have changed our name numerous times and have been known as “Securiteyes,” “Medify Solutions Limited,” “Petel Incorporated” and “Gleeworks, Inc.” We amended our Certificate of Incorporation and changed our name to Capital Art, Inc. on April 28, 2011. On June 6, 2018, we changed our name to Globe Photos, Inc.    

 

Recent Asset Purchase with Photo File, Inc.

 

On October 11, 2018,   we acquired the assets of Photo File, Inc., a New York corporation (“Photo File”) and one of the nation’s leaders in licensed professional and collegiate sports photography.  

 

Founded in 1987, Photo File, Inc. was initially awarded a license for photography by Major League Baseball and the MLB Players Association, becoming the first company to be given a license for photography by any major sport in the U.S. The company holds major sports licenses with the NFL, NBA, MLB, NHL and key colleges to produce licensed sports prints, lithographs and other related items. Photo File is also licensed by thousands of additional individuals and organizations, including Babe Ruth, Joe Namath, Vince Lombardi, and others.

 

Its physical assets also include more than a million negatives and vintage sports prints, over 1,000 autographed lithographs and related memorabilia, and high-volume printing and packaging equipment. Photo File can produce a full range of framed, unframed and matted products in sizes up to 30" x 40", plaques, as well as photo sculptures, ceramic tiles, key chains and event covers.

 

Globe Photos and Photo File Opportunity

 

Photo File has current licenses with all the major U.S. professional sports leagues and many major colleges to produce and sell officially licensed sports prints, lithographs and sports memorabilia. Its physical assets include more than a million negatives and vintage sports prints, over 1,000 autographed lithographs and related memorabilia, and high-volume printing and packaging equipment. With Photo File’s annual revenues of approximately $7 million, this acquisition presents a tremendous opportunity to use Photo File’s existing sales and marketing organization to open new distribution channels for Globe Photo’s product lines and take advantage of the growing market demand for pop culture imagery and sports memorabilia.

 

We believe this highly-synergistic acquisition significantly expands our collection of iconic sports photography and greatly strengthens our sales and production capabilities. We expect to benefit from Photo File’s reputation for excellent customer service, as well as its strong ties to its professional and collegiate sports leagues and large retail customers. This will be important as we further develop Photo File’s relationships with top retail clients and distributors including Costco, Walmart, Target, Bed Bath and Beyond, USPS, Scheels and others

 

  4  

 

Pop Culture Imagery

 

We are engaged in the business of selling and managing classic and contemporary, limited edition photographic images and reproductions, with a focus on iconic celebrity images, by acquiring ownership or rights to collections of rare iconic negatives and photographs. We also make available images for publications and merchandising by third parties.

 

Our objective is to become the largest repository of archival pop culture photography in the online world. To this end, we have been and continue to search for photographic archives. We have amassed our current inventory and rights to photographic images and reproductions from a series of acquisitions that started in 2011. These past few years of acquisitions have resulted in an impressive collection for our company, including the rights to the Frank Worth collection, Globe Photos and the rights or ownership to millions of photos and negatives. Archived and stored in our warehouse are boxes of never seen before negatives, one-of-a kind prints and other memorabilia. We have rare images of celebrity icons, such as Elvis Presley, James Dean, Marilyn Monroe, and many others, which have never been seen by the public.

 

As part of increasing our product offerings, we plan to continue our search for photographic archives that are undervalued by the market. These archives may be acquired outright, or we may enter into representation or consignment agreements with the owners of the archives. These opportunities are typically (1) aging photographers who are looking to monetize their archive while still alive via a single large transaction, or (2) media companies that have aggregated assets (or rights to assets) and are seeking to dispose of the archive or a partner who can help them grow cash flows related to the archive. These opportunities exist both in the United States and abroad and we continue to search for value wherever it may be geographically located.

 

Our business is to monetize the value of our collection. We sell our photographic images and reproductions through auctions, third-party galleries, art consultants, interior decorators, bricks and mortar locations, specialty and big box retailers and directly to end consumers. We reach our customers through diverse marketing channels, including our websites, events and interactive campaigns. We also reproduce mass quantities of different photographs from our collection, which are sold through third party on-line retailers. We are continually exploring these and other marketing possibilities and we expect to continue our efforts to pursue contracts and to diversify our revenues.    

 

Our principal place of business is located at 6445 South Tenaya Way, Suite B-130, Las Vegas, NV 89113. General information about us can be found at www.capitalart.com. The information contained on or connected to our website is not incorporated by reference into this Quarterly Report on Form 10-Q and should not be considered part of this or any other report filed with the SEC.

 

  5  

 

Results of Operations  

 

Revenues

 

Our total revenue reported for the three months ended September 30, 2018 was $197,507, compared with $474,421 for the three months ended September 30, 2017. Our total revenue reported for the nine months ended September 30, 2018 was $951,760, compared with $932,465 for the nine months ended September 30, 2017.

 

Our license revenue increased by $10,746 for the three months ended September 30, 2018 over the same period ended 2017; however, our image revenue decreased by $287,660 for the three months ended September 30, 2018 over the same period ended 2017. Similarly, our license revenue increased by $223,797 for the nine months ended September 30, 2018 over the same period ended 2017, but our image revenue decreased by $204,502 for the same period ended 2017.

 

The decrease in revenue for the three months ended September 30, 2018 over the same period ended 2017 is largely the result of a one-time sale of a large photo archives during the previous three-month period ended September 30, 2017. Additionally, with a substantial amount of our small management team’s time and effort being focused on the Photo File acquisition, we pushed retail programs scheduled for Q3 to Q4 2018.

 

The increase in revenue for the nine months ended September 30, 2018 over the same period ended 2017 is largely the result of the Company closing a large auction during the nine months ended September 30, 2018.

 

With the closing of the Photo File acquisition on October 11, 2018, we expect our revenues to significantly increase in the 4 th quarter.

 

For the nine months ended September 30, 2018, the collectibles division accounted for over 62% of total revenues. Management has instituted aggressive direct-to-consumer marketing, implemented programs with third-party re-sellers as well as bricks and mortar, and online retailers. We have also continued to enhance and market our licensing division, Globe Photos, LLC. Additionally, we have invested considerable time and monies in the development of software to more efficiently ingest images and push them through to our retail and licensing channels that is expected to help scale each division considerably.

 

There is significant financial risk associated with a dependence upon a small number of distributors and customers which could have an adverse effect on our future consolidated financial statements if these distributors or customers were to leave. We intend to continue our investment in sales and marketing in order to increase distribution and demand for our products and adding content to our product lines, along with adding additional channels of distribution. There are no assurances this will result in increased revenues.

 

Cost of Revenues

 

Our cost of revenues consists primarily of royalties, depreciation, and amortization expense. For the three months ended September 30, 2018, cost of revenues decreased to $206,957, compared with $300,933 for the three months ended September 30, 2017, as a result of decreased sales largely the result of a one-time sale of a large photo archives during the previous three month period ended September 30, 2017.

 

Our total cost of revenues for the nine months ended September 30, 2018 increased to $693,429, compared with $595,498 for the nine months ended September 30, 2017, largely as a result of increased depreciation and royalties and selling fees related to a large auction that closed during the nine months ended September 30, 2018.

 

With the closing of the Photo File acquisition on October 11, 2018, we expect our cost of revenues to also significantly increase in the 4 th quarter.

 

  6  

 

Operating Expenses

 

Operating expenses increased to $401,395 for the three months ended September 30, 2018 from $216,352 for the three months ended September 30, 2017. Operating expenses increased to $898,193 for the nine months ended September 30, 2018 from $625,810 for the nine months ended September 30, 2017. The detail by major category is reflected in the table below.

 

    Three Months Ended September 30   Nine Months Ended September 30
   

2018

  2017   2018   2017
Product development, sales and marketing   $ 100,840     $ 57,252     $ 214,004     $ 150,611
General and administrative     291,533       151,075       657,232       451,628
Depreciation expense     9,022       8,025       26,957       23,571
                               
Total operating expenses   $ 401,395     $ 216,352     $ 898,193     $ 625,810

 

The main reason for the overall increase in operating expenses in 2018 was an increase in the general and administrative expense category.

 

Product development, sales and marketing expenses increased in both the three and nine months ended September 30, 2018 over the same periods in 2017. Product development, sales and marketing expenses primarily consists of website development costs, sales and marketing salaries, as well as other expenses associated with marketing. We continue to utilize our working capital resources in sales and marketing in order to increase the distribution and demand for our products and to add content to our product lines along with adding additional channels of distribution.

 

General and administrative costs also increased in 2018 over 2017 for both periods as a result of expenses related to increased expenses and professional fees incurred in anticipation of the Photo File acquisition.

 

Total depreciation expense increased in 2018 over 2017. We record archival images, and property and equipment at cost for purchases over $500. Archival images, property and equipment are depreciated using the straight-line method over the estimated useful lives ranging from three to ten years. We capitalize direct costs associated with improvements to archival images, and property and equipment in accordance with ASC 360 – Property, Plant, and Equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful life or the term of the related lease.

 

Other Expenses/Other Income

 

We had other expenses of $564,041 for the three months ended September 30, 2018, as compared with other income of $30,094 for the same period ended 2017. We had other expenses of $927,247 for the nine months ended September 30, 2018, as compared with other expenses of $23,266 for the same period ended 2017. The increase in other expenses is a result of the loss on our settlement of accrued liabilities, interest expense and the amortization of debt discount and financing fees.

 

We expect our other expenses to increase in through the next two quarters as we have taken on more debt as a result of our recent offering that closed on October 24, 2018 and sale of convertible notes for total gross proceeds of $3,156,756, of which $2,569,800 was received as of September 30, 2018.   The notes mature on April 30, 2019, bear interest at the rate of 10% per annum, and are convertible along with accrued interest at $0.10 per share at the option of the note holders.

 

Net Loss

 

We finished the three months ended September 30, 2018 with a loss of $974,886, as compared to a loss of $12,770 during the three months ended September 30, 2017. We finished the nine months ended September 30, 2018 with a loss of $1,567,109, as compared to a loss of $312,109 during the nine months ended September 30, 2017.

 

  7  

 

Liquidity and Capital Resources

 

As of September 30, 2018, we had total current assets of $1,129,961 and current liabilities of $2,882,190, resulting in a working capital deficit of $1,752,229. This compares with the working capital deficit of $ 1,924,638 at September 30, 2017. This decrease in working capital deficit, as discussed in more detail below, is primarily the result of increased cash on hand as a result of our convertible note offering that commenced in July and ended in October 2018.

 

Our operating activities used $534,982 in the nine months ended September 30, 2018 as compared with $130,718 used in operating activities in the nine months ended September 30, 2017. Our negative operating cash flow in 2018 was largely the result of our net loss for the period.

 

Investing activities used $877,923 in the nine months ended September 30, 2018 compared with $74,407   in the nine months ended September 30, 2017. Our negative investing cash flow in 2018 is largely the result of funds we contributed in connection with our asset purchase with Photo File, Inc.

 

Financing activities provided $2,400,143 in the nine months ended September 30, 2018 compared with $172,828 provided in the nine months ended September 30, 2017. Our positive financing cash flow in 2018 was largely the result of our recent offering and sale of convertible notes for total net proceeds of $2,321,424 through September 30, 2018. The offering concluded in October 2018 for total proceeds of $3,156,756.

 

There is no guarantee we will generate sufficient revenues or have access to sufficient capital to continue operations. We recently concluded a convertible note offering and most of that was used to finance our asset purchase agreement with Photo File, Inc., with the balance available for working capital. Our management estimates we will need approximately $10,000,000 in annual revenues and/or additional capital to continue operations after taking into account the asset purchase with Photo File and the costs associated with incorporating the sports photography line of business with our existing operations. For the immediate future, we plan to ramp up fees earned from licensing imagery to media companies growing a network of global sales agents. On the capital raising front, we intend to reach out to investment bankers to discuss and develop a plan to meet our capital needs for the next 12 months and beyond. There is no guarantee that we will generate sufficient revenues or have access to capital to continue operations. We expect to continue incurring significant operating losses for the near future. If we are not successful in achieving revenues required to continue operations at our current operating levels within three to four months, or obtain additional financing, our operations will be significantly negatively impacted, and we will need to significantly scale back our operations or liquidate all or a portion of our collections.

 

Inflation

 

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the three month period ended September 30, 2018.

 

Critical Accounting Polices

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are disclosed in Note 2 of our audited consolidated financial statements included in the Form 10-K filed with the Securities and Exchange Commission.

 

Off Balance Sheet Arrangements

 

As of September 30, 2018, there were no off balance sheet arrangements.

 

  8  

 

Recent Accounting Pronouncements

 

The recent accounting pronouncements that are material to our financial statements are disclosed in Note 2 of our consolidated audited financial statements included in the Form 10-K filed with the Securities and Exchange Commission and in Note 2 of our unaudited consolidated financial statements included herein.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.

 

Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures -  Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.

 

These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of September 30, 2018, at reasonable assurance level, due to the following material weaknesses:

 

§ ineffective control environment and lack of qualified full-time CFO who has SEC experience to focus on our financial affairs;
§ lack of qualified and sufficient personnel, and processes to adequately and timely identify making any and all required public disclosures;
§ deficiencies in the period-end reporting process and accounting policies;
§ inadequate internal controls over the application of new accounting principles or the application of existing accounting principles to new transactions;
§ inadequate internal controls relating to the authorization, recognition, capture, and review of transactions, facts, circumstances, and events that could have a material impact on the Company’s financial reporting process;
§ inadequate controls over maintenance of records;
§ inadequate internal controls with respect to inventory transactions; and
§ improper and lack of timely accounting for accounts such as prepaid expenses, accounts payable and accrued liabilities.

 

Our Board of Directors has assigned a priority to the short-term and long-term improvement of our internal control over financial reporting. Although we recently hired an interim Chief Financial Officer, we intend to retain a permanent Chief Financial Officer in 2019 to remedy the processes that would eliminate the issues that may arise due to the absence of separation of duties within the financial reporting functions. We have also retained an independent director and have plans to add more independent directors and to also increase our corporate governance with committees as we look to up list to Nasdaq. Additionally, our Board of Directors will work with management to continuously review controls and procedures to identified deficiencies and implement remediation within our internal controls over financial reporting and our disclosure controls and procedures.

 

We believe that our financial statements presented in this quarterly report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.

 

Inherent Limitations  -   Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

 

Changes in Internal Control over Financial Reporting  - There were no changes in our internal control over financial reporting during the three month period ended September 30, 2018, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  9  

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any material pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

Item 1A: Risk Factors

 

See Risk Factors contained in our Form 10-K filed with the SEC on May 2, 2018.

 

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

 

The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933.

 

On June 1, 2018, the Company granted 2,183,333, 10-year stock options in lieu of common stock with an exercise price of $0.01 valued at $327,488 for services and settlement of accrued liabilities.

 

From July 2018 to October 24, 2018, we executed Convertible Promissory Notes (the “Notes”) in the aggregate principal amount of $3,156,756 to several accredited investors. The notes matured on April 30, 2019, bear interest at the rate of 10% per annum, and are convertible along with accrued interest at $0.10 per share at the option of the note holders. The proceeds of the Notes are to be used in connection with our payment obligations under the asset purchase agreement we signed with Photo File, Inc. and for our general working capital purposes.

 

During the nine months ended September 30, 2018, the Company repurchased 94,118 shares of common stock for $32,000 related to the Globe Photo Asset Purchase Agreement entered on July 22, 2015. As of September 30, 2018, the Company had repurchased 352,941 shares from Globe for cash payments of $120,000.

 

During the nine months ended September 30, 2018, the Company in connection with a consulting agreement issued 1,000,000 shares of common stock for $25,000.

 

Subsequent to September 30, 2018, the Company issued 210,000 shares of common stock for the settlement of consulting fees.

 

These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

N/A

 

Item 5. Other Information

 

None

 

  10  

 

Item 6. Exhibits

   
Exhibit Number

Description of Exhibit

 

31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101** The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 formatted in Extensible Business Reporting Language (XBRL).
 

 

**Provided herewith

 

  11  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on November 13, 2018 on its behalf by the undersigned thereunto duly authorized.

 

GLOBE PHOTOS, INC.
   
/s/Stuart Scheinman  

Stuart Scheinman

Principal Executive Officer

 
   
   
/s/Shamar Tobias  

Shamar Tobias

Principal Financial and Accounting Officer

 

 

  12  

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