The accompanying notes are an integral part of these consolidated financial statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
|
ORGANIZATION AND BUSINESS OPERATIONS
|
Capital Art, Inc. (formerly
Movie Star News, LLC) (“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.
Movie Star News, LLC (“MSN”)
was organized in the state of Nevada on August 29, 2012 as a limited liability company to acquire the assets of Kramer Productions,
Inc. d/b/a Movie Star News, a New York institution since 1939 that was credited for creating the concept of “pin-up art”.
The acquisition resulted in MSN holding one of the largest and most diverse collections of Hollywood photographs in the world of
over 3 million Hollywood-related posters, vintage photographs and original negatives.
Capital Art, Inc. (“CAPA”),
formed in the state of Delaware on April 26, 2007 along with its wholly owned subsidiary, Capital Art, LLC (collectively “CAPA”
or “pre-merger CAPA”) formed in the state of California on January 24, 2011, owned rare iconic celebrity images, including
the rights to the Frank Worth Collection. The Frank Worth Collection comprises an extensive collection of Marilyn Monroe, James
Dean and other iconic photographs, many rare and never seen that were accumulated over a period of 60 years.
On July 22, 2015, the Company
entered into an Asset Purchase Agreement with Globe Photos, Inc., a New York corporation, to purchase substantially all of the
assets of Globe Photos, Inc., which principally comprise photographer contracts granting the Company the right to exploit copyrights,
digital and tangible photographs, and related copyrights and trademarks, of Globe Photo, Inc. On July 24, 2015, the Company formed
Globe Photo, LLC, a wholly owned subsidiary of CAPA, to license the Company’s extensive photograph image archive to third
parties worldwide for a fee.
Going Concern
The accompanying 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 December 31, 2016 the Company had $54,034 cash on hand. At December
31, 2016 the Company has an accumulated deficit of $2,324,977. For the twelve months ended December 31, 2016, the Company had a
net loss of $591,512 and cash used in operations of $187,336. These factors raise substantial doubt about the Company’s ability
to continue as a going concern.
Over the next twelve months
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
|
Basis of Presentation and Principles of Consolidation
The accompanying consolidated
financial statements represent the results of operations, financial position and cash flows of Capital Art, Inc. prepared on the
accrual basis of accounting and conform to accounting principles generally accepted in the United States of America. The consolidated
financial statements include the financial statements of the Company, and its 100% owned subsidiaries Capital Art, LLC and Globe
Photos, LLC. 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.
Fair Value of Financial Instruments
The Company measures fair
value in accordance with Accounting Standards Codification (“ASC”) 820 – Fair Value Measurements. ASC 820 defines
fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurements. ASC 820 establishes a
framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.
To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value
hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair
value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by ASC 820 are:
Level 1 — Inputs are unadjusted, quoted prices in active markets
for identical assets or liabilities at the measurement date.
Level 2 — Inputs (other than quoted market
prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 — Inputs reflect management’s
best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments
includes unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
As defined by ASC 820, the
fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to
sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants
at the measurement date.
The reported fair values
for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety of factors and assumptions.
Accordingly, certain fair values may not represent actual values of the Company’s financial instruments that could have been
realized as of December 31, 2016, or that will be recognized in the future, and do not include expenses that could be incurred
in an actual settlement. The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable,
receivables from related parties, prepaid expenses and other, accounts payable, accrued liabilities, and related party and third
party notes payables approximate fair value due to their relatively short maturities. The Company’s notes payable to related
parties approximates the fair value of such instrument based upon management’s best estimate of terms that would be available
to the Company for similar financial arrangements at December 31, 2016 and 2015.
The carrying value of financial
assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities
measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs.
Financial assets and
liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2016:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,922
|
|
|
$
|
57,922
|
Financial assets and liabilities measured
at fair value on a recurring basis are summarized below as of December 31, 2015:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,000
|
|
|
$
|
55,000
|
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:
|
|
Amount
|
Balance December 31, 2015
|
|
$
|
55,000
|
Change in fair market value of derivative liability
|
|
|
2,922
|
Balance December 31, 2016
|
|
$
|
57,922
|
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 $0.29; b) risk-free rate of 0.85%; c) volatility
factor of 142%; d) dividend yield of 0% and e) remaining term of 1.39 years.
R
elated
parties
The
Company follows ASC 850, "Related Party Disclosures" for reporting activit
ies
with
related parties. A party is considered to be related to the Company if the party directly or indirectly or through one or more
intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal
owners of the Company, its management, members of the immediate families of principal owners of the Company and its management
and other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence management or operating policies of the transacting parties or if it has an
ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of
the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Accounts receivable, net
The Company sells its products
through various means, including distributors, auction houses, and via the internet. The Company also licenses its images to third
parties for which royalty income is received by the Company. The Company continually monitors the collectability of its trade accounts
receivables based on a combination of factors, including the aging of the accounts receivable, historical experience, and other
currently available evidence and provides for an allowance for doubtful accounts equal to estimated uncollectible amounts based
on historical collection experience and a review of the current status of trade accounts receivable. There was an allowance for
bad debt of $11,100 recorded during the year ended December 31, 2016. As of December 31, 2016 and 2015, the Company’s accounts
receivable was netted against an allowance of $11,100 and $0 respectively.
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. As of December 31, 2016 and 2015, the Company has recorded
allowance related to slow moving inventory in the amount of $117,453 and $0, respectively.
Archival Images, and Property and Equipment
Archival images, and property
and equipment are recorded at cost for purchases over $500, and depreciated using the straight-line method over the estimated useful
lives ranging from three to ten years. The Company capitalizes 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. Expenditures for ordinary repairs
and maintenance are expensed as incurred.
Intangible Assets
Intangible assets, consisting
of content provider and photographic agreements, and copyrights, are accounted for in accordance with ASC 350 Intangibles - Goodwill
and Other. Intangible assets that have finite lives are amortized using the straight-line method over their estimated useful lives
of ten years.
Impairment of Long-Lived Assets
Long-lived assets, including
intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. In such situations, long-lived assets are considered impaired when future undiscounted cash flows
resulting the use of the asset and its eventual disposition are less than the asset’s carrying amount. In such situations,
the asset is written down to the present value of the estimated future cash flows. Factors that are considered when evaluating
long-lived assets for impairment include a current expectation that it is more likely than not that the long-lived asset will be
sold significantly before the end of its useful life, a significant decrease in the market price of the long-lived asset, and a
change in the extent of manner in which the long-lived asset is being used. Based on management’s assessment there were no
impairments to its long-lived assets at December 31, 2016 and 2015.
Derivative Financial Instruments
The Company accounts for
derivative instruments in accordance with the provisions of ASC 815 - Derivatives Hedging: Embedded Derivatives. ASC 815 establishes
accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts
and for hedging activities.
The Company does not use
derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms in agreements are reviewed to determine
whether or not they contain embedded derivatives that are required under ASC 815 to be accounted for and separated from the host
contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities is required to be revalued
at each reporting date, with the corresponding changes in fair value recorded in current period operating results.
Revenue Recognition
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.
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.
Shipping and Handling
The Company records shipping
and handling expenses in the period in which they are incurred and are included in cost of revenues. In limited circumstances this
cost is passed through to the customers.
Stock-based Compensation
The Company recognizes stock-based
compensation issued to employees in accordance with ASC 718 – Compensation: Stock Compensation, based on the fair value of
the equity instrument in exchange for employee services and the resulting recognition of compensation expense.
The Company’s accounts
for stock-based payment transactions with nonemployees for services in accordance with ASC 50-550 Equity: Equity-based Payments
to Non-Employees. If the fair value of the services received in a stock-based payment with nonemployees is more reliably measureable
than the fair value of the equity instrument issued, the fair value of the services received is used to measure the transaction.
Conversely, if the fair value of the equity instruments issued in a stock-based transaction with nonemployees is more reliably
measureable than the fair value of the consideration received, the transaction is measured at the fair value of the equity instruments
issued. The Company recognizes an increase in equity or a liability, depending on whether the equity instruments granted have satisfied
the equity or liability classification criteria.
Advertising
The Company expenses
the cost of advertising, including promotional expenses, as incurred. Advertising expenses for the twelve months ended December
31, 2016 and 2015 was $5,167 and $10,811, respectively.
Income Taxes
The Company’s calculation
of its tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing
jurisdictions. The Company recognizes tax liabilities for uncertain tax positions based on management’s estimate of whether
it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions as of December 31,
2016 and 2015.
Deferred income taxes are
recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis
of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences
arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based
and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more
likely than not that some or all of the deferred tax assets will not be realized.
The application of tax laws
and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are
subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings.
Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from management’s
estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
Interest and penalties are included in tax expense.
The Company includes interest
and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As
of December 31, 2016 and 2015, the Company had no accrued interest or penalties related to uncertain tax positions.
Concentrations of Credit
Risk and Financial Instruments
Financial instruments that
potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.
The Company’s cash
balances are placed at financial institutions, which at times, may exceed federally insured limits. Generally, these deposits may
be redeemed upon demand and, therefore, bear minimal risk. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant risk on cash.
Basic and Diluted Loss per Share
The Company computes
loss per share in accordance with ASC 260 - Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings
per share (“EPS”) on the face of the consolidated statements of operations. Basic EPS is computed by dividing net loss
available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method
and convertible preferred stock using the if-converted method. Diluted EPS excludes all dilutive potential shares if their effect
is antidilutive. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because
they are antidilutive.
A reconciliation of weighted-average basic shares
outstanding to weighted-average diluted shares outstanding follows:
|
|
Twelve
Months Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
325,398,392
|
|
|
|
321,910,400
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Diluted weighted average common and potential common shares outstanding
|
|
|
325,398,392
|
|
|
|
321,910,400
|
Recent Accounting Pronouncements
In March 2016, the FASB
issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net)
. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations and includes
indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers.
ASU 2016-08 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09, as discussed above. Management
is currently assessing its procedures for determining revenues derived from principal versus agents in connection with the impact
of adopting this new accounting standard on the Company’s consolidated financial statements and does not believe that the
adoption of ASU 2016-08 will have a material impact on the Company’s consolidated financial statements.
In April 2016, the FASB
issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
The
amendments in this update affect the guidance in ASU 2014-09, which is not yet effective. The amendments in ASU 2016-10 clarify
the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining
the related principles for those areas. ASU 2016-10 is effective January 1, 2018 to be in alignment with the effective date of
ASU 2014-09, as discussed above. Management is currently
assessing the potential impact of adopting this new accounting standard on the Company’s consolidated financial statements
in connection with revenues recognized from licensing its vast archive of photographic images.
In May 2016, the FASB issued
ASU 2016-12,
Revenue from Contracts from Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The
amendments in this update affect the guidance in ASU 2014-09, which is not yet effective. The core principle of the guidance in
Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments
in ASU 2016-12 do not change the core principle of the guidance in Topic 606, but instead affect only the narrow aspects noted
in Topic 606. ASU 2016-12 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09, as discussed
above. Management evaluated ASU 2016-12 and does not believe the adoption of ASU 2016-12 will have a material impact on the Company’s
consolidated financial statements.
In January 2016, the FASB
issued ASU 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU
2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments including
requirements to measure most equity investments at fair value with changes in fair value recognized in net income, to perform a
qualitative assessment of equity investments without readily determinable fair values, and to separately present financial assets
and liabilities by measurement category and by type of financial asset on the balance sheet or the accompanying notes to the financial
statements. ASU 2016-01 will be effective for the Company beginning on January 1, 2018, and will be applied by means of a cumulative
effect adjustment to the balance sheet, except for effects related to equity securities without readily determinable values, which
will be applied prospectively. Management is currently evaluating the potential impact of adopting this new accounting standard
on the Company’s consolidated financial statements.
In February 2016, the FASB
issued ASU 2016-02,
Leases
, which requires an entity to recognize long-term lease arrangements as assets and liabilities
on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all long-term
leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest
expense for financing leases. The amendments also require certain new quantitative and qualitative disclosures regarding leasing
arrangements. ASU 2016-02 will be effective for the Company beginning on January 1, 2019. Lessees must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. Early adoption is permitted. Management does not believe the adoption of ASU 2016-02 will have a material
impact on the Company’s consolidated financial statements.
In March 2016, the FASB
issued ASU 2016-05,
Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
,
which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument would
not, in and of itself, be considered a termination of the derivative instrument, provided that all other hedge accounting criteria
continue to be met. ASU 2016-05 is effective for the Company beginning on January 1, 2017. Early adoption is permitted, including
in an interim period. Management evaluated ASU 2016-05 and does not believe the adoption of this new accounting standard will have
a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB
issued ASU 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
, which
aims to reduce the diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the
nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether
the call or put option must be separated from the debt instrument and accounted for separately as a derivative. ASU 2016-06 will
be effective for the Company beginning on January 1, 2017. Management evaluated ASU 2016-06 and does not believe the adoption of
this new accounting standard will have a material impact on the Company’s consolidated financial statements effective January
1, 2017.
In March 2016, the FASB
issued ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU
2016-09 simplifies several aspects of the accounting and presentation of share-based payment transactions, including the accounting
for related income taxes consequences and certain classifications within the statement of cash flows. ASU 2016-09 is effective
for the Company beginning on January 1, 2017. Management evaluated the impact
of adopting ASU 2016-09 and does not believe the new accounting standard will have a material impact on the Company’s consolidated
financial statements.
In August 2016, the FASB
issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments
are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in
the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
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. The provisions of this guidance are to be applied using a retrospective approach which requires application
of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard. Management does
not believe that this new accounting standard will have a material impact on the Company’s consolidated financial statements.
In
December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers”. The amendments in this Update affect the guidance in Update 2014-09, which is not yet effective. The effective
date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606
(and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,
Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date
, defers the effective date of Update 2014-09 by one year.
In
May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments
in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods,
and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including
adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have
not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made
available for issuance
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic
815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for
as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize
the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available
to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are
now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with
Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize
the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a
scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this
Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For
all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019,
and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including
adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period.
3.
|
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
December 31, 2016 and 2015, the total reserve payable to Globe Photos, Inc. is $10,000 and $130,000, respectively.
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 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 1/15
th
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 1/15
th
of the
shares of common stock for $8,000 per month. As of November 16, 2017, the Company has repurchased 235,294 shares from Globe
for cash payments of $80,000.
In
accordance with ASC 815 – Derivatives and Hedging: Embedded Derivatives, the Company determined the put options are an embedded
derivative subject to bifurcation. The put options are a hybrid instrument that are not legally detachable or a mandatorily redeemable
financial instrument. If exercised by Globe Photos, the put options embody an unconditional obligation by the Company to buy back
its shares for cash at $0.34 per share, the market value of the Company’s common shares on the original transfer date of
August 22, 2015. Globe may exercise this right beginning January 22, 2017 up to fifteen months subsequent that date. Using the
Black-Scholes Valuation Model, the Company determined the fair value of the embedded derivative on August 22, 2015, the date of
transfer of the common stock to Globe, to be $75,000. The Company’s stock price on August 22, 2015 was $0.34,
risk-free
discount rate of 1.01% and volatility of 100% was used to obtain fair value.
Management determined
the assets acquired from Globe for net purchase price of $370,000 and $75,000 related to the embedded derivative, for a total
of $445,000. Based on its analysis of industry historical values of archival celebrity images and licensing and experience in
the industry, Management’s allocation of the assets acquired in connection with the Globe APA is assigned as
follows:
Inventory
|
|
$
|
10,000
|
Intangible assets – content provider and photographic agreements
|
|
|
400,000
|
Copyrights
|
|
|
35,000
|
Total
fair value of purchased assets
|
|
$
|
445,000
|
In accordance with ASC
350 – Intangibles – Goodwill and Other, the Company determined the content provider and photographic agreements and
copyrights acquired from Globe have finite useful lives with estimated useful life of 10 years. See Note 6– Intangible Assets.
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment
as of December 31, 2016 and 2015 comprise of the following:
|
|
December 31,
|
|
|
|
|
2016
|
|
2015
|
|
Estimated Useful Lives
|
Frank Worth Collection
|
|
$
|
2,770,000
|
|
|
$
|
2,770,000
|
|
|
10 years
|
Other archival images
|
|
|
889,331
|
|
|
|
730,076
|
|
|
10 years
|
Leasehold improvements
|
|
|
12,446
|
|
|
|
12,446
|
|
|
7 years
|
Computer and other equipment
|
|
|
65,316
|
|
|
|
53,332
|
|
|
3 – 5 years
|
Furniture and fixtures
|
|
|
83,666
|
|
|
|
83,666
|
|
|
7 years
|
|
|
|
3,820,759
|
|
|
|
3,649,520
|
|
|
|
Less accumulated deprecation
|
|
|
(977,172
|
)
|
|
|
(590,537
|
)
|
|
|
Total property and equipment, net
|
|
$
|
2,843,587
|
|
|
$
|
3,058,983
|
|
|
|
Depreciation expense for the years ended December 31, 2016 and 2015
was $386,635 and $358,808, respectively.
|
5.
|
FRANK WORTH COLLECTION
|
On November 12, 2014,
the Frank Worth Estate agreed to accept $155,000 and 200,000 common shares, with a fair value of $0.05 per share ($10,000), of
the Company’s common stock in exchange for sole and exclusive, world-wide, royalty free rights to all negatives, prints,
products and other materials the Company possesses including the use of the Frank Worth seal, Frank Worth’s name, likeness,
publications and biography plus merchandising and selling rights. $30,000 due under the agreement for royalties was paid in January
2015. The remainder of 125,000 and 200,000 ($10,000) shares of common stock were due and payable on or before May 31, 2015, which
is being held by the Company until a dispute with the executor of the Estate (the “Claimant”) is settled.
On October 18, 2016,
an arbitration hearing was held on this matter. On October 28, 2016, the arbitrator issued an amended award, finding the 2011 Agreement
to remain valid, but also recognizing the Company’s demand for clean title to the 38 Key images. Thus, the Company was ordered
to pay Claimant $70,000 as final payment due under the November 12, 2014 agreement, payable to the Claimant no later than February
23, 2017. The Company was granted an award for delivery of clean title of the 38 Key images no later than February 23, 2017. In
the event, Claimant provides such clean title by such deadline, the parties have the option to comply with the 2011 agreement and
enter into negotiations for a new royalty agreement on the 38 Key images. But in the event Claimant does not deliver clean title,
the Company shall retain possession of the entire collection, including the 38 Key images with no further obligation to pay royalties.
The Claimant failed to deliver clean title by February 23, 2017.
As
of December 31, 2016 and 2015, $80,000
and $135,000,
respectively, has been provided for in accrued liabilities in the Company’s consolidated balance sheets. Additionally, the
Company has recorded a gain on settlement of the accrued liability of $55,000
for
the year ended December 31, 2016. See Note 7
–
Accrued Liabilities. Effective February 28, 2017, all liabilities with the Frank Worth Estate were settled by the Company. See
Note 14
– Subsequent Events.
|
6.
|
INTANGIBLE ASSETS, NET
|
Identifiable intangible assets comprise of the following
at December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
|
December 31, 2015
|
|
|
|
|
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
|
|
|
$
|
60,000
|
|
|
$
|
340,000
|
|
|
$
|
400,000
|
|
|
$
|
20,000
|
|
|
$
|
380,000
|
Copyrights
|
|
|
35,000
|
|
|
|
5,250
|
|
|
|
29,750
|
|
|
|
35,000
|
|
|
|
1,750
|
|
|
|
33,250
|
Total
|
|
$
|
435,000
|
|
|
$
|
65,250
|
|
|
$
|
369,750
|
|
|
$
|
435,000
|
|
|
$
|
21,750
|
|
|
$
|
413,250
|
Amortization expense in
connection with the photographic agreements and copyrights for the twelve months ended December 31, 2016 and 2015 was $43,500 and
$21,750, respectively and is included in depreciation and amortization expense in the consolidated statements of operations. Estimated
amortization expense over the next five years is $43,500 per year.
7
|
.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accrued liabilities at December
31, 2016 and 2015 comprise of the following:
|
|
December 31,
|
|
|
2016
|
|
2015
|
Accounts payable
|
|
$
|
132,485
|
|
|
$
|
244,977
|
Due to Frank Roach
|
|
|
22,500
|
|
|
|
—
|
|
Due to New World
|
|
|
35,000
|
|
|
|
—
|
|
Accrued payroll
|
|
|
3,911
|
|
|
|
3,518
|
Accrued consulting fee
|
|
|
6,375
|
|
|
|
—
|
Due to Frank Worth Estate (Note 5
)
|
|
|
80,000
|
|
|
|
135,000
|
Interest payable
|
|
|
54,502
|
|
|
|
4,176
|
Due to consultants for website development
|
|
|
56,140
|
|
|
|
102,000
|
Stock-based compensation due to non-employees
|
|
|
104,167
|
|
|
|
104,167
|
Contingent liability for taxes assumed in reverse merger
|
|
|
78,920
|
|
|
|
91,000
|
Other
|
|
|
28,153
|
|
|
|
20,847
|
Total accounts payable
and accrued liabilit
ies
|
|
$
|
602,153
|
|
|
$
|
705,685
|
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. The note matures 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. Interest accrues at the rate of 10% per annum and
is payable monthly beginning October 28, 2015. Accrued interest payable due under the note agreement was $11,404 and $154 at December
31, 2016 and 2015, respectively. Effective May 1, 2017, the note was extended to July 31 and was further extended on July 31,
2017 to December 31, 2017.
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 matures on December 31, 2017, bears interest at the rate of 10% per annum, and is payable
on the 1
st
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. The note matures on December 31, 2017
and bears interest at the rate of 10% per annum. 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 $12,665 and $655 at December
31, 2016 and 2015, respectively.
In
April 2016, the Company entered into two unsecured promissory note agreements with unrelated parties for working capital purposes
for total proceeds of $75,000. The promissory notes mature in December 2017 and bear interest at the rate of 6% per annum. The
interest expense accrued on the notes was $3,358 as of December 31, 2016.
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.
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 December 31, 2016, the balance of $100,000 remains outstanding.
As of December 31, 2016, $11,835 of the discount has been amortized. The note is shown net of the unamortized portion of the discount
of $13,165 as of December 31, 2016. The interest expense accrued on the notes was $0 as of December 31, 2016.
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.
|
9.
|
NOTES PAYABLE TO RELATED PARTIES
|
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 matures 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 years ended December 31, 2016 and 2015 is $19,200 and $8,627 . Per the terms of the agreement the Company incurred loan
fees totaling $8,000 to be amortized over the term of the loan. For the years ended December 31, 2016 and 2015, amortization expense
in connection with the loan fees totaled $4,424 and $3,576, respectively. The note was initially extended to July 20, 2017
and then to December 31, 2017. The note is being shown net of unamortized loan fees of $0 as of December 31, 2016.
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. As of December 31, 2016 and 2015, $76,183 and $91,143 was outstanding under
the unsecured promissory note agreement, respectively. Interest expense for the year ended December 31, 2016 and 2015 was $3,809
and $4,386 , respectively. The loan matured on July 14, 2014 and was extended to July 31, 2016. Effective July 31, 2016,
the note agreement was extended to December 31, 2017.
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 shareholders 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. Effective December
15, 2016, the loan with Dreamstar was extended to December 31, 2017. Effective December 31, 2016, the loan with Dino Satallante
was extended to December 31, 2017 . At December 31, 2016 and 2015, $20,500 and $18,100 was outstanding to Dino Satallante
and Dreamstar, respectively. Accrued interest expense in connection with the two unsecured promissory note agreements for the
year ended December 31, 2016 and 2015 was $3,171 and $314, respectively.
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 matures on or before April
1, 2017. The note was extended to July 31, 2017 and is outstanding to date. Accrued interest expense on the note
was $3,875 for the year ended December 31, 2016.
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.
Accrued interest was $2,145 for the year ended December 31, 2016.
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.
Accrued interest was $740 for the year ended December 31, 2016.
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.
Accrued interest was $155 for the year ended December 31, 2016.
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.
|
10.
|
RELATED PARTY TRANSACTIONS
|
Due From/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 December 31, 2016 and 2015. 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.