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 June 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: 325,218,584 common shares as of August 9, 2018

 

  1  

 

 

 

 

 

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 7
Item 4: Controls and Procedures 8

 

PART II – OTHER INFORMATION

 

Item 1: Legal Proceedings 9
Item 1A: Risk Factors 9
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 9
Item 3: Defaults Upon Senior Securities 9
Item 4: Mine Safety Disclosures 9
Item 5: Other Information 9
Item 6: Exhibits 10

 

  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 June 30, 2018 and December 31, 2017 (unaudited);
F-2 Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (unaudited);
F-3 Consolidated Statements of Cash Flows for the six months ended June 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 June 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)

    June 30, 2018   December 31, 2017
Assets        
         
Current Assets              
Cash   $ 25,317     $ 1,297
Accounts receivable, net     29,730       44,548
Inventory, net     56,500       56,500
Prepaid expenses     35,582       12,765
  Total Current Assets     147,129       151,110
               
Property and equipment, net     2,299,455       2,493,224
Security deposit     6,356       6,356
Intangible Assets, net     304,500       326,250
               
Total Assets   $ 2,757,440     $ 2,940,940
               
Liabilities and Stockholders' Equity              
               
Current Liabilities              
Accounts payable and accrued liabilities   $ 590,402     $ 540,947
Payable to Globe Photo, Inc.     10,000       10,000
Due to related parties     294,455       147,113
Notes payable - related parties     643,755       456,235
Notes payable, net of debt discount     355,000       417,500
Deferred revenue     50,000       75,000
Derivative liability     —         9,195
Loans payable, net of unamortized discounts     564,418       738,805
Total Current Liabilities     2,508,030       2,394,795
               
Total Liabilities     2,508,030       2,394,795
               
Stockholders' Equity              
               
Preferred stock, $0.0001 par value, 50,000,000 shares authorized; none issued and outstanding at June 30, 2018 and December 31, 2017.     —         —  
Common stock par value $0.0001: 450,000,000 shares authorized; 325,218,583 and 325,570,524 issued and outstanding as of  June 30, 2018 and December 31, 2017     32,522       32,557
Additional paid in capital     4,331,766       4,124,243
Treasury stock; 0 and 258,823 shares as of June 30, 2018 and December 31, 2017.     —         (88,000)
Accumulated deficit     (4,114,878 )     (3,522,655)
Stockholders' Equity   $ 249,410       546,145
               
Total Liabilities and Stockholders' Equity   $ 2,757,440     $ 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 six months ended
    June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017
                 
License revenue   $ 83,818     $ 55,065     $ 314,593     $ 101,542
Image revenue     120,614       250,414       439,660       356,502
Total revenue     204,432       305,479       754,253       458,044
                               
Cost of revenue     190,329       148,892       486,472       294,565
                               
Gross margin     14,103       156,587       267,781       163,479
                               
Operating expenses                              
Product development, sales and marketing     108,632       51,521       113,164       93,359
General and administrative     208,252       134,242       365,699       300,553
Depreciation and amortization     11,221       7,968       17,935       15,546
                               
Total operating expenses     328,105       193,731       496,798       409,458
                               
                               
Loss from operations     (314,002 )     (37,144 )     (229,017 )     (245,979)
                               
Other income (expenses)                              
Loss of settlement of accrued liability     (208,322 )     —          (208,322 )     —  
Interest expense     (145,715 )     (25,285 )     (164,079 )     (64,023)
Change in fair value of derivative liabilities     4,810       20,430       9,195       10,663
Other income (expenses)     (349,227 )     (4,855 )     (363,206 )     (53,360)
                               
Net loss     (663,229 )     (41,999 )     (592,223 )     (299,339)
                               
Per-share data                              
Basic and diluted loss per share   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00)
                               
Weighted average number of common shares outstanding     325,221,721       325,476,408       325,288,172       325,507,778

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 six months ended
    June 30, 2018   June 30, 2017
         
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net loss   $ (592,223 )   $ (299,339)
Adjustments to reconcile net loss to net cash used in operating activities:              
Depreciation and amortization     228,441       225,585
Amortization of debt discount     4,597       24,318
Options issued for services     14,999       —  
Loss of settlement of accrued liability     208,322       —  
Change in fair value of embedded derivative     (9,195 )     (10,663)
Changes in operating assets and liabilities:              
Accounts receivable     14,818       (58,186)
Prepaid expenses     (22,817 )     (44,976)
Inventory     —         (2,500)
Deferred revenue     (200,000 )     —  
Accounts payable and accrued liabilities     153,622       (68,278)
         Net Cash Used In Operating Activities     (199,436 )     (234,039)
               
CASH FLOWS FROM INVESTING ACTIVITIES:              
Net cash paid for minority investment in business     —          
Purchase of archival images, property and equipment     (12,922 )     (107,202)
        Net Cash Provided By (Used In) Investing Activities     (12,922 )     (107,202)
               
CASH FLOWS FROM FINANCING ACTIVITIES:              
Proceeds from loans payable     150,000       200,000
Repayment of loans payable     (3,984 )     (7,195)
Proceeds from related party advances     147,342       164,725
Repayment of related party advances     —         (19,725)
Proceeds from notes payable     —         25,000
Repayment of note payable     —         (35,000)
Proceeds from note payable - related party     —         (7,569)
Repayment of note payable - related party     (24,980 )     —  
Purchase of treasury stock     (32,000 )     (32,000)
        Net Cash Provided By Financing Activities     236,378       288,236
               
Net Change in Cash     24,020       (53,005)
               
Cash - Beginning of Period     1,297       54,034
               
Cash - End of Period   $ 25,317     $ 1,029
               
SUPPLEMENTARY CASH FLOW INFORMATION:              
Cash Paid During the Period for:              
    Interest   $ 11,219     $ 10,609
               
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   $ 104,167     $ —  

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

June 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 merchandising. 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 June 30, 2018, the Company had $25,317 cash on hand. At June 30, 2018 the Company has an accumulated deficit of $4,114,878. For the six months ended June 30, 2018, the Company had a net loss of $592,223 and cash used in operations of $199,436.  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

   

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 six months ended June 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 pursuant to Rule 12(b) under the Securities Act of 1934.

 

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.

 

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 ended December 31, 2018.

 

  F- 4  

 

Globe Photos, Inc.

( Formerly Capital Art, Inc.)

Notes to Consolidated Financial Statements

June 30, 2018 and 2017

(Unaudited)

 

The accompanying unaudited consolidated financial statements represent the results of operations, financial position and cash flows of Globe Photos, Inc., and its 100% owned subsidiary Capital Art, LLC for the three and six months ended June 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

 

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.

 

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 six months ended June 30, 2018 as a result of applying Topic 606.

 

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 June 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

June 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 June 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
      June 30, 2018       December 31, 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 six months ended June 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.

 

  F- 6  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.) 

Notes to Consolidated Financial Statements

June 30, 2018 and 2017

(Unaudited)

 

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, 2017 and 2016, the total reserve payable to Globe Photos, Inc. is $10,000.

 

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

 

  5. PROPERTY AND EQUIPMENT, NET

 

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

 

    June 30,   December 31,   Estimated Useful
    2018   2017   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     (1,591,609 )     (1,384,918 )    
Total archival images, property and equipment, net   $ 2,299,455     $ 2,493,224      

 

Depreciation expense was $206,691, and $203,835 for the six months ended June 30, 2018 and 2017, respectively of which $210,507 and $210,039 are reported in cost of revenue, respectively.

 

  F- 7  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.) 

Notes to Consolidated Financial Statements

June 30, 2018 and 2017

(Unaudited)

 

  6. INTANGIBLE ASSETS, NET

 

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

 

    June 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     $ 120,000     $ 280,000     $ 400,000     $ 100,000     $ 300,000
Copyrights     35,000       10,500       24,500       35,000       8,750       26,250
Total   $ 435,000     $ 130,500     $ 304,500     $ 435,000     $ 108,750     $ 326,250

  

Amortization expense in connection with the photographic agreements and copyrights for the six months ended June 30, 2018 and 2017 was $21,750   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.

 

  7. 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. 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. 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 $13,904 and $15,154 at June 30, 2018 and December 31, 2017, respectively. 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.

 

On April 1, 2016, the Company entered into a unsecured promissory note agreements 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 June 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, as of March 28, 2018, was extended to June 30, 2018, and on June 30, 2018 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 June 30, 2018 and December 31, 2017, a balance of $20,000 remains outstanding, respectively.

 

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

 

On April 13, 2018, the Company entered into an unsecured promissory note agreements with an unrelated party for total proceeds of $150,000. The note is due upon demand and carries 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 June 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

June 30, 2018 and 2017

(Unaudited)

 

  8. 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 June 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 $42,537 and $34,412 as of June 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 a unsecured promissory note agreements with an unrelated party 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 $6,727 and $5,228   as of June 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 six months ended June 30, 2018, the Company made payment of $7,480. As of June 30, 2018 and December 31, 2017, $53,655 and $61,355 was outstanding under the unsecured promissory note agreement, respectively. Interest expense for the six months ended June 30, 2018 and 2017 was $1,341 and $1,214   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.

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. 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, the note was further extended to December 31, 2018. As of June 30, 2018, $20,500 and $600 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.   Interest expense in connection with the two unsecured promissory note agreements for the six months ended June 30, 2018 and 2017 was $633   and 579, respectively.

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 six months ended June 30, 2018 and 2017 was $9,600. Per the terms of the agreement the Company incurred loan fees totaling $8,000 which were 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 $2,600 for the six months ended June 30, 2018 and 2017.

  F- 9  

Globe Photos, Inc.

(Formerly Capital Art, Inc.) 

Notes to Consolidated Financial Statements

June 30, 2018 and 2017

(Unaudited)

 

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 matured 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 $1,500 and $1,000   for the six months ended June 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 matured 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 $1,500 for the six months ended June 30, 2018 and 2017. All the accrued interest through the December 31, 2017, was still due to the original noteholder.

 

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 matured 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 $945 for the six months ended June 30, 2018 and 2017, respectively. All the accrued interest through the December 31, 2017, was still due to the original noteholder.

 

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.

 

Due To Related Parties

The following table summarizes amounts due to related parties for cash advances and expenses paid for on the behalf of the Company as of June 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.

 

    June 30, 2018   December 31, 2017
Due to related parties:              
ICONZ Art, LLC, beneficial interest shareholder     266,423     $ 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   $ 294,455     $ 147,113

 

  F- 10  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.) 

Notes to Consolidated Financial Statements

June 30, 2018 and 2017

(Unaudited)

 

  9. 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 six months ended June 30, 2018 and 2017, interest expense related to these loans amounted to $14,597   and $11,153 respectively, which has been included in interest expense and a corresponding increase in loans payable. During the six months ended June 30, 2018 and 2017, the Company made payments of $3,984 and $7,195   to the loan holders, respectively. As of June 30, 2018, loan payable net of unamortized debt discount amounted $364,418.

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 six months ended June 30, 2018.

The Company accounted for the above transaction as debt and recognized the amount received as a loan payable. As of June 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 six months ended June 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 six months ended June 30, 2018.

  F- 11  

 

Globe Photos, Inc.

(Formerly Capital Art, Inc.) 

Notes to Consolidated Financial Statements

June 30, 2018 and 2017

(Unaudited)

 

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 June 30, 2018, the Company has paid $25,000 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   $ 21,441  
2019     36,807  
Total   $ 58,248  

 

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 six months ended June 30, 2018 and 2017 was $27,442 and $26,791, respectively, in connection with the operating lease agreements.

 

  10. 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 June 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 June 30, 2018, and December 31, 2017, there were 325,218,583 and 325,570,524 shares of common stock issued and outstanding, respectively.

 

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

 

  F- 12  

 

Capital Art, Inc.

(Formerly Capital Art, Inc.) 

Notes to Consolidated Financial Statements

June 30, 2018 and 2017

(Unaudited)

 

STOCK OPTIONS

  

The following is a summary of stock option activity during six months ended June 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 six months ended June 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%

 

    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, June 30, 2018     2,283,333   $ $0.01
Balance exercisable, June 30, 2018     2,283,333   $ $0.01

 

  11. SUBSEQUENT EVENTS

 

Subsequent to June 30, 2018, Company entered into various debt extension agreements with noteholders extending the payment terms of certain notes with term ranging from due on demand through December 31, 2018. (See Note 7 and Note 8)

 

Subsequent to June 30, 2018, the Company entered issued various convertible notes for total proceeds of $1,480,000. 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.

 

  F- 13  

 

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.

 

We currently 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 business is in its early stages and consequently our financial results are difficult to compare from one period to the next. We expect such period-to-period differences to continue to be significant over the next several quarters, until we have a number of full years of operations.

 

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.

 

  4  

 

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.

 

Results of Operations  

 

Revenues

 

Our total revenue reported for the three months ended June 30, 2018 was $204,432, compared with $305,479 for the three months ended June 30, 2017. Our total revenue reported for the six months ended June 30, 2018 was $754,253, compared with $458,044 for the three months ended June 30, 2017, the increase in revenue was primarily driven by a $213,051 or 210% increase in license revenue.

 

The decrease in revenue for the three months ended June 30, 2018 over the same period ended 2017 is largely the result of the following: (i) our auction has been postponed from Q2 2018 to Q3 2018, as we had acquired another photo agency, Retna USA, and we wanted to include vintage prints and negatives into the auction; (ii) a new retail program with Restroation Hardware was pushed from Q2 2018 to Q3 2018; and (iii) a large sale through our interior design division was pushed back to Q3 2018. In addition, we have spent considerable time on a potential acquisition, which held the attention of our management team for the past 6 months.

 

For the six months ended June 30, 2018, the collectibles division accounted for over 70% 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 total cost of revenues for the three months ended June 30, 2018 increased to $190,329, compared with $148,892 for the three months ended June 30, 2017. Our total cost of revenues for the six months ended June 30, 2018 increased to $486,472, compared with $294,565 for the six months ended June 30, 2017. The increase in cost of revenue is due to increased depreciation and amortization expenses during the current period.

 

Operating Expenses

 

Operating expenses increased to $328,105 for the three months ended June 30, 2018 from $193,731 for the three months ended June 30, 2017. Operating expenses increased to $496,798 for the six months ended June 30, 2018 from $409,458 for the six months ended June 30, 2017. The detail by major category is reflected in the table below.

 

  5  

 

    Three Months Ended June 30   Six Months Ended June 30
   

2018

  2017   2018   2017
Product development, sales and marketing   $ 108,632     $ 51,521     $ 113,164     $ 93,359
General and administrative     208,252       134,242       365,699       300,553
Depreciation expense    

11,221 

      7,968       17,935       15,546
                               
Total operating expenses   $ 328,105     $ 193,731     $ 496,798     $ 409,458

 

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 six months ended June 30, 2017 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 its products and to add content to its 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 professional fees.

 

Total depreciation expense also 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

 

We had other expenses of $349,227 for the three months ended June 30, 2018, as compared with other expenses of $4,855 for the same period ended 2017. We had other expenses of $363,206 for the six months ended June 30, 2018, as compared with other expenses of $53,360 for the same period ended 2017. The increase in other expenses is primarily a result of 2,083,000 options valued at $312,489 issued to settle $104,167 in debt, resulting in a loss on settlement of accrued liability of $208,322 and $164,079 in interest expense, which primarily consist of our obligation to issue 1,000,000 shares of common stock valued $100,000 to amend a purchase agreement.

 

Net Loss

 

We finished the three months ended June 30, 2018 with a loss of $663,229, as compared to a loss of $41,999 during the three months ended June 30, 2017. We finished the six months ended June 30, 2018 with a loss of $592,223, as compared to a loss of $299,339 during the three months ended June 30, 2017. The reasons for specific components are discussed above. Overall, we had an increase in revenue and resulting gross margin along with increased operating expenses to support future growth.

 

Liquidity and Capital Resources

 

As of June 30, 2018, we had total current assets of $147,129 and current liabilities of $2,508,030, resulting in a working capital deficit of $2,360,901. This compares with the working capital deficit of $ 2,279,685 at December 31, 2017. This increase in working capital deficit, as discussed in more detail below, is primarily the result of an increase in notes payable and related party notes payable.

 

Our operating activities used $199,436 in the six months ended June 30, 2018 as compared with $234,039 used in operating activities in the six months ended June 30, 2017. Our negative operating cash flow in 2018 was largely the result of our net loss and deferred revenue, offset by depreciation and amortization and the loss on settlement of accrued liabilities.

 

  6  

 

Investing activities used $12,922 in the six months ended June 30, 2018 compared with $107,202   in the six months ended June 30, 2017. Our negative investing cash flow in 2017 is largely the result of purchasing images, property and equipment. We anticipate that our investing expenditures will increase as we expand our collection.

 

Financing activities provided $236,378 in the six months ended June 30, 2018 compared with $288,236 provided in the six months ended June 30, 2017. Our positive financing cash flow in 2018 was largely the result of related party advances and loans payable.

 

There is no guarantee we will generate sufficient revenues to continue operations. Our management estimates we will need approximately $1,000,000 in annual revenues to continue operations at our current operating level, without consideration given to investment in new sales and marketing channels. For the immediate future we plan to achieve this revenue target by ramping up fees earned from licensing imagery to media companies growing a network of global sales agents. There is no guarantee that we will generate sufficient revenues 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.

We believe that our principal difficulty in our ability to successfully generate profits has been the lack of available capital to operate and expand our business. We believe we need a minimum of approximately $3,000,000 in additional working capital to be utilized for key archive acquisitions, inventory management software, technology development, additional staffing and working capital. As of the date of this report we have no commitment from any investor or investment-banking firm to provide us with the necessary funding and there can be no assurances we will obtain such funding in the future. Failure to obtain this additional financing will have a material negative impact on our ability to generate profits in the future.

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 June 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 June 30, 2018, there were no off balance sheet arrangements.

 

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.

 

  7  

 

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 June 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. We intend to retain a qualified Chief Financial Officer in 2018 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. 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 June 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.

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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 November 24, 2017.

 

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, we granted 2,183,333 10-year stock options with exercise prices of $0.01 valued at $327,488 for services and settlement of accrued liabilities.

 

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

 

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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 June 30, 2018 formatted in Extensible Business Reporting Language (XBRL).
 

 

**Provided herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on August 14, 2018 on its behalf by the undersigned thereunto duly authorized.

 

GLOBE PHOTOS, INC.
   
/s/Stuart Scheinman  

Stuart Scheinman

Principal Executive Officer

 
   
   
/s/Scott C. Black  

Scott C. Black

Principal Financial and Accounting Officer

 

 

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