GBPT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Amendment No. 1 to

 

FORM 10

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

 

Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934

 

CAPITAL ART, 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	702-722-6113
(Address of principal executive office)	(Zip Code)	(Registrant’s telephone number, Including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act:  Common Stock.

 

Title of each class	Name of each exchange on which registered
Common Stock, $0.0001 par value	N/A

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨	Accelerated filer ¨
Non-accelerated filer  ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

 

 

EXPLANATORY NOTE

 

This Amendment No. 1 to Form 10 (this “Amendment”) amends the Form 10-12G filing, originally filed on February 10, 2015 (the “Original Filing”) by Capital Art, Inc., a Delaware corporation. (the “Company,” “we,” “us,” “our” “Capital Art” or “CAPA”). We are filing this Amendment to address the Securities and Exchange Commission’s (“SEC”) comments sent on March 11, 2015. Based on such comments, the Company has retained a new accounting firm, and undergone an audit and is providing herein amended and restated consolidated financial statements for the year ended December 31, 2013, consolidated financial statements for the year ending December 31, 2014 and quarterly consolidated financial statements for second quarter of 2015, the first quarter following the effective date of the Company’s registration pursuant to §12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”).

 

The Original Filing continues to speak as of the date of the Original Filing except as indicated herein, and we have updated the disclosures contained herein to reflect any events which occurred at a date subsequent to the filing of the Original Filing. The following information supplements and clarifies the information set forth in the Original Filing.

 

 

 

Item 1.              Business.

 

Reverse Merger

 

The Company previously listed the October 8, 2014 Asset Purchase Agreement with Movie Star News, LLC (“MSN”) as an acquisition; however, this transaction was effectively a contract to merge the two companies to combine assets of rare images. As such, this Amendment gives effect to the acquisition in accordance with reverse acquisition accounting methods with the historical consolidated financial statements of the Company being those of the former MSN financials retroactively adjusted as if MSN were the acquirer for accounting purposes. The results of the Company are included from October 8, 2014 and thereafter.

 

Company’s Business

 

Such reclassification of this transaction does not change the Company’s organization or business as described in the Original Filing. The Company sells and manages 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. The Company also makes available images for publications and merchandizing by third parties.

 

The Company intends to become the largest repository of archival pop culture photography in the online world. To this end, the Company has been and continues to search for photographic archives. The market is unknown and has not been tested, making this business similar to a start-up business. These archives may be purchased outright or the Company may enter into reproduction or licensing agreements with the owners of the archives. These opportunities are typically (1) photographers who are looking to monetize their archives, or (2) media companies that are either seeking to dispose of the archive or seeking a method to derive revenues from the archive. These opportunities exist both in the United States and abroad and the Company continues to search for value wherever it may be geographically located. However, the Company’s ability to acquire such depository is dependent on its ability to raise additional capital in order to have funds to make such acquisitions.

 

Such photographic assets are the basis for the Company’s competitive advantage and the company takes steps to protect such assets, including but not limited to maintaining insurance to protect against loss or theft of more than 5 times the actual value.

 

Subsequent Event

 

Acquisition of Globe Photos, Inc.

 

On July 22, 2015, the Company entered into an Asset Purchase Agreement with Globe Photos, Inc. (“Globe”), a New York corporation, for purchase of substantially all of the assets of Globe for total purchase price of $400,000 payable $250,000 in cash and $150,000 in common stock of the Company at said market price . The common stock was to be transferred to Globe sixty (60) days after closing subject to satisfaction of successful termination of certain subagent agreements by Globe, which occurred on one deal and not the other resulting in a reduction of $30,000 less in stock, resulting in a final 352,941 shares ($120k of stock at $0.34/share). Per the agreement $180,000 in cash shall be 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.

 

Sales and Distribution

 

The Company sells its photographic images and reproductions through third-party galleries, art consultants, interior decorators and directly to consumers. The Company also reproduces mass quantities of different photographs from its collection and sells through third party on-line retailers. For the twelve months ended December 31, 2014, through on-line retailer’s sales accounted for 94% of total revenues. The Company is continuing to pursue contracts to diversify revenues, and to develop its own website as a site for retail clients to purchase our prints but also as a portal for our interior decorator, third party gallery and charity partners. The downside is that there are a limited number of interior decorators, galleries and charity partners, which produce higher revenues than on-line sales, and while the Company is actively pursuing such contracts, its success will depend upon its ability to obtain such contracts for sales and also upon its ability to acquire a larger depository.

 

Intellectual Property

 

Most of our collection of iconic photographic images were acquired and are owned by the Company. A small percentage of the images in our collection are obtained through reproduction or licensing agreements, wherein we pay a royalty based on the percentage of revenues we receive from the use of the licensed images.

 

 

Item 1A. Risk Factors.

 

Updated/Additional Risks related to our Business and our Industry

 

We have a history of operating losses.

 

We have generated net losses since we began operations, however, due to reclassifications and the reverse merger, we generated a small profit of $43,341 for the year ended December 31, 2013, but still were negative for the year ended December 31, 2014 of $380,327. Net losses are currently at $696,089 for the six months ended June 30, 2015. As the Company begins to operate on a combined basis and add more content, we need to work on our ability to generate revenue and achieve profitability, which includes scaling our operations. To generate revenue, the Company needs to acquire a larger depository, which is dependent upon its ability to raise additional capital in order to have funds to make such acquisitions, after which the Company must also have the ability to obtain contracts for sales. The Company is also operating a fairly new business in an unknown market. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Our business can become substantially dependent upon a small number of customers

 

For the twelve months ended December 31, 2014, no customers accounted for over 10% of total revenues. For twelve months ended December 31, 2013, revenues from two customers comprised 28% and 19% of the Company’s total revenue, of which one customer accounting for 19% was a related party of the Company. See Note 8 – Related Party Transactions in the Notes to the Consolidated Financial Statements. There is no certainty regarding how or if the market for the Company’s products will continue to develop, or whether such market will decline. Our ability to attract and retain customers will depend in part on our ability to sign up a significant number of galleries, third party websites, interior decorators and charities that will market to their clients, and our ability to drive business to our website. Moreover, the market for the Company’s products is comprised primarily of collectors, which market is limited and subject to changes in popular trends, demographics, disposable income, and overall interest in such products. There can be no guarantee that the market for the Company’s products will grow or that demand for the Company’s products will continue.

 

Our growth strategy requires us to expand our website which can expose us to data security breaches or service disruptions

 

The risk of a data security breach or service disruption caused by computer hackers and cyber criminals has increased as the frequency, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Such risk also increases as we expand our presence on the web and increase on-line sales. Our systems have not been, but may in the future be, the target of various forms of cyber-attacks. While we make significant efforts to maintain the security and integrity of our systems, our cybersecurity measures and the cybersecurity measures taken by our third-party hosting facilities may be unable to anticipate, detect or prevent all attempts to compromise our systems. Any security breach, whether successful or not, could harm our reputation, subject us to lawsuits and other potential liabilities and ultimately could result in the loss of customers and loss of revenue.

 

Intellectual property rights are important to our business

 

Our intellectual property rights are very important to our business. We rely on a combination of copyright, trade secret, trademark, and other rights in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property. As most of our assets relate to photographs, we deal primarily in copyrights, which do not necessarily have to be registered rights until enforced. Despite our efforts to protect our proprietary rights, third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights. Policing unauthorized use of our products and intellectual property rights is difficult and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our intellectual property rights. 

 

Updated/Additional Risks Related to Our Common Stock

 

If the Company fails to maintain an effective system of internal controls, it may not be able to accurately report its financial results or detect fraud. Consequently, investors could lose confidence in the Company’s financial reporting and this may decrease the trading price of its stock.

 

As a reporting company the Company must begin to comply with the requirements regarding evaluation and maintenance of its internal controls over financial reporting. The Company has been assessing its internal controls to identify areas that need improvement, and as part of this process has retained new outside auditors, outside securities counsel, and is in the process of restructuring management, all with emphasis on improving financial reporting and accounting procedures. As the Company starts to report and operate as a reporting company, new procedures have become and will continue to be implemented to ensure compliance, and as part of such procedures, the Company will continue to assess its intended controls. Failure to implement these changes to the Company’s internal controls, or any changes as necessary to maintain an effective system of internal controls, could result in misleading or inadequate financial reports and failure to comply with applicable securities laws as well as cause investors to lose confidence in the Company’s reported financial information. Any such loss of confidence would have a significant negative effect on the value of the Company’s stock.

 

 

Certain of our stockholders can exercise significant influence over our business and affairs.

 

As a result of the reverse merger, MSN holds approximately 82% of the common stock of the Company, and as a result, has significant influence and control over the Company, including the election of directors and the approval of business combinations. The substantial percentage of our common stock held by MSN could also make a significant stake in the Company a less attractive acquisition candidate or have the effect of delaying or discovering a third party from acquiring or otherwise affecting the market for the Company’s shares. In addition to ownership of common stock, certain members of MSN have management and/or director roles within our company.

 

Item 2.              Financial Information.

 

Updated Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management Discussion and Analysis (“MD&A”) contains “forward-looking statements”, which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management’s future plans or objectives or to our future economic and financial performance. In some cases, you can identify these statements by terminology such as “may”, “should”, “plans”, “believe”, “will”, “anticipate”, “estimate”, “expect” “project”, or “intend”, including their opposites or similar phrases or expressions.

 

You should be aware that these statements are projections or estimates as to future events and are subject to a number of factors that may tend to influence the accuracy of the statements. These forward-looking statements should not be regarded as a representation by the Company or any other person that the events or plans of the Company will be achieved. You should not unduly rely on these forward-looking statements, which speak only as of the date of this MD&A. Except as may be required under applicable securities laws, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this MD&A or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe under “Risk Factors” in this report. Actual results may differ materially from any forward-looking statement.

 

This MD&A is updated to discuss the amended and restated financial statements for the year ended December 31, 2013 and for the addition of the financial statements for the year ended December 31, 2014, along with quarterly financial statements for second quarter of 2015, the first quarter following the Company’s effective date.

 

Results of Operations

 

Following is a summary of our revenues, assets and net losses for our two most recent fiscal years ended December 31, 2014 compared to December 31, 2013

 

		2014				2013
Total revenues		$	254,926			$	533,360
Net (loss) income		$	(380,327	)		$	43,341
Total assets		$	4,164,085			$	658,090
Total liabilities		$	963,999			$	156,330

 

Our summary results are presented below:

 

		2014				2013				Change				% Change
Revenues		$	254,926			$	533,360			$	(278,434	)			-52.2%
Costs and operating expenses			(839,971	)			(487,958	)			352,013				72.1%
(Loss) income from operations			(585,045	)			45,402				(630,447)
Interest income			36				–				36				100.0%
Interest expense			(9,353)				(2,061)				(7,292)				353.8%
Gain on bargain purchase			214,035				-				214.035				100.0%
Net other income (expense)			204,718				(2,061	)			206,779
Net (loss) income		$	(380,327	)		$	43,341			$	(423,688)
Basic and diluted (loss) income per common share		$	–			$	–
Weighted average basic and diluted shares outstanding			268,407,275				256,400,226

 

 

Revenues.  Revenues by category and for the Company as a whole were as follows:

 

		2014				2013				Change				% Change
Revenues		$	254,926			$	533,360			$	(278,434	)			-52.2%

 

For the twelve months ended December 31, 2014 and December 31, 2013, all revenues were from product sales. For the twelve months ended December 31, 2014, no customers accounted for over 10% of total revenues. For twelve months ended December 31, 2013, revenues from two customers comprised 28% and 19% of the Company’s total revenue, of which one customer accounting for 19% was a related party of the Company. Due to reclassifications and the reverse merger, there were no revenues from sources other than product sales. Regarding product sales, although the Company sells its photographic images and reproductions through third-party galleries, art consultants, interior decorators and directly to consumers, these sales accounted for only 6% of total revenues as of the year ended December 31, 2014. The mass quantities of different photographs sold through third party on-line retailers accounted for 94% of total revenues.

 

The decrease in revenues from 2013 to 2014 was due to in part to the reverse merger re-classifications and accounting adjustments made for 2013. Revenues have already begun to increase in 2015, as the Company continues to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products and in adding content to its product along with adding additional channels of distribution.

 

As part of increasing its product offerings, the Company has been and continues to search for photographic archives that can be acquired at wholesale or below market prices. These archives may be acquired purchased or the Company may enter into reproduction or licensing agreements with the owners of the archives. These opportunities are typically (1) photographers who are looking to monetize their archives, or (2) media companies that are either seeking to dispose of the archive or seeking a method to derive revenues from the archive. These opportunities exist both in the United States and abroad and the Company continues to search for value wherever it may be geographically located. As part of this initiative, on July 22, 2015, the Company acquired substantially all of the assets of Globe Photo.

 

However, there is no guarantee the Company will generate sufficient revenues to continue operations.

 

Costs and Operating Expenses.  Costs and operating expenses consisting primarily of cost of shipping, product development, sales and marketing expenses, and general and administrative costs, increased $352,013 (72.1%) for the twelve month period ended December 31, 2014 compared to the twelve month period ended December 31, 2013.

 

		2014				2013				Change				% Change
Cost of revenues		$	173,841			$	176,602			$	(2,761	)			-1.6%
Product development, sales and marketing			92,545				81,510				11,035				13.5%
General and administrative			429,099				171,684				257,415				149.9%
Depreciation expense			144,486				58,162				86,324				148.4%
Total costs and operating expenses		$	839,971			$	487,958			$	352,013				72.1%

 

Costs of revenues decreased slightly by $2,761 or 1.6% during the twelve months of 2014 compared to the same period of 2013. Costs of revenues primarily consist of fulfillment costs to create reproductions or images and shipping and handling expenses. As the Company works with various channels to distribute its product, it continues to negotiate deals to reduce fulfillment costs and shipping costs.

 

Product development, sales and marketing expenses increased $11,035 (13.5%) to $92,545 for twelve month period ending December 31, 2014 compared to $81,510 for the same period in 2014. Product development, sales and marketing expenses primarily consists of website development costs, sales and marketing salaries, as well as other expenses associated with marketing. The Company continues to utilize its working capital resources in sales and marketing in order to increase the distribution and demand for its products and to add additional content to its product lines along with adding additional channels of distribution. Advertising expenses for the twelve months ended December 31, 2014 and 2013 were $11,076 and $6,407, respectively.

 

General and administrative costs for twelve month period ending December 31, 2014 increased $257,415 (149.9%) due to the reverse merger and the addition of expenses associated with MSN, including administrative salaries and cost of facilities.

 

Depreciation expense increased $86,324 (148.4%) for the twelve months ended December 31, 2014 from $58,162 in the same period 2013. The increase in depreciation expense is due to depreciation of the Company’s archival images. The Company depreciates its archival images using the straight-line method over their estimated useful lives of ten years.

 

Interest Expense. Interest expense resulted from interest incurred on notes payable to related parties and credit cards.

 

		2014				2013				Change				% Change
Interest expense		$	(9,353	)		$	(2,061	)		$	(7,292	)			-353.81%

 

On August 1, 2013 the Company entered into a Promissory Note agreement with a related party for $100,000. The loan bears interest at 5%. The loan matured on July 14, 2014 and was extended to July 31, 2016. For the twelve months ended December 31, 2014 and 2013 total interest expense under the agreement was $4,313 and $2,061, respectively.

 

 

Effective September 11, 2014 the Company entered into two separate promissory note agreements for $20,500 each with two related parties for working capital purposes. The loans bear interest at 6% per annum. The loans matured on September 10, 2015 and were extended to December 31, 2016. Total interest expense for the twelve months ending December 31, 2014 was $748.

 

Liquidity and Capital Resources

 

Fiscal Year Ended December 31, 2014 Compared to December 31, 2013

 

Cash totaled $340,523 and $20,919 at December 31, 2014 and December 31, 2013, respectively.  The change in cash is as follows:

 

		2014				2013				Change
Cash (used in) provided by operations		$	(201,751	)		$	134,927			$	(336,678	)
Cash provided by (used in) investing activities			2,868				(87,032	)			89,900
Cash provided by (used in) financing activities			518,487				(31,482	)			549,969
Net increase in cash		$	319,604			$	16,413			$	303,191

 

Cash in the twelve months ended December 31, 2014, compared to the same period of 2013, increased by $303,191 due to the reverse merger transaction, which also funded the shortfalls in operations. 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, 2014, the Company had $340,523 cash on hand. At December 31, 2014 the Company has a retained deficit of $371,072. For the year ended December 31, 2014 the Company had a loss from operations of $380,327 and cash used in operations of $201,751. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Following is a summary of our revenues and net losses for our two most recent fiscal periods ended June 30, 2015 compared to June 30, 2014

 

		Six Months Ended June 30,
		2015				2014
Total revenues		$	376,282			$	163,168
Net loss		$	(696,089	)		$	(52,201	)

 

Following is a summary of our assets and liabilities for most recent fiscal period ended June 30, 2015 compared to December 31, 2014

 

		06/30/2015				12/31/2014
Total assets		$	3,564,861			$	4,164,085
Total liabilities		$	667,614			$	963,999

 

Results of Operations

 

Three and Six Month Periods Ended June 30, 2015 Compared to June 30, 2014

 

Our summary results are presented below:

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2015				2014				Change				% Change				2015				2014				Change				% Change
Revenues		$	35,040			$	62,100			$	(27,060	)			(43.57	)%		$	376,282			$	163,168			$	213,114				130.61%
Costs and operating expenses			(531,134	)			(111,838	)			419,296				374.91	%			(1,066,331	)			(212,697	)			853,634				401.34%
Loss from operations			(496,094	)			(49,738	)			446,356				897.41	%			(690,049	)			(49,529	)			640,520				1,293.22%
Interest income (expense), net			(1,826	)			(1,887	)			(61	)			(3.23	)%			(6,040	)			(2,672	)			3,368				126.05%
Net loss		$	(497,920	)		$	(51,625	)		$	446,295				864.49	%		$	(696,089	)		$	(52,201	)		$	643,888				1,233.48%
Basic and diluted loss per common share		$	–			$	–											$	–			$	–
Weighted average basic and diluted shares outstanding			320,383,974				256,400,226												320,383,974				256,400,226

 

 

Revenues. Revenues by category and for the Company as a whole were as follows:

 

		Six Months Ended June 30,
		2015				2014				Change				% Change
Revenues		$	376,282			$	163,168			$	213,114				130.61%

 

The Company derives its revenues from sales of its classic and contemporary limited edition photographic images and reproductions, with a focus on iconic celebrity images through third-party galleries, art consultants, interior decorators and directly to consumers. On August 15, 2014, the Company entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant received compensation of limited edition photographs with an estimated aggregate retail fair value of $250,000, which accounted for 66% of total revenues for the six months ended June 30, 2015. The Company’s intends to continue its investment in its working capital resources in sales and marketing in order to increase the distribution and demand for its products and in adding content to its product along with adding additional channels of distribution.

 

As part of increasing its product offerings, the Company has been and continues to search for photographic archives that can be acquired at wholesale or below market prices. These archives may be acquired purchased or the Company may enter into reproduction or licensing agreements with the owners of the archives. These opportunities are typically (1) photographers who are looking to monetize their archives, or (2) media companies that are either seeking to dispose of the archive or seeking a method to derive revenues from the archive. These opportunities exist both in the United States and abroad and the Company continues to search for value wherever it may be geographically located. As part of this initiative, on July 22, 2015, the Company acquired substantially all of the assets of Globe.

 

However, there is no guarantee the Company will generate sufficient revenues to continue operations.

 

Costs and Operating Expenses.

 

Costs and operating expenses consisting primarily of cost of revenues, marketing and sales expenses, general and administrative costs, and depreciation expense, increased $419,296 and $853,634 for the three and six month periods ended June 30, 2015 compared to the same period in 2014, respectively.

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2015				2014				Change				% Change				2015				2014				Change				% Change
Cost of revenues		$	42,378			$	41,993			$	385				0.92%			$	116,276			$	81,070			$	35,206				43.43%
Product development, sales and marketing			197,131				5,900				191,231				3,241.20%				350,206				15,462				334,744				2,164.95%
General and administrative			197,219				45,807				151,412				330.54%				412,243				80,760				331,483				410.45%
Depreciation expense			94,406				18,138				76,268				420.49%				187,606				35,405				152,201				429.89%
Total costs and operating expenses		$	531,134			$	111,838			$	419,296				374.91%			$	1,066,331			$	212,697			$	853,634				401.34%

 

 

Costs of revenues was consistent with a nominal increase of $385 or 0.92% to $42,378 for the three months ended June 30, 2015 compared to $41,993 for the same period of 2014.  Costs of revenues primarily consist of fulfillment costs to create reproductions or images, fulfillment labor, and shipping and handling expenses.  As the Company works with various channels to distribute its product, it continues to negotiate deals to reduce its overall fulfillment costs.

 

Product development, sales and marketing expenses increased $191,231 (3,241.20%) to $197,131 for the three months ending June 30, 2015 compared to $5,900 for the same period in 2014. For the six months ended June 30, 2015 product development, sales and marketing expenses increased $334,744 (2,164.95%) to $350,206 compared to $15,462 for the same period in 2014. Product development, sales and marketing expenses primarily consists of website development costs, sales and marketing salaries, as well as other expenses associated with marketing. The Company continues to utilize its 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 for three and six months ended June 30, 2015 increased $151,412 (330.54%) and $331,483 (410.45%), respectively, due to the reverse merger and addition of expenses associated with MSN, including administrative salaries and cost of facilities.

 

Depreciation expense increased $76,268 (420.49%) and $152,201 (429.89%) for the three and six months ended June 30, 2015, respectively, from $18,138 and $35,405 in the same period 2014, respectively. The increase in depreciation expense is due to deprecation of the Company’s archival images. The Company depreciates its archival images using the straight-line method over their estimated useful lives of ten years.

 

 

Interest Expense – Related Party. Interest expense resulted from related party interest expense.

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2015				2014				Change				% Change				2015				2014				Change				% Change
Interest income (expense), net		$	(1,826	)		$	(1,887	)		$	(61	)			(3.23)%			$	(6,040	)		$	(2,672	)		$	3,368				126.05%

 

 

On August 1, 2013 the Company entered into an unsecured Promissory Note agreement with a related party for $100,000.  The loan bears interest at 5%.  The loan matured on July 14, 2014 and was extended to July 31, 2016.  For the six months ended June 30, 2015 and 2014 total interest expense under the agreement was $2,485 and $2,027, respectively. 

 

Effective September 11, 2014 the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties for working capital purposes. The loans bear interest at 6% per annum. The loans matured on September 10, 2015 and were extended to December 31, 2016. Total interest expense in connection with the two unsecured promissory note agreements for the six months ended June 30, 2015 is $1,220.

 

As of June 30, 2015 and December 31, 2014, interest payable in connection with the unsecured promissory note agreements with related parties was $1,968 and $748, respectively, and is included in accrued liabilities in the Company’s condensed consolidated balance sheets. 

 

Liquidity and Capital Resources

 

Six Months Ended June 30, 2015 Compared to June 30, 2014:

 

Cash totaled $61,039 and $150 at June 30, 2015 and 2014, respectively.  The change in cash is as follows:

 

		Six Months Ended June 30,
		2015				2014				Change
Cash (used in) provided by operating activities		$	(551,226	)		$	4,164			$	(555,390	)
Cash used in investing activities			(69,762	)			(51,940	)			(17,822	)
Cash provided by financing activities			341,504				27,008				314,496
Net decrease in cash		$	(279,484	)		$	(20,768	)		$	(258,716)

 

As of June 30, 2015, the Company’s principal source of liquidity consisted of $61,039 in cash. Working capital, defined as net current assets minus net current liabilities, was $229,875 as of June 30, 2015. Total cash used in operations during the six months ended June 30, 2015 was $551,226 compared to cash provided by operations of $4,164 during the six months ended June 30, 2014. Cash used in investing activities for the six months ending June 30, 2015 and 2014 was $69,762 and $51,940, respectively, for additions to the Company’s archival images, which consists of the Frank Worth Collection and other images, and direct costs associated with improvements to the archival images. Cash from financing activities totaled $391,000 in connection with proceeds from sale of common stock and settlement of stock subscription receivable during the six months ending June 30, 2015. This was offset by repayment of short-term advances totaling $49,496 to related parties. For the six months ended June 30, 2014, cash provided by financing activities totaled $27,008 due to proceeds from notes payable to related parties of $30,000, offset by repayment of short-term advances of $2,992.

 

Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the condensed 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, 2015 the Company had $61,039 cash on hand. At June 30, 2015 the Company has a retained deficit of $1,067,161. For the six months ended June 30, 2015 the Company had a net loss of $696,089 and cash used in operations of $551,226. 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.

 

A reconciliation of weighted-average basic shares outstanding to weighted-average diluted shares outstanding follows:

 

		For the six months ended June 30,
		2015				2014
Basic weighted average common shares outstanding			320,383,974				256,400,226
Effect of dilutive securities			–				–
Diluted weighted average common and potential common shares outstanding			320,383,974				256,400,226

 

 

The Company is required to reserve and keep available of its authorized, but unissued shares of common stock an amount sufficient to effect shares due in connection with the Stock Purchase Agreement and Stock-Based Compensation to Non-Employees. As of June 30, 2015, shares reserved for future issuance comprised of the following:

 

			Shares
			Reserved
Shares to be issued to consultant			340,000
Shares to be issued to Frank Worth Estate			200,000
			540,000

 

These shares were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

The Company’s accounting policies are described in the notes to the consolidated financial statements, which are incorporated by reference. Below is a summary of the critical accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Financial Statement Presentation

 

The Company’s 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 (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. These require the use of estimates and assumptions that affect the assets, liabilities, revenues and expenses reported in the consolidated financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities.

 

Principles of Consolidation

 

The consolidated financial statements include the financial statements of the Company, and its 100% owned subsidiaries Capital Art, LLC. All inter-company balances and transactions have been eliminated.

 

Reverse Merger

 

On October 8, 2014, Capital Art, Inc. (“CAPA”) a Delaware Corporation and Capital Art, LLC, a California Limited Liability Company and wholly owned subsidiary of Capital Art, Inc. (collectively “CAPA” or “pre-merger CAPA”), CAPA entered into an Asset Purchase Agreement with Movie Star News, LLC. (“MSN”), a Nevada Limited Liability Company. The Agreement was effectively a contract to merge the three companies to combine assets of rare images. Refer to the consolidated financial statements and accompanying notes as of December 31, 2014.

 

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.

 

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.

 

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 505-50 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.

 

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. Revenues from royalties as of December 31, 2014 and 2013 were insignificant.

 

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.

 

Until the merger date, MSN, a Nevada Limited Liability Company, was taxed as a limited liability company and, as such, any profit or loss from operations flowed directly to the members who were responsible for payment of any federal and state income tax. MSN was only required for payment of minimum business and filing income tax costs. The Company has not included any pro forma income tax information as if the Company were a tax paying entity for the year ended December 31, 2013, any pro forma tax provision on the loss before income taxes would be offset by a valuation allowance for the delated deferred tax asset as it would be more likely than not that the future tax benefits 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.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 – Revenues from Contracts with Customers, which introduces a new five-step framework for revenue recognition. The core principle of the standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled for those goods or services. The ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Management does not believe the adoption of ASU 2014-09 will have a material impact on the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU No. 2015-11 clarifies that inventory should be held at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose and transport such inventory. ASU No. 2015-11 will be effective for fiscal years and interim periods beginning after December 15, 2016. ASU No. 2015-11 is required to be applied prospectively and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

Item 3.              Properties.

 

See Original Filing Item 3.

 

Item 4.              Security Ownership of Certain Beneficial Owners and Management.

 

See Original Filing Item 4.

 

Item 5.              Directors and Executive Officers.

 

See Original Filing Item 5.

 

 

 

Item 6.              Executive Compensation.

 

The following table sets forth all compensation of the named executive officers as updated for the last two fiscal years.

 

Summary Compensation Table

 

Name and Principal

Salary

Bonus

Stock Awards

Option Awards

Nonequity incentive plan compensation

Nonqualified deferred compensation earnings

All Other Compensation

Total

Position

Year

($)

($)

($)

($)

($)

($)

($)

($)

Sean Goodchild

2013

5,000

(1)

–

–

–

–

–

–

5,000

Sean Goodchild

2014

–

–

–

–

–

–

–

David Morton

2013

6,000

(2)

–

–

–

–

–

–

6,000

Chief Financial Officer

2014

–

–

–

–

–

–

 

(1)

Represents imputed compensation of $625 per quarter for the period ended December 31, 2013. Cash paid for compensation was $5,000 in 2013.

(2)

Represents imputed compensation of $1,500 per quarter for the period ended December 31, 2013.  No cash was paid for compensation in 2013, and was recorded as additional paid in capital.

 

Salary and compensation for 2014 is zero. There were no employment or other agreements with our executive officers, and no salaries were paid as such in 2014.

 

Outstanding Equity Awards at Fiscal Year-End

 

Our officers and directors do not have unexercised options, stock that has not vested, or equity awards. There were no outstanding equity awards to our named executive officers as of December 31, 2014. 

 

Director Compensation

 

Our directors did not receive compensation for the years ended December 31, 2014 and December 31, 2013 in consideration for their services rendered in their capacity as directors and no other arrangements are presently in place regarding compensation to directors for their services as directors or for committee participation or special assignments. 

 

The Company does not believe risks arising from its compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the Company.

 

Item 7.              Certain Relationships and Related Transactions, and Director Independence.

 

See Original Filing Item 7.

 

Item 8.              Legal Proceedings.

 

See Original Filing Item 8.

 

 

Item 9.              Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

 

See Original Filing Item 9.

 

Item 10. Recent Sales of Unregistered Securities.

 

See Original Filing Item 10.

 

Item 11.            Description of Registrant’s Securities to be Registered.

 

See Original Filing Item 11.

 

Item 12.            Indemnification of Directors and Officers.

 

See Original Filing Item 12.

 

Item 13.            Financial Statements and Supplementary Data.

 

The financial statements of the Company begin on Page F-1.

 

Item 14.            Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

See Original Filing Item 14.

 

Item 15.            Financial Statements and Exhibits.

 

(a) Financial Statements

 

(b) See the exhibits listed in the Original Filing.

      

 

 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf buy the undersigned, thereunto duly authorized.

 

Date: October 1, 2015

 

 

	CAPITAL ART, INC.
	By:	/s/ Sean Goodchild
		Sean Goodchild
		Chief Executive Officer

 

 

 

 

INDEX TO FINANCIAL STATEMENTS

 

	Page
Report of Independent Registered Accounting Firm	F–2
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 2014 and 2013	F–3
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013	F–4
Consolidated Statement of Shareholders’ Equity (Deficit) for the years ended December 31, 2014 and 2013	F–5
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013	F–6
Notes to the Consolidated Financial Statements	F–7
Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and  December 31, 2014	F–21
Condensed Consolidated Statements of Operations for the six months
ended June 30, 2015 and June 30, 2014	F–22
Condensed Consolidated Statement of Changes in Shareholders’ Equity for the year ended
December 31, 2014 (audited) and for the six months ended June 30, 2015 (unaudited)	F–23
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2015 and June 30, 2014 (unaudited)	F–24
Notes to the Consolidated Financial Statements	F–25

 

 

 

 

 

 

 

To the Board of Directors and Shareholders

Capital Art, Inc.

Las Vegas, Nevada

 

We have audited the accompanying consolidated balance sheets of Capital Art, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, shareholders’ equity, and cash flows for years ended December 31, 2014 and 2013. Capital Art, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital Art, Inc. as of December 31, 2014 and 2013, and the results of its consolidated operations and its consolidated cash flows for the years period ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company suffered losses from operations and had negative cash flows from operating activities during the year ended December 31, 2014 and as of December 31, 2014, the Company had a working capital deficit. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

Salt Lake City, Utah

September 17, 2015

 

www.eidebailly.com

5 Triad Center, Ste. 600 | Salt Lake City, UT 84180-1106 | T 801.532.2200 | F 801.532.7944 | EOE

 

 

CAPITAL ART, INC.

CONSOLIDATED BALANCE SHEETS

			12/31/2014				12/31/2013
ASSETS
Current Assets:
Cash		$	340,523			$	20,919
Accounts receivable			13,691				4,316
Inventory			59,034				64,237
Stock subscription receivable			300,000				–
Due from related parties			93,316				16,458
Prepaid expenses and other			9,613				4,628
Total current assets			816,177				110,558
Archival images, and property and equipment, net			3,341,552				541,176
Security deposits			6,356				6,356
TOTAL ASSETS		$	4,164,085			$	658,090
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities:
Accounts payable		$	108,694			$	27,241
Accrued liabilities			650,031				414
Due to related parties			64,274				28,675
Short-term notes payable to related parties			41,000				–
Total current liabilities			863,999				56,330
Related party note payable			100,000				100,000
Total liabilities			963,999				156,330
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; none issued and outstanding at December 31, 2014 and 2013			–				–
Common stock, $0.0001 par value; 450,000,000 shares authorized; 311,973,283 and 256,400,226 shares issued and outstanding at December 31, 2014 and 2013, respectively			31,197				25,640
Additional paid-in capital			3,239,961				466,865
Common stock subscribed			300,000				–
Retained (deficit) earnings			(371,072	)			9,255
Total Shareholders’ equity			3,200,086				501,760
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	4,164,085			$	658,090

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

CAPITAL ART, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Year Ended December 31,
		2014				2013
Revenues		$	254,926			$	533,360
Cost of revenues			173,841				176,602
Gross profit			81,085				356,758
Operating expenses:
Product development, sales and marketing			92,545				81,510
General and administrative			429,099				171,684
Depreciation expense			144,486				58,162
Total operating expenses			666,130				311,356
(Loss) income from operations			(585,045	)			45,402
Other income (expense):
Interest income			36				–
Gain on bargain purchase			214,035				–
Interest expense			(9,353	)			(2,061	)
Total other income (expense)			204,718				(2,061	)
Net (loss) income before income taxes			(380,327	)			43,341
Income taxes			–				–
Net (loss) income		$	(380,327	)		$	43,341
Basic and diluted (loss) income per common share		$	–			$	–
Weight average basic and diluted shares outstanding			268,407,275				256,400,226

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

CAPITAL ART, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

For the Years Ended December 31, 2014 and 2013

 

	Ordinary Shares						Common Stock						Additional Paid-in			Common Stock			Retained Earnings			Total Shareholders’
	Shares			Amount			Shares			Amount			Capital			Subscribed			(Deficit)			Equity
BALANCE DECEMBER 31, 2012		256,400,226		$	25,640			–		$	–		$	566,865		$	–		$	(34,086	)	$	558,419
Distributions to members		–			–			–			–			(100,000	)		–			–			(100,000	)
Net income		–			–			–			–			–			–			43,341			43,341
BALANCE DECEMBER 31, 2013		256,400,226			25,640			–			–			466,865			–			9,255			501,760
Reverse merger acquisition		(256,400,226	)		(25,640	)		256,400,226			25,640			–			–			–			–
Outstanding shares of CAPA at the time of the reverse merger								42,348,057			4,235			2,113,168			–			–			2,117,403
Common shares issued for services		–			–			4,225,000			422			210,828			–			–			211,250
Common shares issued for cash		–			–			9,000,000			900			449,100			–			–			450,000
Common shares subscribed		–			–			–			–			–			300,000			–			300,000
Net loss		–			–			–			–			–			–			(380,327	)		(380,327	)
BALANCE DECEMBER 31, 2014		–		$	–			311,973,283		$	31,197		$	3,239,961		$	300,000		$	(371,072	)	$	3,200,086

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

CAPITAL ART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Year Ended December 31,
		2014				2013
Cash flows from operating activities:
Net (loss) income		$	(380,327	)		$	43,341
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization			144,486				58,162
Stock-based and other compensation to non-employees			211,250				–
Gain on bargain purchase			(214,035	)			–
Changes in assets and liabilities, net of reverse merger:
Accounts receivable			7,805				(2,698	)
Inventory			5,203				8,057
Prepaid expenses and other			(3,485	)			5,826
Security deposits			–				150
Accounts payable			64,999				21,675
Accrued liabilities			(37,647	)			414
Net cash (used in) provided by operating activities			(201,751	)			134,927
Cash flows from investing activities:
Cash acquired in reverse merger			177,730				–
Purchase of archival images, property and equipment			(174,862	)			(87,032	)
Net cash provided by (used in) investing activities			2,868				(87,032	)
Cash flows from financing activities:
Short-term advances related parties, net			27,487				(31,482	)
Proceeds from sale of common stock			450,000				–
Distributions to Movie Star News, LLC Members			–				(100,000	)
Proceeds from notes payable to related parties			41,000				100,000
Net cash provided by (used in) financing activities			518,487				(31,482	)
Net increase in cash			319,604				16,413
Cash at beginning of year			20,919				4,506
Cash at end of year		$	340,523			$	20,919
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	9,019			$	1,647
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Accrued liability for addition of Frank Worth Collection to archival images and property & equipment (Note 5)		$	135,000			$	–
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common stock subscribed and receivable		$	300,000			$	–
SUPPLEMENTAL CASH FLOW INFORMATION – REVERSE MERGER:
Fair value of current assets acquired, excluding cash		$	18,680			$	–
Fair value of Frank Worth Collection acquired		$	2,635,000			$	–
Fair value of related party receivables acquired, net		$	68,746			$	–
Fair value of liabilities assumed		$	568,718			$	–

 

The accompanying notes are an integral part of the consolidated financial statements.

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. ORGANIZATION AND BUSINESS OPERATIONS

 

Capital Art, Inc. (formerly Movie Star News, LLC) (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 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 of 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.

 

Reverse Merger

 

On October 8, 2014, CAPA entered into an Asset Purchase Agreement with Movie Star News, LLC . The Agreement was effectively a contract to merge the three companies to combine assets of rare images. No consideration was transferred in connection with the agreement.

 

After giving effect to the acquisition and the issuance 256,400,226 shares of Capital Art, Inc. common stock to the former members of MSN, combined with 42,348,057 shares of common stock of pre-merger CAPA, the combined company had 298,748,283 shares of common stock issued and outstanding, resulting in the shareholders of pre-merger CAPA collectively owning approximately 14%, and the former MSN members owning approximately 86%, of the outstanding common stock of the Company. MSN was determined to be the accounting acquirer since its former members has majority control of the common stock, the majority members of the board of directors, and comprise the executive officers of the Company after the merger was to be consummated. Thus, for accounting purposes the merger has been accounted for as a reverse acquisition with MSN as the accounting acquirer (legal acquiree) and CAPA as the accounting acquiree (legal acquirer and the registrant).

 

In accordance with reverse acquisition accounting, the historical consolidated financial statements of the registrant will become those of MSN, with the equity of MSN retroactively adjusted to reflect the equity structure of MSN treated for accounting purposes as the acquirer. The results of CAPA are included from October 8, 2014 and thereafter. Thus, the footnote discussions in the accompanying consolidated financial statement relates to the historical business and operations solely of MSN, unless indicated. As of the acquisition date, MSN allocated the deemed purchase price consideration to the tangible assets acquired and liabilities assumed from CAPA at their estimated fair values, with a gain on bargain purchase recorded in the consolidated statements of operations. See Note 3 – Reverse Merger.

 

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, 2014, the Company had $340,523 cash on hand. At December 31, 2014 the Company has a retained deficit of $371,072. For the year ended December 31, 2014 the Company had a loss from operations of $380,327 and cash used in operations of $201,751. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Over the next twelve months after the date that the financial statements are available to be issued, 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.

 

2. SUMMARY OF 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 subsidiary Capital Art, 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, 2014, 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 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, 2014 and 2013.

 

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. As of December 31, 2014 and 2013, the Company had no assets and liabilities measured at fair value on a recurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. On October 8, 2014 CAPA entered into an Asset Purchase Agreement with MSN. For accounting purposes the merger has been accounted for as a reverse acquisition. The fair value of assets acquired and liabilities assumed were based on historical values due to their relatively short maturities. The estimated fair value of the Frank Worth Collection acquired in the reverse merger was determined under Level 2 inputs. See Note 3 – Reverse Merger for the Company’s determination of fair value of assets acquired and liabilities assumed.

 

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. No allowance for uncollectible accounts or bad debt expense has been recorded for the years ended December 31, 2014 and 2013.

 

Inventory

 

The Company’s inventory comprises of rare photos of movie stars and other famous people. 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.

 

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.

 

Impairment of Long-Lived Assets

 

Long-lived 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 at December 31, 2014 and 2013.

 

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.

 

 

CAPITAL ART, INC. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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. Revenues from royalties as of December 31, 2014 and 2013 were insignificant.

 

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.

 

Advertising

 

The expenses the cost of advertising, including promotional expenses, as incurred. Advertising expenses for the twelve months ended December 31, 2014 and 2013 was $11,076 and $6,407, 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, 2014 and 2013.

 

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.

 

Until the merger date, MSN, a Nevada Limited Liability Company, was taxed as a limited liability company and, as such, any profit or loss from operations flowed directly to the members who were responsible for payment of any federal and state income tax. MSN was only required for payment of minimum business and filing income tax costs. The Company has not included any pro forma income tax information as if the Company were a tax paying entity for the year ended December 31, 2013, any pro forma tax provision on the loss before income taxes would be offset by a valuation allowance for the delated deferred tax asset as it would be more likely than not that the future tax benefits 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, 2014 and 2013, the Company had no accrued interest or penalties related to uncertain tax positions. Pre-merger CAPA has not filed federal and state income tax returns for tax years 2011 through 2013. Management determined a liability contingency for income taxes existed as of the merger date exists for $91,000. The liability is to be reimbursed by a related party of pre-merger CAPA. See Note 3 – Reverse Merger.

 

 

CAPITAL ART, INC. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

For the twelve months ended December 31, 2014, no customers accounted for over 10% of total revenues. For twelve months ended December 31, 2013, revenues from two customers comprised 28% and 19% of the Company’s total revenue, of which one customer accounting for 19% was a related party of the Company. See Note 8 – Related Party Transactions. Accounts receivable balances from customers as of December 31, 2014 and 2013 were not material to the Company’s consolidated financial statements. There is significant financial risk associated with a dependence upon a small number of customers which could have an adverse effect on the Company’s future consolidated financial statements if these customers were to leave.

 

Basic and Diluted Income and Loss per Share

 

The Company computes income and 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 income (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:

 

		For the Year Ended December 31,
		2014				2013
Basic weighted average common shares outstanding			268,407,275				256,400,226
Effect of dilutive securities			–				–
Diluted weighted average common and potential common shares outstanding			268,407,275				256,400,226

 

At December 31, 2014, 8,525,000 shares are reserved in connection with the Stock Purchase Agreement dated August 14, 2014, the Frank Worth Estate agreement entered into on November 12, 2014, and consulting agreements dated February 1, 2014 and August 15, 2014. See Note 9 – Shareholders’ Equity. These were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive. There were no dilutive securities at December 31, 2013.

 

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 – Revenues from Contracts with Customers, which introduces a new five-step framework for revenue recognition. The core principle of the standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled for those goods or services. The ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard is effective for annual reporting periods after December 15, 2016. . Management does not believe the adoption of ASU 2014-09 will have a material impact on the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU No. 2015-11 clarifies that inventory should be held at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose and transport such inventory. ASU No. 2015-11 will be effective for fiscal years and interim periods beginning after December 15, 2016. ASU No. 2015-11 is required to be applied prospectively and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements–Going Concern, (Subtopic 204-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU requires management to evaluate each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Management does not believe the adoption of ASU-2014-15 will have a material effect on the consolidated financial statements.

 

3. REVERSE MERGER

 

On October 8, 2014, CAPA entered into an Asset Purchase Agreement with MSN, a Nevada Limited Liability Company, whereby the former members of MSN received 256,400,226 (86%) shares of common stock. Combined with 42,348,057 (14%) outstanding shares of common stock of pre-merger CAPA, the combined company had 298,748,283 shares of common stock issued and outstanding at the date of the merger. Thus, for accounting purposes the merger has been accounted for as a reverse acquisition with MSN as the accounting acquirer (legal acquiree) and CAPA as the accounting acquiree (legal acquirer and the registrant).

 

The Company determined the fair value of consideration effectively transferred in connection with the reverse merger in accordance with ASC 805, whereas as the accounting acquirer (MSN) is required to calculate a hypothetical amount of consideration it would have transferred to the accounting acquiree (CAPA) to obtain the same percentage ownership interest in the combined entity that results from the transaction. Under reverse acquisition accounting, as the accounting acquirer, MSN is deemed (for accounting purposes only) to have issued 42,348,057 shares with an aggregate value at the merger date of $2,117,403 based on estimated fair value of $0.05 per share.

 

The Company determined the fair value of its common stock in accordance with the guidance in ASC 820 - Fair Value Measurement. ASC 820 states fair value is based on market prices or market inputs, not based on entity-specific measurements. In conducting its analysis of the fair value of the Company’s common stock, the Company noted that CAPA stock is traded on the OTC market, but is not widely traded, thus the Company determined that the OTC market is not a reliable measure of the fair value of the Company’s common stock. Instead the Company determined fair value of its common stock based on recent substantial sales and determined the fair value of its common stock to be $0.05 per share.

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The total purchase price allocation was allocated to identifiable tangible assets deemed acquired, and liabilities assumed, of CAPA in the merger, based on their estimated fair values. The estimated fair values were determined from information that was available at the merger date. The Company believes that the information available provided a reasonable basis for estimating the fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

 

		Amount
Asset consideration allocation:
Cash		$	177,730
Accounts receivable			17,180
Fair value of related party receivables acquired, net			68,746
Prepaid expenses and other			1,500
Frank Worth Collection			2,635,000
Accounts payable			(16,788	)
Stock-based compensation due non-employees			(165,625	)
Fair value of limited edition prints due to consultant			(250,000	)
Royalties due Frank Worth Estate			(37,500	)
Contingent liability for income taxes			(91,000	)
Other accrued liabilities			(7,805	)
Gain on bargain purchase			(214,035	)
Total acquisition consideration		$	2,117,403

 

The excess of fair value of acquired net assets over the acquisition consideration resulted in a gain on a bargain purchase. In accordance with ASC 805, the Company reassessed whether all acquired assets and assumed liabilities have been identified and recognized, and performed re-measurements to verify that the consideration effectively transferred, assets acquired, and liabilities assumed have been properly valued, and determined a gain on bargain purchase of $214,035 in connection with the reverse merger.

 

In determining the acquisition date estimated fair value of the Frank Worth Collection, which comprises of rare photographs and negatives of famous people, such as Marilyn Monroe and James Dean, the Company retained an independent third party valuation expert that specializes in appraising photographer’s estates and photographic archives of both fine art photographers and commercial photographers. Based on this appraisal, management determined the fair market value of the images in an orderly liquidation value, less 15% seller’s fee, to be $2,635,000.

 

In connection with the reverse merger, the Company determined a liability contingency for income taxes existed as of the merger date. The liability is to be reimbursed by a related party of pre-merger CAPA. This contingency has been accounted in accordance with ASC 805, which states that a liability from a contingency recognized as of the acquisition date is in the scope of ASC 450 – Contingencies, is not acquired or assumed in a business combination, shall continue to be recognized by the acquirer at its acquisition-date fair value. At of the merger date, contingent liability for income taxes totaled $91,000 which has been accounted for in accrued liabilities and due from related party in the total acquisition consideration.

 

 

CAPITAL ART, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The following net sales and net loss of CAPA prior to the October 8, 2014 merger with MSN is included in the following unaudited pro forma net sales and net loss of the combined entity had the acquisition been completed on January 1, 2013: 

 

		For the Year Ended December 31,
		2014				2013
(Unaudited)
Supplement pro forma combined results of operations:
Net sales		$	389,018			$	533,360
Net loss			(1,525,665	)			(302,902	)
Basic and diluted loss per common share		$	–				$

 

The unaudited pro forma information includes depreciation expense for the Frank Worth Collection as if the acquisition of the combined entity had been completed on January 1, 2013. The unaudited pro forma information excludes the gain on bargain purchase from the merger transaction which has been added back for the year ended December 31, 2014.

 

The unaudited pro forma condensed consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of future results of the consolidated entities. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.

 

4.            ARCHIVAL IMAGES, AND PROPERTY AND EQUIPMENT

            

Archival images, and property and equipment as of December 31, 2014 and 2013 comprise of the following:

 

		December 31,								Estimated
		2014				2013				Useful Lives
Frank Worth Collection		$	2,770,000			$	–			10 years
Other archival images			676,215				549,044			10 years
Leasehold improvements			12,446				11,062			7 years
Computer and other equipment			40,204				20,252			3 – 5 years
Furniture and fixtures			56,416				30,061			7 years
			3,555,281				610,419
Less accumulated deprecation			(213,729	)			(69,243	)
Total archival images, property and equipment, net		$	3,341,552			$	541,176

 

5.            FRANK WORTH COLLECTION

             

On November 8, 2011, pre-merger CAPA entered into Photographic Reproduction and Marketing Rights Agreement with the Estate of Frank Worth (the “Estate”), the Estate granted to pre-merger CAPA exclusive global reproduction rights to all negatives, prints, products and other materials from the Frank Worth collection, including the use of the Frank Worth Seal, Frank Worth’s name, likeness, publications and biography, plus merchandising and product selling rights as well as exclusive rights to the signature of the Frank Worth Estate’s executor (the “Executor”) in conjunction with any and all Certificates of Authenticity printed by the Company that accompany limited edition prints (the “Frank Worth Archive”). In consideration for the continued exclusive rights, the Company agreed to pay the Estate monthly royalties of 7.5% of all net sales, with an annual minimum guarantee of $50,000. In June 2014, the Estate agreed to a reduced minimum royalty guarantee payment for 2014 to the amount of $30,000 for each year. The Agreement also granted pre-merger CAPA the right to buyout the exclusive agreement from the Frank Worth Estate at any time for $250,000.

 

On November 12, 2014, the 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. See Note 9 – Shareholders’ Equity. $30,000 was payable on execution in connection with 2014 royalties, and the remainder of $125,000 and 200,000 ($10,000) shares of common stock is payable on or before May 31, 2015, 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. The Company capitalized $135,000 in accordance with ASC 360-Property, Plant and Equipment, in the consolidated balance sheets as Archival Images, and Property and Equipment. Upon payment of cash and common stock, the Company is relieved of all future financial and royalty obligations under the agreement.

 

CAPITAL ART, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2014, the consolidated balance sheets include accrued liabilities in connection with the agreement of $165,000, which comprises of $155,000 cash per the agreement and 200,000 ($10,000) shares of common stock. $30,000 due under the agreement for royalties was paid in January 2015. See Note 11 – Subsequent Events.

 

6. ACCRUED LIABILITIES

 

 Accrued liabilities at December 31, 2014 and 2013 comprise of the following:  

 

		December 31,
		2014				2013
Accrued payroll and related		$	8,242			$	–
Accrued management fee due to related party			5,781				–
Due to Frank Worth Estate (Note 5)			135,000				–
Interest payable to related parties			748				414
Accrued royalties due to Frank Worth Estate			30,000				–
Stock-based compensation due to non-employees			126,250				–
Fair value of limited edition prints due to consultant			250,000				–
Contingent liability for taxes assumed in reverse merger			91,000				–
Other			3,010				–
Total accrued liabilities		$	650,031			$	414

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation of 5,500,000 shares of the Company’s common stock (See Note 9 – Shareholders’ Equity) and limited edition photographs for aggregate retail fair value of $250,000. The prints were earned upon execution of the agreement, and have not been delivered as of December 31, 2014.

 

7. NOTES PAYABLE TO RELATED PARTIES

 

On August 1, 2013 the Company entered into an unsecured Promissory Note agreement with a related party for $100,000. The loan bears interest at 5%. The loan matured on July 14, 2014 and was extended to July 31, 2016. For the twelve months ended December 31, 2014 and 2013 total interest expense under the agreement was $5,061 and $2,061, respectively.

 

Effective September 11, 2014 the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties for working capital purposes. The loans bear interest at 6% per annum and mature on September 10, 2015. Total interest expense in connection with the two unsecured promissory note agreements for the twelve months ending December 31, 2014 was $748.

 

As of December 31, 2014 and 2013, interest payable due to the related party in connection with the unsecured promissory note agreements with related parties as of December 31, 2014 and 2013, was $748 and $414, respectively, and is included in accrued liabilities in the Company’s consolidated balance sheets.

 

8. RELATED PARTY TRANSACTIONS

Due From/To Related Parties

 

As of December 31, 2014 and 2013 amounts due to the Company from related parties for funds advanced by the Company on behalf of related parties totaled $2,316 and $16,458, respectively. As of December 31, 2014 and 2013 funds advanced from related parties for short-term working capital purposes totaled $64,274 and $28,675, respectively. 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, and are due on demand.

 

 

CAPITAL ART, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

In connection with the reverse merger management determined a contingent liability for prior years income taxes existed as of the merger date. The liability is to be reimbursed by a related party of pre-merger CAPA. This contingency has been accounted in accordance with ASC 805, which states that a liability from a contingency recognized as of the acquisition date is in the scope of ASC 450 – Contingencies, shall continue to be recognized by the acquirer at its acquisition-date fair value until resolved. As of December 31, 2014 the contingent liability for income taxes was outstanding for $91,000 which has been included in accrued liabilities and due from related party in the Company’s consolidated balance sheets.

 

The Company also assumed liabilities in connection with the reverse merger for funds advanced for working capital purposes by a related party of pre-merger CAPA for $22,254. As of December 31, 2014, this amount has been fully paid to the related party of pre-merger CAPA.

 

Management Agreement

 

On January 4, 2014 the Company entered into Management Agreement with MSN Holdings, LLC, a related party and principal of MSN, for management consulting services of MSN. Under the terms of the agreement the consultant shall receive 10% of gross revenues of MSN. For the twelve months ended December 31, 2014 the consultant earned $26,281 in connection with the agreement, which $20,500 was paid. At December 31, 2014 $5,781 is included in accrued liabilities in the Company’s consolidated balance sheets.

 

Distributions to Movie Star News, LLC Members

 

In May 2013, Pre-merger MSN, a Nevada limited liability company, distributed capital of $100,000 to its members.

 

Sale of Negatives to Related Party

 

On March 31, 2013, a company controlled by a related party purchased negatives totaling $100,000.

 

9. 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 $0.001. 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 December 31, 2014, there were no shares of Preferred Stock were issued and outstanding.

 

Fair Value of Common Shares

 

As discussed in Note 2 – Summary of Significant Accounting Policies, the Company determined the fair value of its common stock in accordance with the guidance in ASC 820 - Fair Value Measurement at $0.05 per share.

 

Stock Purchase Agreement

 

On August 14, 2014 pre-merger CAPA entered into a Stock Purchase Agreement with an investor for sale of 20,000,000 of the Company’s common stock at $0.05 per share, for total of $1,000,000 payable in installments in August 2014 through December 31, 2014. As of December 31, 2014, 6,000,000 ($300,000) common shares remained outstanding under the terms of the agreement, which has been included in the consolidated balance sheets in current assets – stock subscription receivable and equity – common stock subscribed. $209,000 and $91,000 was received in January 2015 and June 2015, respectively. See Note 11 - Subsequent Event.

 

Stock-based and Other Compensation to Non-Employees

 

On February 1, 2014, pre-merger CAPA executed a consulting agreement for services. The agreement specifies issuance of 500,000 shares of common stock at execution of the agreement and 3,500,000 shares upon introduction of a strategic business partner. The Consultant introduced a strategic business partner August 15, 2014. The agreement calls for payment of the Company’s common stock pro-ratably upon receipt of payment of the introduced strategic partner. As of date of the merger the Company assumed a liability for 2,625,000 common shares with a fair value of $131,250 in connection with the agreement. As of December 31, 2014 1,750,000 common shares were issued to the consultant with a fair value of $87,500 and 875,000 remained unissued with fair value of $43,750, which is included in accrued liabilities in the Consolidated Balance Sheets.

 

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation of 5,500,000 shares of the Company’s common stock payable in four equal installments. As of the date of the merger 2,062,500 shares of common stock was earned by the Consultant, of which 1,375,000 were issued prior to the merger. In connection with the merger, the Company assumed a liability for 687,500 unissued shares with a fair value of $34,375 due to the consultant. For the fourth quarter ending December 31, 2014, the consultant earned the remaining 3,437,500 shares and 2,475,000 were issued, with a fair value of $123,750. As of December 31, 2014, 1,650,000 shares of common stock are unissued with a fair value of $82,500, and is included in accrued liabilities in the consolidated balance sheets.

 

Shares Reserved for Future Issuance

 

The Company is required to reserve and keep available of its authorized, but unissued shares of common stock an amount sufficient to effect shares due in connection with the Stock Purchase Agreement and Stock-Based Compensation to Non-Employees. As of December 31, 2014, shares reserved for future issuance comprised of the following:

 

		Shares Reserved
Shares subscribed in connection with Stock Purchase Agreement			6,000,000
Shares to be issued to consultants			2,525,000
Shares to be issued to Frank Worth Estate			200,000
			8,725,000

 

10. COMMITMENTS AND CONTINGENCIES

 

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.

 

As of December 31, 2014, future minimum payments due under the 60-month operating lease agreement are as follows:

 

2015		$	39,439
2016			40,623
2017			41,841
2018			43,096
2019			36,807
Total future minimum payments		$	201,807

 

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 Brooklyn, New York at rate of $500 per month.

 

Total rent expense for the twelve months ended December 31, 2014 and 2013 was $49,074 and $13,307 respectively, in connection with the operating lease agreements.

 

Contingent Liability for Taxes Assumed in Reverse Merger

 

In connection with the reverse merger management determined a liability contingency for income taxes existed as of the merger date. The liability is to be reimbursed by a related party of pre-merger CAPA. As of December 31, 2014 the contingent liability for income taxes was outstanding for $91,000 which has been accounted for in accrued liabilities and due from related party in the consolidated financial statements. See Note 8 – Related Party Transactions.

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

10. INCOME TAXES

 

Significant components of the Company’s deferred tax assets and liabilities for federal and state income taxes as of December 31, 2014 are as follows:

 

Deferred tax assets:
Net operating loss		$	178,000
Accrued liabilities			87,000
			265,000
Deferred tax liabilities:
Deprecation			(9,000	)
Total deferred tax asset			256,000
Less valuation allowance			(256,000	)
Net deferred tax asset		$	–

 

Provision for income tax provision (benefit) as of December 31, 2014 consist of the following:

 

Deferred:
Federal		$	256,000
State			–
Total deferred tax asset			256,000
Less valuation allowance			(256,000	)
Net deferred tax asset		$	–

 

The income tax provision (benefit) differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax income as of December 31, 2014 as follows:

 

Effective tax rate (benefit):
Federal			(34.0	)%
State			–
Permanent differences			24.8
Other			18.6
Change in valuation allowance			(9.4	)
			–	%

 

As discussed in Note 2 – Summary of Significant Accounting Policies, until the merger date, MSN, a Nevada Limited Liability Company, was taxed as a limited liability company and, as such, any profit or loss from operations flowed directly to the members who were responsible for payment of any federal and state income tax. The Company has not included any pro forma income tax information as if the Company were a tax paying entity for the year ended December 31, 2013, as any pro forma tax provision on the loss before income taxes would be offset by a valuation allowance for the related deferred tax asset as it would be more likely than not that the future tax benefits will not be realized.

 

A full valuation allowance of $256,000 has been applied against the Company’s net deferred tax assets as of December 31, 2014, due to projected losses and because is not more likely than not that the Company will realize future benefits associated with these deferred tax assets.

 

The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of specified occurrences, including significant ownership changes. As a result of these provisions, utilization of net operating losses would be limited in the event of any future significant ownership change. Such a limitation could result in the expiration of the net operating loss carryforwards before utilization. The Company had such an ownership change related to the reverse merger transaction.

 

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2014, the Company had gross federal net operating loss carryforwards of approximately $968,000, which was reduced to $523,000 due to such ownership change. The Company expects the limitation placed on the federal net operating loss carryforwards prior to the ownership change will likely expire unused.

 

11. SUBSEQUENT EVENTS

 

Management has evaluated subsequent events, as defined by ASC 855, Subsequent Events, through September 17, 2015, 2015, the date on which the financial statements were available to be issued. The following items were noted:

 

Asset Purchase Agreement

 

On July 22, 2015, the Company entered into an Asset Purchase Agreement with Globe Photos, Inc. (“Globe”), a New York corporation, for purchase of substantially all of the assets, which comprises of digital and tangible photographs, and related copyrights and trademarks, of Globe Photo for total purchase price of $400,000 payable in $250,000 cash and $150,000 common stock of the Company. The Common stock is to be transferred to Globe sixty (60) days after closing subject to satisfaction of successful termination of certain subagent agreements by Globe. Per the agreement $180,000 in cash shall be 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 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 Glove’s possession that were granted in connection with the agreement, at a price per share equity to the market price per share 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.

 

Stock Purchase Agreement

 

On August 14, 2014 pre-merger CAPA entered into a Stock Purchase Agreement with an investor for sale of 20,000,000 of the Company’s common stock at $0.05 per share, for total of $1,000,000 payable in installments in August 2014 through December 31, 2014. As of December 31, 2014 the final installment of $250,000 was outstanding. The final $209,000 and $91,000 was received in January 2015 and June 2015, respectively.

 

Consulting Agreements

 

On January 1, 2015 the Company entered in a 12-month agreement for non-exclusive investment banking advisory services for total consideration of 2,000,000 shares of the Company’s common stock. The shares are payable within 14 days of the effective date of the agreement and deemed earned in full upon execution of the agreement. The shares were issued in May 2015 in connection with the agreement. The agreement may be renewed for an addition 12-month term whereby the Company at its discretion shall pay the investment banking advisor $400,000 cash or an equivalent amount in the Company’s common stock based upon the thirty day volume weighted average price for thirty trading days prior to renewal.

 

Effective January 2, 2015, the Company entered into an agreement with a consultant for website development for total project fee of $193,000 with $40,000 payable in cash at execution of the agreement. The remaining $153,000 is payable in the Company’s common stock, which the number of shares shall be determined by the closing price of the Company’s common stock at issuance.

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation of 5,500,000 shares of the Company’s common stock payable in four equal installments. In addition, the consultant is to receive limited edition photographs for aggregate retail value of $250,000. The Company satisfied the liability for limited edition prints in March 2015.

 

 

CAPITAL ART, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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, $30,000 payable on execution and the remainder payable on or before May 31, 2015. See Note 4- Frank Worth Collection. In January 2015 the Company paid $30,000 in connection with the agreement. As of the date the consolidated financial statements have been issued, the remaining balance of $125,000 and 200,000 ($10,000) shares of the Company’s common stock have been held by the Company until to a dispute between the Estate and an unrelated third party of the Company is settled. The Company has no involvement in the dispute.

 

Private Placement

 

In March 2015, the former president of pre-merger CAPA closed a private placement comprising of individuals related to the former president for 1,820,000 shares of common stock at a $0.05 per share for aggregate proceeds of $91,000.

 

In connection with the private placement, the former president received 200,000 shares of the Company’s common stock in lieu of cash for payment of finder’s fee total stock-based compensation of $10,000 based on fair value of the Company’s common stock of $0.05 per share.

 

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2015 (UNAUDITED) AND DECEMBER 31, 2014 (AUDITED)

 

		6/30/2015				12/31/2014
ASSETS
Current Assets:
Cash		$	61,039			$	340,523
Accounts receivable			3,647				13,691
Inventory			53,927				59,034
Stock subscription receivable			–				300,000
Due from related parties			109,430				93,316
Prepaid expenses and other			109,696				9,613
Total current assets			337,739				816,177
Archival images, and property and equipment, net			3,220,766				3,341,552
Security deposits			6,356				6,356
TOTAL ASSETS		$	3,564,861			$	4,164,085
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	129,113			$	108,694
Accrued liabilities			366,609				650,031
Due to related parties			30,892				64,274
Short-term notes payable to related parties			41,000				41,000
Total current liabilities			567,614				863,999
Related party note payable			100,000				100,000
Total liabilities			667,614				963,999
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; none issued and outstanding at June 30, 2015 and December 31, 2014			–				–
Common stock, $0.0001 par value; 450,000,000 shares authorized 324,988,283 and 311,973,283 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively			32,499				31,197
Additional paid-in capital			3,931,909				3,239,961
Common stock subscribed			–				300,000
Retained deficit			(1,067,161	)			(371,072	)
Total Shareholders’ equity			2,897,247				3,200,086
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	3,564,861			$	4,164,085

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

 

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the Six Months Ended June 30,
		2015				2014
Revenues		$	376,282			$	163,168
Cost of revenues			116,276				81,070
Gross profit			260,006				82,098
Operating expenses:
Product development, sales and marketing			350,206				15,462
General and administrative			412,243				80,760
Depreciation expense			187,606				35,405
Total operating expenses			950,055				131,627
Loss from operations			(690,049	)			(49,529	)
Other income (expense):
Interest income and other income			660				–
Interest expense			(6,700	)			(2,672	)
Total other income (expense)			(6,040	)			(2,672	)
Loss before income taxes			(696,089	)			(52,201	)
Income taxes			–				–
Net loss		$	(696,089	)		$	(52,201	)
Basic and diluted loss per common share		$	–			$	–
Weight average basic and diluted shares outstanding			320,383,974				256,400,226

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

JUNE 30, 2015 (UNAUDITED) AND DECEMBER 31, 2014 (AUDITED)

 

 

		Common Stock								Additional Paid-in				Common Stock				Retained Earnings				Total Shareholders’
		Shares				Amount				Capital				Subscribed				(Deficit)				Equity
BALANCE DECEMBER 31, 2014			311,973,283			$	31,197			$	3,239,961			$	300,000			$	(371,072	)		$	3,200,086
Common shares issued for services			2,670,000				267				175,733				–								176,000
Common shares issued for settlement of accrued liabilities			2,525,000				253				125,997				–				–				126,250
Common shares issued for cash			7,820,000				782				390,218				(300,000	)							91,000
Net loss			–				–				–								(696,089	)			(696,089	)
BALANCE JUNE 30, 2015			324,988,283			$	32,499			$	3,931,909			$	–			$	(1,067,161	)		$	2,897,247

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

		For the Six Months Ended June 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(696,089	)		$	(52,201	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			187,606				35,405
Stock-based and other compensation to non-employees			176,000				–
Sale of fixed assets to customer included in cost of sales, net			2,942				–
Changes in assets and liabilities, net of reverse merger:
Accounts receivable			10,044				147
Inventory			5,107				10,552
Prepaid expenses and other			(100,083	)			1,515
Accounts payable			20,419				(6,941	)
Accrued liabilities			(157,172	)			15,687
Net cash (used in) provided by operating activities			(551,226	)			4,164
Cash flows from investing activities:
Purchase of archival images, property and equipment			(69,762	)			(51,941	)
Net cash used in investing activities			(69,762	)			(51,940	)
Cash flows from financing activities:
Short-term advances related parties, net			(49,496	)			(2,992	)
Proceeds from sale of common stock and settlement of stock subscription receivable			391,000				–
Proceeds from notes payable to related parties			–				30,000
Net cash provided by financing activities			341,504				27,008
Net decrease in cash			(279,484	)			(20,768	)
Cash at beginning of year			340,523				20,919
Cash at end of year		$	61,039			$	150
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	5,480			$	2,027
Common shares issued for settlement of accrued liabilities		$	126,250			$	–

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

  

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed 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 condensed consolidated financial statements for the six months ended June 30, 2015 should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form 10 filed with the SEC pursuant to Rule 12(b) under the Securities Act of 1934.

 

The condensed consolidated balance sheet as of December 31, 2014, 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 condensed 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 full year ending December 31, 2015.

 

Reverse Merger

 

On October 8, 2014, Capital Art, Inc. (“CAPA”) a Delaware Corporation and Capital Art, LLC, a California Limited Liability Company and wholly owned subsidiary of Capital Art, Inc. (collectively “CAPA” or “pre-merger CAPA”), CAPA entered into an Asset Purchase Agreement with Movie Star News, LLC. (“MSN”), a Nevada Limited Liability Company. The Agreement was effectively a contract to merge the three companies to combine assets of rare images. Refer to the consolidated financial statements and accompanying notes as of December 31, 2014. The accompanying condensed consolidated financial statements represent the results of operations, financial position and cash flows of Capital Art, Inc. (formerly Movie Star News, LLC), and its 100% owned subsidiary Capital Art, LLC. (the “Company”), for the six months ended June 30, 2015. All intercompany balances and transactions have been eliminated.

 

The following unaudited pro forma information is presented to reflect the operations of the Company as if the reverse merger had been completed on January 1, 2015 and 2014, respectively:

 

 

		For the Six Months Ended June 30,
(Unaudited)		2015				2014
Supplement pro forma combined results of operations:
Net sales		$	376,282			$	246,925
Net loss			(696,089	)			(463,585	)
Basic and diluted loss per common share		$	–			$	–

 

 

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Going Concern

 

The accompanying condensed 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 condensed 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, 2015 the Company had $61,039 cash on hand. At June 30, 2015 the Company has a retained deficit of $1,067,161. For the six months ended June 30, 2015 the Company had a net loss of $696,089 and cash used in operations of $551,226. 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.

 

Inventory

 

The Company’s inventory comprises of rare photos of movie stars and other famous people. 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.

 

 

 

 

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Impairment of Long-Lived Assets

 

Long-lived 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 at June 30, 2015 and December 31, 2014.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 – Revenues from Contracts with Customers, which introduces a new five-step framework for revenue recognition. The core principle of the standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled for those goods or services. The ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard is effective for annual reporting periods after December 15, 2016. Management does not believe the adoption of ASU 2014-09 will have a material impact on the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU No. 2015-11 clarifies that inventory should be held at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose and transport such inventory. ASU No. 2015-11 will be effective for fiscal years and interim periods beginning after December 15, 2016. ASU No. 2015-11 is required to be applied prospectively and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements–Going Concern, (Subtopic 204-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU requires management to evaluate each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Management does not believe the adoption of ASU-2014-15 will have a material effect on the consolidated financial statements.

 

2. BASIC AND DILUTED INCOME AND LOSS PER SHARE

 

The Company computes income and 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 condensed consolidated statements of operations. Basic EPS is computed by dividing net income (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:

 

			For the six months ended June 30,
			2015				2014
Basic weighted average common shares outstanding			320,383,974				256,400,226
Effect of dilutive securities			–				–
Diluted weighted average common and potential common shares outstanding			320,383,974				256,400,226

 

 

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company is required to reserve and keep available of its authorized, but unissued shares of common stock an amount sufficient to effect shares due in connection with the Stock Purchase Agreement and Stock-Based Compensation to Non-Employees. As of June 30, 2015, shares reserved for future issuance comprised of the following:

 

			Shares Reserved
Shares to be issued to consultant			340,000
Shares to be issued to Frank Worth Estate			200,000
			540,000

 

These shares were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive.

 

3.      ARCHIVAL IMAGES, AND PROPERTY AND EQUIPMENT

 

Archival images, and property and equipment as of June 30, 2015 and December 31, 2014 comprise of the following:

 

		June 30,				December 31,				Estimated
		2015				2014				Useful Lives
Frank Worth Collection		$	2,770,000			$	2,770,000				10 years
Other archival images			707,051				676,215				10 years
Leasehold improvements			12,446				12,446				7 years
Computer and other equipment			48,350				40,204				3 – 5 years
Furniture and fixtures			83,666				56,416				7 years
			3,621,513				3,555,281
Less accumulated depreciation			(400,747	)			(213,729	)
Total archival images, property and equipment, net		$	3,220,766			$	3,341,552

 

4.      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. The Company capitalized $135,000 in accordance with ASC 360-Property, Plant and Equipment, in the condensed consolidated balance sheets as Archival Images, and Property and Equipment. Upon payment of cash and common stock, the Company is relieved of all future financial and royalty obligations under the agreement.

 

As of December 31, 2014, the condensed consolidated balance sheets include accrued liabilities in connection with the agreement of $165,000, which comprises of $155,000 cash per the agreement and 200,000 ($10,000) shares of common stock. $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 between the Estate and an unrelated party of the Company is settled. The Company has no involvement in the dispute.

 

 

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5. ACCRUED LIABILITIES

 

Accrued liabilities at June 30, 2015 and December 31, 2014 comprise of the following:

 

		June 30,				December 31,
		2015				2014
Accrued payroll and related		$	17,441			$	8,242
Accrued management fee due to related party			5,781				5,781
Due to Frank Worth Estate			135,000				135,000
Interest payable to related parties			2,381				748
Accrued royalties due to Frank Worth Estate			–				30,000
Stock-based compensation due to non-employees			102,000				126,250
Fair value of limited edition prints due to consultant			–				250,000
Contingent liability for taxes assumed in reverse merger			91,000				91,000
Other			13,006				3,010
Total accrued liabilities		$	366,609			$	650,031

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation of 5,500,000 shares of the Company’s common stock (See Note 7 – Shareholders’ Equity) and limited edition photographs for aggregate retail fair value of $250,000. The prints were earned upon execution of the agreement, and were delivered and included in revenues in the Company’s unaudited condensed consolidated statement of operations as of June 30, 2015.

 

In connection with the reverse merger on October 8, 2014, the Company determined a liability contingency for income taxes existed as of the merger date. The liability is to be reimbursed by a related party of pre-merger CAPA. This contingency has been accounted in accordance with ASC 805, which states that a liability from a contingency recognized as of the acquisition date is in the scope of ASC 450 – Contingencies, is not acquired or assumed in a business combination, shall continue to be recognized by the acquirer at its acquisition-date fair value. As of June 30, 2015 and December 31, 2014, contingent liability for income taxes totaled $91,000 which has been accounted for in accrued liabilities and due from related party.

 

5. NOTES PAYABLE TO RELATED PARTIES

 

On August 1, 2013 the Company entered into an unsecured Promissory Note agreement with a related party for $100,000. The loan bears interest at 5%. The loan matured on July 14, 2014 and was extended to July 31, 2016. For the six months ended June 30, 2015 and 2014 total interest expense under the agreement was $2,485 and $2,027, respectively.

 

Effective September 11, 2014 the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties for working capital purposes. The loans bear interest at 6% per annum and mature on September 10, 2015. Total interest expense in connection with the two unsecured promissory note agreements for the six months ended June 30, 2015 is $1,220.

 

As of June 30, 2015 and December 31, 2014, interest payable in connection with the unsecured promissory note agreements with related parties was $1,968 and $748, respectively, and is included in accrued liabilities in the Company’s condensed consolidated balance sheets.

 

 

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

6. RELATED PARTY TRANSACTIONS

 

Due From/To Related Parties

 

As of June 30, 2015 and December 31, 2014, amounts due to the Company from related parties for funds advanced by the Company on behalf of related parties totaled $18,430 and $2,316, respectively. As of June 30, 2015 and December 31, 2014 funds advanced from related parties for short-term working capital purposes totaled $30,892 and $64,274, respectively. These amounts have been included in the condensed consolidated balance sheets as current assets due from related parties and current liabilities due to related parties, respectively, and are due on demand.

 

In connection with the reverse merger on October 8, 2014, the Company determined a liability contingency for income taxes existed as of the merger date. The liability is to be reimbursed by a related party of pre-merger CAPA. As of June 30, 2015 and December 31, 2014, contingent liability for income taxes totaled $91,000 which has been accounted for in accrued liabilities and due from related party. See Note 5 – Accrued Liabilities.

 

7. 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 $0.001. 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, 2015, there were no shares of Preferred Stock were issued and outstanding.

 

Stock Purchase Agreement

 

On August 14, 2014 pre-merger CAPA entered into a Stock Purchase Agreement with an investor for sale of 20,000,000 of the Company’s common stock at $0.05 per share, for total of $1,000,000 payable in installments in August 2014 through December 31, 2014. As of December 31, 2014, 6,000,000 ($300,000) common shares remained outstanding under the terms of the agreement, which has been included in the condensed consolidated balance sheets in current assets – stock subscription receivable and equity – common stock subscribed. As of June 30, 2015, $300,000 was received in connection with the outstanding stock subscription receivable for 6,000,000 shares.

 

Private Placement

 

In March 2015, the former president of pre-merger CAPA closed a private placement comprising of individuals related to the former president for 1,820,000 shares of common stock at a $0.05 per share for aggregate proceeds of $91,000.

 

In connection with the private placement, the former president received 200,000 shares of the Company’s common stock in lieu of cash for payment of finder’s fee total stock-based compensation of $10,000 based on fair value of the Company’s common stock of $0.05 per share.

 

Stock-based and Other Compensation to Non-Employees

 

On February 1, 2014, pre-merger CAPA executed a consulting agreement for services. The agreement specifies issuance of 500,000 shares of common stock at execution of the agreement and 3,500,000 shares upon introduction of a strategic business partner. As of December 31, 2014 875,000 shares of common stock with a fair value of $43,750 were unissued and included in accrued liabilities in the Company’s condensed consolidated balance sheets. The shares were issued as of June 30, 2015.

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation of 5,500,000 shares of the Company’s common stock payable in four equal installments. As of December 31, 2014, 1,650,000 shares of common stock with a fair value of $82,500 were unissued and included in accrued liabilities in the Company’s condensed consolidated balance sheets. The shares were issued as of June 30, 2015.

 

 

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On January 1, 2015 the Company entered in a 12-month agreement for non-exclusive investment banking advisory services for total consideration of 2,000,000 shares of the Company’s common stock. The shares are payable within 14 days of the effective date of the agreement and deemed earned in full upon execution of the agreement. The shares were issued in May 2015 in connection with the agreement with a fair value determined by the Company of $0.05 per share, for total $100,000. The agreement may be renewed for an addition 12-month term whereby the Company at its discretion shall pay the investment banking advisor $400,000 cash or an equivalent amount in the Company’s common stock based upon the thirty day volume weighted average price for thirty trading days prior to renewal.

 

On January 2, 2015 the Company entered into a fixed price agreement with a consultant for website development services for total contract price of $193,000 payable in cash of $40,000 and 510,000 shares of the Company’s common stock with a stated fair

value of $0.30 per share. As of June 30, 2015, 170,000 shares of common stock with fair value of $51,000 were issued. 340,000 shares of common stock were unissued for $102,000 which is included in accrued liabilities in the unaudited condensed consolidated balance sheets. See Note 4 – Accrued Liabilities.

 

On June 9, 2015 the Company entered into a management consulting agreement for total monthly compensation of $17,500. In addition the consultant received 300,000 shares of common stock at fair value of $0.05 per share, for total $15,000.

 

8.      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.

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation limited edition photographs for aggregate retail fair value of $250,000. See Note 4 – Accrued Liabilities. For the six months ended June 30, 2015 the Company delivered the limited edition prints to the consultant, which accounted for 66% of total revenues. No other customers accounted for over 10% of total revenues for the six months ended June 30, 2015. For the six months ended June 30, 2014 no customers accounted for over 10% of total revenues. Accounts receivable balances from customers as of June 30, 2015 and December 31, 2014 were not material to the Company’s consolidated financial statements. There is significant financial risk associated with a dependence upon a small number of customers which could have an adverse effect on the Company’s future consolidated financial statements if these customers were to leave.

 

9.      SUBSEQUENT EVENT

 

On July 22, 2015, the Company entered into an Asset Purchase Agreement with Globe Photos, Inc. (“Globe”), a New York corporation, for purchase of substantially all of the assets, which comprises of digital and tangible photographs, and related copyrights and trademarks, of Globe Photo for total purchase price of $400,000 payable in $250,000 cash and $150,000 common stock of the Company. The Common stock is to be transferred to Globe sixty (60) days after closing subject to satisfaction of successful termination of certain subagent agreements by Globe. Per the agreement $180,000 in cash shall be 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 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 Glove’s possession that were granted in connection with the agreement, at a price per share equity to the market price per share 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.