Item
1. Financial Statements
Our
condensed consolidated financial statements included in this Form 10-Q are as follows:
F-1
|
Condensed
Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015;
|
F-2
|
Condensed Consolidated
Statements of Operations for the three months ended March 31, 2016 and 2015 (unaudited);
|
F-3
|
Condensed Consolidated
Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited); and
|
F-4
|
Notes to Condensed
Consolidated Financial Statements (unaudited).
|
These
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended
March 31, 2016 are not necessarily indicative of the results that can be expected for the full year.
Capital
Art, Inc.
Condensed
Consolidated Balance Sheets
March
31, 2016 and December 31, 2015
(Unaudited)
|
|
March
31, 2016
|
|
December
31, 2015
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Cash
|
|
$
|
7,000
|
|
|
$
|
32,570
|
Accounts receivable,
net
|
|
|
11,725
|
|
|
|
112,460
|
Inventory
|
|
|
130,437
|
|
|
|
84,550
|
Prepaid
expenses and other, net
|
|
|
23,086
|
|
|
|
41,061
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
172,248
|
|
|
|
270,641
|
|
|
|
|
|
|
|
|
Archival images, and
property and equipment, net
|
|
|
2,984,362
|
|
|
|
3,058,983
|
Intangible assets,
net
|
|
|
402,375
|
|
|
|
413,250
|
Due from related party
|
|
|
105,000
|
|
|
|
91,000
|
Security
deposits
|
|
|
13,581
|
|
|
|
13,581
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
3,677,566
|
|
|
$
|
3,847,455
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
844,068
|
|
|
$
|
705,685
|
Payable
to Globe Photo, Inc., short-term portion
|
|
|
110,000
|
|
|
|
120,000
|
Due
to related parties
|
|
|
63,084
|
|
|
|
46,084
|
Notes
payable
|
|
|
—
|
|
|
|
150,000
|
Notes
payable - related party
|
|
|
—
|
|
|
|
289,743
|
Total
current liabilities
|
|
|
1,017,152
|
|
|
|
1,311,512
|
|
|
|
|
|
|
|
|
Payable to Globe Photo,
Inc., less short-term portion
|
|
|
—
|
|
|
|
10,000
|
Notes payable - related
party - net of current portion
|
|
|
283,580
|
|
|
|
—
|
Notes payable - net
of current portion
|
|
|
292,500
|
|
|
|
120,000
|
Embedded
derivative - put option
|
|
|
57,000
|
|
|
|
55,000
|
TOTAL
LIABILITIES
|
|
|
1,650,232
|
|
|
|
1,496,512
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; 50,000,000 shares authorized; none issued and outstanding at March 31, 2016 and December 31, 2015
|
|
|
—
|
|
|
|
—
|
Common
Stock, $0.0001 par value; 450,000,000 shares authorized; 325,341,224 and 325,341,224 shares issued and outstanding at March
31, 2016 and December 31, 2015
|
|
|
32,534
|
|
|
|
32,534
|
Additional
paid-in capital
|
|
|
4,051,874
|
|
|
|
4,051,874
|
Retained
deficit
|
|
|
(2,057,074
|
)
|
|
|
(1,733,465)
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
2,027,334
|
|
|
|
2,350,943
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND PARTNERS' EQUITY
|
|
$
|
3,677,566
|
|
|
$
|
3,847,455
|
The
accompanying notes are an integral part of the consolidated financial statements.
Capital
Art, Inc.
Condensed
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues
|
|
$
|
98,349
|
|
|
$
|
341,242
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
69,562
|
|
|
|
73,898
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
28,787
|
|
|
|
267,344
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Product
development, sales and marketing
|
|
|
83,108
|
|
|
|
153,075
|
General
and administrative
|
|
|
146,142
|
|
|
|
215,024
|
Depreciation
and amortization expense
|
|
|
105,596
|
|
|
|
93,200
|
Total
operating expenses
|
|
|
334,846
|
|
|
|
461,299
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(306,059
|
)
|
|
|
(193,955)
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Loss
on derivative liability
|
|
|
(2,000
|
)
|
|
|
—
|
Interest
and other income
|
|
|
—
|
|
|
|
656
|
Interest
expense
|
|
|
(15,550
|
)
|
|
|
(4,870)
|
Total
other income (expense)
|
|
|
(17,550
|
)
|
|
|
(4,214)
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(323,609
|
)
|
|
|
(198,169)
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(323,609
|
)
|
|
$
|
(198,169)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Weight average
basic and diluted shares outstanding
|
|
|
325,341,224
|
|
|
|
313,050,616
|
The
accompanying notes are an integral part of the consolidated financial statements.
Capital
Art, Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
March
31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(323,609
|
)
|
|
$
|
(198,169)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
105,596
|
|
|
|
93,200
|
Stock-based
compensation to non-employees
|
|
|
—
|
|
|
|
10,000
|
Allowance
for bad debt
|
|
|
4,600
|
|
|
|
—
|
Change
in fair value of embedded derivative
|
|
|
2,000
|
|
|
|
—
|
Loss
on sale of property included in cost of sales
|
|
|
—
|
|
|
|
2,942
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
96,135
|
|
|
|
4,773
|
Inventory
|
|
|
(45,887
|
)
|
|
|
3,111
|
Prepaid
expenses and other
|
|
|
15,552
|
|
|
|
(11,529)
|
Accounts
payable and accrued liabilities
|
|
|
138,383
|
|
|
|
(245,880)
|
Accrued
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(7,230
|
)
|
|
|
(341,552)
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
Purchase
of archival images, property and equipment
|
|
|
(20,100
|
)
|
|
|
(55,695)
|
Cash
paid to Globe Photo, Inc. for assets acquired
|
|
|
(20,000
|
)
|
|
|
—
|
Advances
to related parties
|
|
|
(14,000
|
)
|
|
|
—
|
Net
cash used in investing activities
|
|
|
(54,100
|
)
|
|
|
(55,695)
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
Repayment
of advances to related party
|
|
|
—
|
|
|
|
(11,727)
|
Advances
from related parties
|
|
|
17,000
|
|
|
|
(35,396)
|
Proceeds
from sale of common stock
|
|
|
—
|
|
|
|
91,000
|
Proceeds
from settlement of common stock subscription
|
|
|
—
|
|
|
|
209,000
|
Proceeds
from notes payable
|
|
|
22,500
|
|
|
|
—
|
Repayment
of notes payable to related parties
|
|
|
(3,740
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
35,760
|
|
|
|
252,877
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(25,570
|
)
|
|
|
(144,370)
|
|
|
|
|
|
|
|
|
Cash
at beginning of year
|
|
|
32,570
|
|
|
|
340,523
|
|
|
|
|
|
|
|
|
Cash
at end of year
|
|
$
|
7,000
|
|
|
$
|
196,153
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
9,261
|
|
|
$
|
847
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING & FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Stock
based-compensation to non-employees
|
|
$
|
—
|
|
|
$
|
10,000
|
The
accompanying notes are an integral part of the consolidated financial statements.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
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 its images for
publications and merchandizing. The Company aims to become a leading global photography marketing and distribution company by
acquiring rights and ownership to collections of rare iconic negatives and photographs, and to establish worldwide wholesale and
retail sales channels.
Movie
Star News, LLC (“MSN”) was organized in the state of Nevada on August 29, 2012 as a limited liability company to acquire
the assets of Kramer Productions, Inc. d/b/a Movie Star News, a New York limited liability company 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.
The
Company 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, owns rare iconic celebrity images, including the rights to the Frank Worth
Collection. The Frank Worth Collection comprises an extensive collection of Marilyn Monroe, James Dean and other iconic photographs,
many rare and never seen that were accumulated over a period of 60 years.
On
July 22, 2015, the Company entered into an Asset Purchase Agreement with Globe Photos, Inc., a New York corporation, to purchase
substantially all of the assets of Globe Photos, Inc., which principally comprise photographer contracts granting the Company
the right to exploit copyrights, digital and tangible photographs, and related copyrights and trademarks, of Globe Photo, Inc.
On July 24, 2015, the Company formed Globe Photo, LLC, a wholly owned subsidiary of CAPA, to license the Company’s extensive
photograph image archive to third parties worldwide for a fee.
Going
Concern
The
accompanying 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 March 31, 2016 the Company had $7,000
cash on hand. At March 31, 2016 the Company has a retained deficit of $2,057,074. For the three months ended March 31, 2016 the
Company had a net loss of $323,609 and cash used in operations of $7,230. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company intends to invest its working
capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails
to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may
be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate
sufficient revenues or raise capital to continue operations. The condensed consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
|
2.
|
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 three months ended March 31, 2016 should
be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form
10-K for the Company’s fiscal year ended December 31, 2015 as filed with the SEC pursuant to Rule 13a-13 under the Securities
Exchange Act of 1934, as amended.
The
condensed consolidated balance sheet as of December 31, 2015, 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 ended December 31, 2016.
The
accompanying condensed consolidated financial statements represent the results of operations, financial position and cash flows
of Capital Art, Inc., and its 100% owned subsidiaries Capital Art, LLC and Globe Photo, LLC for the three months ended March 31,
2016 and 2015. All inter-company balances and transactions have been eliminated.
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also requires
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those estimates.
Inventory
The
Company’s inventory is comprised of rare photos of movie stars and other famous people, and is stated at the lower of cost
or net realizable value. Direct labor and raw material costs associated with the process of making the photos available for sale
are also included in inventory at cost. These costs are expensed to cost of sales pro-ratably as sold.
Revenue
Recognition
The
Company recognizes revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has
occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and
(iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer
as required by ASC 605 – Revenue Recognition. Cost of sales, rebates and discounts are recorded at the time of revenue recognition
or at each financial reporting date.
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 March 31, 2016 and 2015 were insignificant.
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.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
A
reconciliation of weighted-average basic shares outstanding to weighted-average diluted shares outstanding follows:
|
|
Three
Months Ended March 31,
|
|
|
2016
|
|
|
2015
|
Basic
weighted average common shares outstanding
|
|
|
325,341,224
|
|
|
|
313,050,616
|
|
|
|
|
|
|
|
|
Effect of dilutive
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Diluted weighted average
common and potential common shares outstanding
|
|
|
325,341,224
|
|
|
|
313,050,616
|
Shares
Reserved
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 a Stock Purchase Agreement. As of March 31, 2016, shares reserved for future issuance
comprised of the following:
|
|
Shares
Reserved
|
Shares
to be issued to Frank Worth Estate
|
|
|
200,000
|
|
|
|
200,000
|
These
shares were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive.
Effective
February 28, 2017, all liabilities with the Frank Worth Estate were settled by the Company. See Note 14 – Subsequent
Events.
Recent
Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-08,
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. ASU
2016-08 clarifies the implementation guidance on principal versus agent considerations and includes indicators to assist an entity
in determining whether it controls a specified good or service before it is transferred to the customers. ASU 2016-08 is effective
January 1, 2018 to be in alignment with the effective date of ASU 2014-09, as discussed above. Management is currently assessing
its procedures for determining revenues derived from principal versus agents in connection with the impact of adopting this new
accounting standard on the Company’s condensed consolidated financial statements and does not believe that the adoption of
ASU 2016-08 will have a material impact on the Company’s condensed consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10,
Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
The amendments in this update
affect the guidance in ASU 2014-09, which is not yet effective. The amendments in ASU 2016-10 clarify the following two aspects
of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles
for those areas. ASU 2016-10 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09, as discussed
above. Management is currently assessing the potential impact of adopting this new accounting standard on the Company’s condensed
consolidated financial statements in connection with revenues recognized from licensing its vast archive of photographic images.
In May 2016, the FASB issued ASU 2016-12,
Revenue
from Contracts from Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The amendments in this
update affect the guidance in ASU 2014-09, which is not yet effective. The core principle of the guidance in Topic 606 is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2016-12
do not change the core principle of the guidance in Topic 606, but instead affect only the narrow aspects noted in Topic 606. ASU
2016-12 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09, as discussed above. Management
evaluated ASU 2016-12 and does not believe the adoption of ASU 2016-12 will have a material impact on the Company’s condensed
consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets
and Financial Liabilities.
ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments including requirements to measure most equity investments at fair value with changes in fair value recognized
in net income, to perform a qualitative assessment of equity investments without readily determinable fair values, and to separately
present financial assets and liabilities by measurement category and by type of financial asset on the balance sheet or the accompanying
notes to the financial statements. ASU 2016-01 will be effective for the Company beginning on January 1, 2018, and will be applied
by means of a cumulative effect adjustment to the balance sheet, except for effects related to equity securities without readily
determinable values, which will be applied prospectively. Management is currently evaluating the potential impact of adopting
this new accounting standard on the Company’s condensed consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases
, which requires an entity to recognize long-term lease arrangements
as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will
be recorded for all long-term leases, whether operating or financing, while the income statement will reflect lease expense for
operating leases and amortization/interest expense for financing leases. The amendments also require certain new quantitative
and qualitative disclosures regarding leasing arrangements. ASU 2016-02 will be effective for the Company beginning on January
1, 2019. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements. Early adoption is permitted. Management does not believe
the adoption of ASU 2016-02 will have a material impact on the Company’s condensed consolidated financial statements.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
In
March 2016, the FASB issued ASU 2016-05,
Derivatives and Hedging: Effect of Derivative Contract Novations on Existing
Hedge Accounting Relationships
, which clarifies that a change in the counterparty to a derivative instrument that has been
designated as a hedging instrument would not, in and of itself, be considered a termination of the derivative instrument, provided
that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for the Company beginning on January 1,
2017. Early adoption is permitted, including in an interim period. Management evaluated ASU 2016-05 and does not believe the adoption
of this new accounting standard will have a material impact on the Company’s condensed consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt
Instruments
, which aims to reduce the diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06
clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes
of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative.
ASU 2016-06 will be effective for the Company beginning on January 1, 2017. Management evaluated ASU 2016-06 and does not believe
the adoption of this this new accounting standard will have a material impact on the Company’s condensed consolidated financial
statements effective January 1, 2017.
In
March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment
Accounting.
ASU 2016-09 simplifies several aspects of the accounting and presentation of share-based payment transactions,
including the accounting for related income taxes consequences and certain classifications within the statement of cash flows.
ASU 2016-09 is effective for the Company beginning on January 1, 2017. Management evaluated the impact of adopting ASU 2016-09
and does not believe the new accounting standard will have a material impact on the Company’s condensed consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash
receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for
fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable
to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company
is currently in the process of evaluating the impact of ASU 2016-15 on its condensed consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of
cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would
have a material effect on the consolidated financial statements filed with this annual report.
In
December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers”. The amendments in this Update affect the guidance in Update 2014-09, which is not yet effective. The effective
date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606
(and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,
Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date
, defers the effective date of Update 2014-09 by one year
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
|
3.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The
Company’s derivative liability measured at fair value on a recurring basis was determined using the following inputs:
|
|
Fair
Value Measurements at March 31, 2016
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
Embedded
derivative liability
|
|
$
|
57,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
57,000
|
As
of March 31, 2016, the Company’s recognized a loss totaling $2,000 in the condensed consolidated statements of operations
for three months ended March 31, 2016.
A
reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) is as follows:
|
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level 3) Embedded Derivative Liability
|
|
|
March
31, 2016
|
|
|
March
31, 2015
|
|
|
|
|
|
|
|
|
Balance beginning
of period
|
|
$
|
55,000
|
|
|
$
|
-
|
Total unrealized loss
included in earnings
|
|
|
2,000
|
|
|
|
-
|
Balance end of period
|
|
$
|
57,000
|
|
|
$
|
-
|
Archive
Acquisition Agreements
On
March 23, 2016, the Company entered in an agreement to purchase a celebrity photograph archive from Photoshot License Limited,
a UK corporation, for total purchase price of $55,000. In addition, the Company paid a finder’s fee of $10,000 to a consultant
in connection with the purchase of the archives. Per the terms of the agreement, the photographs may only be sold as a physical
asset and CAPA does not have the right to license the images.
|
5.
|
ARCHIVAL
IMAGES, AND PROPERTY AND EQUIPMENT
|
Archival
images, and property and equipment as of March 31, 2016 and December 31, 2015 comprise of the following:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
Estimated
Useful Lives
|
Frank Worth Collection
|
|
$
|
2,770,000
|
|
|
$
|
2,770,000
|
|
|
10
years
|
Other archival images
|
|
|
749,168
|
|
|
|
730,076
|
|
|
10
years
|
Leasehold improvements
|
|
|
12,446
|
|
|
|
12,446
|
|
|
7
years
|
Computer and other
equipment
|
|
|
54,340
|
|
|
|
53,332
|
|
|
3
– 5 years
|
Furniture and fixtures
|
|
|
83,666
|
|
|
|
83,666
|
|
|
7
years
|
|
|
|
3,669,620
|
|
|
|
3,649,520
|
|
|
|
Less accumulated deprecation
|
|
|
(685,258)
|
|
|
|
(590,537)
|
|
|
|
Total archival images,
property and equipment, net
|
|
$
|
2,984,362
|
|
|
$
|
3,058,983
|
|
|
|
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
|
6.
|
FRANK
WORTH COLLECTION
|
On
November 12, 2014, the Frank Worth Estate agreed to accept $155,000 and 200,000 common shares, with a fair value of $0.05
per share ($10,000), of the Company’s common stock in exchange for sole and exclusive, world-wide, royalty free rights
to all negatives, prints, products and other materials the Company possesses including the use of the Frank Worth seal, Frank
Worth’s name, likeness, publications and biography plus merchandising and selling rights. $30,000 due under the
agreement for royalties was paid in January 2015. The remainder of $125,000 and 200,000 ($10,000) shares of common stock were
due and payable on or before May 31, 2015, which is being held by the Company until a dispute between the Estate and an
unrelated party of the Company is settled. As of March 31, 2016 and December 31, 2015, $135,000 and $135,000, respectively,
has been provided for in accrued liabilities in the Company’s consolidated balance sheets. See Note 8 – Accounts
Payable and Accrued Liabilities. Effective February 28, 2017, all liabilities with the Frank Worth Estate were settled by the
Company. See Note 14 – Subsequent Events.
Identifiable
intangible assets comprise of the following at March 31, 2016 and December 31, 2015:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
Intangible assets
with determinable lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content
provider and photographic agreements
|
|
$
|
400,000
|
|
|
$
|
30,000
|
|
|
$
|
400,000
|
|
|
$
|
20,000
|
Copyrights
|
|
|
35,000
|
|
|
|
2,625
|
|
|
|
35,000
|
|
|
|
1,750
|
Total
|
|
$
|
435,000
|
|
|
$
|
32,625
|
|
|
$
|
435,000
|
|
|
$
|
21,750
|
Amortization
expense in connection with the photographic agreements and copyrights for the three months ended March 31, 2016 was $10,875, and
is included in depreciation and amortization expense in the condensed consolidated statements of operations. Estimated amortization
expense over the next five years is $43,500 per year.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
|
8.
|
ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES
|
Accrued
liabilities at March 31, 2016 and December 31, 2015 comprise of the following:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
Accounts
payable
|
|
$
|
299,473
|
|
|
$
|
244,977
|
Accrued payroll and
related
|
|
|
6,919
|
|
|
|
3,518
|
Deferred rent
|
|
|
2,946
|
|
|
|
-
|
Due to Frank Worth
Estate
|
|
|
135,000
|
|
|
|
135,000
|
Interest payable
|
|
|
8,466
|
|
|
|
4,176
|
Accrued liability
in connection with archive acquisition
|
|
|
67,500
|
|
|
|
-
|
Due to consultants
for website development
|
|
|
102,000
|
|
|
|
102,000
|
Accrued royalties
|
|
|
2,332
|
|
|
|
-
|
Accrued tax payable
|
|
|
1,756
|
|
|
|
-
|
Stock-based compensation
due to non-employees
|
|
|
104,167
|
|
|
|
104,167
|
Contingent liability
for taxes assumed in reverse merger
|
|
|
91,000
|
|
|
|
91,000
|
Other
|
|
|
22,509
|
|
|
|
20,847
|
Total accrued liabilities
|
|
$
|
844,068
|
|
|
$
|
705,685
|
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 March 31, 2016 and 2015, contingent liability for income taxes totaled $91,000
which has been accounted for in accrued liabilities.
On September 28, 2015, the Company entered
into an unsecured promissory note agreement for working capital purposes with an unrelated party for total proceeds of $150,000.
The note matured on September 28, 2016. Effective September 28, 2016, the note was extended to March 31, 2017 and is now secured
by approximately 240,000 vintage photographs. Effective March 31, 2017, this note was amended to extend the maturity date to the
earlier of June 30, 2018 or receipt by the Company of equity capital in the minimum amount of $1 million. Interest accrues at
the rate of 10% per annum and is payable monthly beginning October 28, 2015. Interest paid under the unsecured promissory note
agreement totaled $3,750 for the three months ended March 31, 2016. Accrued interest payable due under the unsecured note agreement
was $154 at March 31, 2016. In event of default, interest increases to 25% per annum.
On December 31, 2015, the Company
entered into a secured promissory note agreement with an unrelated party for working capital purposes for total proceeds of $120,000.
On February 15, 2016, the Company entered into a new promissory note agreement with the unrelated party for a promissory note in
the amount of $62,500. The notes bear interest at 10%, per annum, and mature on December 31, 2017, with principal and accrued interest
being due at such time. The Company only received one tranche in amount of $22,500 as of March 31, 2016. The remaining $40,000
of the total proceeds were received on April 5, 2016. Of the $22,500 received during the quarter, $14,000 was advanced to a related
party. The note is secured by certain inventory and archival images of the Company in the amount up to $200,000. Accrued interest
payable due under the promissory note agreement was $3,563 at March 31, 2016.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
|
10.
|
NOTES PAYABLE TO
RELATED PARTIES
|
Effective July 21, 2015, the Company
entered into a promissory note agreement with a related party, Dino Satallante, a principal shareholder, for total proceeds of
$160,000. The Company utilized $80,000 of the proceeds for payments due in connection with the Globe Photo assets acquired. The
remainder of the proceeds was used for working capital purposes. The note matured on July 20, 2016, with monthly interest only
payments commencing July 22, 2015. Interest accrues at the rate of 12% per annum. The note is secured by the Globe Photo assets.
Total interest expense in connection with the secured promissory note agreement for the three months ended March 31, 2016 was $4,800.
Per the terms of the agreement the Company incurred loan fees totaling $8,000 to be amortized over the term of the loan. For the
three months ended March 31, 2016, amortization expense in connection with the loan fees totaled $2,001. Effective July 20, 2016
the note was extended to July 20, 2017. The note is being shown net of unamortized loan fees of $2,423 as of March 31, 2016.
On August 1, 2013, the Company entered
into another unsecured promissory note agreement with, Dino Satallante for $100,000. The loan bears interest at 5%. As of March
31, 2016 and December 31, 2015, $87,404 and $91,143 was outstanding under the unsecured promissory note agreement, respectively.
Interest expense for the three months ended March 31, 2016 was $1,204. For the three months ended March 31, 2015 interest expense
was $1,260. The loan matured on July 14, 2014 and was extended to July 31, 2016. Effective July 31, 2016, the note agreement was
extended to July 31, 2017.
Effective September 11, 2014, the Company
entered into two separate unsecured promissory note agreements for $20,500 each with two related parties, Dreamstar, Inc., an entity
owned and controlled by Sam Battistone, a Company officer and director and a principal shareholder, and Dino Satallante, a principal
shareholder of the Company, 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. Effective December 31, 2016, the loans were extended to December 31, 2017 and
are being shown as long term in the quarter ended March 31, 2016. At March 31, 2016, $20,500 and $18,100 was outstanding to Dino
Satallante and Dreamstar, respectively. Total interest expense in connection with the two unsecured promissory note agreements
for the three months ended March 31, 2016, was $579. Interest expense for the three months ended March 31, 2015 was $615.
As of March 31, 2016 and 2015, interest
payable in connection with the unsecured promissory note agreements with related parties was $5,536 and $1,776, respectively, and
is included in accrued liabilities in the Company’s consolidated balance sheet.
|
11.
|
RELATED
PARTY TRANSACTIONS
|
Due
From/To Related Parties
The
following table summarizes amounts due to the Company from related parties for funds advanced from the Company on behalf of related
parties and funds advanced from related parties for short-term working capital purposes as of March 31, 2016 and December 31,
2015. These amounts have been included in the condensed consolidated balance sheets with due from related parties as long term
assets, and due to related parties as current liabilities since they are due on demand.
|
|
March
31, 2016
|
|
December
31, 2015
|
Due
from related parties:
|
|
|
|
|
|
|
|
Klaus
Moeller, related party of pre-merger CAPA and beneficial interest shareholder
|
|
$
|
91,000
|
|
|
$
|
91,000
|
ICONZ
Art, LLC, beneficial interest shareholder
|
|
|
14,000
|
|
|
|
—
|
Total
due from related parties
|
|
$
|
105,000
|
|
|
$
|
91,000
|
|
|
|
|
|
|
|
|
Due
to related parties:
|
|
|
|
|
|
|
|
MSN
Holding Co., beneficial interest shareholder
|
|
$
|
12,999
|
|
|
$
|
12,999
|
Premier
Collectibles, beneficial interest shareholder
|
|
|
33,085
|
|
|
|
33,085
|
Stuart
Scheinman, officer, director and beneficial interest shareholder
|
|
|
17,000
|
|
|
|
—
|
Total
due to related parties
|
|
$
|
63,084
|
|
|
$
|
46,084
|
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
Credit
Card Payable
As
of March 31, 2016 and December 31, 2015, $73,282 and $37,790, respectively, was outstanding on a personal credit card in the name
of a beneficial interest shareholder of the Company – Premier Collectibles. The liability is included in accounts payable
in the consolidated balance sheets.
Related
Party Transactions
In
February and March 2016, Stuart Scheinman, the Company’s current President and director, as well as a beneficial interest
shareholder, advanced $17,000 for short-term working capital purposes.
12. SHAREHOLDERS’
EQUITY
Preferred
Stock
The
Company is authorized to issue up to 50,000,000 shares of preferred stock authorized with a par value of $0.0001. The Board of
Directors is authorized, subject to any limitations prescribed by law, without further vote or action by the Company’s stockholders,
to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have such number
of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined
by the board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, and conversion
rights. As of March 31, 2016, there were no shares of Preferred Stock issued and outstanding.
Stock-based
and Other Compensation to Non-Employees
The Company committed to issue a consultant 2,083,333 shares of common stock at fair value of $0.05 per share for 2015 services
rendered. The Company provided for the fair value as of December 31, 2015 and recorded $104,167, which is included in accrued
liabilities in the condensed consolidated balance sheet.
13.
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.
The
Company leases various corporate housing from unrelated third parties for terms that range from month-to-month to one year. Until
June 2016 the Company also rented office space on a month-to-month basis in New York at rate of $850 per month. This lease was
terminated in June 2016.
Total
rent expense for the three months ended March 31, 2016 and 2015 was $18,320 and $15,363 respectively, in connection with the operating
lease agreements.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
14.
SUBSEQUENT EVENTS
Notes
Payable
On September 28, 2015, the Company entered
into an unsecured promissory note agreement for working capital purposes with an unrelated party for total proceeds of $150,000.
See Note 9 – Notes Payable. The note matured on September 28, 2016. Effective September 28, 2016 the note was extended to
March 31, 2017 and is now secured by an interest in approximately 240,000 vintage photographs. Effective March 31, 2017, this note
was amended to extend the maturity date to the earlier of June 30, 2018 or receipt by the Company of equity capital in the minimum
amount of $1 million. Interest continues to accrue at the rate of 10% per annum and is payable monthly. In event of default, interest
increases to 25% per annum. Effective March 17, 2017 the note was extended to July 31, 2017.
In April 2016 the Company entered into
two promissory note agreements with unrelated parties for working capital purposes for total proceeds of $75,000. The promissory
notes mature in December 2017 and bear interest at the rate of 6% per annum.
On April 7, 2016 an unrelated party
advanced the Company $75,000 for purchase of a Marilyn Monroe archive. The advance is secured by the archive for which it was used
and is to be repaid on or before July 31, 2017 for a total of $100,000 to satisfy the terms of the promissory note.
Archive Acquisition Agreements
Effective June 1, 2016 the Company entered
into three separate non-exclusive license agreements for the use of licensed images and trademarks through December 31, 2019. Under
the terms of the agreements, the Company is required to pay a royalty of 10% on net sales. The agreements call for combined annual
guaranteed minimum royalties per year of $150,000 based on combined minimum sales of $1,500,000 per year. The Company was required
to pay advances related to 50% of the first year’s royalties totaling $75,000 upon execution of the agreements. The remainder
of the first year’s combined minimum royalties is due on or before February 1, 2017.
Related Party Transactions
On April 4, 2016, the Company entered
into a promissory note agreement with Premier Collectibles, a company owned by the Company’s President, Stuart Scheinman,
in the principal amount of $65,000 to be used for an acquisition of archives. The promissory note bears interest at the rate of
8% per annum, is secured by the archive collection, which the proceeds were used, and matures on or before April 16, 2017. Effective
May 1, 2017, the note was extended to July 31, 2017 with a principal amount due at such time of $75,000. This note was made by
an associate of Mr. Scheinman to him for the purposes of him loaning these funds to the Company. The parties intend to amend the
structure of this loan so that it is between the Company and the original maker, with Mr. Scheinman acting as the guarantor of
this obligation and releasing the security interest.
On
April 15, 2016, the Company entered into a promissory note agreement with Sean Goodchild, at the time an officer and director
of the Company and currently a shareholder, for total proceeds of $50,000. The promissory note bears interest at the rate of 6%
per annum and matures on December 15, 2017. The Company entered into two additional promissory note agreements with Mr. Goodchild
for two additional loans of $50,000 for working capital purposes on October 3, 2016 and December 2, 2016. The promissory notes
bear interest at 6% per annum and mature on December 31, 2017.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2016 and 2015
(unaudited)
Effective
July 21, 2015, the Company entered into a promissory note agreement with related party, Dino Satallante, a principal shareholder.
The note matured on July 20, 2016. Effective July 20, 2016 the note was extended to July 20, 2017. See Note 10 – Notes Payable
to Related Parties.
Effective
September 11, 2014 the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related
parties, Sam Battistone, a Company officer and director and a principal shareholder, and Dino Satallante, a principal shareholder
of the Company. The loans bear interest at 6% per annum. The loans matured on September 10, 2015, and were extended to December
31, 2016. Effective December 31, 2016, the loans were extended to December 31, 2017. All other terms of the loans remain unchanged.
See Note 10 – Notes Payable to Related Parties.
On
August 1, 2013, the Company entered into an unsecured promissory note agreement with a related party, Dino Satallante, a principal
shareholder, for $100,000. The loan bears interest at 5%. The loan matured on July 14, 2014 and was extended to July 31, 2016.
Effective July 31, 2016, the note agreement was extended to July 31, 2017. All other terms remain unchanged.
Frank
Worth Collection
On
July 6, 2016, Stuart Harris, as an individual and as Executor of the Estate of Frank Worth (“Claimant”) filed a Statement
of Claim with the American Arbitration Association against the Company for breach of the Frank Worth Reproduction Rights Agreement
entered into on November 18, 2011 (“the Frank Worth Reproduction Rights Agreement”) for royalties allegedly due. The
Frank Worth Reproduction Rights Agreement called for royalty payments to be paid to Claimant by the Company for the exclusive
global reproduction rights to all negatives, prints, products and other materials from the Frank Worth collection. However, on
November 12, 2014, Claimant had previously agreed to accept $155,000 and 200,000 shares 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 paid $30,000 to the Claimant in January 2015 in connection with November 12, 2014 agreement. See
Note 6 – Frank Worth Collection. The Statement of Claim also sought an award for breach of the November 12, 2014 agreement.
The
Company made no further payments under the November 12, 2014 agreement due to Claimant selling the rights to 38 key images to
Apsara, Inc. in 2007 and failing to disclose such prior sale to the Company. The Company also brought a counterclaim for breach
of the November 12, 2014 agreement against Claimant for failure to disclose the previous sale of 38 key images which the Company
had purchase the world-wide, royalty free rights under the Frank Worth Reproduction Rights Agreement and the subsequent November
12, 2014 agreement.
On
October 18, 2016, an arbitration hearing was held on this matter. On October 28, 2016, the arbitrator issued an amended award,
finding the 2011 Agreement to remain valid, but also recognizing the Company’s demand for clean title to the 38 Key images.
Thus, the Company was ordered to pay Claimant $70,000 as final payment due under the November 12, 2014 agreement, payable to the
Claimant no later than February 23, 2017. The Company was granted an award for delivery of clean title of the 38 Key images no
later than February 23, 2017. In the event, Claimant provides such clean title by such deadline, the parties have the option to
comply with the 2011 agreement and enter into negotiations for a new royalty agreement on the 38 Key images. But in the event
Claimant does not deliver clean title, the Company shall retain possession of the entire collection, including the 38 Key images
with no further obligation to pay royalties. Claimant failed to deliver clean title by February 23, 2017.
In
the interim, the Company learned that Claimant is the subject of an action in a California Probate Court action challenging his
actions as Executor of the Estate after March 2008. At that time Claimant was discharged as Executor of the Estate and he had
no legal authority from that point on to represent the interests of the Estate, including entering into the agreements that were
the subject of the Arbitration. That information has led the Company to secure the $70,000 final payment until such time as the
California Probate Court determines the appropriate recipient.
Finally,
on January 26, 2017, Claimant filed a separate civil suit against us in Nevada District Court. This new suit seeks to vacate the
decision of the Arbitrator in the Binding Arbitration. Claimant is dissatisfied with the results of the Binding Arbitration, notwithstanding
his agreement to be bound by the decisions of the Arbitrator. We have challenged whether Claimant has standing to pursue this
action because of his lack of status as an Executor, and his lack of any status as a Beneficiary of the Estate.
On
February 28, 2017, the parties agreed to dismiss this action with prejudice.
Stock-based
and Other Compensation to Non-Employees
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 December 31, 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 Company’s consolidated
balance sheets. On October 1, 2016, the Company issued 229,300 ($68,790) shares of common stock as progress payment towards the
fixed price agreement. Effective December 15, 2016, the consultant notified the Company that they have ceased operations. The
Company has no further obligation for issuance of the remainder of common stock under the agreement.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements
Certain
statements, other than purely historical information, including estimates, projections, statements relating to our business plans,
objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified
by the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions. We intend such
forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions.
Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations
and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory
changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties
should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. Further information concerning our business, including additional factors that could materially affect
our financial results, is included herein and in our other filings with the SEC.
Overview
and History
We
were originally incorporated on September 20, 2004, in the State of Delaware under the name “Blog8.” Since incorporation,
we have changed our name numerous times and have been known as “Securiteyes,” “Medify Solutions Limited,”
“Petel Incorporated” and “Gleeworks, Inc.” We amended our Certificate of Incorporation and changed our
name to Capital Art, Inc. on April 28, 2011.
We
currently are engaged in the business of selling and managing classic and contemporary, limited edition photographic images and
reproductions, with a focus on iconic celebrity images, by acquiring ownership or rights to collections of rare iconic negatives
and photographs. We also make available images for publications and merchandizing by third parties. Our business is in its early
stages and consequently our financial results are difficult to compare from one period to the next. We expect such period-to-period
differences to continue to be significant over the next several quarters, until we have a number of full years of operations.
Our
objective is to become the largest repository of archival pop culture photography in the online world. To this end, we have been
and continue to search for photographic archives. We have amassed our current inventory and rights to photographic images and
reproductions from a series of acquisitions that started in 2011. These past few years of acquisitions have resulted in an impressive
collection for our company, including the rights to the Frank Worth collection, and the rights or ownership over hundreds of thousands
of photos and negatives. Archived and stored in our warehouse are boxes of never seen before negatives, one-of-a kind prints and
other memorabilia. We have rare images of celebrity icons, such as Elvis Presley, James Dean, Marilyn Monroe, and many others,
which have never been seen by the public.
As
part of increasing our product offerings, we plan to continue our search for photographic archives that are undervalued by the
market. These archives may be acquired outright or we may enter into representation or consignment agreements with the owners
of the archives. These opportunities are typically (1) aging photographers who are looking to monetize their archive while still
alive via a single large transaction, or (2) media companies that have aggregated assets (or rights to assets) and are seeking
to dispose of the archive or a partner who can help them grow cash flows related to the archive. These opportunities exist both
in the United States and abroad and we continue to search for value wherever it may be geographically located.
Our
business is to monetize the value of our collection. We sell our photographic images and reproductions through auctions, third-party
galleries, art consultants, interior decorators and directly to consumers. We reach our customers through diverse marketing channels,
including our websites, events and interactive campaigns. We also reproduce mass quantities of different photographs from our
collection, which are sold through third party on-line retailers. We are continually exploring these and other marketing possibilities
and we expect to continue our efforts to pursue contracts and to diversify our revenues.
Our
principal place of business is located at 6445 South Tenaya Way, Suite B-130, Las Vegas, NV 89113
.
General information
about us can be found at www.capitalart.com. The information contained on or connected to our website is not incorporated by reference
into this Quarterly Report on Form 10-Q and should not be considered part of this or any other report filed with the SEC.
Results
of Operations
Comparison
of Results of Operations for the three months ended March 31, 2016 and 2015
Our
summary results are presented below:
|
|
Three
Months Ended March 31,
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
%
Change
|
Revenues
|
|
$
|
98,349
|
|
|
$
|
341,242
|
|
|
|
(242,893)
|
|
|
|
(71%)
|
Cost of revenues
|
|
|
69,562
|
|
|
|
73,898
|
|
|
|
(4,336)
|
|
|
|
(6%)
|
Gross profit (loss)
|
|
|
28,787
|
|
|
|
267,344
|
|
|
|
(238,557)
|
|
|
|
(89%)
|
Operating expenses
|
|
|
334,846
|
|
|
|
461,299
|
|
|
|
(126,453)
|
|
|
|
(27%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
operations
|
|
|
(306,059)
|
|
|
|
(193,955)
|
|
|
|
(112,104)
|
|
|
|
58%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense),
net
|
|
|
(15,550)
|
|
|
|
(4,214)
|
|
|
|
(11,336)
|
|
|
|
239%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivative
liabilities
|
|
|
(2,000)
|
|
|
|
-
|
|
|
|
(2,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(323,609)
|
|
|
$
|
(198,169)
|
|
|
|
(125,440)
|
|
|
|
39%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
loss per common share
|
|
$
|
(0.00)
|
|
|
$
|
(0.00)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic
and diluted shares outstanding
|
|
|
325,341,224
|
|
|
|
313,050,616
|
|
|
|
|
|
|
|
|
Revenues.
Our
revenues by principal category were as follows:
|
|
Three
Months Ended March 31,
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
%
Change
|
Licensing
fees
|
|
$
|
37,961
|
|
|
$
|
3,165
|
|
|
$
|
34,796
|
|
|
|
1,099%
|
Print sales
|
|
|
60,388
|
|
|
|
338,077
|
|
|
|
(277,689)
|
|
|
|
(82%)
|
Total revenues
|
|
$
|
98,349
|
|
|
$
|
341,242
|
|
|
$
|
(242,893)
|
|
|
|
(71%)
|
We
derive our revenues from sales of our classic and contemporary limited edition photographic images and reproductions, with a focus
on iconic celebrity images, through specialized fine art dealers and distributors, which includes, but is not limited to, third-party
galleries, art consultants, and interior decorators, or directly to end consumers.
During
the three months ended March 31, 2016, revenues decreased by $242,893 (71%) to $98,349 for the three months ended March 31, 2016,
compared to $341,242 for the same period in 2015. This decrease in revenue was in part a result of a decrease in print sales,
which decreased by $277,689 because we were not able to conduct our anticipated Q1 auction on time. Our goal was to have our large
quarterly online auction during Q1, but due to the immense amount of work that it takes to put these auctions together sometimes
it takes more time than anticipated, which caused the Q1 auction to actually take place in mid-April of Q2. We believe this will
balance out in the future as we diversify our sales platforms. Our product sales are generated through sale of limited edition
or reproductions from our collection of classic and contemporary limited edition photographic images and reproductions. In private
and online auction sales, we stimulate buyer interest through marketing and sell the item to the highest bidder.
Accounts
receivable balances as of March 31, 2016 and 2015 were not material to our condensed consolidated financial statements. There
is significant financial risk associated with a dependence upon a small number of distributors and customers which could have
an adverse effect on our future consolidated financial statements if these distributors or customers were to leave. We intend
to continue our investment in sales and marketing in order to increase distribution and demand for our products and adding content
to our product lines, along with adding additional channels of distribution.
Cost
of Revenues
Our
cost of revenues were as follows:
|
|
Three
Months Ended March 31,
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
%
Change
|
Prints,
framing and related costs
|
|
$
|
24,808
|
|
|
$
|
37,832
|
|
|
$
|
(13,024)
|
|
|
|
(34%)
|
Selling and auction
fees
|
|
|
16,545
|
|
|
|
10,171
|
|
|
|
6,374
|
|
|
|
63%
|
Cost of fulfillment
and shipping
|
|
|
20,205
|
|
|
|
25,895
|
|
|
|
(5,690)
|
|
|
|
(21%)
|
Total cost of revenues
|
|
$
|
69,562
|
|
|
$
|
73,898
|
|
|
$
|
(4,336)
|
|
|
|
(6%)
|
Cost
of revenues decreased by $4,336 (6%) to $69,562 for the three months ended March 31, 2016, compared to $73,898 for the same period
in 2015. The decrease in cost of revenue is due to lower revenue in the three months ended March 31, 2016 compared to the same
period in 2015.
Gross
profit as a percentage of total revenues was 29% and 78% for the three months ended March 31, 2016 and 2015, respectively. Our
gross profit mix as a percentage of total revenues for the three months ended March 31, 2016, compared to the same period in 2015
increased due to added payroll costs associated with fulfillment labor. Cost of sales mix will vary depending on our revenue mix.
During the three months ended March 31, 2016 compared to the same period in 2015, gross profit as a percentage of revenues increased
due to costs associated with the limited edition photographs for an aggregate retail fair value of $250,000 delivered to the consultant
in March 2015. See Note 9 of the Notes to Condensed Consolidated Financial Statements.
As
we work with various channels to distribute our product, we continue to negotiate deals to reduce our overall fulfillment costs.
For
the three months ended March 31, 2016, costs associated with prints, framing and related costs decreased $13,024 to $24,808 (34%)
from $37,832 during the same three month period in 2015. This decrease was primarily due to the limited edition photographs delivered
to the consultant in March 2015. As of the date of this report we have begun to outsource all print and framing. We believe that
this will reduce overhead and allow us to focus our efforts on expanding our retail channels.
Total
selling and auction fees associated with the sales of our prints and fine art on the World Wide Web for the three months ended
March 31, 2016 and 2015 were $16,545 and $10,171, respectively. Selling and auction fees will vary depending on the online or
auction house fee structure.
Operating
Expenses
Operating
expenses consisting of marketing and sales expenses, general and administrative costs, and depreciation expense, decreased by
$126,453 to $334,846 for the three month period ended March 31, 2016 compared to $461,299 for the same period in 2015, respectively.
|
|
Three
Months Ended March 31,
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
%
Change
|
Product
development, sales and marketing
|
|
$
|
83,108
|
|
|
$
|
153,075
|
|
|
$
|
(69,967)
|
|
|
|
(46%)
|
General and administrative
|
|
|
146,142
|
|
|
|
215,024
|
|
|
|
(68,882)
|
|
|
|
(32%)
|
Depreciation expense
|
|
|
105,596
|
|
|
|
93,200
|
|
|
|
12,396
|
|
|
|
12%
|
Total costs and operating
expenses
|
|
$
|
334,846
|
|
|
$
|
461,299
|
|
|
$
|
(126,453)
|
|
|
|
(27%)
|
Product
development, sales and marketing expenses decreased by $69,967 (46%) to $83,108 for the three months ending March 31, 2016, compared
to $153,075 for the same period in 2015. Product development, sales and marketing expenses is primarily comprised of costs associated
with website development costs, sales and marketing salaries, as well as other expenses associated with marketing and related
services. We continue investing our available working capital resources in sales and marketing in order to increase distribution
and demand for our products and adding content to product lines, along with adding additional channels of distribution.
General
and administrative expenses decreased by $68,882 (32%) to $146,142 during the three months ending March 31, 2016 compared to $215,024
in the same period 2015. The decrease was comprised primarily of costs associated with legal and accounting fees, costs associated
with investor relations, including fees, expenses and stock compensation, and management consultants, administrative payroll and
related costs. This decrease was offset by increased costs associated with our facilities, insurance and other supplies during
the three months ending March 31, 2016 compared to the same period in 2015.
For
the three months ended March 31, 2016, general and administrative costs as a percentage of total revenues increased by 86% to
149% compared to 63% for the same period in 2015.
Depreciation
expense increased by $12,396 (13%) to $105,596 for the three months ended March 31, 2016, from $93,200 in the same period 2015.
We record archival images, and property and equipment at cost for purchases over $500. Archival images, property and equipment
are depreciated using the straight-line method over the estimated useful lives ranging from three to ten years. We capitalize
direct costs associated with improvements to archival images, and property and equipment in accordance with ASC 360 – Property,
Plant, and Equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful life or the
term of the related lease. The increase in depreciation expense for the three months ended March 31, 2016, compared to the same
period in 2015 is primarily due to depreciation of our archival images, comprising primarily of the Frank Worth Collection acquired
in a transaction entered into on November 12, 2014.
Interest
Expense
Interest
expense primarily resulted from related party interest expense and interest on revolving credit cards.
|
|
Three
Months Ended March 31,
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
%
Change
|
Interest
expense – related parties
|
|
$
|
6,583
|
|
|
$
|
1,875
|
|
|
$
|
4,708
|
|
|
|
251%
|
Other interest expense,
net
|
|
|
8,967
|
|
|
|
2,995
|
|
|
|
5,956
|
|
|
|
199%
|
Total interest expense,
net
|
|
$
|
15,550
|
|
|
$
|
4,870
|
|
|
$
|
10,680
|
|
|
|
219%
|
On
August 1, 2013, we entered into an unsecured promissory note agreement with Dino Satallante, a principal shareholder, for $100,000.
The loan bears interest at 5%. The loan matured on July 14, 2014 and was extended to July 31, 2016. Effective July 31, 2016, the
note agreement was extended to July 31, 2017. As of March 31, 2016 and December 31, 2015, $100,000 was outstanding under the unsecured
promissory note agreement. Interest expense for the three months ended March 31, 2016 and 2015 was $1,204 and $1,260, respectively.
Effective
September 11, 2014, we entered into two separate unsecured promissory note agreements for $20,500 each with two related parties,
Dreamstar Inc., an entity owned and controlled by Sam Battistone, one of our officers and directors and a principal shareholder,
and Dino Satallante, a principal shareholder of the Company, for working capital purposes. The loans bear interest at 6% per annum
and matured on September 10, 2015and were extended to December 31, 2016. Effective December 31, 2016, the loans were extended
to December 31, 2017. At March 31, 2016, $20,500 and $20,500 was outstanding to Dino Satallante and Dreamstar, respectively. Total
interest expense in connection with the two unsecured promissory note agreements for the three months ended March 31, 2016 was
$5,072.
Liquidity
and Capital Resources
As
of March 31, 2016, we had cash or cash equivalents of $7,000.
Net
cash used in operating activities was $7,230 during the three month period ended March 31, 2016, compared to $341,552 for the
three month period ended March 31, 2015. We anticipate that overhead costs in current operations will increase in the
future as our business continues to expand.
Net
cash used in investing activities was $54,100 during the three month period ended March 31, 2016, compared to $55,695 for the
three month period ended March 31, 2015. We anticipate that our investing expenditures will increase as we expand our
collection.
Cash
flows provided by financing activities were $35,760 for the three month periods ended March 31, 2016, compared to cash flows of
$252,877 provided by financing activities during the three months ended March 31, 2015.
There
is no guarantee we will generate sufficient revenues to continue operations. Our management estimates we will need approximately
$1,000,000 in annual revenues to continue operations at our current operating level, without consideration given to investment
in new sales and marketing channels. For the immediate future we plan to achieve this revenue target by ramping up fees earned
from licensing imagery to media companies growing a network of global sales agents. There is no guarantee that we will generate
sufficient revenues to continue operations. We expect to continue incurring significant operating losses for the near future.
If we are not successful in achieving revenues required to continue operations at our current operating levels within three to
four months, or obtain additional financing, our operations will be significantly negatively impacted, and we will need to significantly
scale back our operations or liquidate all or a portion of our collections.
We
believe that our principal difficulty in our ability to successfully generate profits has been the lack of available capital to
operate and expand our business. We believe we need a minimum of approximately $3,000,000 in additional working capital to
be utilized for key archive acquisitions, inventory management software, technology development, additional staffing and working
capital. As of the date of this Report we have no commitment from any investor or investment-banking firm to provide us with the
necessary funding and there can be no assurances we will obtain such funding in the future. Failure to obtain this additional
financing will have a material negative impact on our ability to generate profits in the future.
Inflation
Although
our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results
of operations during the three month period ended March 31, 2016.
Critical
Accounting Polices
In
December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management
Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the
portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our critical accounting policies are disclosed in Note 2 of our audited financial statements included in the Form 10-K filed with
the Securities and Exchange Commission.
Off
Balance Sheet Arrangements
As
of March 31, 2016, there were no off balance sheet arrangements.
Recent
Accounting Pronouncements
The
recent accounting pronouncements that are material to our financial statements are disclosed in Note 2 of our audited financial
statements included in the Form 10-K filed with the Securities and Exchange Commission.