Notes
to Condensed Consolidated Financial Statements
June
30, 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.
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,
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 September 30, 2016 the Company had $84,453
cash on hand. At September 30, 2016 the Company has a retained deficit of $2,155,504. For the nine months ended September 30,
2016 the Company had a net loss of $422,039 and cash used in operations of $29,498. 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.
|
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 and nine months ended September 30, 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 12(b) under the Securities Act
of 1934.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
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 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. (formerly Movie Star News, LLC), and its 100% owned subsidiary Capital Art, LLC for the three and nine months
ended September 30, 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 September 30, 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.
A
reconciliation of weighted-average basic shares outstanding to weighted-average diluted shares outstanding follows:
|
|
Nine
Months Ended September 30,
|
|
|
2016
|
|
|
2015
|
Basic
weighted average common shares outstanding
|
|
|
325,341,224
|
|
|
|
320,754,226
|
|
|
|
|
|
|
|
|
Effect of dilutive
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Diluted weighted average
common and potential common shares outstanding
|
|
|
327,424,557
|
|
|
|
325,015,137
|
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
|
|
Three
Months Ended September 30,
|
|
|
2016
|
|
|
2015
|
Basic
weighted average common shares outstanding
|
|
|
325,341,224
|
|
|
|
325,015,137
|
|
|
|
|
|
|
|
|
Effect of dilutive
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Diluted weighted average
common and potential common shares outstanding
|
|
|
325,341,224
|
|
|
|
325,015,137
|
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 the Stock Purchase Agreement and Stock-Based Compensation to Non-Employees. As of September
30, 2016, shares reserved for future issuance comprised of the following:
As
of September 30, 2016 , shares reserved for future issuance comprised of the following:
|
|
Shares
Reserved
|
Shares
to be issued to Frank Worth Estate
|
|
|
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.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
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.
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.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
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.
|
3.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The
Company’s derivative liability measured at fair value on a recurring basis was determined using the following inputs:
|
|
Fair
Value Measurements at September 30, 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
|
|
$
|
99,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
99,000
|
|
|
Fair
Value Measurements at December 31, 2015
|
|
|
|
|
|
|
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
|
|
$
|
55,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
55,000
|
|
As
of September 30, 2016, the Company’s recognized an a unrealized loss totaling $17,000 and $44,000 in the condensed consolidated
statements of operations for three and nine months ended September 30, 2016, respectively.
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
|
|
|
|
September
30, 2016
|
|
|
|
December
31, 2015
|
Balance beginning
of period
|
|
$
|
55,000
|
|
|
$
|
-
|
Embedded
derivative in connection with the issuance of put option
|
|
|
-
|
|
|
|
55,000
|
Total
unrealized loss included in earnings
|
|
|
44,000
|
|
|
|
-
|
Balance end of period
|
|
$
|
99,000
|
|
|
$
|
55,000
|
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
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 September 30, 2016 and December 31, 2015 comprise of the following:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
Estimated
Useful Lives
|
Frank Worth Collection
|
|
$
|
2,770,000
|
|
|
$
|
2,770,000
|
|
|
|
10
years
|
Other archival images
|
|
|
854,721
|
|
|
|
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
|
|
|
|
3,775,173
|
|
|
|
3,649,520
|
|
|
|
|
Less accumulated deprecation
|
|
|
(878,766
|
)
|
|
|
(590,537
|
)
|
|
|
|
Total
archival images, property and equipment, net
|
|
$
|
2,896,407
|
|
|
$
|
3,058,983
|
|
|
|
|
Depreciation
expense for the three and nine months ended September 30, 2016 was 96,832 and 288,229, respectively. Depreciation expense was
$105,971 and $293,557 for the three and nine months ended September 30, 2015.
|
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 September 30, 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. 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 September 30, 2016 and December 31, 2015:
|
|
September
30, 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
|
|
|
$
|
50,000
|
|
|
$
|
400,000
|
|
|
$
|
20,000
|
Copyrights
|
|
|
35,000
|
|
|
|
4,375
|
|
|
|
35,000
|
|
|
|
1,750
|
Total
|
|
$
|
435,000
|
|
|
$
|
54,375
|
|
|
$
|
435,000
|
|
|
$
|
21,750
|
Amortization
expense in connection with the photographic agreements and copyrights for the three and nine months ended September 30, 2016 was
$10,875 and $32,625 , and is included in depreciation and amortization expense in the condensed consolidated statements of
operations and comprehensive loss. Estimated amortization expense over the next five years is $43,500 per year.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
|
8.
|
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|
Accounts
payable and accrued liabilities at September 30, 2016 and December 31, 2015 comprise of the following:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
Accounts and other
payable
|
|
$
|
145,868
|
|
|
$
|
244,977
|
Accrued payroll and
related
|
|
|
8,361
|
|
|
|
3,518
|
Accrued rent
|
|
|
3,571
|
|
|
|
-
|
Due to Frank Worth
Estate (Note 7)
|
|
|
135,000
|
|
|
|
135,000
|
Interest payable
|
|
|
35,843
|
|
|
|
4,776
|
Due to consultants
for website development
|
|
|
102,000
|
|
|
|
102,000
|
Accrued royalties
|
|
|
2,332
|
|
|
|
-
|
Accrued tax payable
|
|
|
1,755
|
|
|
|
-
|
Stock-based compensation
due to non-employees
|
|
|
104,167
|
|
|
|
104,167
|
Contingent liability
for taxes assumed in reverse merger
|
|
|
91,000
|
|
|
|
91,000
|
Other
|
|
|
7,919
|
|
|
|
20,847
|
Total accrued liabilities
|
|
$
|
637,816
|
|
|
$
|
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 September 30, 2016 and December 31, 2015 , contingent liability for income
taxes totaled $91,000 which has been accounted for in accrued liabilities and due from related party.
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 matures on September 28, 2016. Effective September 28, 2016, the note was extended
to March 31, 2017 and is secured by approximately 240,000 vintage photographs. Interest accrues at the rate of 10% per annum and
is payable monthly beginning October 28, 2015. Interest paid under the unsecured promissory note agreement totaled, $3,750 and
$11,250 for the three and nine months ended September 30, 2016, respectively. Accrued interest payable due under the unsecured
note agreement was $7,654 at September 30, 2016. Effective March 17, 2017 the note was extended to July 31, 2017.
In
December 2015, the Company entered into a secured promissory note agreement with an unrelated party for working capital purposes
for total proceeds of $120,000. The note matures on December 31, 2017, bears interest at the rate of 10% per annum, and is payable
on the 1
st
day of each month commencing in February 2016. On February 15, 2016, the Company entered into an additional
promissory note agreement with the unrelated party for additional proceeds of $62,500. The amount received is recorded on the
books of the Company at that date. The notes are secured by certain inventory and archival images of the Company in the amount
up to $200,000. Accrued interest payable due under the unsecured note agreement was $13,586 at September 30, 2016.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
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. The interest
expense accrued on the note was $2,141 for the nine months ended September 30, 2016.
On
April 7, 2016, an unrelated party advanced the Company $75,000 plus an original issued discount of $25,000 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 .
This transaction is actually being handled as a consignment arrangement. The Company has agreed to pay 50% of the proceeds derived
from the Marilyn Monroe archives up to a guaranteed total of $100,000. Once the $100,000 is paid, the Company has no further obligations.
At September 30, 2016, the Company had paid $0 on this obligation. As of June 30, 2016, the balance of $100,000 remains outstanding.
As of September 30, 2016, $11,835 of the discount has been amortized. The note is shown net of the unamortized portion of the
discount of $13,165 as of September 30, 2016.
|
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 beneficial interest
shareholder of the Company, for total proceeds of $160,000. The Company utilized $80,000 of the proceeds for payments due in connection
with the Globe Photo assets acquired. The remainder of the proceeds were used for working capital purposes. The note matures on
July 20, 2016, with monthly interest only payments commencing July 22, 2015. Interest accrues at the rate of 12% per annum. The
note is secured by the Globe Photo Assets. Total interest expense in connection with the secured promissory note agreement for
the nine months ended September 30, 2016 is $14,400. 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 nine months ended September 30, 2016, amortization expense in connection with
the loan fees totaled $4,424. Effective July 20, 2016 the note was extended to July 31, 2017. The note is being shown net of unamortized
loan fees of $0 as of September 30, 2016.
On
August 1, 2013 the Company entered into an unsecured promissory note agreement with related party Dino Satallante for $100,000.
The loan bears interest at 5%. As of September 30, 2016 and December 31, 2015, $78,677 and $91,143 was outstanding under the unsecured
promissory note agreement, respectively. Interest expense for the three and nine months ended September 30, 2016 was $1,561 and
$2,950, respectively. For the three and nine months ended September 30, 2015 interest expense was $1,221 and $3,706, respectively.
The loan matured on July 14, 2014 and was extended to July 31, 2016. Effective July 31, 2016, the note agreement was extended
to 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 an entity owned and controlled by Sam Battistone, a Company officer and director and a principal shareholder,
and Dino Satallante, a beneficial interest shareholders of the Company, for working capital purposes. The loans bear interest
at 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. See Note 16 – Subsequent Events. At September 30, 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 and nine months ended September 30, 2016 was $579 and $1,737, respectively. Interest expense for
the three and nine months ended September 30, 2015 was $619 and $1,839, respectively.
On
April 4, 2016, the Company entered into a promissory note agreement with Premier Collectibles, a beneficial interest shareholder
for total proceeds of $65,000 to be used for acquisition of archive agreement. The promissory note bears interest at the rate
of 8% per annum, is secured by the archive collection which the proceeds were used and matures on or before April 16, 2017. The
interest expense paid on the note was $2,539 for the nine months ended September 30, 2016.
On
April 15, 2016, the Company entered into a promissory note agreement with a beneficial interest shareholder for total proceeds
of $50,000. The promissory note bears interest at the rate of 6% per annum and matures on December 15, 2017. The interest expense
was $1,389 for the nine months ended September 30, 2016.
As
of September 30, 2016 and 2015, interest payable in connection with the unsecured promissory note agreements with related parties
was $12,379 and $9,332, respectively, and is included in accrued liabilities in the Company’s consolidated balance sheet.
Capital
Art, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2016 and 2015
(unaudited)
|
11.
|
RELATED
PARTY TRANSACTIONS
|
Due
From/To Related Parties
The
following table summarizes amounts due to the Company from related parties for funds advanced to the Company on behalf of related
parties and funds advanced from related parties for short-term working capital purposes as of September 30, 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.