Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(unaudited)
1.
|
ORGANIZATION AND BUSINESS OPERATIONS
|
Capital Art, Inc. (formerly Movie Star
News, LLC) (“we”, “our”, the “Company”) sells and manages classic and contemporary, limited
edition photographic images and reproductions, with a focus on iconic celebrity images. The Company also makes available its images
for publications and merchandizing. The Company aims to become a leading global photography marketing and distribution company
by acquiring rights and ownership to collections of rare iconic negatives and photographs, and to establish worldwide wholesale
and retail sales channels.
Going Concern
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a
going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal
course of business.
Management evaluated
all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated
financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a
going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate
revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows
to enable the Company to finance its operations internally. As of March 31, 2017, the Company had $16,088 cash on hand. At March
31, 2017 the Company has an accumulated deficit of $2,932,135 For the three months ended March 31, 2017 the Company had a net loss
of $257,340
and cash used in operations of $215,617
.
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company intends to invest its working
capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails
to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be
forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient
revenues or raise capital to continue operations. The consolidated financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP)
and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain
information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have
been condensed or omitted pursuant to such rules and regulations. As such, the information included in the consolidated financial
statements for the three months ended March 31, 2017 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, 2016 as filed
with the SEC pursuant to Rule 12(b) under the Securities Act of 1934.
The consolidated balance sheet as of
December 31, 2016, included herein was derived from the audited financial statements as of that date, but does not include all
disclosures including notes required by GAAP.
The accompanying unaudited consolidated
financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations,
and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the
year ended December 31, 2017.
The accompanying consolidated financial
statements represent the results of operations, financial position and cash flows of Capital Art, Inc., and its 100% owned subsidiary
Capital Art, LLC and Globe Photos, LLC for the three months ended March 31, 2017 and 2016. All inter-company balances and transactions
have been eliminated.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(unaudited)
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and also requires disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Inventory
The Company’s inventory is comprised
of rare photos of movie stars and other famous people, and is stated at the lower of cost or net realizable value. Direct labor
and raw material costs associated with the process of making the photos available for sale are also included in inventory at cost.
These costs are expensed to cost of sales pro-ratably as sold.
Revenue Recognition
The Company recognizes revenue related
to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated
to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for
future performance to directly bring about the resale of the product by the buyer as required by ASC 605 – Revenue Recognition.
Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reporting date.
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 and royalties are recognized when realized or realizable based on royalty reporting received from licensees.
Basic
and Diluted 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 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:
|
|
Three
Months Ended March 31,
|
|
|
2017
|
|
2016
|
Basic
weighted average common shares outstanding
|
|
|
325,523,466
|
|
|
|
325,341,224
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Diluted
weighted average common and potential common shares outstanding
|
|
|
325,523,466
|
|
|
|
325,341,224
|
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(unaudited)
Reclassifications
Certain prior year amounts have been reclassified
for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
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.
In April 2016, the FASB issued
ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
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.
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. Management evaluated ASU 2016-08, ASU2016-09, ASU 2016-10, and ASU 2016-12 and
determined the adoption will not have a material impact on the Company’s consolidated
financial statements.
In December 2016, the
FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”.
The effective date and transition
requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic
amended by Update 2014-09). Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date, defers the effective date of Update 2014-09 by one year.
In 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 has reviewed this pronouncement and have
determined that it would not have a material impact to the financial statements.
In February 2016, the FASB issued
ASU 2016-02, Leases, which requires an entity to recognize long-term lease arrangements as assets and liabilities on the
balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all long-term leases,
whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest
expense for financing leases. The amendments also require certain new quantitative and qualitative disclosures regarding leasing
arrangements. ASU 2016-02 will be effective for the Company beginning on January 1, 2019. Lessees must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements. Early adoption is permitted. Management does not believe the adoption of ASU 2016-02 will have a
material impact on the Company’s consolidated financial statements.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(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 determined the adoption of this new accounting standard did not have
a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued
ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, which aims to reduce the
diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise
contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put
option must be separated from the debt instrument and accounted for separately as a derivative. ASU 2016-06 is effective for the
Company beginning on January 1, 2017. Management evaluated ASU 2016-06 and determined the adoption of this this new accounting
standard did not have a material impact on the Company’s consolidated financial statements.
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 determined the new accounting standard did not
have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued
ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments
are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as of the earliest date practicable.
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. Management has reviewed this pronouncement and have
determined that it would not have a material impact to the financial statements.
In May 2017, the FASB
issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update
provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods, and interim periods
within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim
period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and
(2) all other entities for reporting periods for which financial statements have not yet been made available for issuance.
Management has reviewed this pronouncement and have determined that it would not have a material impact to the financial statements.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(unaudited)
In July 2017, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings
Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments
in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features)
with down round features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As
a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as
a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available
to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are
now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with
Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize
the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a
scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this
Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For
all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019,
and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including
adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period.
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3.
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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, 2017
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
Put option derivative liability
|
|
$
|
67,689
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
67,689
|
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
Put option derivative liability
|
|
$
|
57,922
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
57,922
|
The following table provides a summary
of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair
value on a recurring basis using significant unobservable inputs:
|
|
Fair
Value Measurements Using Significant Unobservable Inputs
|
|
|
(Level
3)
|
|
|
|
Embedded
Derivative Liability
|
|
|
|
March
31,
|
|
|
|
December
31,
|
|
|
|
2017
|
|
|
|
2016
|
Balance beginning of period
|
|
$
|
57,922
|
|
|
$
|
55,000
|
|
|
|
|
|
|
|
|
Change in fair market value of derivative liability
|
|
|
9,767
|
|
|
|
2,922
|
Balance end of period
|
|
$
|
67,689
|
|
|
$
|
57,922
|
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(unaudited)
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment
as of March 31, 2017 and December 31, 2016 comprise of the following:
|
|
March
31,
|
December
31,
|
|
|
Estimated
Useful
|
|
|
2017
|
|
|
2016
|
|
|
Lives
|
Frank Worth Collection
|
|
$
|
2,770,000
|
|
|
$
|
2,770,000
|
|
|
10 years
|
Other archival images
|
|
|
931,683
|
|
|
|
889,331
|
|
|
10 years
|
Leasehold improvements
|
|
|
12,446
|
|
|
|
12,446
|
|
|
7 years
|
Computer and other equipment
|
|
|
71,354
|
|
|
|
65,316
|
|
|
3 – 5 years
|
Furniture and fixtures
|
|
|
83,666
|
|
|
|
83,666
|
|
|
7 years
|
|
|
|
3,869,149
|
|
|
|
3,820,759
|
|
|
|
Less accumulated deprecation
|
|
|
(1,078,431)
|
|
|
|
(977,172
|
)
|
|
|
Total archival images, property and equipment, net
|
|
$
|
2,790,718
|
|
|
$
|
2,843,587
|
|
|
|
Depreciation expense was $101,259 and $105,596 for the three
months ended March 31, 2017 and 2016, respectively of which $93,681 and $86,679 are reported in cost of revenue, respectively.
|
5.
|
INTANGIBLE ASSETS, NET
|
Identifiable intangible assets comprise
of the following at March 31, 2017 and December 31, 2016:
|
|
March
31, 2017
|
|
|
|
December
31, 2016
|
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
book value
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
book value
|
Intangible
assets with determinable lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content
provider and photographic agreements
|
|
$
|
400,000
|
|
|
$
|
70,000
|
|
|
$
|
330,000
|
|
|
$
|
400,000
|
|
|
$
|
60,000
|
|
|
$
|
340,000
|
Copyrights
|
|
|
35,000
|
|
|
|
6,125
|
|
|
|
28,875
|
|
|
|
35,000
|
|
|
|
5,250
|
|
|
|
29,750
|
Total
|
|
$
|
435,000
|
|
|
$
|
76,125
|
|
|
$
|
358,875
|
|
|
$
|
435,000
|
|
|
$
|
65,250
|
|
|
$
|
369,750
|
Amortization expense in connection
with the photographic agreements and copyrights for each of the three months ended March 31, 2017 and 2016 was $10,875 and is included
in depreciation and amortization expense in the consolidated statements of operations. Estimated amortization expense over the
next five years is $43,500 per year.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(unaudited)
On September 28, 2015, the Company
entered into a promissory note agreement for working capital purposes with an unrelated party for total proceeds of $150,000. The
note matured on September 28, 2016. Effective September 28, 2016, the note was extended to March 31, 2017 and is secured by approximately
240,000 vintage photographs. Interest accrues at the rate of 10% per annum and is payable monthly beginning October 28, 2015. Interest
expense was $3,750 and $3,750 at March 31, 2017 and 2016, respectively. Effective July 31, 2017 the note was extended to December
31, 2017 and is currently past due.
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 matured on December 31, 2017 and is currently past due, bears interest at the rate of 10% per annum, and is payable on the
1st day of each month commencing in February 2016. On February 15, 2016, the Company entered into an additional promissory
note agreement with the unrelated party for additional proceeds of $62,500 under the same terms as the first note. The notes are
secured by certain inventory and archival images of the Company in the amount of up to $200,000. Interest expense was $4,563 and
$3,563 at March 31, 2017 and 2016, respectively. As of the date of this filing this note is still outstanding and currently in
default.
In April 2016, the Company entered
into two unsecured promissory note agreements with unrelated parties for working capital purposes for total proceeds of $75,000.
The promissory notes matured in December 2017 and is currently past due and bear interest at the rate of 6% per annum. Interest
expense was $1,125 and $0 at March 31, 2017 and 2016, respectively.
On April 7, 2016, an unrelated party
advanced the Company $75,000 plus an original issue discount of $25,000 for the purchase of a Marilyn Monroe archive. The advance
is secured by the archive for which it was used and is to be repaid on or before April 7, 2017. As of May 3, 2017, the note was
extended to December 31, 2017 and is currently past due. The Company has agreed to pay 50% of the proceeds derived from the Marilyn
Monroe archives up to a guaranteed total of $100,000. Once the $100,000 is paid, the Company has no further obligations. As of
March 31, 2017, the balance of $100,000 remains outstanding. During three months ended March 31, 2017, $12,466 of the discount
has been amortized to interest expense. The note is shown net of the unamortized portion of the discount of $699 as of March 31,
2017.
On February 24, 2017, the Company
entered into a short-term unsecured note with an unrelated party for working capital purposes for total proceeds of $25,000. During
the three months ended March 31, 2017, the Company repaid $27,000, including $2,000 in interest expense. As of March 31, 2017,
the note has been paid in full.
|
7.
|
RELATED PARTY TRANSACTIONS
|
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 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, 2017 and 2016 is $3,750 and $4,800, respectively. 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, 2017 and 2016, amortization expense in
connection with the loan fees totaled $0 and $2,001, respectively. Effective July 20, 2016 the note was extended to December 31,
2017 and is currently past due. We considered ASC Topic 470-50, Debt Modifications and Extinguishments, and determined that the modification is not considered
substantially different under the guidance and as such extinguishment accounting was not applied.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2017 and 2016
(unaudited)
On August 1, 2013 the Company
entered into an unsecured promissory note agreement with a related party Dino Satallante for $100,000. The loan bears interest
at the rate of 5% per annum. During three months ended March 31, 2017, $3,830 of note principal was repaid. As of March 31, 2017,
and December 31, 2016 and 2015, $72,354 and $76,183 was outstanding under the unsecured promissory note agreement, respectively.
Interest expense for the three months ended March 31, 2017 and 2016 was $904 and $1,260 respectively. The loan matured on July
14, 2014 and was extended to July 31, 2016. Effective July 31, 2016, the note agreement was extended to December 31, 2017 and is
currently past due. We considered ASC Topic 470-50, Debt Modifications and Extinguishments, and determined that the modification is not considered
substantially different under the guidance and as such extinguishment accounting was not applied.
Effective September 11, 2014
the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties,
Dreamstar an entity owned and controlled by Sam Battistone, a Company officer and director and a principal shareholder, and
Dino Satallante, a beneficial interest shareholders of the Company, for working capital purposes. The loans bear interest at
the rate of 6% per annum. The loans matured on September 10, 2015, and were extended to December 31, 2016. In December 2016,
both loans were extended to December 31, 2017 and are currently past due. We considered ASC Topic 470-50, Debt Modifications
and Extinguishments, and determined that the modification is not considered substantially different under the guidance and as
such extinguishment accounting was not applied. At March 31, 2017 and December 31, 2016, $20,500 and $18,100 was outstanding
to Dino Satallante and Dreamstar, respectively. Interest expense in connection with the two unsecured promissory note
agreements for the three months ended March 31, 2017 and 2016 was $579 and $579, respectively.
On April 4, 2016 the Company
entered into a secured promissory note agreement with Premier Collectibles, a beneficial interest shareholder for total
proceeds of $65,000 to be used for acquisition of archive agreement. The promissory note bears interest at the rate of 8% per
annum, is secured by the archive collection which the proceeds were used and matured on April 1, 2017. The note was extended
to July 31, 2017 and is currently past due. We considered ASC Topic 470-50, Debt Modifications and Extinguishments, and
determined that the modification is not considered substantially different under the guidance and as such extinguishment
accounting was not applied. Interest expense on the note was $1,300 and $0 for the three months ended March 31, 2017 and
2016, respectively.
On April 15, 2016, the Company entered
into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds of $50,000.
The promissory note bears interest at the rate of 6% per annum and matured on December 15, 2017 and is currently past due. Interest
expense was $745 and $0 for the three months ended March 31, 2017 and 2016, respectively.
On October 3, 2016, the Company
entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds
of $50,000. The promissory note bears interest at the rate of 6% per annum and matured on December 31, 2017 and is currently past
due. Interest expense was $750 and $0 for the three months ended March 31, 2017 and 2016, respectively.
On December 2, 2016, the Company
entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds
of $31,500. The promissory note bears interest at the rate of 6% per annum and matured on December 31, 2017 and is currently past
due. Interest expense was $473 and $0 for the three months ended March 31, 2017 and 2016, respectively.
Due From/To Related Parties
The following table summarizes amounts
due to the Company from related parties related to contractual agreements and amounts due to related parties for expenses paid
for on the behalf of the Company as of March 31, 2017 and December 31, 2016. During the three month ended March 31, 2017 and 2016,
the Company was advanced $50,275 and $17,000 and repaid $250 and $0, respectively. The amounts due are non-interest bearing and
due upon demand. These amounts have been included in the consolidated balance sheets as current assets due from related parties
and current liabilities due to related parties, respectively.
On March 8, 2016, the Company
entered into a Listing Agreement with Royalty Network, LLC, doing business as Royalty Exchange for auction of a 50% ownership of
photographic copyrights of certain celebrity archival images owned by the Company. In addition, the sale also assigns the winning
bidder the right to receive 50% of the future share of income derived from the assigned images.
During 2016, the Company
received gross proceeds of $396,000, less 12.5% auction broker fee, from five separate auctions of these rights. The Company retains
all exclusive licensing authority over the images and may exercise a buyback option to buy back the 50% ownership of the rights
for two times the original auction proceeds over a period ranging from 1 to 2 years. During the quarter ended March 31, 2017 and
2016, the Company paid out royalties of $4,134 and $0, respectively, to the winning bidders.
The Company accounted for the 50% profit
consideration for the above agreement in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to
be amortized under the interest method as described in ASC 835-30, Interest Method. The Company determined an effective interest
rate based on future expected cash flows to be paid to the loan holders. This rate represents the discount rate that equates estimated
cash flows with the initial proceeds received from the loan holders and is used to compute the amount of interest to be recognized
each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions
about future revenues and such estimates are subject to significant variability. Therefore, the estimates are likely to change
which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of
the related loans.
Accordingly, the
Company has estimated the cash flows associated with the images and determined a discount of $151,316 which is being accounted
as interest expense over a 10 year estimated life of the asset based on expected future revenue streams. For the three months ended
March 31, 2017, interest expense related to this loan amounted to $5,502 which has been included in interest expense in the consolidated
statements of operations. During the three months ended March 31, 2017, the Company made payments of $4,134 to the loan holders.
As of March 31, 2017, loans payable, net of unamortized debt discount amounted $351,186.
On March 3, 2017, the Company entered
into an agreement to sell 20% of its ownership in certain photographic archive asset for $200,000. As part of the agreement the
buyer will be reimbursed the entire purchase price over a period of 24 months from any profits generated from the related asset.
If however the entire purchase price is not paid back after 24 months then all net revenues from the Company will be paid to the
buyer until the full purchase price has been paid.
The Company accounted for the above transaction as debt and recognized
the amount received as a loan payable. As of March 31, 2017, the outstanding balance of the loan amounted to $200,000.
Effective June 1, 2016 the
Company entered into three separate non-exclusive license agreements use of licensed images and trademarks through December 31,
2019. Under the terms of the agreements, the Company is required to pay royalties of 10% on net sales. The agreements call for
combined annual guaranteed
minimum
royalties per year of $150,000 based on combined
minimum
sales of $1,500,000 per year. 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 of $75,000 was paid during the three months ended March
31, 2017.
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. The Company also rents office space
on a month-to-month basis in New York at rate of $850 per month.
Total rent expense for three months
ended March 31, 2017 and 2016 was $13,175 and $18,320, respectively, in connection with the operating lease agreements.
Future minimum lease payments related to the Company’s
office leases as of March 31, 2017 are as follows:
The Company is authorized to issue up
to 450,000,000 shares of common stock with a par value of $0.0001. As of March 31, 2017, and December 31, 2016, there were 325,570,524
and 325,570,524 shares of common stock issued and 325,523,466 and 325,570,524 outstanding, respectively.
As of March 31, 2017, the Company repurchased
47,058 shares of common stock for $16,000 related to the Globe Photo Asset Purchase Agreement entered into on July 22, 2015.
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, 2017, there were no shares of Preferred Stock issued and outstanding.