Notes to Consolidated Financial Statements
March 31, 2018 and 2017
(unaudited)
1.
|
ORGANIZATION AND BUSINESS OPERATIONS
|
Capital Art, Inc. (“we”,
“our”, the “Company”) sells and manages classic and contemporary, limited edition photographic images and
reproductions, with a focus on iconic celebrity images. The Company also makes available its images for publications and 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 unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the
normal course of business.
Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate,
as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Company's
ability to continue as a going concern. The Company's ability to continue as a going concern is dependent on the Company's
ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide
sufficient cash flows to enable the Company to finance its operations internally. As of March 31, 2018, the Company had $7,490
cash on hand, an accumulated deficit of $3,451,649 and working capital deficit of $2,118,811. Though the Company had a net income of $71,006 for the three months ended March 31, 2018, it incurred negative
cash flows from operations of $111,417. 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.
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|
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, 2017
as
filed with the SEC pursuant to Rule 12(b) under the Securities Act of 1934.
The consolidated balance sheet as of
December 31, 2017, included herein was derived from the audited financial statements as of that date, but does not include all
disclosures including notes required by GAAP.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2018 and 2017
(unaudited)
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 ending December 31, 2018.
The accompanying unaudited
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 Photos, LLC as of and for the three months ended March
31, 2018 and 2017. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and also requires disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Inventory
The Company’s inventory is comprised
of rare photos of movie stars and other famous people, and is stated at the lower of cost or net realizable value. Direct labor
and raw material costs associated with the process of making the photos available for sale are also included in inventory at cost.
These costs are expensed to cost of sales pro-ratably as sold.
Revenue Recognition
The Company recognizes revenue related to product sales
when (i) the seller's price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product,
(iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance
to directly bring about the resale of the product by the buyer. Cost of sales, rebates and discounts are
recorded at the time of revenue recognition or at each financial reporting date. On January 1, 2018, the Company adopted Topic
606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results
for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted
and continue to be reported in accordance with our historic accounting under Topic 605
We did not have a cumulative impact as of January 1,
2018 due to the adoption of Topic 606 and there was not an impact to our consolidated statement of operations for the three months
ended March 31, 2018 as a result of applying Topic 606.
The Company's other revenue represent payments based on net sales from brand licensees
for content reproduction rights. These license agreements are held in conjunction with third parties that are responsible
for collecting fees due and remitting to the Company its share after expenses. Revenue from licensed products is recognized
when realized or realizable based on royalty reporting received from licensees. Revenues from royalties during the three months
ended March 31, 2018 and 2017 were insignificant. During the quarter ended March 31, 2018, the Company recognized $250,000
in revenue which were recorded as deferred revenue and other debt as of December 31, 2017.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2018 and 2017
(unaudited)
Deferred Revenue
Deferred revenue consists of amounts
that have been invoiced but that have not yet been recognized as revenue as of the period end. The majority of the Company's deferred
revenue balance consists of product revenue from auction sales and amounts related to asset purchase agreements.
Basic and Diluted Income (Loss) per Share
The Company computes income and loss
per share in accordance with ASC 260 - Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per
share (“EPS”) on the face of the consolidated statements of operations. Basic EPS is computed by dividing net loss
available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method
and convertible preferred stock using the if-converted method. Diluted EPS excludes all dilutive potential shares if their effect
is antidilutive. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because
they are antidilutive.
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock:
|
|
March 31, 2018
|
|
March 31, 2017
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
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Numerator:
|
|
|
|
|
|
|
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Income (loss) allocated to common shareholders
|
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$
|
71,006
|
|
|
$
|
(257,340)
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Total
|
|
|
|
|
|
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Denominator:
|
|
|
|
|
|
|
|
Number of shares used in per share computation
|
|
|
325,355,361
|
|
|
|
325,523,466
|
Basic net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.00)
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Income (loss) allocated to common shareholders
|
|
$
|
71,006
|
|
|
$
|
(257,340)
|
Adjusted Income (loss) allocated to common shareholders
|
|
$
|
71,006
|
|
|
$
|
(257,340)
|
|
|
|
|
|
|
|
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Denominator:
|
|
|
|
|
|
|
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Weighted-average shares
|
|
|
325,355,361
|
|
|
|
325,523,446
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Add:
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|
|
|
|
|
|
|
Options
|
|
|
95,784
|
|
|
|
—
|
Adjusted weighted average shares
|
|
|
325,451,145
|
|
|
|
325,523,446
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Diluted net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.00)
|
Recent Accounting Pronouncements
In November 2016, the FASB issued ASU
2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the
total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash
equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15,
2017 with early adoption permitted.
Management evaluated ASU 2016-18 and determined that the adoption
of this new accounting standard did not have a material impact on the Company’s consolidated financial statements.
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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:
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Fair Value Measurements at March 31, 2018
|
|
|
|
|
|
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Quoted Prices in Active Markets for Identical Assets
|
|
|
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Significant Other Observable Inputs
|
|
|
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Significant Unobservable Inputs
|
|
|
|
Total
|
|
|
|
(Level 1)
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|
|
|
(Level 2)
|
|
|
|
(Level 3)
|
Put option derivative liability
|
|
$
|
4,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,810
|
|
|
Fair Value Measurements at December 31, 2017
|
|
|
|
|
|
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Quoted Prices in Active Markets for Identical Assets
|
|
|
|
Significant Other Observable Inputs
|
|
|
|
Significant Unobservable Inputs
|
|
|
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Total
|
|
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(Level 1)
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|
|
|
(Level 2)
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|
|
|
(Level 3)
|
Put option derivative liability
|
|
$
|
9,195
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,195
|
The following table provides a summary
of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair
value on a recurring basis using significant unobservable inputs:
|
|
Fair Value Measurements Using Significant
Unobservable Inputs
|
|
|
(Level 3)
|
|
|
|
Embedded
Derivative Liability
|
|
|
|
March
31,
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
|
2017
|
Balance beginning of period
|
|
$
|
9,195
|
|
|
$
|
57,922
|
Change in fair market value of derivative liability
|
|
|
(4,385
|
)
|
|
|
(48,727)
|
Balance end of period
|
|
$
|
4,810
|
|
|
$
|
9,195
|
The Company’s derivative instruments were valued using
the Black-Scholes option pricing model. Assumptions used in the valuation include the following: a) market value of stock on measurement
date of $0.17; b) risk-free rate of 1.63%; c) volatility factor of 276%; d) dividend yield of 0% and e) remaining term of 0.14
years.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2018 and 2017
(unaudited)
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment
as of March 31, 2018 and December 31, 2017 comprise of the following:
|
|
March 31,
|
|
December 31,
|
|
Estimated Useful
|
|
|
2018
|
|
2017
|
|
Lives
|
Frank Worth Collection
|
|
$
|
2,770,000
|
|
|
$
|
2,770,000
|
|
|
10 years
|
Other archival images
|
|
|
939,343
|
|
|
|
939,343
|
|
|
10 years
|
Leasehold improvements
|
|
|
12,446
|
|
|
|
12,446
|
|
|
7 years
|
Computer and other equipment
|
|
|
72,687
|
|
|
|
72,687
|
|
|
3 – 5 years
|
Furniture and fixtures
|
|
|
83,666
|
|
|
|
83,666
|
|
|
7 years
|
|
|
|
3,878,142
|
|
|
|
3,878,142
|
|
|
|
Less accumulated deprecation
|
|
|
(1,487,911
|
)
|
|
|
(1,384,918
|
)
|
|
|
Total archival images, property and equipment, net
|
|
$
|
2,390,231
|
|
|
$
|
2,493,224
|
|
|
|
Depreciation expense was $102,993 and
$101,259 for the three months ended March 31, 2018 and 2017, respectively, of which $96,279 and $93,681 are reported in cost of
revenue, respectively.
|
5.
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INTANGIBLE ASSETS, NET
|
Identifiable intangible assets comprise
of the following at March 31, 2018 and December 31, 2017:
|
|
December 31, 2018
|
|
|
|
December 31, 2017
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Net book value
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Net book value
|
Intangible assets with determinable lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Content provider and photographic agreements
|
|
$
|
400,000
|
|
|
$
|
110,000
|
|
|
$
|
290,000
|
|
|
$
|
400,000
|
|
|
$
|
100,000
|
|
|
$
|
300,000
|
Copyrights
|
|
|
35,000
|
|
|
|
9,625
|
|
|
|
25,375
|
|
|
|
35,000
|
|
|
|
8,750
|
|
|
|
26,250
|
Total
|
|
$
|
435,000
|
|
|
$
|
119,625
|
|
|
$
|
315,375
|
|
|
$
|
435,000
|
|
|
$
|
108,750
|
|
|
$
|
326,250
|
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2018 and 2017
(unaudited)
Amortization expense in
connection with the photographic agreements and copyrights for each of the three months ended March 31, 2018 and 2017 was
$10,875 and is included in cost of revenue in the consolidated statements of operations. Estimated
amortization expense over the next five years is $43,500 per year.
On
September 28, 2015, the Company entered into a promissory note agreement for working capital purposes with an unrelated party for
total proceeds of $150,000. The note matured on September 28, 2016. Effective September 28, 2016, the note was extended to March
31, 2017 and is secured by approximately 240,000 vintage photographs. Interest accrues at the rate of 10% per annum and is payable
monthly beginning October 28, 2015. Accrued interest payable due under the note agreement was $15,154
at
March 31, 2018 and December 31, 2017. The note was further extended to July 31, 2017 and then to December 31, 2017.
Effective March 30, 2018, the note was extended to June 30, 2018.
On April 1, 2016, the
Company entered into an unsecured promissory note agreement with an unrelated party for working capital purposes for
total proceeds of $25,000. The promissory note matured in December 2017 and on March 30, 2018 was extended through June 30,
2018 and bear interest at the rate of 6% per annum. Accrued interest payable due under the unsecured note agreement was
$3,005 and $2,630 as of March 31, 2018 and December 31, 2017, respectively.
On April 7, 2016, an unrelated
party advanced the Company $75,000 plus an original issue discount of $25,000 for the purchase of a Marilyn Monroe archive. The
advance is secured by the archive for which it was used and is to be repaid on or before April 7, 2017. As of May 3, 2017, the
note was extended to December 31, 2017 and as of March 28, 2018, was further extended to June 30, 2018. The Company has agreed
to pay 50% of the proceeds derived from the Marilyn Monroe archives up to a guaranteed total of $100,000. Once the $100,000 is
paid, the Company has no further obligations. As of March 31, 2018 and December 31, 2017, a balance of $20,000 remains outstanding,
respectively.
On December 20, 2017, the Company
entered into a short-term unsecured note with an unrelated party for working capital purposes for total proceeds of $10,000. As
of March 31, 2018, the note was still outstanding.
The Company evaluated the modification
of the notes resulting from the extensions in maturity dates under ASC 470-50 and determined that the modifications were not considered
substantial and would not qualify for extinguishment accounting under such guidance.
7.
|
RELATED PARTY TRANSACTIONS
|
Notes payable to related parties
In
December 2015, the Company entered into a secured promissory note agreement with an unrelated party for working capital
purposes for total proceeds of $120,000. The note bears interest at the rate of 10% per annum, and is payable on the 1st day
of each month commencing in February 2016. On February 15, 2016, the Company entered into an additional promissory note
agreement with the same unrelated party for additional proceeds of $62,500 and under the same terms as the first note. As of
March 31, 2018 and December 31, 2017, the balance of $162,500 remains outstanding. Both notes are secured by certain
inventory and archival images of the Company in the amount of up to $200,000. Accrued interest payable due under the
unsecured note agreement was $38,474 and $34,412 as of March 31, 2018 and December 31, 2017, respectively. The notes matured
on December 31, 2017; however, on January 22, 2018, the outstanding balance on the notes was purchased by a
related
party (ICONZ Art, LLC, beneficial interest shareholder) and the notes were extended to June 30, 2018. Interest accrued
through December 31, 2017 is still due to the original noteholder.
On April 5, 2016, the Company entered into an unsecured promissory note agreement with an unrelated party
for working capital purposes for total proceeds of $50,000. The promissory note matured in December 2017 and bear interest at the
rate of 6% per annum. However, on January 22, 2018, the outstanding balance on the notes was purchased by a related party (
ICONZ
Art, LLC, beneficial interest shareholder) and the note was extended to June 30, 2018. Accrued interest payable due under the unsecured
note agreement was $5,895 and $5,228 as of March 31, 2018 and December 31, 2017, respectively. Interest accrued through December
31, 2017 is still due to the original note hol
der.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2018 and 2017
(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 the three months ended March 31, 2018, the Company made a payment of $3,740 on the outstanding principal.
As of March 31, 2018 and December 31, 2017, $57,395 and $61,135 was outstanding under the unsecured promissory note agreement,
respectively. Interest expense for the three months ended March 31, 2018 and 2017 was $717 and $906 respectively. The loan matured
on July 14, 2014 and was extended to July 31, 2016 and then to December 31, 2017. Effective March 30, 2018, the note agreement
was extended to June 30, 2018.
Effective September 11, 2014 the
Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties, Dreamstar an
entity owned and controlled by Sam Battistone, a Company officer and director and a principal shareholder, and Dino Satallante,
a beneficial interest shareholder of the Company, for working capital purposes. The loans bear interest at the rate of 6% per annum.
The loans matured on September 10, 2015, and were extended to December 31, 2016. In December 2016, both loans were extended to
December 31, 2017 and on March 30, 2018, the notes were extended to June 30, 2018. At March 31, 2018 and December 31, 2017, $20,500
and $18,100 was outstanding to Dino Satallante and Dreamstar, respectively. Interest expense in connection with the two unsecured
promissory note agreements for each of the three months ended March 31, 2018 and 2017 was $579.
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 each of the three months
ended March 31, 2018 and 2017 was $4,800. Per the terms of the agreement the Company incurred loan fees totaling $8,000 which were
fully amortized in 2016. Effective March 30, 2018 the note was extended to June 30, 2018.
On April 4, 2016 the Company entered
into a secured promissory note agreement with Premier Collectibles, a beneficial interest shareholder for total proceeds of $65,000
to be used for acquisition of archive agreement. The promissory note bears interest at the rate of 8% per annum, is secured by
the archive collection which the proceeds were used and matured on April 1, 2017. On March 30, 2018, the note was extended to June
30, 2018. Interest expense on the note was $1,300 for each of the three months ended March 31, 2018 and 2017.
On
April 15, 2016, the Company entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder,
for total proceeds of $50,000. The promissory note bears interest at the rate of 6% per annum and matured on December 15, 2017,
however, on January 22, 2018, the outstanding balance on the notes was purchased by another related party
(ICONZ
Art, LLC, beneficial interest shareholder) and the n
otes were extended to June 30, 2018. Interest expense was $750 and
$745 for the three months ended March 31, 2018 and 2017, respectively. Interest accrued through December 31, 2017 is still due
to the original note holder.
On October 3, 2016, the Company entered
into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds of $50,000.
The promissory note bears interest at the rate of 6% per annum and matured on December 31, 2017, however, on January 22, 2018,
the outstanding balance on the notes was purchased by another related party (ICONZ Art, LLC, beneficial interest shareholder) and
the notes were extended to June 30, 2018. Interest expense was $750 for each of the three months ended March 31, 2018 and 2017.
Capital Art, Inc.
Notes to Consolidated Financial Statements
March 31, 2018 and 2017
(unaudited)
On
December 2, 2016, the Company entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder,
for total proceeds of $31,500. The promissory note bears interest at the rate of 6% per annum and matured on December 31, 2017,
however, on January 22, 2018, the outstanding balance on the notes was purchased by another related party (
ICONZ Art, LLC,
beneficial interest shareholder
) and the notes were extended to June 30,
2018. Interest expense was $473 for each of the three months ended March 31, 2018 and 2017, respectively. Interest accrued through
December 31, 2017 is still due to the original note holder.
The
Company evaluated the modification of the notes resulting from the extensions in maturity dates under ASC 470-50 and determined
that the modifications were not considered substantial and would not qualify for extinguishment accounting under such guidance.
Due
To Related Parties
The following table summarizes amounts
due to related parties for cash advances and expenses paid
for on the behalf of the Company as of March 31, 2018 and December 31, 2017. The amounts due are non-interest bearing and due upon
demand. These amounts have been included in the consolidated balance sheets as current assets due from related parties and current
liabilities due to related parties, respectively.
On March 8, 2016, the Company
entered into a Listing Agreement with Royalty Network, LLC, doing business as Royalty Exchange for auction of a 50% ownership of
photographic copyrights of certain celebrity archival images owned by the Company. In addition, the sale also assigns the winning
bidder the right to receive 50% of the future share of income derived from the assigned images.
During 2016, the Company
received gross proceeds of $396,000, less 12.5% auction broker fee, from five separate auctions of these rights. The Company retains
all exclusive licensing authority over the images and may exercise a buyback option to buy back the 50% ownership of the rights
for two times the original auction proceeds over a period ranging from 1 to 2 years.
The Company accounted
for the 50% profit consideration for the above agreement in accordance with ASC 470-10-25 and 470-10-35 which requires amounts
recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. The Company determined
an effective interest rate based on future expected cash flows to be paid to the loan holders. This rate represents the discount
rate that equates estimated cash flows with the initial proceeds received from the loan holders and is used to compute the amount
of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make
certain estimates and assumptions about future revenues and such estimates are subject to significant variability. Therefore, the
estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized
cost based carrying value of the related loans.
Accordingly, the Company
has estimated the cash flows associated with the images and determined a discount of $151,316 which is being accounted as interest
expense over a 10-year estimated life of the asset based on expected future revenue streams. For the three months ended March 31,
2018 and 2017, interest expense related to these loans amounted to $1,603 and $5,502, respectively, which has been included in interest
expense and a corresponding increase in loans payable. During the quarter ended March 31, 2018 and 2017, the Company made payments
of $2,000 and $4,134 to the loan holders, respectively. As of March 31, 2018, loan payable net of unamortized debt discount amounted
$363,408.
On March 3, 2017, the Company
entered into an agreement to sell 20% of its ownership in a certain photographic archive asset for $200,000. As part of the agreement
the buyer received preferential distributions of their entire purchase price of the asset. If however the entire purchase price
is not paid back after 24 months then all net revenues from the Company will be paid to the buyer until the full purchase price
has been paid. During the three months ended March 31, 2018, the Company entered into an addendum to the agreement to remove the
preferential distributions clause from the agreement. Additionally, on May 1, 2018, the Company entered into a second addendum
to the agreement whereby the Company agreed to repay the seller the total purchase price of $200,000 and issue 1,000,000 shares
of the Company’s common stock within 120 days of the effective date of the agreement.
The Company accounted
for the above transaction as debt and recognized the amount received as a loan payable. As of March 31, 2018, the outstanding
balance on this liability amounted to $200,000.
On July 21, 2017, the Company entered
into an agreement to sell 25% of its ownership in a certain photographic archive asset for $175,000. As part of the agreement
the buyer received preferential distributions of their entire purchase price of the asset plus a 30% return. If however the entire
purchase price is not paid back after 24 months then all net revenues from the Company will be paid to the buyer until the full
purchase price plus a 30% return has been paid. During the three months ended March 31, 2018, the Company entered into an addendum
to the agreement to remove the preferential distributions clause from the agreement. Effectively, the buyer obtained full ownership
of the photographic archive asset consisting mainly of vintage original photographs and the Company no longer has an obligation
to repay the buyer. Consequently, the Company determined that it no longer has any performance obligations as it relates to the
sale of the asset. As such, the Company has reclassified the debt to revenue for the three months ended March 31, 2018.
Effective June 1, 2016 the Company
entered into three separate non-exclusive license agreements use of licensed images and trademarks through December 31, 2019. Under
the terms of the agreements, the Company is required to pay royalties of 10% on net sales. The agreements call for combined annual
guaranteed minimum royalties per year of $150,000 based on combined minimum sales of $1,500,000 per year. As of March 31, 2018,
the Company has paid $25,000 toward the guaranteed royalties.
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, 2018 and 2017 was $13,695 and $13,175, respectively, in connection with the operating lease agreements.
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, 2018, there were no shares of Preferred Stock issued and outstanding.
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, 2018, and December 31, 2017, there were 325,241,112
and 325,570,524 shares of common stock issued and outstanding, respectively.
During the three months ended March 31,
2018, the Company repurchased 70,588 shares of common stock for $24,000 related to the Globe Photo Asset Purchase Agreement entered
into on July 22, 2015. As of March 31, 2018, a total of 329,412 shares repurchased by the Company for $112,000 and recorded as
treasury stock were cancelled.
On April 13, 2018, the Company issued
an unsecured $150,000 note payable to an unrelated party. The note is due upon demand and carry an interest rate of 15%.
On May 1, 2018, the Company
entered into a second addendum to the $200,000 asset purchase agreement originally entered into on March 3, 2017, whereby the
Company agreed to repay the seller the total purchase price of $200,000 and 1,000,000 shares of common stock within 120 days of
the effective date of the agreement.
On May 15, 2018, the Company’s
Board of Directors secured waivers and cancelled agreements entered into on March 30, 2018, for the grant of 15,283,333 options.