UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

  

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ____________.

 

 

Commission File Number: 000-1527844

 

CAPITAL ART, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		27-0746744
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
6445 South Tenaya Way, B-130 Las Vegas, Nevada	89113	702-722-6113
(Address of principal executive office)	(Zip Code)	(Registrant’s telephone number, Including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o  Yes      x   No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o   Yes      x   No

 

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

 

Large accelerated filer  o	Accelerated filer o
Non-accelerated filer  o	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes      x  No

 

As of January 14, 2016, the registrant had outstanding 325,341,224 shares of common stock, 0.0001 par value.

 

CAPITAL ART, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2015

 

 

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial statements (unaudited)	4
	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 (unaudited)	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months and six months ended June 30, 2015 and June 30, 2014 (unaudited)	5
	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2015 and June 30, 2014 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and June 30, 2014 (unaudited)	7
	Notes to the Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	22
Item 4.	Controls and Procedures	22
PART II – OTHER INFORMATION		23
Item 6.	Exhibits	23
SIGNATURES		24

 

 

FORWARD-LOOKING STATEMENTS

 

 

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. The words “expect,” “believe,” “plan,” “intend,” “estimate,” “anticipate,” “propose,” “seek” and similar words and variations thereof, when used, are intended to specifically identify forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties, including but not limited to those set forth in our Form 10, as amended, filed with the SEC pursuant to Rule 12(b) under the Securities Act of 1934. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure you that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We do not undertake any obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

 

The terms the “Company”, “we,” “us,” “our” “Capital Art” or “CAPA”, and derivatives thereof, as used herein refer to Capital Art, Inc., a Delaware corporation.

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2015 and December 31, 2014

(UNAUDITED)

 

 

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

 

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

 

 

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Revenues		$	35,040			$	62,100			$	376,282			$	163,168
Cost of revenues			42,378				41,993				116,276				81,070
Gross profit			(7,338	)			20,107				260,006				82,098
Operating expenses:
Product development, sales and marketing			197,131				5,900				350,206				15,462
General and administrative			197,219				45,807				412,243				80,760
Depreciation and amortization expense			94,406				18,138				187,606				35,405
Total operating expenses			488,756				69,845				950,055				131,627
Loss from operations			(496,094	)			(49,738	)			(690,049	)			(49,529	)
Other income (expense):
Interest and other income			4				–				660				–
Interest expense			(1,830	)			(1,886	)			(6,700	)			(2,672	)
Total other income (expense)			(1,826	)			(1,886	)			(6,040	)			(2,672	)
Net loss before income taxes			(497,920	)			(51,624	)			(696,089	)			(52,201	)
Income taxes			–				–				–				–
Net loss		$	(497,920	)		$	(51,624	)		$	(696,089	)		$	(52,201	)
Basic and diluted loss per common share		$	–			$	–			$	–			$	–
Weight average basic and diluted shares outstanding			322,010,151				256,400,226				320,383,974				256,400,226

 

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

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

JUNE 30, 2015 and JUNE 30, 2014

(UNAUDITED)

 

 

							Additional			Common			Retained			Total
	Common Stock						Paid-in			Stock			Earnings			Shareholders'
	Shares			Amount			Capital			Subscribed			(Deficit)			Equity
BALANCE DECEMBER 31, 2013		256,400,226		$	25,640		$	466,865		$	–		$	9,255		$	501,760
Net loss		–			–			–			–			(52,201	)		(52,201	)
BALANCE JUNE 30, 2014		256,400,226		$	25,640		$	466,865		$	–		$	(42,946	)	$	449,559
BALANCE DECEMBER 31, 2014		311,973,283		$	31,197		$	3,239,961		$	300,000		$	(371,072	)	$	3,200,086
Common shares issued for services		2,470,000			247			165,753			–			–			166,000
Common shares issued to related party for finder's fee		200,000			20			9,980			–			–			10,000
Common shares issued for settlement of accrued liabilities		2,525,000			253			125,997			–			–			126,250
Common shares issued for cash		7,820,000			782			390,218			(300,000	)		–			91,000
Net loss		–			–			–						(696,089	)		(696,089	)
BALANCE JUNE 30, 2015		324,988,283		$	32,499		$	3,931,909		$	–		$	(1,067,161	)	$	2,897,247

 

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

 

 

CAPITAL ART, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		June 30,
		2015				2014
Cash flows from operating activities:
Net income (loss)		$	(696,089	)		$	(52,201	)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization			187,606				35,405
Stock-based compensation to non-employees			176,000				–
Loss on sale of fixed assets			2,942
Changes in assets and liabilities:
Accounts receivable			10,044				147
Inventory			5,107				10,552
Prepaids and other			(100,083	)			1,515
Accounts payable			20,419				(6,941	)
Accrued liabilities			(157,172	)			15,687
Net cash (used in) provided by operating activities			(551,226	)			4,164
Cash flows from investing activities:
Purchase of archival images, property and equipment			(69,762	)			(51,941	)
Net cash used by investing activities			(69,762	)			(51,941	)
Cash flows from financing activities:
Short-term advances from related parties, net			(49,496	)			(2,992	)
Proceeds from sale of common stock			391,000				–
Distributions to members			–				–
Proceeds notes payable to related parties			–				30,000
Net cash provided by financing activities			341,504				27,008
Net decrease in cash			(279,484	)			(20,769	)
Cash at beginning of year			340,523				20,919
Cash at end of period		$	61,039			$	150
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest to related party		$	5,480			$	2,027
Common shares issued for settlement of accrued liabilities		$	126,250			$	–

 

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

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in the condensed consolidated financial statements for the three and six months ended June 30, 2015 should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form 10, as amended, filed with the SEC pursuant to Rule 12(b) under the Securities Act of 1934.

 

The condensed consolidated balance sheet as of December 31, 2014, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

 

The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2015.

 

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 six months ended June 30, 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.

 

Reverse Merger

 

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

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
(Unaudited)		2015				2014				2015				2014
Supplement pro forma combined results of operations:
Net sales		$	35,040			$	110,245			$	376,282			$	246,925
Net loss			(497,919	)			(152,727	)			(696,089	)			(463,585	)
Basic and diluted loss per common share		$	–			$	–			$	–			$	–

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

 

Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the condensed consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of June 30, 2015 the Company had $61,039 cash on hand. At June 30, 2015 the Company has a retained deficit of $1,067,161. For the six months ended June 30, 2015 the Company had a net loss of $696,089 and cash used in operations of $551,226. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Over the next twelve months the Company intends to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations.

 

Inventory

 

The Company’s inventory is comprised of rare photos of movie stars and other famous people. Direct labor and raw material costs associated with the process of making the photos available for sale are also included in inventory at cost. These costs are expensed to cost of sales pro-ratably as sold.

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In such situations, long-lived assets are considered impaired when future undiscounted cash flows resulting the use of the asset and its eventual disposition are less than the asset’s carrying amount. In such situations, the asset is written down to the present value of the estimated future cash flows. Factors that are considered when evaluating long-lived assets for impairment include a current expectation that it is more likely than not that the long-lived asset will be sold significantly before the end of its useful life, a significant decrease in the market price of the long-lived asset, and a change in the extent of manner in which the long-lived asset is being used. Based on management’s assessment there were no impairments at June 30, 2015 and December 31, 2014.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09 – Revenues from Contracts with Customers, which introduces a new five-step framework for revenue recognition. The core principle of the standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled for those goods or services. The ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard, as amended in ASU No. 2015-14, is effective for annual reporting periods after December 15, 2017. Management does not believe the adoption of ASU No. 2014-09 will have a material impact on the Company’s consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements–Going Concern, (Subtopic 204-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU requires management to evaluate each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU No. 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Management does not believe the adoption of ASU No. 2014-15 will have a material effect on the consolidated financial statements.

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement–Period Adjustments. The amendments in ASU No. 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in ASU No. 2015-16 require that an acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in ASU No. 2015-16 require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been reported in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU No. 2015-16 is effective for financial statements issued for annual periods beginning after December 15, 2015, including interim periods within those fiscal years. Management does not believe the adoption of ASU No. 2015-16 will have a material effect on the Company’s consolidated financial statements

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Tax. ASU No. 2015-17 was issued by the FASB as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments of ASU 2015-17. ASU No, 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016. Management does not believe the adoption of ASU No. 2015-17 will have a material effect on the Company’s consolidated financial statements.

 

2.

Basic and Diluted Income and Loss per Share

 

The Company computes income and loss per share in accordance with ASC 260 - Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the condensed consolidated statements of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. Diluted EPS excludes all dilutive potential shares if their effect is antidilutive. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Basic weighted average common shares outstanding			322,010,151				256,400,226				320,383,974				256,400,226
Effect of dilutive securities			–				–				–				–
Diluted weighted average common and potential common shares outstanding			322,010,151				256,400,226				320,383,974				256,400,226

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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

 

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

 

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

 

3.

ARCHIVAL IMAGES, AND PROPERTY AND EQUIPMENT

 

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

 

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

 

 

4.

FRANK WORTH COLLECTION

 

On November 12, 2014, the Frank Worth Estate agreed to accept $155,000 and 200,000 common shares, with a fair value of $0.05 per share ($10,000), of the Company’s common stock in exchange for sole and exclusive, world-wide, royalty free rights to all negatives, prints, products and other materials the Company possesses including the use of the Frank Worth seal, Frank Worth’s name, likeness, publications and biography plus merchandising and selling rights. $30,000 due under the agreement for royalties was paid in January 2015. The remainder of $125,000 and 200,000 ($10,000) shares of common stock were due and payable on or before May 31, 2015, which is being held by the Company until a dispute between the Estate and an unrelated party of the Company is settled. The Company has no involvement in the dispute.

 

 

5.

ACCRUED LIABILITIES

 

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

 

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

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation of 5,500,000 shares of the Company’s common stock (See Note 8 – Shareholders’ Equity) and limited edition photographs for aggregate retail fair value of $250,000. The Company evaluated the transaction under the guidance in ASC 845-Nonmonetary Transactions. ASC 845 requires fair value of nonmonetary exchanges be recorded based on fair value inherent in the transaction. The Company determined the aggregate retail fair value of the prints totaling $250,000 represented the fair value of the reciprocal transfer between the Company and the consultant. The prints were earned upon execution of the agreement, and were delivered in March 2015, and included in revenues in the Company’s unaudited condensed consolidated statement of operations as of June 30, 2015.

 

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

 

 

6.

NOTES PAYABLE TO RELATED PARTIES

 

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%. The loan matured on July 14, 2014 and was extended to July 31, 2016. As of June 30, 2015 and December 31, 2014, $100,000 was outstanding under the unsecured promissory note agreement. Interest expense for the three and six months ended June 30, 2015 was $1,225 and $2,485, respectively. For the three and six months ended June 30, 2014 interest expense was $1,241 and $2,027, respectively.

 

Effective September 11, 2014 the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties, Dreamstar and Dino Satallante, both beneficial interest shareholders of the Company, for working capital purposes. The loans bear interest at 6% per annum. The loans mature on September 10, 2015, and were extended to December 31, 2016. See Note 10 – Subsequent Events. As of June 30, 2015, $20,500 and $20,500 was outstanding to Dino Satallante and Dreamstar, respectively. Total interest expense in connection with the two unsecured promissory note agreements for the three and six months ended June 30, 2015 was $605 and $1,220, respectively.

 

As of June 30, 2015 and December 31, 2014, interest payable in connection with the unsecured promissory note agreements with related parties was $2,381 and $748, respectively, and is included in accrued liabilities in the Company’s condensed consolidated balance sheets.

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

7.

RELATED PARTY TRANSACTIONS

 

Due From/To Related Parties

 

The following table summarizes amounts due to the Company from related parties for funds advanced by the Company on behalf of related parties and funds advanced from related parties for short-term working capital purposes as of June 30, 2015 and December 31, 2014. These amounts have been included in the condensed consolidated balance sheets as current assets due from related parties and current liabilities due to related parties, respectively, and are due on demand.

 

		June 30,				December 31,
		2015				2014
Due from related parties:
Dino Satallante, beneficial interest shareholder		$	1,350			$	1,350
ICONZ Art, LLC, beneficial interest shareholder			13,735				–
Sam Battistone, beneficial interest shareholder			966				966
Stuart Scheinman, President of the Company and beneficial interest shareholder			2,379				–
Klaus Moeller, related party of pre-merger CAPA and beneficial interest shareholder			91,000				91,000
Total due from related parties		$	109,430			$	93,316
Due to related parties:
ICONZ Art, LLC, beneficial interest shareholder		$	2,014			$	2,014
Klaus Moeller, related party of pre-merger CAPA			521				4,562
MSN Holding Co., beneficial interest shareholder			28,272				28,272
Premier Collectibles, beneficial interest shareholder			85				85
Stuart Scheinman, President of the Company and beneficial interest shareholder			–				29,341
Total due to related parties		$	30,892			$	64,274

 

 

8.

SHAREHOLDERS’ EQUITY

 

Preferred Stock

 

The Company is authorized to issue up to 50,000,000 shares of preferred stock authorized with a par value of $0.0001. The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by the Company’s stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by the board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, and conversion rights. As of June 30, 2015, there were no shares of Preferred Stock issued and outstanding.

 

Stock Purchase Agreement

 

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

 

 

 

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Private Placement

 

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

 

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

 

Stock-based and Other Compensation to Non-Employees

 

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

 

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

 

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

 

On January 2, 2015 the Company entered into a fixed price agreement with a consultant for website development services for total contract price of $193,000 payable in cash of $40,000 and 510,000 shares of the Company’s common stock with a stated fair value of $0.30 per share. As of June 30, 2015, 170,000 shares of common stock with fair value of $51,000 were issued. 340,000 shares of common stock were unissued for $102,000 which is included in accrued liabilities in the unaudited condensed consolidated balance sheets. See Note 5 – Accrued Liabilities.

 

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

 

9.

Concentrations of Credit Risk and Financial Instruments

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.

 

The Company’s cash balances are placed at financial institutions, which at times, may exceed federally insured limits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash.

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant is to receive compensation limited edition photographs for aggregate retail fair value of $250,000. The Company evaluated the transaction under the guidance in ASC 845-Nonmonetary Transactions. ASC 845 requires fair value of nonmonetary exchanges be recorded based on fair value inherent in the transaction. The Company determined the aggregate retail fair value of the prints totaling $250,000 represented the fair value of the reciprocal transfer between the Company and the consultant. See Note 5 – Accrued Liabilities. The Company delivered the limited edition prints to the consultant in March 2015, which accounted for 66% of total revenues for the six months ended June 30, 2015. No other distributor or customer accounted for over 10% of total revenues for the three and six months ended June 30, 2015 and 2014.

CAPITAL ART, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

On May 11, 2015 the Company entered into an exclusive marketing agreement with a distributor to distribute the Company’s vintage original fine art prints to fine art dealers and collector auction houses, as well as private third party collectors. Under the terms of the agreement the distributor is to receive 50% of the gross receipts from sales generated by the distributor.

 

As of June 30, 2015, and December 31, 2014, accounts receivable balances were not material to the Company’s condensed consolidated financial statements. There is significant financial risk associated with a dependence upon a small number of distributors and customers which could have an adverse effect on the Company’s future consolidated financial statements if these distributors were to leave. The Company’s intends to continue its investment in sales and marketing in order to increase distribution and demand for its products and adding content to its product lines, along with adding additional channels of distribution.

 

 

10.

SUBSEQUENT EVENTS

 

Management has evaluated subsequent events, as defined by ASC 855, Subsequent Events, through the date on which the financial statements were available to be issued.

 

Asset Purchase Agreement

 

On July 22, 2015, the Company entered into an Asset Purchase Agreement with Globe Photos, Inc. (“Globe”), a New York corporation, for purchase of substantially all of the assets, which principally comprises of photographer contracts granting the Company the right to exploit copyrights, digital and tangible photographs, and related copyrights and trademarks, of Globe Photo for total purchase price of $400,000 payable in $250,000 cash and $150,000 common stock of the Company.

 

Per the agreement, $180,000 in cash shall be held in reserve by the Company against Globe’s full performance and compliance with all terms of the agreement. This amount is to be released to Globe at the rate of $10,000 per month beginning August 22, 2015.

 

The Common stock is to be transferred to Globe sixty (60) days after closing subject to satisfaction of successful termination of certain subagent agreements by Globe. The seller retained these certain subagent agreements, but was not able to successfully terminate these agreements. As such, the amount payable in common stock of the Company was reduced by $30,000, thereby reducing the total purchase price of the assets acquired from $400,000 to $370,000. Under the terms of the Agreement the Company issued 352,941 shares of its common stock based on the closing price of the Company’s common shares as traded on the OTC market on the measurement date July 22, 2015 of $0.34 per share for total of $120,000.

 

The Company evaluated the Asset Purchase Agreement in accordance with ASC 805 – Business Combinations which notes the threshold requirements of a business combination that includes the expanded definition of a “business” and defines elements that are to be present to be determined whether an acquisition of a business occurred. No “activities” of Globe were acquired. Instead, the Company obtained control of a set of inputs (the acquired assets). Thus the Company determined agreement is an acquisition of assets, not an acquisition of a business in accordance with ASC 805.

 

As a form of liquidity protection, Globe shall have limited put options in connection with the common stock beginning eighteen (18) months after the closing date, whereas the Company shall have up to fifteen (15) successive monthly options, with no less than thirty (30) days notice for each, which requires the Company to repurchase from Globe up to 1/15^th of the shares of common stock in Globe’s possession that were granted in connection with the agreement, at a price per share equity to the market price per share ($0.34) on the effective date of the original share transfer to Globe. The exercise of any put option is not conditioned upon exercise of any prior put option.

 

Note Payable

 

On September 28, 2015, the Company entered into an unsecured promissory note agreement for working capital purposes with an unrelated party for total proceeds of $150,000. The note matures on September 28, 2016. Interest accrues at the rate of 10% per annum and is payable monthly beginning October 28, 2016.

 

Notes Payable to Related Parties

 

Effective July 21, 2015, the Company entered into a promissory note agreement with 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 was used for working capital purposes. The note matures on July 20, 2016, with monthly interest only payments commencing beginning August 20, 2015 at the rate of 12% per annum. The note is secured by the Globe Photo Assets. Per the terms of the agreement the Company incurred loan fees totaling $8,000 to be amortized over the term of the loan.

 

Effective September 11, 2014 the Company entered into two separate unsecured promissory note agreements for $20,500 each with two related parties, Dreamstar and Dino Satallante, both beneficial interest shareholders of the Company, for working capital purposes. The loans matured on September 10, 2015, and were extended to December 31, 2016.

 

 

Item 2.              Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. See “Forward Looking Statements” on page 3 of this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Our consolidated financial statements included elsewhere in this report have been prepared assuming that we will continue as a going concern. 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Over the next twelve months the Company intends to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations.

 

Business Overview

 

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

 

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

 

Significant Transaction

 

On July 22, 2015, the Company entered into an Asset Purchase Agreement with Globe Photos, Inc. (“Globe”), a New York corporation, for purchase of substantially all of the assets of Globe for total purchase price of $400,000 payable $250,000 in cash and $150,000 in common stock of the Company at said market price . The common stock was to be transferred to Globe sixty (60) days after closing subject to satisfaction of successful termination of certain subagent agreements by Globe, which occurred on one deal and not the other resulting in a reduction of $30,000 less in stock, resulting in a final 352,941 shares ($120k of stock at $0.34/share). Per the agreement $180,000 in cash shall be held in reserve by the Company against Globe’s full performance and compliance with all terms of the agreement. This amount is to be released to Globe at the rate of $10,000 per month beginning August 22, 2015.

 

 

Sales and Distribution

 

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

 

Intellectual Property

 

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

 

 

Results of Operations

 

Our business is in its early stages and consequently our financial results are difficult to compare from one period to the next. We expect such period-to-period differences to continue to be significant over the next several quarters, until we have a number of full years of operations.

 

Results of Operations

 

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

 

Our summary results are presented below:

 

	Three Months Ended June 30,												Six Months Ended June 30,
	2015			2014			Change			% Change			2015			2014			Change			% Change
Revenues	$	35,040		$	62,100		$	(27,060	)		(43.57	)%	$	376,282		$	163,168		$	213,114			130.61.%
Costs and operating expenses		(531,134	)		(111,838	)		419,296			374.91	%		(1,066,331	)		(212,697	)		853,634			401.34%
Loss from operations		(496,094	)		(49,738	)		446,356			897.41%			(690,049	)		(49,529	)		640,5200			1,293.22%
Interest income (expense), net		(1,826	)		(1,887	)		(61	)		(3.23	)%		(6,040	)		(2,672	)		3,368			126.05%
Net loss	$	(497,920	)	$	(51,625	)	$	446,295			864.49%		$	(696,089	)	$	(52,201	)	$	643,8888			1,233.48%
Basic and diluted loss per common share	$	–		$	–								$	–		$	–
Weighted average basic and diluted shares outstanding		322,010,151			256,400,226									320,383,974			256,400,226

 

 

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

 

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

 

The Company derives its revenues from sales of its classic and contemporary limited edition photographic images and reproductions, with a focus on iconic celebrity images, through specialized fine art dealers and distributors, which includes, but is not limited to, third-party galleries, art consultants, and interior decorators, or directly to end consumers.

 

During the three months ended June 30, 2015, revenues decreased $27,060 (43.57%) to $35,040 from $62,100 for the same period in 2014. Product sales from third party on-line retailers accounted for 73% and 100%, respectively, of total sales for the three months ended June 30, 2015 and 2014. Sales to private end consumers accounted for 13% of total revenues for the three months ended June 30, 2015, while sales from private auction houses accounted for 8%. The remaining 6% of total revenues were derived from third party licensing fees.

 

For the six months ended June 30, 2015 total revenues increased $213,114 (130.61%) to $376,282 from $168,168 for the same period in 2014. For the six months ended June 30, 2015, product sales from third party on-line retailers and private end consumers accounted for 73% and 14%, respectively, of total revenues.

 

On August 15, 2014, pre-merger CAPA entered into a four-month agreement for strategic management services with a consultant. In connection with the agreement, the consultant received compensation of limited edition photographs for an aggregate retail fair value of $250,000. The Company evaluated the transaction under the guidance in ASC 845-Nonmonetary Transactions. ASC 845 requires fair value of nonmonetary exchanges be recorded based on fair value inherent in the transaction. The Company determined the aggregate retail fair value of the prints totaling $250,000 represented the fair value of the reciprocal transfer between the Company and the consultant. The prints were earned upon execution of the agreement, and were delivered in March 2015, and accounted for 66% of total revenues for the six months ended June 30, 2015.

 

100% of total revenues for the six months ended June 30, 2014 were product sales generated from third party on-line retailers.

 

 

For the three and six months ended June 30, 2015 total revenues excluding the fair value of the limited edition photographs to the consultant were $35,040 and $126,282, respectively, compared to total revenues for the three and six months ended 2014 of $62,100 and $163,168, total revenues decreased $27,060 and $36,886, respectively. The Company’s product sales are generated through sale of limited edition or reproductions from it’s a diverse collection of classic and contemporary limited edition photographic images and reproductions, with a focus on iconic celebrity images, which each sale is unique and driven by customer demand for certain, and often obscure, images. In private and online auction sales the Company stimulates buyer interest through marketing and sells the item to the highest bidder. In the case of generic photographs or reproductions, the Company sells the print at a fixed price which is based on the popularity and demand of the celebrity in the image. Excluding the fair value of the prints to the consultant, the decrease in revenues for the three and six months ended June 30, 2015 compared to the same period in 2014 was in part as a result of decreased volume of items sold due to the transition and integration of operations due to the reverse merger. The Company continues to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products and in adding content to its product along with adding additional channels of distribution, resulting in increases in volumes of goods being sold.

 

Fees paid to third party on-line retailers for the three months ended June 30, 2015 and 2014 were $6,041 and $12,629, respectively. For the six months ended June 30, 2015, fees paid to third party on-line retailers were $16,212 and $30,536, respectively. Selling and auction fees are included in cost of revenues and will vary depending on the online or auction house fee structure.

 

However, there is no guarantee the Company will generate sufficient revenues to continue operations. The Company estimates it will need approximately $1,000,000 in annual revenues to continue operations at its current operating level, without consideration given to investment in new sales and marketing channels. For the immediate future the Company plans to achieve this revenue target by ramping up fees earned from licensing imagery to media companies growing a network of global sales agents. The Company expects to continue incurring significant operating losses for the near future. If the Company is not successful in achieving revenues required to continue operations at its current operating levels within three to four months, or obtain additional financing, the Company’s operations will be significantly impacted, and the Company will be required to eliminate its headcount, and significantly scale back its operations, including up to the possibility of seeking a buyer for its vast collections and winding down its operations.

 

Costs and Operating Expenses.

 

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

 

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

 

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2015				2014				Change				% Change				2015				2014				Change				% Change
Prints, framing and related costs		$	11,079			$	6,937			$	4,142				59.71%			$	48,911			$	15,579			$	33,332				213.95%
Selling and auction fees			6,041				12,629				(6,588	)			(52.17%	)			16,212				30,536				(14,324	)			(46.91%	)
Cost of fulfillment and shipping			25,258				22,427				2,831				12.62%				51,153				34,955				16,198				46.34%
Total cost of revenues		$	42,378			$	41,993			$	385				0.91%			$	116,276			$	81,070			$	35,206				43.43%

 

 

 

Costs of revenues increased $385 (0.91%) to $42,378 for the three months ending June 30, 2015 compared to $41,993 for the same period in 2014. For the six months ended June 30, 2015, cost of revenues increased $35,206 (43.43%) to $116,276 from $81,070 for the same period 2014.

 

Gross profit as a percentage of total revenues was (21%) and 32% for the three months ended June 30, 2015 and 2014. For the six months ended June 30, 2015 and 2014, gross profit as a percentage of total revenues was 69% and 50%. Cost of sales mix will vary depending on the Company’s revenue mix.

 

The Company’s negative gross profit as a percentage of total revenues for the three months ended June 30, 2015 compared to the same period in 2014 is due to payroll costs associated with fulfillment labor costs on total revenues of $35,040. As the Company works with various channels to distribute its product, it continues to negotiate deals to reduce its overall fulfillment costs.

 

For the six months ended June 30, 2015 and 2014, gross profit as a percentage of revenues was 69% and 50%, respectively. Cost of revenues for the six months ended June 30, 2015 compared to 2014 increased due to costs associated with the limited edition photographs for an aggregate retail fair value of $250,000 delivered to the consultant in March 2015.

 

Prints, framing and related costs comprise of product cost associated with the Company’s sales of its classic and contemporary limited edition photographic images, costs associated with reproduction of archival images for sale, framing and other related costs. For the three months ended June 30, 2015 costs associated with prints, framing and related costs increased $4,142 to $11,079 (59.71%) from $6,937 during the same three month period in 2014. Costs associated with prints, framing and related costs increased $33,332 (213.95%) to $48,911 for the six months ended June 30, 2015 compared $15,579 during the same period in 2014.

 

Fees paid to third party on-line retailers for the three months ended June 30, 2015 and 2014 were $6,041 and $12,629, respectively. For the six months ended June 30, 2015 and 2014, selling and auction fees were $16,212 and $30,536, respectively. Selling and auction fees will vary depending on the online or auction house fee structure.

 

Product development, sales and marketing expenses increased $191,231 (3,241.20%) to $197,131 for the three months ending June 30, 2015 compared to $5,900 for the same period in 2014. For the six months ended June 30, 2015 product development, sales and marketing expenses increased $334,744 (2,164.95%) to $350,206 compared to $15,462 for the same period in 2014. Product development, sales and marketing expenses primarily consists of website development costs, sales and marketing salaries, as well as other expenses associated with marketing. The Company continues to utilize its working capital resources in sales and marketing in order to increase the distribution and demand for its products and to add content to its product lines along with adding additional channels of distribution.  

 

On October 8, 2014 the Company entered into a reverse merger transaction. The operating expenses presented for the three and six months ended June 30, 2014 represent Movie Star News, LLC that operated as a private company prior to the reverse merger transaction, as compared to the combined company presented for the three and six months ended June 2015.

 

General and administrative costs increased $151,412 (330.54%) to $197,219 for three months ended June 30, 2015 compared to $45,807 in the same period 2014. The increase for the three months ended June 30, 2015 compared to 2014 comprise primarily of costs associated with the reverse merger, legal and accounting fees ($64,000); costs associated with investor relations, including fees, expenses and stock compensation ($25,000); and management consultants, administrative payroll and related costs ($34,000); and stock compensation to non-employee consultants totaling $15,000. The remainder of the increase is primarily due to general administrative expenses and increased costs associated with the Company’s facilities, insurance and other supplies during the three months ending June 30, 2015 compared to the same period in 2014.

 

For the six months ended June 30, 2015, general and administrative costs increased $331,483 (410.45%) to $412,243 from $80,760 in the same period 2014. The increase for the six months ended June 30, 2015 is primarily due to costs associated with the reverse merger, legal and accounting fees ($145,000); costs associated with investor relations, including fees, expenses and stock compensation ($80,000), management consultants, administrative payroll and related costs ($58,000); and stock compensation to non-employee consultants totaling $15,000. The remainder of the increase is primarily due to general administrative expenses and increased costs associated with the Company’s facilities, travel expenses, insurance and other supplies in 2015 over the same period in 2014.

 

Depreciation expense increased $76,268 (420.49%) and $152,201 (429.89%) for the three and six months ended June 30, 2015, respectively, from $18,138 and $35,405 in the same period 2014, respectively. The increase in depreciation expense for the three and six months ended June 30, 2015 compared to the same period in 2014 is primarily due to depreciation of the Company’s archival images, comprising primarily of the Frank Worth Collection acquired in the reverse merger transaction entered into on October 8, 2014. Depreciation expense related to the Frank Worth Collection for the three months ended June 30, 2015 was $69,250. For the six months ended June 30, 2015, depreciation expense related to the Frank Worth Collection was $138,500. The Company records archival images, and property and equipment at cost for purchases over $500. Archival images, property and equipment are depreciated using the straight-line method over the estimated useful lives ranging from three to ten years. The Company capitalizes direct costs associated with improvements to archival images, and property and equipment in accordance with ASC 360 – Property, Plant, and Equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful life or the term of the related lease.

 

 

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

 

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

 

 

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

 

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

 

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

 

Liquidity and Capital Resources

 

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

 

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

 

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

 

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

 

Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the condensed consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of June 30, 2015 the Company had $61,039 cash on hand. At June 30, 2015 the Company has a retained deficit of $1,067,161. For the six months ended June 30, 2015 the Company had a net loss of $696,089 and cash used in operations of $551,226. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

 

Over the next twelve months the Company intends to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. As part of increasing its product offerings, the Company has been and continues to search for photographic archives that are undervalued by the market. These archives may be acquired outright or the Company may enter into representation or consignment agreements with the owners of the archives. These opportunities are typically (1) aging photographers who are looking to monetize their archive while still alive via a single large transaction, or (2) media companies that have aggregated assets (or rights to assets) and are seeking to dispose of the archive or a partner who can help them grow cash flows related to the archive. These opportunities exist both in the United States and abroad and the Company continues to search for value wherever it may be geographically located.

 

However, there is no guarantee the Company will generate sufficient revenues to continue operations. The Company estimates it will need approximately $1,000,000 in annual revenues to continue operations at its current operating level, without consideration given to investment in new sales and marketing channels. For the immediate future the Company plans to achieve this revenue target by ramping up fees earned from licensing imagery to media companies by growing a network of global sales agents. The Company expects to continue incurring significant operating losses for the near future. If the Company is not successful in achieving revenues required to continue operations at its current operating levels within three to four months, or obtain additional financing, the Company’s operations will be significantly impacted, and the Company will be required to eliminate its headcount, and significantly scale back its operations, including up to the possibility of seeking a buyer for its vast collections and winding down its operations.

 

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

 

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

 

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

 

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

 

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

 

 

Item 3.              Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.              Controls and Procedures

 

(a)

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

 

(b)

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

 

PART II – OTHER INFORMATION

 

Item 6.              Exhibits

      

Exhibit
Number	Description
3.01	Certificate of Incorporation, dated September 20, 2004
3.02	Certificate of Amendment to Certificate of Incorporation, dated December 2, 2004
3.03	Certificate of Amendment to Certificate of Incorporation, dated February 11, 2005
3.04	Certificate of Amendment to Certificate of Incorporation, dated April 30, 2007
3.05	Certificate of Amendment to Certificate of Incorporation, dated December 7, 2009
3.06	Certificate of Amendment to Certificate of Incorporation, dated April 28, 2011
3.07	Bylaws
10.01	Promissory Note Issued to K. Moeller, dated September 15, 2009
10.02	Amendment to Promissory Note Issued to K. Moeller, dated September 15, 2011
10.03	Amendment to Promissory Note Issued to K. Moeller, dated September 14, 2013
10.04	Membership Interest Purchase Agreement by and between the Members of Capital Art, LLC and Gleeworks, Inc., dated April 25, 2011
10.05	Memorandum of Understanding by and between the Estate of Frank Worth and Capital Art, Inc., dated October 10, 2011
10.06	Photographic Reproduction and Marketing Rights Agreement by and between Capital Art, Inc. and the Estate of Frank Worth, dated November 18, 2011
10.07	Purchase Agreement by and among Capital Art, Inc., International Images Ltd. and Birchley Limited, dated December 21, 2011
10.08	Deed of Variation by and among Capital Art, Inc., International Images Ltd. and Birchley Limited, dated February 28, 2013
10.09	Form of Securities Purchase Agreement (10% Convertible Debentures)
10.10	Form of 10% Convertible Debenture (Expiring December 2015)
10.11	Asset Purchase Agreement by and between Capital Art, Inc. and Movie Star News, LLC, dated October 8, 2014
10.12	Asset Purchase Agreement, between Globe Photos, Inc. and Capital Art, Inc., effective July 22, 2015
21.	Subsidiaries
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instances Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *

 

* Filed herewith

 

 

SIGNATURES

 

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

 

Date: January 21, 2016

 

 

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