The accompanying notes are an integral part of these unaudited consolidated financial statements
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
1.
|
ORGANIZATION AND BUSINESS OPERATIONS
|
Globe Photos, 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.
On June 6, 2018, we filed a Certificate
of Merger with the Secretary of State of Delaware in order to effectuate a merger with our wholly-owned subsidiary, Globe Photos,
Inc. Shareholder approval was not required pursuant to the Delaware General Corporation Law. As part of the merger, our board of
directors authorized a change in our name to “Globe Photos, Inc.” and our Certificate of Incorporation has been amended
to reflect this name change.
On October 11, 2018,
we acquired substantially all of the assets of Photo File, Inc. (“Photo File”), a New York corporation, a 30-year-old
New York-based licensed sports photography company. As part of the Photo File transaction, we acquired licenses to produce and
sell licensed sports prints, lithographs and other related items for major U.S. sports leagues, including the NFL, NBA, MLB, and
NHL Properties and their respective player associations, as well as most major college sports teams. We also gained licenses from
thousands of individuals and organizations, including Babe Ruth, Joe Namath, Vince Lombardi, Marvel Entertainment, Nickelodeon
and others. The acquisition also significantly expanded our collection of company-owned iconic sports photography.
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, 2019, the Company had $378,014 cash on hand. At March
31, 2019 the Company has an accumulated deficit of $7,630,950. For the three months ended March 31, 2019, the Company had a net
loss of $3,593,178 and cash used in operations of $690,028. 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.
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP)
and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain
information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have
been condensed or omitted pursuant to such rules and regulations. As such, the information included in the consolidated financial
statements for the three months ended March 31, 2019 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, 2018, as filed
with the SEC.
The consolidated balance sheet as of December
31, 2018, included herein was derived from the audited financial statements as of that date, but does not include all disclosures
including notes required by GAAP.
The accompanying unaudited consolidated
financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations,
and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the
year ending December 31, 2019.
The accompanying unaudited
consolidated financial statements represent the results of operations, financial position and cash flows of Globe Photos, Inc.
prepared on the accrual basis of accounting and conform to accounting principles generally accepted in the United States of America.
The consolidated financial statements include the financial statements of the Company, and its 100% owned subsidiaries Capital
Art, LLC, Globe Photos, LLC, and Photo File, LLC. All inter-company balances and transactions have been eliminated.
Reclassifications
Certain prior
year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect
on the reported results of operations.
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.
Revenue Recognition
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 year ended December 31, 2018 as a result of applying Topic 606.
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
We recognize revenue
in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”)
Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five basic
criteria be met before revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations
in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or
as the entity satisfied a performance obligation.
Revenue recognition
occurs at the time product is shipped to customers, when control transfers to customers, provided there are no material remaining
performance obligations required of the Company or any matters of customer acceptance. We only record revenue when collectability
is reasonably assured.
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.
Recent Accounting Pronouncements
In February 2016, the
FASB issued ASU 2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases
on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model,
requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated
to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including
guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal
years beginning after December 15, 2018.
We adopted ASC 842
effective January 1, 2019 using the optional transition method of recognizing a cumulative-effect adjustment to the opening balance
of retained earnings on January 1, 2019. Therefore, comparative financial information was not adjusted and continues to be reported
under the prior lease accounting guidance in ASC 840. We elected the transition relief package of practical expedients, and as
a result, we did not assess 1) whether existing or expired contracts contain embedded leases, 2) lease classification for any
existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term
lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less.
|
3.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The Company measures
fair value in accordance with Accounting Standards Codification (“ASC”) 820 – Fair Value Measurements. ASC 820
defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurements. ASC 820 establishes
a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value
hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair
value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by ASC 820 are:
Level 1 — Inputs are unadjusted,
quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Inputs (other than quoted
market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation
with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 — Inputs reflect management’s
best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments
includes unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
As defined by ASC 820,
the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to
sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants
at the measurement date.
The reported fair values
for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety of factors and assumptions.
Accordingly, certain fair values may not represent actual values of the Company’s financial instruments that could have been
realized as of March 31, 2019 or that will be recognized in the future, and do not include expenses that could be incurred in an
actual settlement. The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable,
receivables from related parties, prepaid expenses and other, accounts payable, accrued liabilities, and related party and third-party
notes payables approximate fair value due to their relatively short maturities. The Company’s notes payable to related parties
approximates the fair value of such instrument based upon management’s best estimate of terms that would be available to
the Company for similar financial arrangements at March 31, 2019 and December 31, 2018.
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Estimated
|
|
|
|
2019
|
|
|
2018
|
|
|
Useful Lives
|
|
Frank Worth Collection
|
|
$
|
2,770,000
|
|
|
$
|
2,770,000
|
|
|
10 years
|
|
Other archival images
|
|
|
4,601,768
|
|
|
|
4,576,768
|
|
|
5-10 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
|
|
|
|
|
7,540,567
|
|
|
|
7,515,567
|
|
|
|
|
Less accumulated depreciation
|
|
|
(2,251,603
|
)
|
|
|
(1,981,887)
|
|
|
|
|
Total property and equipment, net
|
|
$
|
5,288,964
|
|
|
$
|
5,533,680
|
|
|
|
|
Depreciation expense
was $269,716 and $102,993 for the three months ended March 31, 2019 and 2018, respectively, of which $261,190 and $96,279
are reported in cost of revenue, respectively.
5.
|
PHOTO FILE ASSET PURCHASE AGREEMENT
|
On October 11,
2018, the Company entered into a definitive Asset Purchase Agreement with Photo File, Inc., a New York corporation along with
it related entity Sportophotos.com and Charles Singer, its CEO and principal shareholder (collectively, the
“Seller”) wherein the Company acquired certain assets and assumed certain liabilities of the Seller in exchange
for $2,000,000. In connection with the agreement, the Company paid $1,515,000 to the Seller as of December 31, 2018 toward
the purchase price of the Asset Purchase Agreement. The final payment of $485,000 which was due was recorded as a payable to
Photo File, Inc. as of March 31, 2019 and December 31, 2018 in the consolidated balance sheet.
As additional consideration
the seller also received the following:
|
·
|
A royalty to Seller that commences upon the initial $6,000,000 in sales from the Nevada subsidiary, with a fair value of $4,279,000.
|
|
·
|
10% interest in the Nevada subsidiary that we have formed to house the assets
|
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
Additionally, the
seller will endeavor to sell its Vintage Photographic Collection over time after Closing. If at the completion of the sale
of the Vintage Photographic Collection, proceeds from net sales but before any expenses other than commissions are less than $2,000,000,
the Company will pay the difference between the proceeds and $2,000,000 within 30 days. Any proceeds above $2,000,000 will be
divided equally between Seller and the Company with the Seller remitting 50% of the net proceeds after expenses of those
sales within 30 days of their receipt. As of December 31, 2018, the Company has recorded the entire $2,000,000 as a contingent
purchase consideration.
The following table
summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired and liabilities assumed.
Cash
|
|
|
2,000,000
|
|
10% Interest in sub
|
|
|
2,750,000
|
|
Royalty payments
|
|
|
4,279,000
|
|
Contingent consideration
|
|
|
2,000,000
|
|
Total Purchase Price
|
|
|
11,029,000
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
313,257
|
|
Other assets
|
|
|
–
|
|
Memorabilia
|
|
|
3,600,000
|
|
Copyright Image library
|
|
|
4,100,000
|
|
Trade name
|
|
|
340,000
|
|
Non-Compete agreement
|
|
|
90,000
|
|
Outbound license agreement
|
|
|
9,000,000
|
|
Customer relationships
|
|
|
2,330,000
|
|
Total Identifiable assets
|
|
|
19,773,257
|
|
|
|
|
|
|
Liabilities
|
|
$
|
(1,447,491
|
)
|
Total liabilities assumed
|
|
$
|
(1,447,491
|
)
|
|
|
|
|
|
Total net assets
|
|
$
|
18,325,766
|
|
|
|
|
|
|
Total bargain purchase gain
|
|
$
|
(7,296,766
|
)
|
Pro Forma
The following table
below shows the unaudited pro-forma information which assumes that the acquisition had been completed as of January 1, 2018.
|
|
For the
three months
ended
|
|
|
|
March 31, 2018
|
|
|
|
|
|
Total revenue
|
|
|
2,884,744
|
|
Cost of revenue
|
|
|
1,334,597
|
|
Gross margin
|
|
|
1,550,147
|
|
Total operating expenses
|
|
|
1,268,591
|
|
Other income (expenses)
|
|
|
(15,135
|
)
|
Net income
|
|
|
266,421
|
|
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
|
6.
|
INTANGIBLE ASSETS, NET
|
|
|
March 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net book value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net book value
|
|
Intangible assets with determinable lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content provider and photographic agreements
|
|
$
|
400,000
|
|
|
$
|
150,000
|
|
|
$
|
250,000
|
|
|
$
|
400,000
|
|
|
$
|
140,000
|
|
|
$
|
260,000
|
|
Copyrights
|
|
|
35,000
|
|
|
|
13,125
|
|
|
|
21,875
|
|
|
|
35,000
|
|
|
|
12,250
|
|
|
|
22,750
|
|
Internal use software
|
|
|
58,667
|
|
|
|
-
|
|
|
|
58,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Copyrighted Image Library
|
|
|
4,100,000
|
|
|
|
203,315
|
|
|
|
3,896,685
|
|
|
|
4,100,000
|
|
|
|
102,500
|
|
|
|
3,997,500
|
|
Non-Compete and Non-Solicitation Covenants
|
|
|
90,000
|
|
|
|
14,878
|
|
|
|
75,122
|
|
|
|
90,000
|
|
|
|
7,500
|
|
|
|
82,500
|
|
Trade name
|
|
|
340,000
|
|
|
|
–
|
|
|
|
340,000
|
|
|
|
340,000
|
|
|
|
–
|
|
|
|
340,000
|
|
License agreements
|
|
|
9,000,000
|
|
|
|
297,534
|
|
|
|
8,702,466
|
|
|
|
9,000,000
|
|
|
|
150,000
|
|
|
|
8,850,000
|
|
Customer relationships
|
|
|
2,330,000
|
|
|
|
231,085
|
|
|
|
2,098,915
|
|
|
|
2,330,000
|
|
|
|
116,500
|
|
|
|
2,213,500
|
|
Total
|
|
$
|
16,353,667
|
|
|
$
|
909,937
|
|
|
$
|
15,443,730
|
|
|
$
|
16,295,000
|
|
|
$
|
528,750
|
|
|
$
|
15,766,250
|
|
Total amortization
expense for the three months ended March 31, 2019 and 2018 was $381,186 and $10,875, respectively and is included in cost of sales
in the consolidated statements of operations. Estimated amortization expense over the next five years is $1,549,500 per
year.
On April 1, 2016,
the Company entered into an unsecured promissory note agreement with unrelated parties for working capital purposes for total
proceeds of $25,000. The promissory notes matured on December 1, 2017 and on March 30, 2018 was extended through June 30, 2018
and on June 30, 2018 was further extended to December 31, 2018, and on December 31, 2018, the note was further extended to June
30, 2019. The notes bear interest at the rate of 6% per annum. Accrued interest payable due under the unsecured note agreement
was $4,505 and $4,130 as of March 31, 2019 and December 31, 2018, respectively.
On December 20, 2017,
the Company entered into an on demand unsecured note with an unrelated party for working capital purposes for total proceeds of
$10,000. As of March 31, 2019, and 2018, the note was still outstanding.
On April 13, 2018,
the Company entered into an unsecured promissory note agreement with an unrelated party for total proceeds of $150,000 of which
is still outstanding as of December 31, 2018. The note is due upon demand and carried an interest rate of 15% and is guaranteed
by a shareholder and director of the Company. Accrued interest payable due under the unsecured note agreement was $22,500 and $22,500
as of March 31, 2019 and December 31, 2018
, respectively.
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
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.
From July 2018 to December
31, 2018, we issued convertible promissory notes in the aggregate principal amount of $2,782,050 to several accredited investors
through a private placement. This includes the convertible note of $50,000 issued to settle an existing account payable. During
the three months ended March 31, 2019, we issued an additional $651,050 notes under the same private placement.
The convertible notes
bear interest at a rate of 10% per annum, mature on April 30, 2019 and are secured by certain archival images owned by the Company.
The notes and accrued interest are convertible at the option of the noteholder into our common stock at $0.10 per share but will
mandatorily convert to common stock at the same price upon an up list to a national exchange and will have piggyback registration
rights to register the shares of common stock underlying the conversion of the notes.
The Company evaluated
the convertible debentures under ASC 470-20 and recognized a debt discount of $3,029,628 related to the beneficial conversion
feature (“BCF”), of which $572,924 was recorded during the three months ended March 31, 2019, with a corresponding
credit to additional paid-in capital. The debt discount is being accreted to interest expense over the term of the notes.
As part of the private
placement, the Company paid a consultant financing fees equivalent to 12% of the gross proceeds received from the issuance of convertible
notes or $403,472, of which $78,126 was recorded during the three months ended March 31, 2019 and was recorded as a debt discount
and accreted to interest expense over the term of the notes.
During the three
months ended March 31, 2019 and 2018, the Company recorded interest expense of $1,452,303 of which $1,376,029 was related
to the accretion of the debt discount and financing cost. As of December 31, 2018, the convertible notes are shown net of unamortized
debt discount and financing cost of $667,908.
On August 16, 2018,
we issued a convertible promissory note with a principal amount of $500,000 to a company managed by one of our former directors.
The note bear interest at a rate of 10% per annum, mature on April 30, 2019 and is secured by certain archival images owned by
the Company. The note and accrued interest are convertible at the option of the noteholder into our common stock at $0.10 per share
but will mandatorily convert to common stock at the same price upon an up list to a national exchange and will have piggyback registration
rights to register the shares of common stock underlying the conversion of the notes.
The Company evaluated
the convertible debentures under ASC 470-20 and recognized a debt discount of $500,000 related to the BCF with a corresponding
credit to additional paid-in capital. The debt discount is being accreted to interest expense over the term of the note.
During the three months
ended March 31, 2019, the Company recorded interest expense of $187,426 related to this note,
of
which $175,097 was related to the accretion of the debt discount. As of March 31, 2019, the convertible note is shown net of unamortized
discount of $58,366.
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
9.
|
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, 2019, and
December 31, 2018, a balance of $162,500 on these two notes 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 $54,724 and $34,412 as of March 31, 2019 and December 31, 2018, 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 and on June 30, 2018 was extended indefinitely
and will now be considered due on demand. All the accrued interest through the December 31, 2017, was still due to the
original noteholder.
On April 5,
2016, the Company entered into an unsecured promissory note agreement with unrelated parties for working capital purposes for
total proceeds of $50,000. The promissory notes 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 and the notes were
extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Accrued
interest payable due under the unsecured note agreement was $8,977 and $8,277 as of March 31, 2019 and December 31, 2018,
respectively. All the accrued interest through the December 31, 2017, was still due to the original noteholder.
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, 2019, the Company made payment of $3,740. As of March 31,
2019, and December 31, 2018, $42,435 and $46,175 was outstanding under the unsecured promissory note agreement, respectively. Interest
expense for the three months ended
March 31, 2019 and 2018
was $750 and $717 respectively. The loan matured on July 14, 2014 and was extended to July 31, 2016. Effective March 30, 2018,
the note agreement was extended to June 30, 2018 and on June 30, 2018, the note was further extended to December 31, 2018 and on
February 11, 2019 the note was further extended to December 31, 2019.
On September 11, 2014,
the Company entered into an unsecured promissory note agreement for $20,500 with Dino Satallante, a beneficial interest shareholder
which bear interest at a rate of 6% per annum. The loan matured on September 10, 2015 and has been extended multiple times up
to December 31, 2018. On February 11, 2019, the note was further extended to December 31, 2019.
Effective July 21,
2015, the Company entered into a promissory note agreement with a related party Dino Satallante, a beneficial interest shareholder
of the Company, for total proceeds of $160,000. The Company utilized $80,000 of the proceeds for payments due in connection with
the Globe Photo assets acquired. The remainder of the proceeds were used for working capital purposes. The note matured on July
20, 2016, with monthly interest only payments commencing July 22, 2015. Interest accrues at the rate of 12% per annum. The note
is secured by the Globe Photo Assets. Total interest expense in connection with the secured promissory note agreement for the three
months ended March 31, 2019 and 2018 is $4,800 and $4,800. Effective March 30, 2018 the note was extended to June 30, 2018, and
on June 30, 2018, the note was further extended to December 31, 2018, and on February 11, 2019 the note was further extended to
December 31, 2019.
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 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Interest expense
on the note was $1,300 and $1,300 for the three months ended March 31, 2019 and 2018, respectively.
Globe Photos, Inc.
Notes to Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)
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 matures 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 notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered
due on demand. Interest expense was $750 and $750 for both the three months ended March 31, 2019 and 2018, respectively. All the
accrued interest through the December 31, 2017, was still due to the original noteholder.
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 matures 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 and on June 30, 2018 was extended indefinitely and will now be considered
due on demand. Interest expense was $750 and $750 for the three months ended March 31, 2019 and 2018, respectively.
On December 2, 2016,
the Company entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total
proceeds of $31,500. The promissory note bears interest at the rate of 6% per annum and matures 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 and on June 30, 2018 was extended indefinitely and will now be considered
due on demand. Interest expense was $473 and $473 for both the three months ended March 31, 2019 and 2018, respectively.
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 the Company from related parties related to contractual agreements and amounts due to related parties for expenses paid
for on the behalf of the Company as of March 31, 2019 and December 31, 2018. 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, 2019 and 2018, interest expense related to these loans amounted to $3,542 and $1,603, respectively, which has been included
in interest expense and a corresponding increase in loans payable. During the three months ended March 31, 2019 and 2018, the
Company made payments of $2,464 and $2,000 to the loan holders, respectively. As of March 31, 2019, loan payable net of unamortized
debt discount amounted to $282,862.
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. On March 30, 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 1,000,000 shares of common stock within
120 days of the effective date of the agreement. The Company valued the 1,000,000 shares at $100,000 as of the agreement date and
recorded the value as interest expense during the year ended December 31, 2018.
The Company accounted
for the above transaction as debt and recognized the amount received as a loan payable. As of March 31, 2019, other debt, net
of unamortized debt discount amounted to $200,000.
Effective June 1, 2016 the Company entered
into three separate non-exclusive license agreements use of licensed images and trademarks through December 31, 2019. Under the
terms of the agreements, the Company is required to pay royalties of 10% on net sales. The agreements call for combined annual
guaranteed minimum royalties per year of $150,000 based on combined minimum sales of $1,500,000 per year. As of March 31, 2019,
the Company has paid $18,750 toward the guaranteed royalties.
With the acquisition
of the assets of Photo File, Inc., we acquired multiple license agreement with royalty rates rating between 6 – 16% and
terms extending through December 31, 2021. As of March 31, 2019, the Company has paid $181,742 in royalty expenses associated
with these agreements which has been included in cost of sales.
The Company has entered
into lease agreements as a lessee for the use of office space. These lease agreements are classified as operating leases and the
liability and right-of-use asset are recognized on the balance sheet at lease commencement. Leases with an initial term of 12 months
or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term.
As a result of the adoption of ASC 842, the Company recognized an operating lease liability of $112,480 and a corresponding right-of-use
asset of $87,830, net of deferred rent of $3,508 and the cumulative effect adjustment to retained earnings of $21,142 as a result
of applying hindsight in determining the lease term.
The Company determines
whether or not a contract contains a lease based on whether or not it provides the Company with the use of a specifically identified
asset for a period of time, as well as both the right to direct the use of that asset and receive the significant economic benefits
of the asset. The Company elected the transition relief package of practical expedients, and as a result, we did not assess 1)
whether existing or expired contracts contain embedded leases, 2) lease classification for any existing or expired leases, and
3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing
an accounting policy to exclude leases with a term of 12 months or less.
The discount rate utilized
for classification and measurement purposes as of the inception date of the lease is based on the Company's collateralized incremental
interest rate to borrow of 10%, as the rate implicit in the lease is not determinable.
On September 6, 2012
the Company entered into a 25-month operating lease agreement for approximately 4,606 square foot warehouse and office facilities
located in Las Vegas, NV. Monthly base rent due under the agreement is $3,270, plus common area maintenance fees. The agreement
calls for 3% annual increase in base rental payments. On October 10, 2014, the Company entered into a First Amendment to Lease
agreement extending the lease term for 60-months, beginning November 1, 2014. All other terms of the agreement remain unchanged.
On February 19, 2019 the Company extended the operating lease agreement for the lease originally entered into September 6, 2012
for an additional 24 months.
On February 26, 2019
the Company entered into a 24-month operating lease agreement for approximately 4,672 square foot warehouse and office facilities
located in Las Vegas, NV. Monthly base rent due under the agreement is $4,437, plus common area maintenance fees. The agreement
calls for 3% annual increase in base rental payments. The Company recorded a right-to-use asset and lease liability during the
three month period ended March 31, 2019 of $98,420 for this new lease. During the three months ended March 31, 2019, the Company
recorded depreciation associated with the right to use asset of $11,851 and made payment on the lease liability of $12,165.
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.
As part of our acquisition
of Photo File, while we did not assume the lease we assumed its existing lease payments as follows: we will pay 100% of the lease
payments through December 31, 2018, and after December 31, 2018 we will pay 50% of the lease until the end of the lease term or
until the lease may be terminated. The Company paid $180,032 in rent related to the lease for the three months ended March 31,
2019.
Total rent expense
for the three months ended March 31, 2019 and 2018 was $187,049 and $13,695, respectively, in connection with short term 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, 2019,
there were no shares of Preferred Stock issued and outstanding.
On January 30, 2019,
we granted 800,000 5-year warrants with exercise prices of $0.10 valued at $312,000 for services. The warrants above 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 $0.39; b) risk-free rate of 2.49%; c) volatility factor of 521.46%; d) dividend yield of 0%.
The following is a
summary of stock warrant activity during the quarter ended March 31, 2019.
As of March 31, 2019,
the outstanding warrants have a weighted average remaining term of was 2.04 years and an intrinsic value of $2,920,000.
The Company did not grant any options during the quarter ended
March 31, 2019. The Company recognized stock option expense of $297,800 for options granted in the prior year.
The following is a
summary of stock option activity during the three months ended March 31, 2019:
As of March 31, 2019,
the outstanding options have a weighted average remaining term of was 8.30 years and an intrinsic value of $8,547,333.
Subsequent to March
31, 2019, the Company made the final payment due per the asset purchase agreement with Photo File, Inc. dated October 11,
2018.