Globe Photos, Inc. - Quarter Report: 2019 September (Form 10-Q)

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 September 30, 2019

[_] 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: 000-55370

Globe Photos, Inc.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act: none

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. [X] Yes [_] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). [X] Yes [_] No

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,588,679 shares of common stock as of November 8, 2019.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Our unaudited consolidated financial statements included in this Form 10-Q are as follows:

These interim, unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2019, are not necessarily indicative of the results that can be expected for the full year.

GLOBE PHOTOS, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements

GLOBE PHOTOS, INC.

Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements

GLOBE PHOTOS, INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements

GLOBE PHOTOS, INC.

Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these unaudited consolidated financial statements

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

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.

On July 20, 2019, we formed Globe Photos Retail, LLC a Nevada corporation for the primarily purpose of the marketing and selling authentic high-end luxury goods and elite vintage collectibles.

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 September 30, 2019, the Company had $308,422 cash on hand. At September 30, 2019 the Company has an accumulated deficit of $18,045,098. For the nine months ended September 30, 2019, the Company had a net loss of $14,007,326 and cash used in operations of $2,158,991. 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

September 30, 2019 and 2018

(Unaudited)

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 and nine months ended September 30, 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 the Company 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, Globe Photos Retail, 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

September 30, 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, as well as the land easement practical expedient for maintaining our current accounting policy for existing or expired land easements.

In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning January 1, 2019. Management evaluated ASU 2018-07 and determined that the adoption of this new accounting standard did not have a material impact on the Company’s consolidated financial statements.

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.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

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.

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 September 30, 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 September 30, 2019 and December 31, 2018.

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 Sportphotos.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 recorded as a payable to Photo File, Inc. as of December 31, 2018 in the consolidated balance sheet was paid during the nine month period end September 30, 2019. The Company has also recorded an additional liability due to the Seller related to a final working capital adjustment of the acquisition as of September 30, 2019 and December 31, 2018 in the amount of $631,634 and $201,943, respectively.

As additional consideration the seller also received the following:

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. This remains outstanding as of September 30, 2019.

The transaction was deemed to be an acquisition of a business and was accounted for under the acquisition method of accounting in accordance with the guidance in ASC 805 - “Business Combinations”.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

The following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired and liabilities assumed.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

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.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

Depreciation expense was $830,232 and $309,575 for the nine months ended September 30, 2019 and 2018, respectively, of which $830,932 and $282,618 are reported in cost of revenue, respectively.

Total amortization expense for the nine months ended September 30, 2019 and 2018 was $1,170,926 and $32,625 respectively and is included in cost of revenue in the consolidated statements of operations. Estimated amortization expense over the next five years is $1,561,233 per year.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

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 September 30, 2019, and was paid in full during the three months ended September 30, 2019.

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 September 30, 2019, 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 September 30, 2019. 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 September 30, 2019 and December 31, 2018, respectively.

On July 23, 2019, the Company entered into an unsecured promissory note agreement with an unrelated party $95,000 for the repurchase of a royalty interest (See Note 10). The note matured on September 30, 2019, is currently past due and accrues interest at a rate of 10% upon default.

Accrued interest payable due under the unsecured note agreement was $875 as of September 30, 2019.

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 secured 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 nine months ended September 30, 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, matured on April 30, 2019, are payable within ten days of written notice, and are secured by certain archival images owned by the Company. The maturity date of the convertible notes were extended to October 31, 2019, as disclosed below. The notes and accrued interest are convertible at the option of the noteholder into our common stock at $4.00 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 nine months ended September 30, 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 nine months ended September 30, 2019 and was recorded as a debt discount and accreted to interest expense over the term of the notes.

During the three months ended September 30, 2019, the Company granted 295,051 3-year warrants with exercise prices of $9.00 valued at $2,238,065 to the noteholders to extend the maturity date of the notes through October 31, 2019. The Company evaluated the adjustment of the maturity and consideration given under ASC 470, and determined that the modification was substantial and should be accounted for as a debt extinguishment. The Company recorded a loss on extinguishment of debt of $2,238,065 related to difference between the reacquisition price of the debt and the carrying value of the debt. Additionally, the Company evaluated the conversion feature associated with the new debt and recorded a beneficial conversion feature amounting to $3,258,100 with a corresponding credit to additional paid-in capital.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

During the nine months ended September 30, 2019 and 2018, the Company recorded interest expense of $4,390,724 and $452,261 of which $4,373,474 and $419,359 was related to the accretion of the debt discount and financing cost, respectively. As of September 30, 2019, the convertible notes are shown net of unamortized debt discount and financing cost of $1,160,932.

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, matured on April 30, 2019, payable within ten days of written notice 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 $4.00 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 nine months ended September 30, 2019, the Company recorded interest expense of $270,860 related to this note, of which $233,463 was related to the accretion of the debt discount. As of September 30, 2019, the convertible note is shown net of unamortized discount of $0.

During the three months ended September 30, 2019, we issued secured convertible promissory notes (“Note”) in the aggregate principal amount of $320,000 to several accredited investors through a private placement.

The Note bears interest at a rate of 12% per annum, and is secured by the Company’s assets. The Note matures on October 31, 2019, are payable within ten days of written notice. The principal and accrued interest therein is convertible at the option of the noteholder into the Company’s common stock at $6.00 per share, subject to certain price adjustments as set forth in the Note. Additionally, the noteholders received a warrant to purchase common stock of the Company equivalent to twenty-five percent (25%) of the convertible number of shares of common stock the noteholder is entitled to under the note, which amounted to 13,333 warrants during the three months ended September 30, 2019.

The Warrant allows the investor to purchase shares of common stock of the Company at $6.00 per share, subject to certain price adjustments as set forth in the warrant and shall be exercisable for a period of three (3) years from the anniversary of the grant date of such warrant. Cashless exercise is available under the terms of the warrant.

The Company evaluated the convertible notes and warrants under ASC 470-20 and recognized a debt discount of $263,138 related to the beneficial conversion feature and the relative fair value of the warrants issued with the convertible notes 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 nine months ended September 30, 2019, the Company recorded interest expense of $175,611, related to the notes, of which $168,722 was related to the accretion of the debt discount. As of September 30, 2019, the convertible note is shown net of unamortized discount of $94,416.

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 September 30, 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 $62,849 and $34,412 as of September 30, 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 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 $10,395 and $8,277 as of September 30, 2019 and December 31, 2018, respectively. All the accrued interest through 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 nine months ended September 30, 2019, the Company made payment of $11,220. As of September 30, 2019, and December 31, 2018, $34,955 and $46,175 was outstanding under the unsecured promissory note agreement, respectively. Interest expense for the nine months ended September 30, 2019 and 2018 was $1,452 and $1,872 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. Total interest expense in connection with the secured promissory note agreement for the nine months ended September 30, 2019 and 2018 is $923 and $941, respectively. 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 nine months ended September 30, 2019 and 2018 is $14,400. 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.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

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 3,900 each of the nine months ended September 30, 2019 and 2018, respectively.

On April 15, 2016, the Company entered into an unsecured promissory note agreement with Sean Goodchild, a beneficial interest shareholder, for total proceeds of $50,000. The promissory note bears interest at the rate of 6% per annum and matured on December 15, 2017, 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 $2,250 for each of the nine months ended September 30, 2019 and 2018, respectively. All the accrued interest through 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 matured on December 31, 2017, however, on January 22, 2018, the outstanding balance on the notes was purchased by another related party (ICONZ Art, LLC, beneficial interest shareholder) and the notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Interest expense was $2,250 for each of the nine months ended September 30, 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 matured on December 31, 2017, however, on January 22, 2018, the outstanding balance on the notes was purchased by another related party (ICONZ Art, LLC, beneficial interest shareholder) and the notes were extended to June 30, 2018 and on June 30, 2018 was extended indefinitely and will now be considered due on demand. Interest expense was $1,418 for each of the nine months ended September 30, 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 related parties for advances and expenses paid for on the behalf of the Company as of September 30, 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 liabilities due to related parties, respectively.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

Proceeds from Auctions of Royalty Rights

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. On July 23, 2019, The Company repurchased the 50% royalty rights sold in one of the agreements above for $115,000. The Company made a payment of $20,000 and issued a $95,000 note that matured on September 30, 2019. The note accrues interest at a rate of 10% upon default.

For the nine months ended September 30, 2019 and 2018, interest expense related to these loans amounted to $30,362 and $10,167, respectively, which has been included in interest expense and a corresponding increase in loans payable. During the nine months ended September 30, 2019 and 2018, the Company made payments of $22,464 and $5,303 to the loan holders, respectively. As of September 30, 2019, loan payable net of unamortized debt discount amounted to $170,147.

Asset purchase agreement

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 25,000 shares of common stock within 120 days of the effective date of the agreement. The Company valued the 25,000 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 September 30, 2019, other debt, net of unamortized debt discount amounted to $200,000. 

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

License Agreements

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 September 30, 2019, the Company has paid $63,750 toward the guaranteed royalties associated with these agreements.

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 September 30, 2019, the Company has incurred $997,221 in royalty expenses associated with these agreements which has been included in cost of sales.

Operating Lease Agreements

The Company has entered into lease agreements as a lessee for the use of land and 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, as well as the land easement practical expedient for maintaining our current accounting policy for existing or expired land easements.

The discount rate utilized for classification and measurement purposes as of the inception date of the lease is based on each 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. During the nine months ended September 30, 2019, the Company recorded noncash lease expense associated with the right of use asset of $20,254 and made payment on the lease liability of $26,035.

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 determined this lease to be an operating lease and recorded a right-of-use asset and lease liability during the nine month period ended September 30, 2019 of $98,420 for this new lease. During the nine months ended September 30, 2019, the Company recorded noncash lease expense associated with the right to use asset of $28,706 and made payments on the lease liability of $19,925.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

Undiscounted Cash Flows

As of September 30, 2019, the right of use asset and lease liability were shown on the consolidated balance sheet at $134,295 and $158,437, respectively. The table below reconciles the fixed component of the undiscounted cash flows and the total remaining years to the operating lease liability recorded on the consolidated balance sheet as of September 30, 2019:

The Company also 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 $530,816 in rent related to the lease for the nine months ended September 30, 2019.

Total rent expense for the nine months ended September 30, 2019 and 2018 was $557,390 and $40,930, respectively, in connection with short term operating lease agreements.

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 September 30, 2019, there were no shares of Preferred Stock issued and outstanding.

Common Stock

On June 18, 2018, the Company’s stockholders voted to give discretionary authority to the Board of Directors of the Company, to effect a reverse split of our issued and outstanding common stock in a range of not less than 1-for-5 and not more than 1-for-500, Effective as of June 6, 2019, FINRA approved the effectiveness of a 1-for-40 reverse stock split of the Company’s common stock. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto, have been retroactively adjusted for the Reverse Stock Split as if such Reverse Stock Split occurred on the first day of the first period presented.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

The Company is authorized to issue up to 450,000,000 shares of common stock with a par value of $0.0001. As of September 30, 2019, and December 31, 2018, there were 8,588,679 and 8,161,679 shares of common stock (post-split) issued and outstanding, respectively.

On June 4, 2019, the Company sold 407,500 shares of common stock for net proceeds of $1,291,285.

On April 22, 2019, the Company issued 5,000 shares for services with a fair value of $99,600.

On May 23, 2019, the Company issued 2,000 shares of common stock valued at $18,000 for the settlement of $8,000 in accrued liabilities. The Company recorded the difference between the fair value of common stock and accrued liability as loss on settlement of accrued liabilities in the amount of $10,000.

On July 29, 2019, the Company issued 12,500 shares of common stock valued at $112,500 for services.

STOCK WARRANTS

On January 30, 2019, we granted 20,000 5-year warrants with exercise prices of $4.00 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 $15.60; b) risk-free rate of 2.49%; c) volatility factor of 242%; d) dividend yield of 0%. 

During the three months ended September 30, 2019, we granted 295,051 3-year warrants with exercise prices of $9.00 valued at $2,238,065 to our convertible noteholders as consideration to extend the maturity date of our debt. 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 $8.00; b) risk-free rate of 1.49%-1.55%; c) volatility factor of 244-249%; d) dividend yield of 0%. 

During the three months ended September 30, 2019, we granted 13,333 3-year warrants with exercise prices of $6.00 valued at $103,553, in connections with convertible notes issued during the period. 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 $8.00; b) risk-free rate of 1.44%-1.89%; c) volatility factor of 245.00%; d) dividend yield of 0%. 

The following is a summary of stock warrant activity during the nine months ended September 30, 2019.

As of September 30, 2019, the outstanding warrants have a weighted average remaining term of was 2.41 years and an intrinsic value of $756,670.

Globe Photos, Inc.

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

(Unaudited)

STOCK OPTIONS

On June 24, 2019, we granted, 12,500 5-year options with an exercise price of $7.00 valued at $92,629 for services. The options 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 $9.00; b) risk-free rate of 1.92%; c) volatility factor of 254.67%; d) dividend yield of 0%. 

On August 14, 2019, we granted, 225,000 unvested 10-year options with an exercise price of $8.00 valued at $1,800,000 for services. The options 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 $8.00; b) risk-free rate of 1.59%; c) volatility factor of 393.00%; d) dividend yield of 0%. The options vest as follows:

100,000 options which shall vest and become exercisable on the earlier of (1) the first anniversary of the effective date of the Prior Agreement, or (2) the consummation of an underwritten public offering and listing with Nasdaq;

 125,000 options of which vest in $12,500 increments beginning the first fiscal quarter in which the Company’s trailing twelve month revenues exceed $10,000,000 and completely vest when trailing twelve month revenues exceed $30,000,000.

During the three months ended September 30, 2019, we granted, 8,750 10-year options with an exercise price of $2.00 valued at $87,850 for services. The options 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 $10.04; b) risk-free rate of 2.52%; c) volatility factor of 307.59%; d) dividend yield of 0%.  The options vest in 20,000 share increments through April 1, 2021 and the Company has recognized option expense of $52,609 for these options for the nine months ended September 30, 2019.

During the nine months ended September 30, 2019, the Company recognized stock option expense of $818,930 for options granted in the prior year.

The following is a summary of stock option activity during the nine months ended September 30, 2019:

As of September 30, 2019, the outstanding options have a weighted average remaining term of was 6.97 years and an intrinsic value of $2,589,833.

On October 2, 2019, the Company issued an unsecured convertible promissory note for $220,000, consisting of net proceeds of $200,000 and an original issue discount of $20,000. The promissory note bears interest at the rate of 12% per annum and matures on December 31, 2019 and is convertible at the sole option of the noteholder at a price of 80% of the price per share of Company’s pending public offering. Additionally, the noteholder received a three year warrant exercisable at the conversion price of the note to purchase common stock of the Company equivalent to one hundred percent (100%) of the convertible number of shares of common stock the noteholder is entitled to under the note.

On October 10, 2019, the Company issued an unsecured convertible promissory note for $440,000, consisting of net proceeds of $400,000 and an original issue discount of $40,000. The promissory note bears interest at the rate of 12% per annum and matures on December 31, 2019 and is convertible at the sole option of the noteholder at a price of 80% of the price per share of Company’s pending public offering. Additionally, the noteholder received a three year warrant exercisable at the conversion price of the note to purchase common stock of the Company equivalent to one hundred percent (100%) of the convertible number of shares of common stock the noteholder is entitled to under the note but not less than 79,200 warrants.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Overview

The Company was originally incorporated on September 20, 2004, in the State of Delaware under the name “Blog8.” Since incorporation, we have changed our name a number of times, having been named “Securiteyes,” “Medify Solutions Limited,” “Petel Incorporated” and “Gleeworks, Inc.” and “Capital Art, Inc.” 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. As part of the merger, our board of directors authorized a change in our name from “Capital Art, Inc.” to “Globe Photos, Inc.” and our Certificate of Incorporation has been amended to reflect this name change.

We are currently engaged in the business of acquiring, selling, licensing and merchandising classic and contemporary photographic images and reproductions. Over the last few years, we have been in a developmental phase, focused mostly on acquiring ownership or rights to collections of rare or unpublished negatives and photographs of iconic celebrity images.

We have been taking advantage of a new market dynamic, where aging celebrities, retiring photographers, and image rights holders (i.e., family estates) are finally offering their exclusive photographic collections up for sale. We seized this opportunity to acquire these historic archives over the last few years, including the acquisition of other companies that have been quietly collecting these rare archives.

We believe we have now assembled one of largest collections of iconic pop culture imagery photography in the world. It is comprised of more than 25 million images taken by more than 3,500 photographers from around the world over the last century. It features iconic personalities and seminal moments from the worlds of entertainment, sports, history and politics. Our branded archives include Frank Worth collection, Movie Star News, and Globe Photos Agency (from the original Globe Photos founded in 1939).

Archived and stored at our Company’s secured warehouse, these collections include never before seen negatives, one-of-a kind prints and other memorabilia. They include rare images of celebrity icons, such as Elvis Presley, James Dean, Marilyn Monroe, Humphry Bogart, Frank Sinatra, the Beatles and more, as well as many contemporary personalities, performing artists and star athletes.

More recently we have been focused on acquiring assets that would provide us the ability to sell and merchandise licensed sports photography, as well as an operational platform for monetizing the photographic assets and associated memorabilia that we have acquired. This effort culminated on October 11, 2018, with the acquisition of substantially all of the assets of Photo File, Inc. (“Photo File”), a 30-year-old New York-based licensed sports photography company with more than 50 employees engaged in the licensing, production, marketing and sales of sports imagery and related collectibles.

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 NFL, NBA, MLB, and NHL Properties and their respective player associations, as well as most major college sports teams. We also gained licenses with thousands of individuals and organizations, including Babe Ruth, Joe Namath, Vince Lombardi, Marvel Entertainment, and others. The acquisition also significantly expanded our collection of company-owned iconic sports photography.

In addition to valuable licenses and photo assets, the Photo File transaction has provided us access to its well-established sales and marketing organization, and it has opened new distribution channels for our existing product lines.

We also expect to benefit from Photo File’s reputation for excellent customer service, as well as its strong ties to its professional and collegiate sports leagues and large retail customers. This will be important as we further develop relationships with top retail clients and distributors including Costco, Walmart, Target, Bed Bath and Beyond, USPS, Scheels and others.

Prior to the Photo File transaction, we had taken preliminary steps to monetize the value of our collection by establishing various sales channels and marketing methodologies. We have been selling some of our photographic images and reproductions on a limited basis through auctions, third-party galleries, art consultants, interior decorators, brick and mortar locations, specialty and big box retailers, as well as through various online outlets, including Amazon and 1stdibs, and directly to end consumers via our Globe Photos website. We have been experimenting with various ways to reach customers through diverse marketing channels, including our websites, events and interactive campaigns.

In many respects, the Company believes it has turned the corner with the Photo File transaction, allowing us to emerge from our development stage into a full-scale commercialization phase and take advantage of the growing market demand for pop culture and sports imagery and related memorabilia.

Our mission is to operate as a global marketplace for licensed sports and pop culture imagery, which includes both sold physical prints as well as licensed digital photography that our customers can use in their communications, such as social media, websites, digital and print marketing materials, books and publications.

Through our online and in-store platforms and manufacturing processes, consumers are able to customize, personalize, share, print and download licensed prints and physical products both for personal use and for creating thoughtful and personalized gifts. These may include such photo-based products as framed photos, canvases, books, calendars, greeting cards, mugs, bags, and apparel. There are numerous ways for our customers to avail themselves of our vast library of digital images.

As part of increasing our product offerings, we plan to continue our search for photographic archives that are undervalued by the market. These archives may be acquired outright, or we 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 we continue to search for value on a global basis.

Our principal place of business is located at 6445 South Tenaya Way, Suite B-130, Las Vegas, NV 89113. General information about us can be found at www.globephotos.com.

Asset Purchase Agreement with Photo File

In 1987, the year it was founded, Photo File was awarded a license for photography by Major League Baseball and the MLB Players Association, becoming the first company to be given a license for photography by any major sport in the United States. Photo File is also licensed by thousands of individuals and organizations, including Muhammad Ali, Babe Ruth, Joe Namath, Vince Lombardi, and Marvel Entertainment. Photo File had become one of the nation’s leading manufacturers of sports photography, with licenses from the NFL, MLB, NBA, NHL, Collegiate Licensing Company (CLC), and their respective player associations.

Besides photos in sizes up to 30"x 40", Photo File offered a full range of framed and matted products, plaques, photo sculptures, ceramics tiles, key chains and event covers. Photo File also produced a line of licensed Framed Gold Records featuring top recording artists, including Elvis Presley, KISS and many others.

At the time of the asset purchase by Globe Photos, Photo File employed 54 people, including its owners. The staff was comprised of 51 full-time and three part-time employees. Photo File’s 43,000 square foot facility, located in Mount Kisco, NY, included a printing lab, a graphics department, framing operation and sales and marketing divisions.

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 $2,000,000 to the Seller as of September 30, 2019, toward the purchase price of the Asset Purchase Agreement. The final payment of $485,000 was paid during the nine months ended September 30, 2019.

As additional consideration the seller also received the following:

Additionally, the seller has the 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 will remitting 50% of the net proceeds after expenses of those sales within 30 days of their receipt. As of December 31, 2018, the Company recorded the entire $2,000,000 as a contingent purchase consideration. As of September 30, 2019, the $2,000,000 remains on the books as a contingent purchase consideration.

Assets acquired in the Photo File transaction included more than 1 million sports negatives, 1,000+ autographed lithographs and memorabilia, as well as printing and packaging equipment. Per the terms of the Purchase Agreement, we have created a new Nevada subsidiary called Photo File, LLC to hold the assets we have acquired from Photo File.

Post-Acquisition Plans

We see Photo File as a classic turnaround situation, during 2017 Photo File alone presented annual revenues of approximately $6.7 million and losses of approximately $1 million, but at one time having generated more than $20 million in annual revenues. Of the approximately $7 million in revenue generated during 2017, only about 8% is generated online. We believe this represents a substantial opportunity to leverage the latest advances in e-Commerce technology and services to grow sales. Through our experience and our review of successful models of other major sports retailers, we determined that more than 80% of the business revenue should be generated by online, print-on-demand or direct-to-consumer sales.

We are also currently executing a plan to right size the organization and move forward efficiently and effectively. In conjunction with this analysis, we have evaluated areas and processes such as printing, production and fulfillment to reduce inefficiencies and further reduce overhead, along with expanding capacities. This review and integration will take place over a measured period as to not disrupt current operations and production. We have identified several viable options to outsource printing and grow the business by including individuals and companies currently working within the industry.

We believe the inclusion of a sports channel is complementary to our existing business and allows us to piggy back the photo assets of Globe Photos onto Photo File’s existing clients and retail opportunities. We plan to leverage the long-term distributor relationships Photo File has developed over the last 30 years to increase the sales of our existing Globe Photos library.

Results of Operations

Revenues

Our total revenue reported for the three months ended September 30, 2019, was $1,325,133, compared with $197,507 for the three months ended September 30, 2018. Our total revenue reported for the nine months ended September 30, 2019, was $4,409,854, compared with $951,760 for the nine months ended September 30, 2018.

The total increase in revenue is primarily a result the increase in merchandise sales associated with our acquisition of the assets of Photo File, Inc. (“Photo File”).

We have instituted direct-to-consumer marketing and implemented programs with third-party re-sellers, brick and mortars and online retailers. We have also continued to enhance and market our licensing division, Globe Photos LLC. Additionally, we have invested considerable time and expense in the development of software designed to more efficiently process digitized images, and push them through to our retail and licensing channels, to help scale each division significantly.

Cost of Revenues

Our cost of revenues consists primarily of royalties, depreciation, and amortization expense. For the three months ended September 30, 2019, cost of revenues increased to $1,572,568, compared with $206,957 for the three months ended September 30, 2018. For the nine months ended September 30, 2019, cost of revenues increased to $4,733,094, compared with $693,429 for the nine months ended September 30, 2018. The change is primarily a result additional royalty and production cost associated with our acquisition of the assets of Photo File.

Operating Expenses

Operating expenses increased to $2,253,319 for the three months ended September 30, 2019, from $401,395 for the three months ended September 30, 2018. Operating expenses increased to $6,810,381 for the nine months ended September 30, 2019, from $898,193 for the nine months ended September 30, 2018.

The main reason for the overall increase in operating expenses for the quarter ended September 30, 2019, was an increase in general and administrative expenses associated with the purchase of the Photo File assets.

Product development, sales and marketing expenses increased by $261,260 and $564,242 for the three and nine months ended September 30, 2019, respectively, as a result of the purchase of the Photo file assets. Product development, sales and marketing expenses primarily consists of website development costs, sales- and marketing-related salaries, as well as other expenses associated with marketing. We continue to utilize our working capital resources in sales and marketing in order to increase the distribution and demand for our products and to add content to our product lines along with adding additional channels of distribution.

General and administrative costs increased by $1,582,616 and $5,323,649 for the three and nine months ended September 30, 2019, respectively, primarily associated with an increase in stock-based compensation and additional insurance and salary expenses associated with the acquisition of Photo File.

Total depreciation expense increased by $8,048 and $24,297 for the three and nine months ended September 30, 2019. The increase is the result of additional assets being depreciated during the current compared to the previous three and nine month periods ended September 30, 2018.

Other Expenses/Other Income

We had other expenses of $4,670,748 and $7,192,863 for the three and nine months ended September 30, 2019, respectively, as compared to $564,041 and $927,247 for the same period ended 2018. The increase in other expenses is a result increased interest expense and the amortization of debt discount and financing fees associated our debt offering. The Company also recognized a loss on debt extinguishment in the amount of $2,239,041 during the three months ended September 30, 2019.

Net Loss

We finished the three and nine months ended September 30, 2019, with a net loss of $7,033,313 and $14,007,326, respectively, as compared to net losses of $974,886 and $1,567,109 during the same three and nine month periods ended 2018. The increases in net loss from the prior year are primarily a result of the increased interest expense, stock-based compensation, and a one-time loss on debt extinguishment incurred during 2019.

Liquidity and Capital Resources

As of September 30, 2019, we had total current assets of $638,604 and current liabilities of $12,075,847, resulting in a working capital deficit of $11,437,243. This compares with the working capital deficit of $8,020,085 at December 31, 2018. This increase in working capital deficit, as discussed in more detail below, is primarily the result of increased current debt resulting from our convertible note offering.

Our operating activities used $2,158,991 during the nine months ended September 30, 2019, as compared with $534,982 used in operating activities in the nine months ended September 30, 2018. Our negative operating cash flow in 2019 was largely the result of our net loss for the period.

Investing activities used $654,070 in the nine months ended September 30, 2019, compared with $877,923 in the nine months ended September 30, 2018. Our negative investing cash flow in 2019 is largely the result of the purchase of image archives and internal use software and payment for the Photo file assets.

Financing activities provided $2,817,216 in the nine months ended September 30, 2019, compared with $2,400,153 provided in the nine months ended September 30, 2018. Our positive financing cash flow in 2019 was largely the result of our offering and sale of convertible notes and net proceeds from the sale of common stock.

There is no guarantee we will generate sufficient revenues to continue operations. Our management estimates we will need approximately $10,000,000 in annual revenues to continue operations at our current operating level, without consideration given to investment in new sales and marketing channels. For the immediate future, we plan to achieve this revenue target by ramping up fees earned from licensing imagery to media companies growing a network of global sales agents. There is no guarantee that we will generate sufficient revenues to continue operations. We expect to continue incurring significant operating losses for the near future. If we are not successful in achieving revenues required to continue operations at our current operating levels within three to four months, or obtaining additional financing, our operations will be significantly negatively impacted, and we will need to significantly scale back our operations or liquidate all or a portion of our collections. 

We believe that our principal difficulty in our ability to successfully generate profits has been the lack of available capital to operate and expand our business. We believe we need a minimum of approximately $6,000,000 in additional working capital to be utilized for key archive acquisitions, inventory management software, technology development, additional staffing and working capital. As of the date of this report, we have no commitment from any investor or investment-banking firm to provide us with the necessary funding and there can be no assurances we will obtain such funding in the future. Failure to obtain this additional financing will have a material negative impact on our ability to generate profits in the future.

Inflation

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the nine month period ended September 30, 2019.

Critical Accounting Polices

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are disclosed in Note 2 of our audited consolidated financial statements included in the Form 10-K filed with the Securities and Exchange Commission.

Off Balance Sheet Arrangements

As of September 30, 2019, there were no off balance sheet arrangements.

Recent Accounting Pronouncements

The recent accounting pronouncements that are material to our financial statements are disclosed in Note 2 of our consolidated audited financial statements included in the Form 10-K filed with the Securities and Exchange Commission and in Note 2 of our unaudited consolidated financial statements included herein.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer (CEO) and the Interim Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2019, and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of 2019.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any material pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

ITEM 1A. RISK FACTORS

A description of the risk factors associated with our business is included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on April 16, 2019, as updated by our subsequent filings under the Exchange Act. There have been no material changes to such risk factors as previously reported. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K, as updated by our subsequent filings under the Exchange Act.  The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 4, 2019, the Company sold 407,500 shares of common stock for net proceeds of $1,291,285.

On July 29, 2019, the Company issued 12,500 shares of common stock valued at $112,500 for services.

During the three months ended September 30, 2019, we granted 295,051 3-year warrants with exercise prices of $9.00 valued at $2,238,065 to our convertible noteholders as consideration to extend the maturity date of our debt. 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 $7.00 -$8.00; b) risk-free rate of 1.44 1.55%; c) volatility factor of 680.96%; d) dividend yield of 0%.

During the three months ended September 30, 2019, we granted 13,333 3-year warrants with exercise prices of $6.00 valued at $103,533 in connections with convertible notes issued during the period. 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 $8.00; b) risk-free rate of 1.44 1.89%; c) volatility factor of 680.96%; d) dividend yield of 0%.

On August 14, 2019, we granted, 225,000 unvested 10-year options with an exercise price of $8.00 valued at $1,800,000 for services. The options 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 $8.00; b) risk-free rate of 1.59%; c) volatility factor of 393.00%; d) dividend yield of 0%.

During the three months ended September 30, 2019, we granted, 8,750 10-year options with an exercise price of $2.00 valued at $87,850 for services. The options 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 $10.04; b) risk-free rate of 2.52%; c) volatility factor of 307.59%; d) dividend yield of 0%.

Except as otherwise noted, these securities were issued pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

SIGNATURES

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