1-SA 1 tv482047_1sa.htm FORM 1-SA

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 1-SA

 

x SEMIANNUAL REPORT PURSUANT TO REGULATION A

 

or

 

¨ SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A

 

For the fiscal semiannual period ended June 30, 2017

 

To The Stars Academy of Arts and Science Inc.

(Exact name of issuer as specified in its charter)

 

Delaware   82-0601064
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification No.)

 

315 S. Coast Hwy 101

Suite U38 

Encinitas, CA 92024

(Full mailing address of principal executive offices)

 

760-637-7931

Issuer’s telephone number, including area code

 

 

 

 

 

 

TO THE STARS ACADEMY OF ARTS AND SCIENCE INC.

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (unaudited)

TABLE OF CONTENTS

 

  PAGE
Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
Item 2. Other Information 2
Item 3. Financial Statements (unaudited) 2
  Consolidated Balance Sheets 3
  Consolidated Statements of Operations 4
  Consolidated Statements of Cash Flows 5
  Consolidated Statement of Stockholders’ Equity 6
  Notes to Consolidated Financial Statements 7
Item 4. Exhibits  14
  Signature 15

 

 

 

 

ITEM 1. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In this Semiannual Report, “Company,” “our company,” “us,” and “our” refer to To The Stars Academy of Arts and Science Inc.

 

Forward-Looking Statements

 

The following information contains certain forward-looking statements. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may,” “could,” “expect,” “estimate,” “anticipate,” “plan,” “predict,” “probable,” “possible,” “should,” “continue,” or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

 

Results of Operations for the Six Months Ended June 30, 2017 and 2016

 

Revenues increased to $683,946 from $520,486 for the six months ended June 30, 2017 and 2016, respectively. Revenues increased primarily as a result of product releases, namely a special edition of vinyl albums under a limited license and trade paperback versions of previously released novels.

 

Cost of revenues increased to $497,448 from $305,935 for the six months ended June 30, 2017 and 2016, respectively. Cost of revenues increased primarily as a result of the increased price of vinyl albums due to license fee.

 

General and administrative expenses increased to $25,038,810 from $259,532 for the six months ended June 30, 2017 and 2016, respectively. General and administrative expenses increased primarily as a result of stock-based compensation expense related to the grant of 9,000,000 options and 2,500,000 shares of common stock under the Company’s 2017 Stock Incentive Plan.

  

Sales and marketing expenses increased to $158,217 from $78,118 for the six months ended June 30, 2017 and 2016, respectively. Sales and marketing expenses increased as a result of higher advertising and promotion costs, primarily related to the Company’s Regulation A offering.

 

Liquidity and Capital Resources

 

We have an accumulated deficit at June 30, 2017 of $26,248,900. We expect to incur substantial expenses and generate continued operating losses until we generate revenues sufficient to meet our obligations. At June 30, 2017, the Company had cash of $70,784. The Company is currently raising additional funds through a Regulation A offering to finance its operations.

 

Cash Flow

 

The following table summarizes, for the periods indicated, selected items in our condensed Statements of Cash Flows:

 

   Six Months Ended 
   June 30, 
   2017   2016 
Net cash (used in) provided by:          
Operating activities  $(151,651)  $18,014 
Investing activities  $(10,500)  $(113,781)
Financing activities  $156,770   $89,734 

 

 1 

 

 

Operating Activities

 

Cash used in operating activities was $151,651 for the six months ended June 30, 2017, as compared to cash provided by operating activities of $18,014 for the six months ended June 30, 2016. The change was primarily due to higher net loss, partially offset by higher non-cash expenses.

 

Investing Activities

 

Cash used in investing activities decreased to $10,500 from $113,781 for the six months ended June 30, 2017 and 2016, respectively. The decrease in cash used in investing activities is primarily due to lower purchases of media assets and of property and equipment.

  

Financing Activities

 

Cash provided by financing activities increased to $156,770 from $89,734 for the six months ended June 30, 2017 and 2016, respectively. The increase in cash provided by financing activities was primarily due to proceeds from related party notes payable, partially offset by deferred offering costs related to the Company’s Regulation A offering.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements, including arrangements that would affect the liquidity, capital resources, market risk support, and credit risk support or other benefits.

 

ITEM 2. OTHER INFORMATION

 

None.

 

ITEM 3. FINANCIAL STATEMENTS

 

The accompanying semiannual consolidated financial statements have been prepared in accordance with the instructions to Form 1-SA. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with accounting principles generally accepted in the United States of America. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report for the year ended December 31, 2016 filed with its Form 1-A. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included, and all such adjustments are of a normal recurring nature. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that can be expected for the year ending December 31, 2017.

 

 2 

 

 

TO THE STARS ACADEMY OF ARTS AND SCIENCE INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30, 2017   December 31, 2016 
ASSETS          
           
Current Assets          
Cash  $70,784   $76,165 
Accounts receivable, net   13,964    62,925 
Inventory   56,063    103,491 
Deferred offering costs   156,205     
Other current assets   182,534    126,859 
Total Current Assets   479,550    369,440 
           
Property and equipment, net   368,987    410,229 
Media assets, net   279,319    341,809 
Total Assets  $1,127,856   $1,121,478 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities          
Accounts payable  $210,933   $218,058 
Accrued liabilities   109,567    51,316 
Capital lease obligations   13,032    25,598 
Total Current Liabilities   333,532    294,972 
           
Noncurrent Liabilities          
Capital lease obligations, net of current portion   39,762    39,762 
Related party note payable   587,436    300,000 
Total Noncurrent Liabilities   627,198    339,762 
           
Preferred stock, $0.0001 par value; 91,000 shares authorized; no shares issued and outstanding as of June 30, 2017 and December 31, 2016        
Class A common stock, par value $0.0001; 100,000,000 shares authorized; 70,000,000 and 60,000,000 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively   7,000    6,000 
Class B common stock, par value $0.0001; 9,000 shares authorized; 5,400 and 1,800 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively   1     
Additional paid-in capital   26,409,025    1,593,831 
Accumulated deficit   (26,248,900)   (1,113,087)
Total Stockholders’ Equity   167,126    486,744 
Total Liabilities and Stockholders’ Equity  $1,127,856   $1,121,478 

 

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

 

 3 

 

 

TO THE STARS ACADEMY OF ARTS AND SCIENCE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Six Months Ended 
   June 30, 
   2017   2016 
Revenues  $683,946   $520,486 
Cost of revenues   497,448    305,935 
Gross Profit   186,498    214,551 
           
Operating Expenses          
General and administrative   25,038,810    259,532 
Sales and marketing   158,217    78,118 
Depreciation and amortization   114,232    124,187 
Total Operating Expenses   25,311,259    461,837 
Operating Loss   (25,124,761)   (247,286)
           
Other Expenses (Income)          
Interest expense   12,861    9,167 
Other (income) expense   (4,209)   174 
Loss Before Income Taxes   (25,133,413)   (256,627)
Provision for income taxes   2,400    2,400 
Net Loss  $(25,135,813)  $(259,027)
           
Net Loss per Common Share – Basic and Diluted:  $(0.40)  $ 
Weighted Average Common Shares Outstanding – Basic and Diluted   62,115,975    60,001,800 

 

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

 

 4 

 

 

TO THE STARS ACADEMY OF ARTS AND SCIENCE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Six Months Ended 
   June 30, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(25,135,813)  $(259,027)
Adjustments to reconcile net loss to net cash flows used in operating activities:          
Depreciation   41,242    43,319 
Amortization   72,990    80,869 
Royalties contributed by shareholder   33,333    50,000 
Stock-based compensation   24,744,757     
Changes in operating assets and liabilities:          
Accounts receivable, net   48,961    109,418 
Inventory   47,428    (45,105)
Other current assets   (55,675)   (13,809)
Accounts payable   (7,125)   48,122 
Accrued liabilities   58,251    4,227 
Net cash (used in) provided by operating activities   (151,651)   18,014 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment       (15,747)
Purchase of media assets   (10,500)   (98,034)
Net cash used in investing activities   (10,500)   (113,781)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Capital contributions from shareholder   38,105    101,303 
Principal payments on capital leases   (12,566)   (11,569)
Proceeds from related party notes payable   287,436     
Deferred offering costs   (156,205)    
Net cash provided by financing activities   156,770    89,734 
           
Decrease in cash   (5,381)   (6,033)
Cash, Beginning of Period   76,165    39,937 
Cash, End of Period  $70,784   $33,904 

 

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

 

 5 

 

 

TO THE STARS ACADEMY OF ARTS AND SCIENCE INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

   Class A
Common Stock
   Class B
Common Stock
             
   Shares   Amount   Shares   Amount   Additional
Paid-in
Capital
   Accumulated
Deficit
   Stockholders'
Equity
 
Balance at December 31, 2016   60,000,000   $6,000    1,800   $   $1,593,831   $(1,113,087)  $486,744 
Contributed royalties                   33,333        33,333 
Stock-based compensation                   24,744,757        24,744,757 
Capital contribution from shareholders   10,000,000    1,000    3,600    1    37,104        38,105 
Net loss                       (25,135,813)   (25,135,813)
Balance at June 30, 2017   70,000,000   $7,000    5,400   $1   $26,409,025   $(26,248,900)  $167,126 

 

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

 

 6 

 

 

TO THE STARS ACADEMY OF ARTS AND SCIENCE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

To The Stars Academy of Arts and Science Inc. (which may be referred to as "TTS Academy," the "Company," "we," "us," or "our") was incorporated on February 13, 2017 as a Delaware public benefit corporation. TTS Academy has created a science, aerospace and entertainment consortium that collaborates with global citizens to investigate the outer edges of science and unconventional thinking and provide access through multi-media entertainment content and education.

 

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 1-SA. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. Notes to the unaudited interim financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2016 have been omitted. This report should be read in conjunction with the audited financial statements and the footnotes thereto for the fiscal year ended December 31, 2016 included within the Company’s Form 1-A as filed with the Securities and Exchange Commission.

 

NOTE 2 – GOING CONCERN

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses from operations and has an accumulated deficit at June 30, 2017 of $26,248,900. These factors raise doubt about the Company’s ability to continue as a going concern.

 

During the next twelve months, the Company intends to fund its operations through the sale of common stock to third parties through its Regulation A offering and other means of financing as available. If we cannot raise additional short-term capital, we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned operations, which could harm our business, financial condition and operating results. The financial statements do not include any adjustments that might result from these uncertainties.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying financial statements include the accounts of To The Stars Academy of Arts and Science Inc. and its subsidiaries, To The Stars, Inc., Poet Productions, LLC (a California LLC), and Love Movie, LLC (a California LLC). Significant inter-company balances and transactions have been eliminated in consolidation.

 

Use of Estimates 

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amount of revenues and expenses during the reporting period. Actual results could materially differ from these estimates. Significant estimates include, but are not limited to, sales return allowance, amortization periods of media assets, and recoverability of long-lived assets. It is reasonably possible that changes in estimates will occur in the near term.

 

 7 

 

 

Cash and Cash Equivalents

 

For purpose of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and are non-interest-bearing. Accounts receivable primarily consists of trade receivables. The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The Company makes judgments as to its ability to collect outstanding receivables and records allowances against receivables if collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding receivable balances. The Company’s estimates of these allowances ultimately may not be reflective of actual collection results. As of June 30, 2017 and December 31, 2016, the reserve was insignificant to the consolidated financial statements.

 

Inventory

 

Inventories, which consist primarily of merchandise are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

 

Property and Equipment

 

Property and equipment are stated at cost. The Company’s fixed assets are depreciated using the straight-line method over the estimated useful life of five (5) to seven (7) years. Leasehold improvements are depreciated over the shorter of the useful life or term of the lease. Maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.

 

Pre-publication Costs (Media Assets)

 

The Company capitalizes the art, prepress, manuscript, studio time, engineering, production and other costs incurred in the creation of the master copy or final product of a book, music or other media (the “pre-publication costs”). Pre-publication costs related to books and other media are primarily amortized from the date of issuance over a period of five years using the straight-line method as most of these pre-publication costs are spread over multiple products issued within that time frame. For music related cost, the Company uses the sum-of-the-years-digits method, which is an accelerated method for calculating an asset’s amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is approximately 47% (year 1), 25% (year 2), 14% (year 3), 8% (year 4) and 5% (year 5). The amortization methods and periods chosen best reflect the pattern of expected sales generated from individual titles, music and/or programs. The Company periodically evaluates the remaining lives and recoverability of capitalized pre-publication costs, which are often dependent upon program acceptance by state adoption authorities. For the six months ended June 30, 2017 and 2016, there was no impairment of pre-publication costs.

 

Royalty Advances

 

Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an author’s product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based primarily upon historical sales experience. Advances are evaluated periodically to determine if they are expected to be recovered. Any portion of a royalty advance that is not expected to be recovered is fully reserved. As of June 30, 2017 and December 31, 2016, royalty advances recorded within other current assets in the accompanying consolidated balance sheets were $195,629 and $123,534, respectively. During the six months ended June 30, 2017 and 2016, there were no reserves recorded against royalty advances.

 

 8 

 

 

Impairment of Long-Lived Assets

 

The long-lived assets held and used by the Company are reviewed for impairment no less frequently than annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. There can be no assurance, however, that market conditions will not change or demand for the Company’s products and services will continue, which could result in impairment of long-lived assets in the future.

 

Revenue Recognition

 

The Company recognizes revenue related to sales of its products and services when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.

 

Revenue is recognized from the Company's in store sales when the customer receives and pays for the merchandise at the register. For e-commerce sales, the Company recognizes revenue at the time the merchandise is shipped from our facility. Customers typically receive goods within four days of shipment. Amounts related to shipping and handling that are billed to customers are reflected in revenues, and the related costs are reflected in cost of revenues. Revenues from the sale of electronic formats of music, books and other media related items are recognized when the product is received by the consumer. Taxes collected from customers and remitted to governmental authorities are presented in the consolidated statements of operations on a net basis. In addition, the Company records revenues net of an estimated sales returns allowance. As of June 30, 2017 and December 31, 2016, the Company sales return allowance was $11,078 and $12,742, respectively.

 

Cost of Revenues

 

Cost of revenues consists of merchandise costs, shipping costs, personnel related salaries and wages, consulting and content costs in which don't meet the capitalization criteria, royalties, etc.

 

General and Administration

 

General and administrative expense include management and administrative personnel related salaries and wages, general corporate expenditures consisting of rent, accounting, legal, information systems expense, etc.

 

Advertising

 

The Company expenses advertising costs as incurred. Advertising expenses were approximately $158,217 and $78,118 for the six months ended June 30, 2017 and 2016, respectively.

  

Income Taxes

 

The Company applies ASC 740 Income Taxes.  Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their consolidated financial statement reported amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities.

 

ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions.  A tax benefit from an uncertain position is recognized only if it is “more likely than not” that the position is sustainable upon examination by the relevant taxing authority based on its technical merit.

 

 9 

 

 

Stock-Based Compensation

 

The Company accounts for stock options issued to employees under ASC 718, Share-Based Payment. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite vesting period. The fair value of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model.

 

The Company measures compensation expense for its non-employee stock-based compensation under ASC 505, Equity. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

 

Concentration of Credit Risk

 

Cash

The Company maintains its cash with a major financial institution located in the United States of America which it believes to be credit worthy.  Balances are insured by the Federal Deposit Insurance Corporation up to $250,000.  At times, the Company may maintain balances in excess of the federally insured limits. To date there have been no losses.

 

Revenues and Accounts Receivable

The Company has a concentration risk from a third-party provider for which accumulates revenues and royalties due to the Company primarily through digital sales of the Company music products and then remits the monies collected to the Company. These revenues represent approximately 9% and 13% of total revenues for the six months ended June 30, 2017 and 2016. The loss of this third-party provider would have a material impact on the Company’s consolidated financial statements.

 

Fair Value of Financial Instruments

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:

 

Level 1  Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2  Include other inputs that are directly or indirectly observable in the marketplace.
Level 3  Unobservable inputs which are supported by little or no market activity.

  

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2017 and 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, other current assets, accounts payable, accrued liabilities, related party notes payable, etc. Fair values for these items were assumed to approximate carrying values because of their short-term nature or they are payable on demand.

 

 10 

 

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective beginning January 1, 2018. The Company is currently in the process of evaluating the effect this guidance will have on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 840), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for a public entity. Early adoption of the amendments in this standard is permitted for all entities and the Company must recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently in the process of evaluating the effect this guidance will have on its consolidated financial statements and related disclosures.

 

The FASB Board issues ASU’s to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.

 

NOTE 4 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

 

Property and equipment consisted of the following at June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Furniture and fixtures  $48,137   $48,137 
Machinery and equipment   157,315    157,315 
Leasehold improvements   372,537    372,537 
    577,989    577,989 
Accumulated depreciation   (209,002)   (167,760)
   $368,987   $410,229 

 

Depreciation expense for the six months ended June 30, 2017 and 2016 was $41,242 and $43,319 respectively.

 

Media assets consisted of the following at June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Music  $293,825   $293,825 
Books and other media   301,639    291,139 
Website development and content   163,800    163,800 
    759,264    748,764 
Accumulated depreciation   (479,945)   (406,955)
   $279,319   $341,809 

 

Amortization expense for the six months ended June 30, 2017 and 2016 was $72,990 and $80,869, respectively.

 

 11 

 

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

Leases

 

There have been no changes to the Company’s camera equipment leases or office lease during the six months ended June 30, 2017.

 

Contracts

 

The Company routinely enters into long-term commitments with writers for the future delivery of book and screenplay related product. Such commitments generally become due only upon delivery and Company acceptance of the product. Additionally, such commitments are typically cancelable at the Company’s discretion, generally without penalty.

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company is authorized to issue 100,000,000 shares of Class A common stock. As of June 30, 2017 and December 31, 2016, there were 70,000,000 and 60,000,000 shares of Class A common stock outstanding, respectively. In May 2017, the Company issued 5,000,000 shares of Class A common stock to Jimsem 1, LLC, a consulting firm owned by Jim Semivan, a co-founder of the Company, and 2,500,000 shares of Class A common stock to Harold E. Puthoff, a co-founder of the Company. The Company recognized $200,000 of stock-based compensation expense related to the issuance of these shares. Additionally, the Company issued 2,500,000 shares through its Stock Incentive Plan, as discussed in further detail below.

 

The Company is authorized to issue 9,000 shares of Class B common stock. As of June 30, 2017 and December 31, 2016, there were 5,400 and 1,800 shares of Class B common stock outstanding, respectively. In May 2017, the Company issued 1,800 shares of Class B common stock each to Jimsem 1, LLC and Harold E. Puthoff.

 

Preferred Stock

 

The Company is authorized to issue 91,000 shares of preferred stock. No shares of preferred stock were outstanding as of June 30, 2017 and December 31, 2016.

 

Stock Incentive Plan

 

In May 2017, TTS Academy established the 2017 Stock Incentive Plan (“Plan”). Under the terms of the Plan, TTS Academy is authorized to issue 17,500,000 shares of Class A common stock. The grants can be in the form of stock options or restricted stock.

 

In June 2017, the Company granted stock options to purchase 9,000,000 shares of Class A common stock, of which 3,500,000 vested upon issuance. The remainder vest over a period of 36 to 48 months. Each option had a life of ten years and an exercise price of $0.003. The Company valued the options using the Black-Scholes pricing model on the date of grant using the following inputs:

 

Expected life (years)   5.00 – 6.08 
Risk-free interest rate   1.7 – 1.8%
Expected volatility   75.0%
Annual dividend yield   0.0%

 

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The total value of options issued during the six months ended June 30, 2017 was $45,000,000, which will be recognized over the related vesting terms. Stock option compensation expense of $18,125,000 was recognized during the six months ended June 30, 2017.

 

The Company also granted 2,500,000 shares of restricted stock, of which 1,250,000 vested upon issuance. The remainder vest over 36 months. Restricted stock compensation expense of $6,419,757 was recognized during the six months ended June 30, 2017.

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

In April 2016, the Company and Our Two Dogs, Inc., an entity owned by a co-founder of the Company, entered into a $300,000 note agreement. The note bears interest at 6% per annum and is due on December 31, 2018. In addition, the holder can require the note to be repaid prior to maturity in an amount equal to 10% of the net proceeds from any third-party debt or equity financing.

 

In April 2017, Our Two Dogs, Inc. agreed to provide additional working capital under the same terms as the initial note. During the six months ended June 30, 2017, Our Two Dogs, Inc. provided an additional $287,436 under the same terms as the initial note. As of June 30, 2017 and December 31, 2016, the aggregate balance of the notes was $587,436 and $300,000, respectively, and the accrued interest was $22,918 and $13,512, respectively.

 

In April 2017, the Company entered into a licensing agreement with Thomas DeLonge and Mr. DeLonge’s affiliated entities Mr. Handsome, LLC and Good in Bed Music, ASCAP (the “DeLonge Entities”), memorializing a verbal license the DeLonge Entities had with the Company since 2011 for the use of certain intellectual property rights, in particular Mr. DeLonge’s legal and professional name and likeness, trademarks and copyrights (including master recordings) relating to Mr. DeLonge and the musical band professionally known as Angels and Airwaves.  TTS Academy will pay the DeLonge Entities a royalty on gross sales ranging from 0.5 – 15% depending on the product category, with a minimum royalty guarantee of $100,000 in each calendar year.  

 

NOTE 8 – SUBSEQUENT EVENTS

 

In September 2017, the Company’s Regulation A offering was qualified by the Securities and Exchange Commission. To date, investors have committed approximately $900,000  under the ongoing offering.

 

The Company has evaluated subsequent events that occurred after June 30, 2017 through December 26, 2017, the issuance date of these consolidated financial statements. There have been no other events or transactions during this time which would have a material effect on these consolidated financial statements, other than those disclosed.

 

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ITEM 4. EXHIBITS

 

Exhibit No.   Exhibit Description
2.1   Amended and Restated Certificate of Incorporation (1)
2.2   Bylaws (2)
2.3  

Stockholders Agreement (3)

6.1   Licensing Agreement dated April 26, 2017 (4)
6.2   Contribution Agreement dated April 27, 2017 (5)
6.3   Contribution Agreement dated June 1, 2017 (6)
6.4   Copyright Assignment dated March 31, 2017 (7)
6.5   Intellectual Property Transfer Agreement dated March 31, 2017 (8)
6.6   2017 Stock Incentive Plan (9)

 

(1) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename3.htm 

 

(2) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename4.htm

 

(3) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename5.htm

 

(4) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename7.htm

 

(5) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename8.htm

 

(6) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename9.htm

 

(7) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename10.htm

 

(8) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename11.htm

 

(9) Filed as an exhibit to the company's Offering Statement on Form 1-A and incorporated by reference. Available at: https://www.sec.gov/Archives/edgar/data/1710274/000114420417036300/filename12.htm

 

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SIGNATURE

 

Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

To The Stars Academy of Arts and Science Inc.
   
Date: December 26, 2017 By: /s/ Thomas M. DeLonge
  Thomas M. DeLonge
  Chief Executive Officer

 

This report has been signed by the following persons in the capacities and on the dates indicated.

 

  /s/ Thomas M. DeLonge
  Thomas M. DeLonge, Director, Chief Executive Officer, and President
  Date: December 26, 2017
   
  /s/ Louis Tommasino
  Louis Tommasino, Chief Financial Officer and Principal Accounting Officer
  Date: December 26, 2017
   
  /s/ James Semivan
  James Semivan, Director
  Date: December 26, 2017
   
  /s/ Harold Puthoff
  Harold Puthoff, Director
  Date: December 26, 2017

 

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