Capital Art, Inc.

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.

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.

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.

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.

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.