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Masterworks 001, LLC – ‘1-SA’ for 6/30/20

On:  Monday, 9/28/20, at 1:43pm ET   ·   For:  6/30/20   ·   Accession #:  1493152-20-18427

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 9/28/20  Masterworks 001, LLC              1-SA        6/30/20    1:269K                                   M2 Compliance LLC/FA

Semi-Annual Report or Special Financial Report   —   Form 1-SA   —   Reg. A
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 1-SA        Semi-Annual Report or Special Financial Report      HTML    150K 


Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Cautionary Statement Regarding Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Other Information
"Index to Consolidated Financial Statements
"Consolidated Balance Sheets
"Consolidated Statements of Operations
"Consolidated Statements of Members' Equity
"Consolidated Statements of Cash Flows
"Consolidated Notes to Financial Statements
"Exhibits

This is an HTML Document rendered as filed.  [ Alternative Formats ]



 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 1-SA

 

SEMIANNUAL REPORT PURSUANT TO REGULATION A

 

For the Fiscal Semiannual Period Ended June 30, 2020

 

MASTERWORKS 001, LLC

(Exact name of issuer as specified in its charter)

 

Commission File Number: 024-10876

 

Delaware   82-5165851

State of other jurisdiction of

incorporation or Organization

 

(I.R.S. Employer

Identification No.)

 

497 BROOME STREET, NEW YORK, NY 10013

(Full mailing address of principal executive offices)

 

(203) 518-5172

(Issuer’s telephone number, including area code)

 

www.masterworks.io

(Issuer’s website)

 

Class A Ordinary Shares

(Securities issued pursuant to Regulation A)

 

 

 

 C: 
 

 

 

TABLE OF CONTENTS

 

Cautionary Statement Regarding Forward-Looking Statements 3
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
   
Other Information 7
   
Index to Consolidated Financial Statements F-1
   
Exhibits 8

 

 C: 
 C: 2

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Report contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “plan,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, or state other forward-looking information. Our ability to predict future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual outcomes could differ materially from those set forth or anticipated in our forward-looking statements. Factors that could cause our forward-looking statements to differ from actual outcomes include, but are not limited to, those described under the heading “Risk Factors” in our most recent Offering Circular filed with the Securities and Exchange Commission (“SEC”), as such factors may be updated from time to time in our periodic filings and offering circular supplements filed with the SEC, which are accessible on the SEC’s website at www.sec.gov. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Report. Furthermore, except as required by law, we are under no duty to, and do not intend to, update any of our forward-looking statements after the date of this Report, whether as a result of new information, future events or otherwise.

 

 C: 
3

 

 

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

 

The following discussion of the financial condition and results of operations of Masterworks 001, LLC should be read in conjunction with our consolidated financial statements and the related notes. The consolidated financial statements included in this filing are unaudited and have not been reviewed, and may not include year-end adjustments necessary to make those financial statements comparable to audited results, although in the opinion of management all necessary adjustments have been included to make the interim consolidated financial statements not misleading.

 

References to the “Company”, “we”, “us” or “our” refer to Masterworks 001, LLC and, as the context requires, the 001 Segregated Portfolio (the “001 Portfolio”) of Masterworks Cayman, SPC, a Cayman Islands segregated portfolio company. Our affiliates, Masterworks.io, LLC, Masterworks Administrative Services, LLC and Masterworks Gallery, LLC are individually and collectively referred to herein as “Masterworks”.

 

Business

 

Masterworks 001, LLC is a Delaware limited liability company formed to facilitate investment in a single work of art created in 1979 by Andy Warhol (the “Artwork”). We are managed by our affiliate, Masterworks Administrative Services, LLC (the “Administrator”).

 

On May 10, 2019, the Company commenced accepting subscriptions for an offering of up to 99,825 of our Class A ordinary shares pursuant to Regulation A of the Securities Act of 1933, as amended, for aggregate consideration of up to $1,996,500 (the “Offering”). Each Class A ordinary share was offered at $20.00 per share. The Company closed the Offering on September 27, 2019. At closing, the Offering was fully subscribed, and the Company issued 99,825 Class A ordinary shares, and received total Offering proceeds of $1,996,500. All of the proceeds from the Offering were used to pay for the acquisition of the Artwork or to repay a non-interest bearing advance made by Masterworks used to acquire the Artwork, and to pay a true-up to Masterworks. As of September 28, 2020, the Artwork was located in a fine art storage facility maintained by the Delaware Freeport, LLC.

 

Following the closing of the Offering, title to the Artwork is held by the 001 Portfolio and 100% of the share capital of the 001 Portfolio is owned by the Company. The 001 Portfolio is not expected to enter into any contracts or incur any liabilities, except as may be necessary in connection with the maintenance or sale of the Artwork.

 

Other than activities related to the Offering and the acquisition of the Artwork, we have not conducted any other business activities or operations. Our strategy is to display, promote and market the Artwork in a manner designed to enhance its provenance and increase its exposure and its value.

 

Pursuant to an administrative services agreement between us and Masterworks entered into upon the closing of the Offering, the Administrator manages all administrative and custodial services relating to our business and pays all ordinary and necessary costs and expenses relating to our business. In exchange for these services and as reimbursement for these costs and expenses, we issue Class A ordinary shares to the Administrator at a rate of 1.5% of the total Class A ordinary shares outstanding after giving effect to such issuance, per annum. The obligation to pay the administrative services fee commenced on the date of the closing of the Offering and there is no overall limit to the number of shares that may be issued to pay this fee. Any extraordinary or non-routine costs, payments and expenses, if any, will be paid for by the Administrator, but such extraordinary or non-routine costs and payments will be reimbursed upon the sale of the Artwork or a sale of our Company, as applicable. Any termination of the Administrative Services Agreement will require the prior written consent of Masterworks.

 

 C: 
4

 

 

We do not expect to generate any revenues or cash flow unless and until the Artwork is sold. We are totally reliant on Masterworks to maintain the Artwork and administer our business.

 

Risk Factors

 

We face risks and uncertainties that could affect us and the Artwork, as well as the art market generally. These risks are outlined under the heading “Risk Factors” contained in documents we file with the SEC. In addition, new risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may adversely affect the value of the Artwork or the Company’s Class A ordinary shares.

 

Critical Accounting Policies and Estimates

 

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our consolidated financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financial statements.

 

Investment in Artwork

 

The Artwork has been recorded on the Company’s consolidated balance sheet at cost, which is the purchase price paid for the Artwork at an auction in November 2017.

 

The Artwork has an indefinite life. We review the Artwork for impairment in accordance with the requirements of ASC 360-10, Impairment and Disposal of Long-Lived Assets (“ASC 360”). Those requirements require us to perform an impairment analysis whenever events or changes in circumstances indicate that the carrying amount of the Artwork might not be recoverable, i.e., information indicates that an impairment might exist. In accordance with ASC 360, we:

 

  Consider whether indicators of impairment are present; Indicators or triggers of impairment management considers are: deteriorating physical condition of the artwork, trends in the art market, reputation of the artist, recent sales of other artworks by the artist and other events, circumstances or conditions that indicate impairment might exist;
     
  If indicators are present, perform a recoverability test by comparing the estimated amount realizable upon sale of the Artwork, to its carrying value; and
     
  If the amount realizable upon sale of the Artwork is deemed to be less than its carrying value, we would measure an impairment charge.

 

If it is determined that measurement of an impairment loss is necessary, the impairment loss would be calculated based on the difference between the carrying amount of the Artwork and its estimated fair value. An impairment loss would be reported as a component of income (loss) in our consolidated financial statements. Management does not believe that there are any events or circumstances indicating impairment of the Artwork as of June 30, 2020 or 2019.

 

 C: 
5

 

 

Operating Results

 

Revenues

 

We did not generate any revenue for the periods presented.

 

True Up Payment Expense

 

In connection with the acquisition of the Artwork we agreed to pay a true-up to Masterworks in the amount of $181,500. We recorded a $181,500 true-up payment made to Masterworks Gallery, LLC as a one-time expense during 2019. We did not record any true-up payments as an expense during the periods presented. The true-up payment compensates and reimburses Masterworks for general operating costs, offering costs, sourcing and purchasing fees and costs, import taxes (if any) and interest and commitments to purchase the Artwork.

 

Share-Based Compensation Expense

 

We recorded an administrative services fee as a share-based compensation expense in the amount of $15,000 for the period January 1, 2020 through June 30, 2020. This fee was paid to the Administrator in the form of 750 newly issued Class A ordinary shares recorded at a fair value of $20.00 per share for the period January 1, 2020 through June 30, 2020. We did not incur any share-based compensation expense for the period January 1, 2019 through June 30, 2019.

 

Contingencies

 

We may be subject to lawsuits, investigations or claims (some of which may involve substantial dollar amounts) that can arise out of our normal business operations. Masterworks may advance funds to cover expenses, settlements or losses resulting from any such claims or investigations, but any such amounts are reimbursable by us upon a sale of the Artwork pursuant to the administrative services agreement. In addition, Masterworks, affiliates of Masterworks, our managers and or our officers may be subject to lawsuits, investigations or claims for which we may have indemnification obligations or reimbursement obligations pursuant to the administrative services agreement. We would continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a thorough analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy.

 

There were no contingencies as of June 30, 2020 or 2019, respectively.

 

Income Taxes

 

We expect that we will be treated as a partnership for U.S. federal income tax purposes and not as an association or publicly traded partnership subject to tax as a corporation. As a partnership, we generally will not be subject to U.S. federal income tax. Instead, each shareholder that is subject to U.S. tax will be required to take into account its distributive share, whether or not distributed, of each item of our income, gain, loss, deduction or credit.

 

We had no federal, state or foreign income tax assets, liabilities or expenses as of June 30, 2020 or 2019, respectively.

 

 C: 
6

 

 

Liquidity and Capital Resources of the Administrator

 

We do not anticipate that we will maintain any material liquid assets and, accordingly, we rely upon the Administrator to pay for the maintenance and administration of our business in accordance with the administrative services agreement. A summary of the financial condition of the Administrator as of June 30, 2020 and 2019 is provided in Note 3 to the Consolidated Financial Statements.

 

We and the Administrator believe that the Administrator’s sources of liquidity together with cash on hand, will be sufficient for the Administrator to perform its obligations under the administrative services agreement for the foreseeable future, although if Scott W. Lynn were to withdraw his financial support, the Administrator would likely be forced to sell the Artwork and cease operations. We do not believe we will need to raise any additional funds through the issuance and sale of additional membership interests and are not permitted to do so under our operating agreement without the prior approval of holders of the Class A ordinary shares.

 

The Administrator is currently financed through equity contributions from Masterworks.io, LLC. As of June 30, 2020, Masterworks.io, LLC is principally funded through an affiliate loan from Scott W. Lynn, the founder and Chief Executive Officer of Masterworks, with an aggregate principal balance of $11.9 million. Because Scott W. Lynn controls Masterworks, the affiliate loan can effectively be declared due and payable at any time in the discretion of Mr. Lynn.

 

The Administrator earns fees in the form of additional Class A ordinary shares issued by us and other similar issuer entities, which it may periodically sell to obtain additional liquidity. The direct incremental costs incurred by the Administrator to satisfy its obligations under the administrative services agreement are expected to be less than its revenues, though such revenues may be insufficient to cover the Administrator’s overhead. In addition, the Administrator has covenanted in the administrative services agreement that for so long as such agreement remains in effect, the Administrator will maintain on hand cash reserves sufficient to pay at least one year of estimated expenses to satisfy its obligations under the administrative services agreement to fund the operations of the Company until the sale of the Artwork.

 

The Administrator conducts other business activities, including the administration of other entities similar to the Company and expects that, with scale, the Administrator’s revenues will exceed its costs. The Company cannot estimate at this time what the aggregate costs and expenses of the Administrator will be with respect to such activities as they will depend on many factors. Additionally, the Company plans to own the Artwork for an indefinite period.

 

We are not aware of any trends, uncertainties, demands, commitments or events that will materially affect our operations or the liquidity or capital resources of the Administrator.

 

Commitments from Affiliates to Fund Operations

 

We have a written commitment from the Administrator to fund our operations and costs to maintain the Artwork which is contained in the administrative services agreement.

 

Commitments from Affiliates to Fund Class A ordinary shares, Offering Costs and Expenses

 

The direct costs associated with the Offering were paid by the Administrator rather than from the net proceeds of the Offering. None of these fees, costs or expenses are reimbursable by the Company to the Administrator, although Masterworks received true-up payments of $181,500 upon the closing of the Offering for acquiring and financing the acquisition of the Artwork and as reimbursement of costs and expenses.

 

Item 2. Other Information

 

None.

 

 C: 
7

 

 

MASTERWORKS 001, LLC

 

CONSOLIDATED FINANCIAL STATEMENTS

 

CONTENTS

 

  Page
   
Consolidated Balance Sheets F-2
   
Consolidated Statements of Operations F-3
   
Consolidated Statements of Members’ Equity F-4
   
Consolidated Statements of Cash Flows F-5
   
Consolidated Notes to Financial Statements F-6 – F-13

 

 C: 
F-1

 

 

MASTERWORKS 001, LLC

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   As of
June 30, 2020
   As of
December 31, 2019
 
         
ASSETS          
           
Current Assets:          
Cash  $100   $100 
Receivable from affiliate   -    - 
Total Current Assets   100    100 
           
Artwork   1,815,000    1,815,000 
           
Total Assets  $1,815,100   $1,815,100 
           
LIABILITIES AND MEMBERS’ EQUITY          
           
Current Liabilities:          
Settling subscriptions  $-   $- 
Non-interest bearing advance payable to affiliate   -    - 
Total Current Liabilities   -    - 
           
Total Liabilities  $-   $- 
           
Members’ Equity:          
Membership interests, not represented by shares   -    - 
Class A ordinary shares, 100,962 and 100,212 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively   1,815,000    1,815,000 
Class B shares, 24,956 and 24,956 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively   100    100 
           
Total Members’ Equity   1,815,100    1,815,100 
           
Total Liabilities and Members’ Equity  $1,815,100   $1,815,100 

 

No assurance is provided on these consolidated financial statements.

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

 

 C: 
F-2

 

 

MASTERWORKS 001, LLC

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

For the Period

January 1, 2020

Through

June 30, 2020

  

For the Period

January 1, 2019

Through

June 30, 2019

 
         
Total Income  $-   $- 
           
Expenses:          
True-up payment expense   -    - 
Share-based compensation - administrative services fees   15,000    - 
           
Total Expenses   15,000    - 
           
Net Loss  $(15,000)  $- 
           
Net Loss per Class A Ordinary Share, Basic and Diluted  $(0.15)  $- 
           
Weighted Average Number of Class A Ordinary Shares Outstanding, Basic and Diluted   100,400         - 

 

No assurance is provided on these consolidated financial statements.

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

 

 C: 
F-3

 

 

MASTERWORKS 001, LLC

 

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

(Unaudited)

 

   Membership Interests   Class A Ordinary Shares   Class B Shares     
                       Total             
                       Members’           Total 
       Contributed       Contributed   Accumulated   Equity -       Contributed   Members’ 
   Interests   Capital   Shares   Capital   Deficit   Class A   Shares   Capital   Equity 
                                     
Balance at January 1, 2019   16,015   $100    -   $-   $-   $-    -   $-   $100 
                                              
Membership interests issued upon entity formation   -    -    -    -    -    -    -    -    - 
                                              
Conversion of membership interests upon entry into the Amended and Restated Operating Agreement   (16,015)   (100)   -    -    -    -    24,956    100    - 
                                              
Share subscriptions settled   -    -    -    -    -    -    -    -    - 
                                              
Class A ordinary shares issued   -    -    -    -    -    -    -    -    - 
                                              
Net loss   -    -    -    -    -    -    -    -    - 
                                              
Balance at June 30, 2019   -   $-    -   $-   $-   $-    24,956   $100   $100 
                                              
Balance at January 1, 2020   -   $-    100,212   $2,004,240   $(189,240)  $1,815,000    24,956   $100   $1,815,100 
                                              
Conversion of membership interests upon entry into the Amended and Restated Operating Agreement   -    -    -    -    -    -    -    -    - 
                                              
Share subscriptions settled   -    -    -    -    -    -    -    -    - 
                                              
Class A ordinary shares issued   -    -    750    15,000    -    15,000    -    -    15,000 
                                              
Net loss   -    -    -    -    (15,000)    (15,000)   -    -    (15,000)
                                              
Balance at June 30, 2020   -   $-    100,962   $2,019,240   $(204,240)  $1,815,000    24,956   $100  $1,815,100 

 

No assurance is provided on these consolidated financial statements.

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

 

 C: 
F-4

 

 

MASTERWORKS 001, LLC

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

For the Period

January 1, 2020

Through

June 30, 2020

  

For the Period

January 1, 2019

Through

June 30, 2019

 
         
Cash Flows from Operating Activities:          
Net loss  $(15,000)  $- 
Adjustments to reconcile net loss to net cash used by operating activities          
Share-based compensation - administrative services fees   15,000    - 
           
Net Cash Used by Operating Activities   -    - 
           
Cash Flows from Investing Activities:          
Purchase of artwork   -    - 
           
Net Cash Used by Investing Activities   -    - 
           
Cash Flows from Financing Activities:          
Proceeds from issuance of membership interests   -    - 
Proceeds from unsettled subscriptions   -    

715,440

 
Settlement of subscriptions previously received   -    

-

 
Proceeds from issuance of Class A ordinary shares   -    - 
Proceeds from non-interest bearing advance from affiliate   -    - 
Repayment of non-interest bearing advance from affiliate   -    - 
           
Net Cash Provided by Financing Activities   -    715,440 
           
Net Change in Cash   -    715,440 
           
Cash, beginning of period   100    100 
           
Cash, end of period  $100   $715,540 

 

No assurance is provided on these consolidated financial statements.

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

 

 C: 
F-5

 

 

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Organization – Masterworks 001, LLC (“Company”) was formed as a Delaware limited liability company on March 28, 2018 to purchase a painting by Andy Warhol (the “Artwork”). On May 10, 2019, the Company commenced an offering (the “Offering”) of membership interests represented by 99,825 of the Company’s Class A shares to third-party investors for $20.00 per share, or aggregate Offering proceeds of $1,996,500. The Company closed the Offering on September 27, 2019. At closing, the Offering was fully subscribed, and the Company issued 99,825 Class A ordinary shares, and received total Offering proceeds of $1,996,500. All of the proceeds from the Offering were used to pay for the acquisition of the Artwork, or to repay a non-interest bearing advance made by Masterworks, and to pay a true-up to Masterworks Gallery, LLC (“Gallery”) as described in Note 2. The Company is managed by a Board of Managers comprised of three individuals and is administered by Masterworks Administrative Services, LLC (the “Administrator”).

 

Principles of Consolidation – The consolidated financial statements include the accounts of the Company and a segregated portfolio of Masterworks Cayman, SPC (the “SPC”), a Cayman Islands segregated portfolio company. The Company owns 100 Class 001 shares of the SPC, which represents 100% ownership of the 001 Segregated Portfolio (the “001 Portfolio”). Title to the Artwork is held by the 001 Portfolio. As the context requires, references in these consolidated financial statements to the “Company” include both the Company and the 001 Portfolio, and references to “consolidated” refer to the fact that the Company treats the 001 Portfolio as a consolidated subsidiary in these financial statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 810-10 Consolidation: Overall. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Basis of Accounting and Use of EstimatesThe Company prepares its consolidated financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheets and the reported amounts of revenues and expenses in the statements of operations during the applicable period. Actual results could materially differ from those estimates.

 

Artwork – The purchase price of the Artwork was $1,815,000. Title to the Artwork is held by the 001 Portfolio. The Company has no assets other than the Artwork, no indebtedness, and does not conduct any operations other than incidental to ownership of the Artwork.

 

 C: 
F-6

 

 

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Artwork (continued) – The Artwork has been initially recorded at cost. Artwork is determined to have an indefinite life. The Company will review the Artwork for impairment in accordance with the requirements of FASB ASC Subtopic 360-10, Property, Plant, and Equipment: Impairment and Disposal of Long-Lived Assets. Those requirements require the Company to perform an impairment analysis whenever events or changes in circumstances indicate that the carrying amount of the Artwork might not be recoverable, i.e., information indicates that an impairment might exist. In accordance with ASC 360, the Company will:

 

  Consider whether indicators of impairment are present. Indicators or triggers of impairment management considers are: deteriorating physical condition of the Artwork, trends in the art market, reputation of the artist, recent sales of other artworks by the artist, and other events, circumstances, or conditions that indicate impairment might exist;
     
  If indicators are present, perform a recoverability test by comparing the estimated amount realizable upon sale of the Artwork to its carrying value; and
     
  If the amount realizable upon sale of the Artwork is deemed to be less than its carrying value, the Company would measure an impairment charge.

 

If it is determined that measurement of an impairment loss is necessary, the impairment loss would be calculated based on the difference between the carrying amount of the Artwork and its estimated fair value. An impairment loss would be reported as a component of income (loss) in the Company’s consolidated financial statements. The Company does not believe that there are any events or circumstances indicating impairment of the Artwork as of June 30, 2020 or 2019.

 

Cash The Company’s cash consists of cash held in a Federal Deposit Insurance Corporation (“FDIC”) insured bank account.

 

 C: 
F-7

 

 

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Changes in Accounting Principles – During fiscal 2019, the Company adopted FASB Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with customers, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted the requirements of ASU 2014-09 utilizing the modified retrospective method of transition. No cumulative-effect adjustment to members’ equity was recorded because the adoption did not impact the Company’s historical revenue. The Company applied the new guidance using the practical expedient provided in Topic 606 that allows the guidance to be applied only to contracts that were not complete as of January 1, 2019. The adoption of ASU 2014-09 had no impact on the consolidated financial statements for the periods presented.

 

During fiscal 2019, the Company adopted FASB ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expanded the scope of Topic 718 to improve aspects of the accounting for nonemployee share-based payment transactions for acquiring goods and services and to eliminate the old guidance at ASC Subtopic 505-50. Under ASU 2018-07, a grantor will continue to recognize cost in the same period and manner as if the grantor had paid cash for the goods or services instead of paying with or using share-based payment awards. The Company adopted ASU 2018-07 because it pays the Administrator’s administrative services fees with Class A shares. The Company applied the new guidance using the modified retrospective method. No cumulative-effect adjustment to retained earnings was made, and the adoption of ASU 2018-07 had no impact on the consolidated financial statements for the periods presented.

 

Concentration of Credit RiskThe Company maintains its cash in bank accounts in amounts that may exceed federally insured limits at times. The Company has not experienced any losses in these accounts in the past, and management believes the Company is not exposed to significant credit risks as management periodically evaluates the strength of the financial institution in which it deposits funds.

 

 C: 
F-8

 

 

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Earnings (loss) per Class A Ordinary Share – Basic earnings (loss) per share is calculated by dividing income (loss) available to Class A shareholders by the weighted-average Class A shares outstanding during the period. Fully diluted earnings (loss) per share will include in the denominator Class A shares issuable upon conversion of Class B shares, if any. At June 30, 2020, no if-converted Class B shares were included in fully diluted earnings (loss) per Class A ordinary share calculation, as zero Class A shares would be received upon conversion, resulting in no dilution.

 

Income TaxesThe Company is a limited liability company taxed as a partnership and thus is generally not subject to federal or state income taxes. Accordingly, the Company’s taxable income or loss, which may vary substantially from income or loss reported for financial reporting purposes, will be included in the federal and state income tax returns of the Company’s members based upon their respective share of the Company’s income and expenses as reported for income tax purposes. Accordingly, no provision for income taxes is reflected in the accompanying consolidated financial statements.

 

For the current tax year and for all major taxing jurisdictions, the Administrator has concluded that the Company is a pass-through entity and there are no uncertain tax positions that would require recognition in the financial statements. If the Company were to incur an income tax liability in the future, interest on any income tax liability would be reported as interest expense, and penalties on any income tax liability would be reported as income taxes. The Administrator does not expect that its assessment regarding unrecognized tax positions will materially change over the next twelve months. However, the Administrator’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof, as well as other factors including but not limited to, questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, compliance with U.S., state, and foreign income tax laws, and changes in administrative practices and precedents of the relevant taxing authorities.

 

Members’ Equity – Members’ equity is comprised of two types of membership interests: Class A and Class B ordinary shares.

 

  Class A shares are entitled to receive any and all net proceeds from the sale of the Artwork up to $20 per share before any payment is made with respect to Class B shares. If and to the extent the holders of Class A shares have received $20 per share following a sale of the Artwork and there are additional net proceeds remaining, the Class A shares are entitled to 80% of such excess funds available for distribution and the Class B shares are entitled to the remaining 20% of such excess funds, provided, that such amounts would be proportionately adjusted if any or all of the Class B shares had been converted to Class A shares prior to the sale of the Artwork. Any Class A shares owned by the Administrator have no voting rights. The authorized number of Class A shares is limited to 99,825, plus (i) shares which may be issued pursuant to the Administrative Services Agreement, plus (ii) shares which may be issued upon conversion of Class B shares. All Class A shares not owned by the Administrator have certain limited voting and approval rights, generally including the issuance of additional shares, sale of the Artwork except for certain instances, and removing members of the Board of Managers. The Board of Managers controls all other actions as stated in the Company’s amended and restated operating agreement.

 

 C: 
F-9

 

 

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Members’ Equity (continued)

 

  Class B shares, which are held by Gallery are entitled to 20% of the excess amount, if any, available for distribution to members following a sale of the Artwork after the holders of Class A shares have received $20 per share. In addition, prior to a sale of the Artwork, Class B shares may be converted into Class A shares with a value at the time of conversion equal to 20% of the increase in value of the Company’s issued and outstanding Class A and B shares. Any increase in value of the Class A shares would potentially dilute earnings (loss) per share in the future. The convertible Class B shares have no specified exercise date, exercise price, or expiration. Class B shares have no voting rights.

 

True-Up The Company agreed to pay Gallery a true-up payment equal to 10% of the purchase price of the Artwork, or $181,500, as reimbursement and compensation for general operating costs, offering services, sourcing and purchasing fees, and interest costs related to the purchase of the Artwork. These costs and fees, which are expensed by the Company, predominantly relate to internal costs in respect of Masterworks’ platform operations. Incremental amounts paid to third parties that are directly attributable to the Offering were evaluated by management and deemed to be immaterial for purposes of capitalization. As of June 30, 2020, the Company had paid the full amount of such true-up payment.

 

Post-Offering ExpensesThe Company’s ongoing expenses are paid by the Administrator pursuant to an Administrative Services Agreement under which the Administrator will receive an administrative services fee, commencing upon the final closing of the Offering. The administrative services fee is payable in the form of additional membership interests represented by Class A shares and will be accounted for as “Share-based compensation - administrative services fee” in the Company’s consolidated financial statements. Ordinary costs of the Company will be paid by the Administrator and its affiliates on behalf of the Company. See Note 3, which summarizes certain financial statement information of the Administrator.

 

Revenue RecognitionThe Company does not plan to generate revenue other than in connection with the sale of the Artwork at some undetermined future date. At the time of signing of a definitive agreement to sell the Artwork, the Company will assess the timing and amount of revenue to be recognized pursuant to ASC 606.

 

 C: 
F-10

 

 

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

2. RELATED PARTY TRANSACTIONS

 

In connection with the Offering, the Company adopted an Amended and Restated Operating Agreement, which created two classes of membership interests, Class A and Class B ordinary shares. As a result, all of the Company’s membership interests were converted into Class B ordinary shares, as represented on the consolidated statements of members’ equity. As of June 30, 2020, the Company entered into certain arrangements with Gallery, which owns 100% of the Class B shares, and the Administrator, each of which are wholly-owned and controlled by Masterworks.io, LLC, and are thus considered to be related parties to the Company.

 

As indicated in Note 1, the Company agreed to pay Gallery a true-up payment equal to 10% of the purchase price of the Artwork, or $181,500, as reimbursement and compensation for Masterworks’ platform operations.

 

On September 27, 2019, the Administrator agreed to pay for certain operating costs of the Company and provide administrative services to the Company and the SPC pursuant to an administrative services agreement. The administrative services fee is paid by issuing Class A shares to the Administrator at a rate of 1.5% of the total Class A shares outstanding (excluding shares issuable upon conversion of Class B shares) per annum. The Company recorded $15,000 in administrative services fees relating to the issuance of 750 Class A shares to the Administrator for the period January 1, 2020 through June 30, 2020. The administrative services fee covers all ordinary operating costs of the Company; however, the Administrator will charge the Company for any extraordinary costs and payments, including costs and payments associated with litigation, arbitration, or judicial proceedings; material or extraordinary transactions related to a merger, third-party tender offer, or other similar transaction and for selling the Artwork. For any extraordinary costs incurred or payments made on behalf of the Company, the Company will show the expense on its statement of operations in the year of occurrence, as well as carry forward a due to related party liability on its balance sheet in perpetuity, until the Artwork is sold and the resulting proceeds can be used to settle the liability to the Administrator. For the purposes of determining the fair value of the administrative services fee, management evaluates the fair value of the Class A shares.

 

 C: 
F-11

 

 

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

3. ADMINISTRATOR SUMMARY FINANCIAL INFORMATION

 

The Company does not maintain a material amount of cash and is entirely dependent upon the Administrator to perform administrative services and to pay ordinary ongoing costs and expenses to maintain the Artwork and administer the Company’s operations. The table below summarizes selected unaudited financial information of the Administrator as of June 30, 2020 and 2019:

 

   June 30, 
   2020   2019 
Assets        
Current assets  $673,802   $137,415 
Property and equipment, net   199,240    185,010 
Deposits   72,090    46,240 
Other assets   47,960    - 
Total assets  $993,092   $368,665 
           
Liabilities          
Current liabilities  $323,974   $122,092 
Total liabilities  $323,974   $122,092 
           
Member’s Equity          
Total member’s equity  $669,118   $246,573 

 

4. RISKS AND UNCERTAINTIES

 

The nature of the Company’s operations are limited in scope. The Company holds no material assets other than a single work of art, has no employees, and has no debts or contractual obligations other than an administrative services agreement pursuant to which the Administrator provides services that are essential to the Company, such as storage, insurance, display, transport, SEC filings and compliance, and other ordinary operating services. The Administrator pays all of such costs and expenses. As a result of this relationship, the Company is dependent upon the Administrator and is totally reliant on the Administrator to manage its business.

 

The preparation of the consolidated financial statements requires the use of estimates by management. Although the Artwork is carried at its cost basis, subject to possible impairment, management must estimate the value of the Artwork to determine the expense associated with fees payable to the administrator, which are payable in the form of Class A shares representing membership interests in the Company. The value of Artwork is highly subjective and given that each work of art is unique, there is a risk that management’s estimates are materially incorrect, which would result in an understatement or overstatement of the Company’s expenses.

 

 C: 
F-12

 

  

MASTERWORKS 001, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

 

4. RISKS AND UNCERTAINTIES (continued)

 

The Company is subject to an exceptionally high level of concentration risk. The Company’s single Artwork can decline in value, become worthless or be difficult or impossible to liquidate due to economic factors, trends in the art market generally, trends relating to the genre of the Artwork or trends relating to the market for works by the artist that produced the Artwork, as well as changes in the condition of the Artwork and other factors. In periods of global financial weakness and disruption in financial and capital markets, the art market tends to experience declines in transaction volume, making it extremely difficult to liquidate Artwork during such periods at acceptable values or at all.

 

5. GOVERNANCE

 

Scott W. Lynn was appointed as a member of the Company’s Board of Managers on November 18, 2018 and resigned in April 2019. The resignation was not the result of any disagreements with the Company relating to the Company’s operations, policies or practices. In April 2019, Nigel S. Glenday was appointed as a member of the Board of Managers of the Company.

 

Leonard J. Sokolow served as a member of the Company’s Board of Managers and Independent Manager of the Company from November 18, 2018 to April 29, 2020. On April 29, 2020, Eli D. Broverman replaced Leonard J. Sokolow as a member of the Board of Managers and as the Independent Manager.

 

On September 25, 2020, Scott W. Lynn, the Chief Executive Officer (“CEO”) of the Company resigned from the position of CEO. The resignation was not the result of any disagreements with the Company relating to the Company’s operations, policies or practices. On September 25, 2020 the Company’s Board of Managers appointed Nigel S. Glenday to serve as the CEO.

 

6. SUBSEQUENT EVENTS

 

Management has evaluated events and transactions that have occurred since June 30, 2020 and reflected their effects, if any, in these consolidated financial statements through September 28, 2020, the date the consolidated financial statements were available to be issued. See Note 5 for certain governance changes that occurred after June 30, 2020.

 

 C: 
F-13

 

 


INDEX OF EXHIBITS

 

Exhibit No.   Description of Exhibit
     
2.1   Certificate of Formation (incorporated by reference to the copy thereof submitted as Exhibit 2.1 to the Company’s Form 1-A filed on July 31, 2018)
2.2   Operating Agreement (incorporated by reference to the copy thereof submitted as Exhibit 2.1 to the Company’s Form 1-A/A filed on November 23, 2018)
2.3   Amended and Restated Operating Agreement (incorporated by reference to the copy thereof submitted as Exhibit 2.3 to the Company’s Form 1-SA filed on September 30, 2019).
4.1   Form of Subscription Agreement (incorporated by reference to the copy thereof submitted as Exhibit 4.1 to the Company’s Form 1-A/A filed on May 2, 2019)
6.1   Form of Art Purchase Agreement (incorporated by reference to the copy thereof submitted as Exhibit 6.1 to the Company’s Form 1-A/A filed on January 30, 2019)
6.2   Form of Administrative Services Agreement (incorporated by reference to the copy thereof submitted as Exhibit 6.2 to the Company’s Form 1-A/A filed on January 30, 2019)

9.1

 

 

Letter from Mayer Hoffman McCann, P.C. to the Securities and Exchange Commission, dated February 27, 2020 (incorporated by reference to the copy thereof submitted as Exhibit 9.1 to the Company’s Form 1-U filed on February 27, 2020).

 

 C: 
8

 

 

SIGNATURES

 

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.

 

  MASTERWORKS 001, LLC
     
  By: /s/ Joshua B. Goldstein
  Name: Joshua B. Goldstein
  Title: General Counsel & Secretary

 

Pursuant to the requirements of Regulation A, this Report has been signed below by the following persons on behalf of the issuer in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Nigel S. Glenday   Chief Executive Officer   September 28, 2020
Nigel S. Glenday   (Principal Executive Officer)    
         
/s/ Nigel S. Glenday   Chief Financial Officer (Principal Financial Officer   September 28, 2020
Nigel S. Glenday   and Principal Accounting Officer)    

 

 C: 
9

 


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘1-SA’ Filing    Date    Other Filings
Filed on:9/28/20
9/25/20
For Period end:6/30/20
4/29/201-K
1/1/20
12/31/191-K
9/27/19
6/30/191-SA
5/10/19253G2,  QUALIF
1/1/19
11/18/18
3/28/18
 List all Filings 


6 Previous Filings that this Filing References

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 2/27/20  Masterworks 001, LLC              1-U:4       2/27/20    2:138K                                   M2 Compliance LLC/FA
 9/30/19  Masterworks 001, LLC              1-SA        6/30/19    2:9M                                     M2 Compliance LLC/FA
 5/02/19  Masterworks 001, LLC              1-A/A                  6:3.6M                                   M2 Compliance LLC/FA
 1/30/19  Masterworks 001, LLC              1-A/A                 10:4.4M                                   M2 Compliance LLC/FA
11/23/18  Masterworks 001, LLC              1-A/A      11/21/18    9:3M                                     M2 Compliance LLC/FA
 7/31/18  Masterworks 001, LLC              1-A                   11:9.1M                                   M2 Compliance LLC/FA
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