UNITED STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the quarter ended June 30, 2010





Commission File Number 000-49676





ARTFEST INTERNATIONAL, INC.


Exact name of Registrant as specified in its charter








NEVADA
30-0177020(State or other jurisdiction of
(I.R.S. Employerincorporation or organization)
Identification No.)





13300 Branch View Lane, Dallas, TX 75234


(Address of Principal Executive Offices)(Zip Code)





(877) 278-6672


(Registrant’s telephone number)








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No   ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ̈    No   ̈





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





Large accelerated filer   ̈
Accelerated filer    ̈Non-accelerated filer   ̈
Smaller reporting company  x





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





As of August 23, 2010, the registrant had 4,583,733,605 shares of common stock, $0.0001 par value per share, outstanding and 3,388,220 shares of preferred stock, $.0001 par value per share, outstanding.











Table of Contents








PART I.
FINANCIAL INFORMATION
3Item 1.
Financial Statements
F-1Item 2.
Management's Discussion and Analysis and Plan of Operation
4Item 3.
Controls and Procedures.
11PART II.
OTHER INFORMATION
11Item 1.
Legal Proceedings
12Item 2.
Unregistered Sales of Securities and Use of Proceeds
12Item 3.
Defaults Upon Senior Securities
12Item 4.
Submission of Matters to a Vote of Security Holders
12Item 5.
Other Information
12Item 6.
Exhibits
12Signatures

13CERTIFICATIONS




















PART I - FINANCIAL INFORMATION





ITEM 1.   FINANCIAL STATEMENTS








PAGEACCOUNTANT'S REVIEW REPORT
F-1FINANCIAL STATEMENTSCondensed and Consolidated Balance Sheet
F-2Condensed and Consolidated Statements of Operations
F-3Condensed and Consolidated Statements of Cash Flows
F-4Statement of Stockholders Equity
F-5Notes to Financial Statements
F-7

























EUGENE M EGEBERG


CERTIFIED PUBLIC ACCOUNTANT


834 SOUTH MILTON AVENUE


BALTIMORE, MARYLAND  21224


Telephone (410) 218-1711  Fax (410) 374-8121








To the Board of Directors and Stockholders


Artfest International, Inc.


13342 Midway Road


Suite 250


Dallas, TX 75244





Report of Independent Registered Public Accounting Firm





I have reviewed the Balance Sheet of Artfest International, Inc. as of June 30, 2010 and the related Statements of Operations, Stockholders Equity, and Cash Flows for the three months ended. These interim financial statements are the responsibility of the Company’s management.





I conducted the review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, I do not express such an opinion.





Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with Public Company Accounting Oversight Board (United States) and U.S. Generally Accepted Accounting Principles.





The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the financial statements, the Company’s future is dependent upon its ability to obtain financing and upon future profitable operations from the development of its new business opportunities.  The Company’s financial position and operating results raise substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.














Eugene M. Egeberg, C.P.A.


August 23, 2010











F-1


ARTFEST INTERNATIONAL, INC.


CONDENSED CONSOLIDATED BALANCE SHEET


(Unaudited)





ASSETS
 June 30,2010


December 31, 2009Current AssetsCash and cash equivalents

$
76,414


$
63,408Other Current Asset


51,307



60,811Inventory


1,351,397



1,340,250Accounts Receivable


398,811



513,556Total Current Assets


1,877,839



1.978,026Non-Current AssetsOther Asset

$
19,167


$
19,167Goodwill, net of accumulated amortization


3,637,706



3,779,500Total Non-Current Assets


3,656,873



3,798,667Property, Plant and Equipmentat cost, net of accumulated depreciation


187,089



52,776TOTAL ASSETS

$
5,721,801


$
5,829,468
 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current LiabilitiesAccounts payable and Accrued Liabilities

$
913,600


$
1,655,633Current Portion of Notes Payable (Note 8)


747,850



150,650Deferred Revenue


351,000



351,000Rewards Payable


-Total Current Liabilities


2,012,450



2,157,283Non-current LiabilitiesLoans Payable (Note 8)


513,162



493,662TOTAL LIABILITIES

$
2,525,612


$
2,650,945Stockholders' Equity:Common Stock - $.0001 par value – 9,995,000,000shares authorized, 2,462,953,303 issued andoutstanding

$
246,295


$
117,484Preferred Stock - $.001 par value - 5,000,000shares authorized, 3,336,020 issued andoutstanding


3,336



3,099Additional paid-in capital


9,721,945



7,503,319Retained earnings (deficit)


(6,775,386
)


(4,445,379
)TOTAL STOCKHOLDERS EQUITY

$
3,196,190


$
3,178,523TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
5,721,801


$
5,829,468
 
 The accompanying notes are an integral part of these financial statements.
  F-2


ARTFEST INTERNATIONAL, INC.


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS


(Unaudited)








For the six


For the threemonths ended


months endedJune 30, 2010


June 30, 2009


June 30, 2010


June 30, 2009Revenue

$
1,424,412


$
167,885


$
571,980


$
36,900Cost of Revenue


590,287



1,000



198,283



12,300Gross Profit (Loss)


834,124



166,885



373,697



24,600Operating Expenses


2,868,101



849,186



1,679,669



417,389Net Income (Loss) from Operations


(2,033,977
)


(682,301
)


(1,305,972
)


(392,789
)Other Income (Expense), Net


(10,525
)


-



(3,708
)


-Net Income (Loss)

$
(2,044,502
)

$
(682,301
)

$
(1,309,680
)

$
(392,789
)Weighted average number of common sharesoutstanding - basic and fully diluted


2,462,953,303



369,131,502



2,462,953,303



369,131,502Net (Loss) per share - basic and fully diluted

$
0.00


$
0.00


$
0.00


$
0.00








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








F-3


ARTFEST INTERNATIONAL, INC.


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


(Unaudited)


For the sixmonths endedJune 30, 2010


June 30, 2009Cash Flows From Operating ActivitiesNet income (loss)

$
(2,044,502
)

$
(392,789
)Adjustments to reconcile net income (loss) tonet cash (used) provided by operating activities:Increase in Depreciation


14,143



8,486(Increase) in Inventory


(11,057
)


(543,624
)Increase in Rewards Payable


-



-(Decrease) in Accounts Receivable


111,249



-(Decrease) in Accounts Payable and Accrued Expenses


(482,743
)


965,572Intercompany Transactions


(30,000
)


-Increase in Deferred Revenue


-



-(Decrease) in Other Assets


-



-(Decrease) in Other Assets


13,001



-Net cash (used) by operating activities


(2,429,909
)


37,645Cash Flows From Investing ActivitiesPurchase of property, plant and equipment


(148,457
)


-Increase in Goodwill


-



-Net cash used in investing activities


(148,457
)


-Cash Flows From Financing ActivitiesNet Changes in Common Stock


128,811



280,000Issuance of Preferred StockIncrease in Notes Payable


209,356



(776,480
)Increase in Loans Payable


34,344



-Increase in Retained Earnings


-



-Increase in Contributed Capital


2,218,625



451,894Net cash used in financing activities


2,591,135



(44,586
)Net decrease in cash and cash equivalents


13,006



(6,941
)Cash and cash equivalents, Beginning of Period


63,408



(2,196
)Cash and cash equivalents, June 30th

$
61,068


$
(9,137
)





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


F-4


ARTFEST INTERNATIONAL, INC.


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


(Unaudited)


PREFERRED

SERIES A


PREFERRED

SERIES B


COMMON STOCK


Additional





TotalPaid In


Accumulated


StockholdersShares


Amount


Shares


Amount


Shares


Amount


Capital


Deficit


EquityBalance


3,099,020


$
3,099



0


$
-



117,484,002


$
117,484


$
7,503,319


$
(4,445,379
)

$
3,178,524December 31, 2009Issuance of Stock

































$
-for acquisition ofsubsidiaryIssuance of Stock

































$
-for acquisition ofpropertyIssuance of Stock


237,000


$
237


















$
1,184,763






$
1,185,000for cashIssuance of


















1,412,495,430


$
141,250


$
558,941


$
(285,505
)

$
414,686Common Stockfor servicesIssuance of


















932,973,873


$
93,297


$
369,186






$
462,483Common Stockfor debtStock Split

































$
-Conversion of

































$
-Preferred SharesAdjustment ( par value amendment)






















(105,736
)


105,736






$
-Net Loss





























$
(2,044,502
)

$
(2,044,502
)Balance

June 30, 2010


3,336,020


$
3,336



-


$
-



2,462,953,305


$
246,295


$
9,721,945


$
(6,775,386
)

$
3,196,191


The accompanying notes are an integral part of these financial statements.
 
 F-5


ARTFEST INTERNATIONAL, INC.


NOTES TO FINANCIAL STATEMENTS


June 30, 2010


(Unaudited)





Note 1 - History and organization of the company





The Company was incorporated on February 21, 2002 (Date of Inception) under the laws of the State of Delaware.  Artfest International Inc. provides sales, marketing, financial and e-commerce systems to the industries of Arts, Antiques, Collectibles and Luxury Goods. The markets are serviced by artists, dealers, galleries, and manufacturers of reproductions and luxury goods.





On December 28, 2007, pursuant to an Acquisition Agreement dated December 28, 2007, the Company acquired 100% of The Art Channel, Inc. in exchange for 28,000,000 shares of Artfest International, Inc. stock, which were issued to the former shareholders of The Art Channel, Inc. of which 8,000,000 shares were issued as of December 28, 2007 and 20,000,000 shares were issued as of March 28, 2008 subsequent to the Company’s annual meeting at which time the shareholders of the Company voted to increase the number of the authorized shares of the Company’s common stock to 500,000,000.





On July 8, 2009, the Board of Directors approved a resolution authorizing the Company to re-incorporate in the State of Nevada.  In order to accomplish the re-incorporation, the Board approved the creation of a new corporation with the same name (Artfest International, Inc.) in Nevada, which is a wholly owned subsidiary of the Company.  A Plan of Merger between the Company and the subsidiary and Articles of Merger were executed and filed with the Nevada and Delaware Secretaries of State pursuant to which the Company merged into the Subsidiary.





On July 8, 2009, the Company entered into a Stock Purchase Agreement and Plan of Reorganization to acquire 100% of Charity Sports Distributor, Inc. in exchange for 15,000,000 shares of Artfest International, Inc. stock valued at $.25 per share, which was issued to former shareholders of Charity Sports Distributor, Inc.





On October 27, 2009, the Board of Directors approved a 1-for-50 reverse split of its common stock. The reverse stock split was effective on October 28, 2009 and the Company’s common stock began trading on a post-reverse split basis under the trading symbol “ARTS.” The reverse stock split reduced the number of outstanding shares of the Company’s common stock from 961,320,064 to 19,226,405. Corresponding proportional adjustments were also made to any outstanding stock options previously issued by the Company.





The purposes of the reverse split was to increase the per share trading price of Artfest’s common stock, thereby appealing to a broader range of investors and to provide shareholders with more useful information in making period-to-period comparisons of Artfest’s earnings per share.





On October 28, 2009, the Company entered into an agreement to acquire all of the assets of Luxor International, Inc. a privately held company, for $5,000,000.  The terms of the acquisition included the issuance of four million (4,000,000) shares of the Company’s common stock valued at $1.00 per share, plus an additional $1,000,000 in cash. The assets being acquired include approximately 750 works of art expected to have an appraised value of approximately $9 million to $12 million. These works of art will provide the original works from which Artfest will produce Giclee reproductions generating future revenue while retaining ownership of the original works.





The Company issued Luxor 4,000,000 shares in anticipation of the closing of the acquisition, which as of the date of this filing, is still pending the remaining payment of $990,000 in cash. The Company intends to pay this amount over time in an equal monthly payment to be determined by both parties.





On April 21, 2010, the Company formed a wholly owned subsidiary Artfest Direct, Inc. pursuant to Chapter 78 of the NevadaRevised Statutes. The authorized capital stock of Artfest Direct consists of 500,000,000 shares of Common Stock, with a par value of $.0001 per share, of which 17,630,000 shares are issued and outstanding with the majority of the shares, or 84.6%, issued to Artfest International, Inc.





On April 28, 2010, the Board of Directors, upon the consent of the shareholders owning a majority of the shares then issued and outstanding, approved a resolution to amend the Articles of Incorporation of the Company to increase the number of authorized shares to two billion (2,000,000,000), of which one billion nine hundred and ninety five million (1,995,000,000) shares shall be common stock, par value $.001 per share, and five million (5,000,000) shares shall be preferred stock, par value $.001 per share.





F-6


On June 21, 2010, the Board of Directors, upon the consent of the shareholders owning a majority of the shares then issued and outstanding, approved a resolution to amend the Articles of Incorporation of the Company to increase the number of authorized shares to ten billion (10,000,000,000), of which nine billion nine hundred and ninety five million (9,995,000,000) shares were designated as common stock, par value $.0001 per share, and five million (5,000,000) shares were designated as preferred stock, par value $.0001 per share.





Note 2 - Accounting policies and procedures





The Company maintains a cash balance in a non-interest-bearing account that currently does not exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of June 30, 2010.





Fixed Assets


Property and equipment are recorded at historical cost. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized and depreciated over their estimated useful lives. Depreciation is calculated using the straight-line method over the estimated useful lives as follows:





Computer equipment
3 yearsOffice equipment
4 yearsProprietary Software
3 yearsFurniture and Fixtures
7 yearsAutomobiles
5 yearsArtwork
Not Depreciated





Property and Equipment consist of the following:


Computer & Video

$
41,907Proprietary software

$
181,150Furniture and Fixtures

$
15,662Furniture and Fixtures – Art

$
53,575Automobiles

$
27,900Less-accumulated depreciation


(133,105
)Total PP&E (net of depreciation)

$
187,089





Total Depreciation Expense for the six months ended June 30, 2010 was $14,143.





Intangible Assets


With the acquisition of The Art Channel Inc. on December 28, 2007, the Company Artfest International Inc. acquired the subsidiary with shares of stock whose total value exceeded the net assets of the company being purchased by $29,500.  The excess amount of $28,500 was booked to the parent company (Artfest International Inc.) as Goodwill and listed under “Other Assets/Intangible Assets.”   This is not amortized.





With the acquisition of Charity Sports Distributor, Inc. on June 30, 2009, the Company acquired the subsidiary with shares of stock whose total value exceeded the net assets of the company being purchased by $3,750,000.  The excess amount was booked to the parent company (Artfest International Inc.) as Goodwill and listed under “Other Assets/Intangible Assets.”  This is not amortized.





Impairment of long-lived assets


Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. No such impairments have been identified by management at June 30, 2010.





F-7


Revenue recognition


The Company recognized revenue and gains when earned and related costs of sales and expenses when incurred.





Advertising costs


The Company expenses all costs of advertising as incurred. There were nominal advertising costs included in selling, or general and administrative expenses as of June 30, 2010.





Loss per share


Net loss per share is provided in accordance with ASC Codification Topic 260 Section 99-1 and SFAS No. 128 "Earnings Per Share". Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number of common shares outstanding during the period. The Company had no dilutive common stock equivalents, such as stock options or warrants as of June 30, 2010.





Reporting on the costs of start-up activities


Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities", which provides guidance on the financial reporting of start-up costs and organizational costs, requires most costs of start-up activities and organizational costs to be expensed as incurred. SOP-98-5 is effective for fiscal years beginning after December 15, 1998. With the adoption of SOP-98, there has been little or no effect on the Company's financial statements.





Estimates


The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.





Fair value of financial instruments


Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2010 and 2009 respectively. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values are assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximated fair values or they are payable on demand.





Income Taxes


Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable on 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. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.





Segment reporting


The Company follows ASC Codification Topic 220 and SFAS No. 130, "Disclosures About segments of an Enterprise and Related Information". The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.





Dividends


The Company has not yet adopted any policy regarding payment of dividends. No dividends have been paid or declared since inception.





Recent pronouncements


In March 2008, SFAS  No 161, “Amendments to FASB Interpretation No. 46(R)” was issued.





In May 2008, SFAS  No 162, “The Hierarchy of Generally Accepted Accounting Principles” was issued.





In May 2008, SFAS  No 163, “Accounting for Financial Guarantee Insurance Contracts” was issued.





F-8


In May 2009, SFAS  No 164, “Not-for-Profit Entities: Mergers and Acquisitions—Including an amendment of FASB Statement No. 142” was issued.





In May 2009, SFAS  No 165, “Amendments Subsequent Events” was issued.





In June 2009, SFAS  No 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” was issued.





In June 2009, SFAS  No 167, “Amendments to FASB Interpretation No. 46(R)” was issued.





In June 2009, SFAS  No 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” was issued.





The Financial Accounting Standards Board (FASB) issued Statement No. 168 – become effective on July 1, 2009 – The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles which makes the Accounting Standards Codification (ASC) the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities for interim and annual periods ending after September 15, 2009. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The adoption of ASC Topic 105 did not have a material impact on the Company’s financial position, cash flows or result of operations. Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material effect on the Company’s operations or financial position.





Stock-Based Compensation


The Company accounts for stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and has adopted the disclosure only alternative of ASC Codification Topic 220 and SFAS No. 123, "Accounting for Stock-Based Compensation". Options granted to consultants, independent representatives and other non-employees are accounted for using the fair value method as prescribed by ASC Topic 220 and SFAS No. 123.





Year End





The Company has adopted December 31 as its fiscal year end.





Note 3 - Going concern





The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has incurred a net loss of $6,775,386 for the period from February 21, 2002 (inception) to June 30, 2010. The future of the Company is dependent upon its ability to obtain financing and upon future profitable operations from the development of its new business opportunities. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amount of the classification of liabilities that might be necessary in the event the Company cannot continue in existence.





Note 4 - Income taxes





The Company accounts for income taxes under ASC Codification Topic 740 and SFAS No. 109, "Accounting for Income Taxes”, which requires use of the liability method. SFAS No. 109 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.





F-9


The provisions for income taxes differs from the amount computed by applying the statutory federal income tax rate to Income before provision for income taxes. The source and tax effects of the differences are as follows:




U.S. federal statutory rate
34.00 %Valuation reserve
34.00 %Total
0.00 %


As of June 30, 2010, the Company has a net operating loss carryforward of approximately $6,775,386 for tax purposes, which will be available to offset future taxable income. This carryforward will expire in various years through 2027.





Note 5 - Stockholders' Equity





As of March 31, 2010, the Company was authorized to issue nine hundred ninety five million (995,000,000) shares of its $0.001 par value common stock and 5,000,000 shares of its $0.001 par value preferred stock.





On April 28, 2010, the Board of Directors, upon the consent of the shareholders owning a majority of the shares then issued and outstanding, approved a resolution to amend the Articles of Incorporation of the Company to increase the number of authorized shares to two billion (2,000,000,000), of which one billion nine hundred and ninety five million (1,995,000,000) shares were designated as common stock, par value $.001 per share, and five million (5,000,000) shares were designated as preferred stock, par value $.001 per share.





On June 21, 2010, the Board of Directors, upon the consent of the shareholders owning a majority of the shares then issued and outstanding, approved a resolution to amend the Articles of Incorporation of the Company to increase the number of authorized shares to ten billion (10,000,000,000), of which nine billion nine hundred and ninety five million (9,995,000,000) shares were designated as common stock, par value $.0001 per share, and five million (5,000,000) shares were designated as preferred stock, par value $.0001 per share.





As of March 31, 2010, the Company had 558,579,430 shares of its common stock issued and outstanding. During the 2nd Quarter of 2010, the Company issued an aggregate of 1,904,373,873 shares of its common stock without registering the securities under the Securities Act of 1933 providing for a total of 2,462,953,303 shares of common stock issued and outstanding as of June 30, 2010.  The issuances of common stock are as follows:





On April 12, 2010, a holder of our promissory note converted $12,500 of the principal due on this note into 12,500,000 shares of Common Stock.





On April 13, 2010, a holder of our promissory note converted $4,000 of the principal due on this note into 40,000,000 shares of Common Stock.





On April 21, 2010, a holder of our promissory note converted $4,000 of the principal due on this note into 40,000,000 shares of Common Stock.





On April 26, 2010, a holder of our promissory note converted $12,500 of the principal due on this note into 12,500,000 shares of Common Stock.





On April 30, 2010, a holder of our promissory note converted $4,000 of the principal due on this note into 40,000,000 shares of Common Stock.





On May 3, 2010, a holder of our promissory note converted $25,000 of the principal due on this note into 25,000,000 shares of Common Stock.





On May 21, 2010, a holder of our promissory note converted $20,000 of the principal due on this note into 20,000,000 shares of Common Stock.





On June 3, 2010, a holder of our promissory note converted $10,000 of the principal due on this note into 100,000,000 shares of Common Stock.





On June 16, 2010, a holder of our promissory note converted $10,000 of the principal due on this note into 100,000,000 shares of Common Stock.





F-10


On June 22, 2010, a holder of our promissory note converted $20,000 of the principal and interest due on this note into 53,873,873 shares of Common Stock.





On June 28, 2010, a holder of our promissory note converted $19,000 of the principal due on this note into 190,000,000 shares of Common Stock.





During the 2nd Quarter 2010, the Company issued an aggregate of 1,270,500,000 shares of Common stock to various consultants valued between $.001 and $.0001 per share.





PREFERRED STOCK





As of March 31, 2010, the Company had 3,153,020 shares of its preferred stock issued and outstanding. During the 2nd Quarter of 2010, the Company issued an aggregate of 183,000 shares of its preferred stock providing for a total of 3,336,020 shares of preferred stock issued and outstanding as of June 30, 2010.  The issuances of preferred stock are as follows:





During the 2nd Quarter 2010, the Company sold 183,000 shares of its Series A Preferred stock to various investors and at a price of $5.00 per share for total consideration of $915,000.





Note 6 - Warrants and options





As of June 30, 2010, there were 1,665,698 warrants outstanding.





Note 7 - Related party transactions





The officers and directors of the Company are involved in other business activities and may, in the future become involved in other business opportunities. If a specific business opportunity becomes available, such person may face a conflict in selecting between the Company and their other business interest. The Company has not formulated a policy for the resolution of such conflicts.





Note 8 - Loans and Notes Payable





On January 31, 2008, the Company signed a Promissory Note payable to Frady Zyskind of the TBF Charitable Trust Foundation for $50,000 due on July 31, 2008. The loan accrued an interest at 1.5% per month, or 18% per annum (“Initial Note”).





On each of May 30, 2008, June 30, 2008, July 15, 2008, July 30, 2008, and August 30, 2008, the Company borrowed $25,000, $25,000, $25,000, $25,000, and $10,000, respectfully,  by issuing convertible promissory notes, each payable twelve months from the date of issuance and bearing an interest rate of 10% per annum (“Subsequent Notes”).





The Initial Note and all of the Subsequent Notes were converted into a total of 191,141,923 shares from July 2009-December 2009.





On October 6, 2009, the Company borrowed $25,000 and issued a convertible promissory note payable twelve months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price of $0.001 per share. The holder of this Note converted the entire outstanding principal into 25,000,000 shares of the Company’s common shares.





On November 3, 2009, the Company borrowed $25,000 and issued a convertible promissory note payable twelve months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price of $0.001 per share. The holder of this Note converted the entire outstanding principal into 25,000,000 shares of the Company’s common shares.





F-11


On November 13, 2009, the Company borrowed $40,000 and issued a convertible promissory note payable six months from the date of issue and bearing an interest rate of 12% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price determined and pursuant to the average trading volume of the Company’s shares at the time of conversion. The holder of this Note converted the entire outstanding principal and interest into 53,873,873 shares of the Company’s common shares.





On November 16, 2009, the Company borrowed $20,000 and issued a convertible promissory note payable twelve months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price of $0.001 per share. The holder of this Note converted the entire outstanding principal into 20,000,000 shares of the Company’s common shares.





On December 29, 2009, the Company borrowed $20,000 and issued a convertible promissory note payable twelve months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price of $0.001 per share.





On March 4, 2010, the Company borrowed $50,000 and issued a convertible promissory note payable twelve months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price of $0.001 per share.





On March 18, 2010, the Company borrowed $25,000 and issued a convertible promissory note payable twelve months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price of $0.001 per share.





On April 13, 2010, the Company borrowed $100,000 and issued a convertible promissory note payable twelve (12) months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price determined and pursuant to the average trading volume of the Company’s shares at the time of conversion.





On April 16, 2010, the Company borrowed $50,000 and issued a convertible promissory note payable six months from the date of issue and bearing an interest rate of 12% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price determined and pursuant to the average trading volume of the Company’s shares at the time of conversion.





The Company believes all of the issuances of securities from the convertible promissory notes were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof and other available exemptions.





SUBSEQUENT EVENTS:





On July 29, 2010, the Company borrowed $47,000 and issued a convertible promissory note payable six months from the date of issue and bearing an interest rate of 12% per annum.  On or before the maturity date, upon written notice to the Company, the Lender may elect to convert the principal amount of this Note into Common shares at a conversion price determined and pursuant to the average trading volume of the Company’s shares at the time of conversion.





On August 1, 2010, the Company entered into a ten (10) year Sublease Agreement and leased its new studio and production facilities located at 13300 Branch View Lane in Dallas, TX. Concurrently, the Company executed and issued to the Lessor a convertible promissory note in the amount of $272,396 in order to cover the first six (6) months of rent, the security deposit, and to allow for a budget for leasehold improvements. The convertible promissory note is made payable six months from the date of issue and bearing an interest rate of 10% per annum.  On or before the maturity date, upon written notice to the Company, the Lessor may elect to convert the principal amount of this Note into Common shares at a conversion price determined and pursuant to the average trading volume of the Company’s shares at the time of conversion.




NOTES PAYABLE RELATED TO CSD
 
 On June 18, 2007, CSD borrowed $250,000 and issued to Frost Bank a promissory note payable in four (4) years and bearing a variable interest rate priced at 1% above the Prime Bank Rate. Pursuant to the Company’s acquisition of CSD, the Company has been making equal monthly payments to Frost Bank in the amount of $5,249.98 per month to pay down this note. The principal balance together with accrued and unpaid interest on the note as of June 30, 2010 was $54,585.
 
 On November 7, 2008, CSD was advised that Frost Bank, who provided a revolving line of credit to CSD, was going to call the total balance owed of $493,248.08 and that the balance was to be paid in three (3) months therefrom. Pursuant to the Company’s acquisition of CSD, the Company has been making equal monthly payments to Frost Bank in the amount of $23,036.59 per month to pay down this note. The principal balance together with accrued and unpaid interest on the note as of June 30, 2010 was $354,983.
 
 On August 1, 2008, CSD borrowed $100,000 and issued a promissory note payable to its President and former shareholder to be made payable in no later than five years from the date of issuance and bearing an interest rate of 10% per annum. The principal balance together with accrued and unpaid interest on the note as of June 30, 2010 was $68,322.


F-12


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION







FORWARD LOOKING STATEMENTS




Certain portions of this report, and particularly the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Notes to Consolidated Financial Statements, contain forward-looking statements which represent the Company’s expectations or beliefs concerning future events. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements





DESCRIPTION OF OUR BUSINESS





Introduction





Artfest International, Inc. (the "Company", "we", "us", "our") is publicly traded on the Over the Counter Bulletin Board under the symbol (ARTS.OB).  The Company, through its wholly owned subsidiaries, Art Channel Galleries, Inc. (“ACG” or “Art Channel”), Artfest Direct (“Artfest Direct”) and Charity Sports Distributors, Inc. (“CSD”) markets and sells paintings (both original and reproduced on canvas using the Giclée and lithograph processes), autographed limited-edition celebrity photographs, and a wide variety of authentic autographed memorabilia, sports memorabilia and collectibles (hereinafter, our “Products”).





All of our products, fine art reproductions and celebrity collectibles are sold utilizing a proprietary direct marketing system, as well as over the Internet through independent contractors known as Associate Members (“AM’s” or “Associate Members”) and Independent Art Dealers (IADs).





Value Proposition





The Company combines the high margins and universal appeal of artistic reproductions, sports memorabilia and collectibles with direct marketing opportunities. This model is centered on building a network of Associate Members and Independent Art Dealers modeled after companies like Home Interiors, Tupperware, Pampered Chef, MonaVie, Herbalife and Avon. New IADs receive special training from the artists themselves, access to a call center for sales and support and a personalized e-commerce website.





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The Art Channel Network creates additional legitimacy through education, promotion of awareness of the arts, entertainment and promoting product sales. According to Mac Report, a media company that provides a Web-based forum for public and private issuers, the worldwide market for collectibles is worth $120 Billion annually. With the penetration of the personal computer and the Internet into most nations, this worldwide market is predicted to grow at a healthy pace over the next two decades.





The Company currently utilizes the following sales strategies:





(1) Direct Marketing and Sales: We utilize an Associate Member and IAD Compensation System modeled after companies like Home Interiors, Tupperware, Pampered Chef, Mona Vie, Herbalife and Avon.





(2) Internet Driven: We offer our Associate Members and IAD’s a state-of-the-art website which is a completely automated, turn-key online business building system which will be supported with unlimited spam-free traffic to our IAD Members’ websites.  This system uses our software technology, which our management believes is unmatched in the industry.





The Company is currently marketing a business opportunity to individuals by allowing them to become Associate Members and IADs..  After individuals become Associate Members, they will be able to sell our Products using our state-of-the-art website. If they decide to develop an independent art dealership, they upgrade their membership and have access to greater resources and compensation from developing a sales network while they sell products.





Description of Our Products and Services





Artfest International is about “All Things Creative.” The Company will be careful to not set a limiting boundary on creativity for anything that may be sold via Artfest or its subsidiaries. As long as it is creative, of quality, and there is demand, our creative managers will take it into consideration.  The following represents some of the products and services as currently offered by and through the Company and its subsidiaries:





·           Quality Reproductions:The Company offers and sells quality art reproductions using theGiclée technique that was designed to reproduce and protect rare and valuable pieces of art.  The average person will not easily recognize a Giclée reproduction and original. The Giclée method is used to reproduce Signed and Numbered Limited Editions of Fine Art, and Autographed Limited-Edition Celebrity Art from existing photographs.  Images are generated from high resolution digital scans and printed with archival quality inks onto various substrates including canvas, fine art, and photo-base paper. The Giclée printing process provides better color accuracy than other means of reproduction.





·           Sports Memorabilia & Collectables:Through the acquisition of CSD on July 6, 2009 the Company has access to production and distribution of authentic framed autographed sports and entertainment collectibles and art pieces. CSDs’ distribution avenues include B2B and B2C sales, charity fundraising auctions, professional and college sports team’s pro shops, e-stores, online auctions and a revolutionary in-game silent auction concept known as Home Game Auction. CSD’s thirteen year experience in the professional and college sports marketplace has developed an extensive client list which consists of hundreds of private charities and conducts home game auctions at various professional and college teams. The addition of CSD’s product line complements and expands the Company’s ongoing product promotions and special purchase packages that are directed towards introducing a select number of acclaimed artists to our members.





·           RFID:Due to the large amount of fraud and falsification of authenticity in the collectables and art community, Artfest has developed a state of the art RFID technology that enables Artfest to validate reproduction numbers, replace damaged goods, and prove provenance. Artfest intends to roll out its RFID technology on all of its products in the 3rd Quarter 2010.





STRATEGIC PLAN





Our motive is to build shareholder value and increase market penetration as a vertically integrated company and service provider. Strategic acquisitions, or “Roll Ups”, are a part of Artfest’ global expansion plan that includes Media, Art, Memorabilia and Distribution companies that will complement and enhance Artfest's sophisticated business model. The Artfest strategy in addressing the markets is to offer high quality art reproductions, sports memorabilia, and collectible items through the direct sales channels, and support the selling effort with training, a broad group of unique and exclusive products, educational content for television and web, and a unique compensation program.





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Internet Driver:Our web based strategy offers members a web site, leads from web based traffic, and a call center to support outbound sales efforts from IADs. Artfest Direct Associate Members and Independent Art Dealers receive a state-of-the-art website that is a completely automated and a turn-key online business building system that will be supported with unlimited traffic. Artfest’s proprietary auction process creates an aftermarket for product so as to insure the free flow of product in open markets.





Art Channel Network Driver: Artfest has built an in-house studio to develop broadcast quality content on artists, art and collectible markets, and sports and celebrity guests to educate and attract members to our community. The Company has acquired and will seek additional broadcast and content acquisitions and partnerships to grow the Art Channel Network. The network will in time become an additional source of advertising revenue & art sales leveraged from the years of production experience of the management team.





Direct Marketing and Sales & Independent Art Dealers: This model is centered on a IAD reward and compensation system modeled after companies like Herbalife, Independent Art Galleries, Home Interiors, Tupperware, Pampered Chef and Avon. Several elements of the Artfest program are patent-pending protected because of the new and exciting applications it brings to this direct-sales business model. New Independent Art Dealers (IADs) receive special training from the Artists themselves and a personalized e-commerce Artfest Direct website.





THE MARKET





According to the Mac Report, a media company that provides a Web-based forum for public and private issuers, the worldwide market for collectibles is $120 Billion annually. With the penetration of the personal computer and the Internet into most nations, this market is predicted to grow at a healthy pace over the next two decades. The internet will provide access to the market and educational information on the art and collectable objects.





Art dealers compete with a wide range of retailers, including Internet retailers, auction houses, mass merchandisers, and home decor and framing service shops. The art dealer industry includes about 6,000 stores with combined annual revenue of $4 billion. The Thomas Kinkade Company is one of the largest art dealers in the US: most companies have only a single location. The industry is highly fragmented: the top 50 companies hold only 30 percent of industry sales.





Consumer spending, discretionary capital and home decorating trends drive demand. The profitability of individual companies depends on effective merchandising and marketing. Large companies have advantages in buying, financing, and marketing. Small companies can compete effectively by offering unique products, providing superior customer service, or serving a local market.





MARKETING PLAN





Artfest models its distribution strategy similar to Home Interiors Inc., Independent Art Galleries, Tupperware, Pampered Chef, Herbalife, and Avon, however, providing high quality, limited edition, signed and numbered fine art, collectables and celebrity endorsed collectibles.  Artfest operates and markets itself to its Associate Members and Independent Art Dealers through four distinct sales channels that are associated with the following high quality and reputation orientated brands:





The Company operates and markets itself through four (4) distinct sales channels which are associated with the following high quality and reputation orientated brands:





Artfest DIRECT – Direct-Sales Model


Artfest DirectTM,our majority owned subsidiary, is our direct-sales Internet-based company where Associate Members and Independent Art Dealers can buy, sell, and trade limited edition signed and numbered fine art and collectibles.  Membership is free and Associate Members will be able to create their own website which will bear our brand name.  People who become Associate Members will have full support from us, including help setting up their own website, utilizing our software which allows the Associate Member to utilize a global debit card system, and place and fulfill orders for limited edition signed and numbered fine art, collectables, and sports memorabilia collectibles from customers. Fine art is available in high quality and popular formats including Giclée, lithography, and serigraph, which uses a stencil to create sharp lines upon the medium. Associate Members can become Independent Art Dealers if they decide to build a business opportunity and grow their business through both direct sales and through other Member teams. You can visit Artfest Direct on the web at www.artfestdirect.com.





6


Charity Sports Distributors, Inc.:  CSD’s distribution avenues include B2B and B2C sales, charity fundraising auctions, professional and college sports team’s pro shops, e-stores, and online auctions. CSDs’ marketing is focused on Home Game activity-which offers sports related memorabilia at home games for professional and college level teams, including a revolutionary in-game silent auction concept known as Home Game Auction; Charity Fundraising Activity – which offers charities a packaged solution to obtaining merchandise for their auction needs; and Walk in traffic at their facility – offering framing and related services to sports stars and enthusiasts. You can visit CSD on the web at www.csdsportsframing.com.





Art Channel NETWORKTM– National TV Syndication and Art Channel


Art Channel NetworkTM, provides a range of multi-cultural programming including artist documentaries, live paintings, artist collections, artist interviews, live concerts and other art centric content which is available online is syndicated to three-million (3,000,000) independent television markets nation-wide.  Art Channel Network is also being broadcasted via Internet Protocol Television (“IPTV”) online and has acquired large slivers of national satellite time so that our content is available 24 hours per day, 7 days per week, creating an Art Channel Network which is similar to the History Channel, Home & Garden Channel, etc. You can visit the Art Channel on the web at (www.artchannel.tv).





Artfest has built an in-house studio to develop broadcast quality content on artists, art and collectible markets, and sports and celebrity guests to educate and attract members to our community. The Company has acquired and will seek additional broadcast and content acquisitions and partnerships to grow the Art Channel Network. The network will in time become an additional source of advertising revenue & art sales leveraged from the years of production experience of the management team.





Artfest GALLERIES – Brick and Mortar Galleries and Celebrity Events


Artfest GalleriesTMcurrently consists of one brick and mortar gallery which showcases fine art and collectibles in a traditional gallery setting. On an ongoing basis, we will have luncheons and weekend gala’s locally in Dallas, Texas. We anticipate that we will soon open additional brick and mortar galleries to expand Artfest GalleriesTM.  We will also showcase new artists, special exhibits, and celebrity events in different markets in the United States and internationally in order to attract new Associate Members to www.artchannelgalleries.com.





Artfest AUCTIONS – Online Auctions


My Artfest TM (www.myartfest.com)is an internet auction website concept that will operate and generate revenues similar to eBayTM. Through this online revenue medium, galleries, wholesalers, artists, dealers, and private collectors will have an art-focused website to auction their fine art and collectibles.





The Direct-Sales Market - Background and Strategy





Artfest will utilize a direct-sales strategy to sell our Products to Associate Members (AM), Independent Art Dealers (IAD) and preferred customers. One of the most tried and successful ways to sell a product is through a direct-sales strategy. With a direct-sales strategy, customers are identified and sold our Products by AMs and IADs who receive a commission for each sale.  Furthermore, if an Associate Members enrolls another individual as an AM, then the initial AM will receive a percentage of the commission for every sale made by the other AM.




Using a direct-sales model allows us to penetrate the market without having to spend large amounts of capital before sales are generated.  The highest cost for customer acquisition is the commissions paid on the sales by Associate Members; however, these commissions are paid only afterthe sale and shipment of the product.  The commissions are paid to the selling AM and other AMs entitled to any commission receive their commission based on the selling AM activity.  All commissions, overrides and bonuses are paid after the sale and shipment of the product.





7


Direct-Sales Strategy Potential


The direct-sales industry increased at a compounded annual growth rate from 1993 through 2003 of 7.5% compared with 5% for traditional retail sales (excluding auto and auto parts sales) and 3.3% for the overall United States economy.  This healthy growth rate has meant that the industry has achieved sales totaling nearly $30 billion in the United States and $88.4 billion overseas. With numbers like these the investment community has begun to take notice of the direct-sales industry. One of the advantages of selling through the direct sales channel is that during times of economic stress, as we are currently experiencing, individuals seeking additional sources of income are attracted to Artfest because it offers that opportunity to generate additional income.





Direct-Sales Logistics Software and Distribution


The most common issues in deploying a direct sales strategy are commission structure, Associate Member and IAD management and product distribution and fulfillment. In today’s environment the only reasonable way to ensure that AM and IADs are paid timely is by the use of the proper computer software.  There are many companies which specialize in multi-level compensation management software.  Pricing ranges from approximately $25,000 to as high as $250,000.00.  The more elaborate a compensation plan (the plan that tracks the commission structure on sales), the more elaborate and involved the software needed to manage it.  In view of the fact that proper software is such an important part of our business model, as our Company grows, we will have to invest significant funds in software development to ensure that our software satisfies these future needs.





Management believes that by utilizing one of the most innovative and revolutionary compensation plans in the direct-sales industry and by targeting a global market and using a global system to pay commissions to AMs and IADs, the Company will cultivate a strong loyalty among our AM’s, IAD’s, and preferred customers as well.





Production and Fulfillment


Our art products are produced by a small number of manufacturers after the order has been placed, which eliminates the need to maintain certain levels of inventory on hand.  This inventory process allows us to produce only the art which is sold and in a “just in time” format.  The relatively few number of our Product skews in our inventory, which are produced before an order for such product has been placed, will be warehoused in our corporate office “vault” located in Dallas TX.





Final preparation of our Products, such as stretching and framing of canvases, is kept in-house in order to minimize cost and eliminate communication issues. The acquisition of CSD has contributed to the ability of the Company to deliver products fully stretched and framed or in the ready to frame state. The tracking   and stretching process can be fully automated and integrated with our sales tracking software.





Internet Marketing – Software and Website


The Internet provides a communications network for the Company to deploy both management and sales tools linked together by Company produced software and customer relations management software. The combination of our IAD and AM websites tied to centralized management and accounting systems provide powerful tools for the IAD and AM to access centralized inventory and product fulfillment services and process orders worldwide for immediate action by the Company. In view of the fact that we will ship our Products and have AMs and IADs all over the world, it will be vital for us to use the Internet for marketing, customer acquisition, sales, collection of funds and data tracking.





The Internet is the most important overall sales tool for us and the AMs and IADs.  The company has established relationships with major search engine companies to deliver qualified leads to our network marketing system, thereby assisting the AM and IAD in development of their sales groups. The importance of an attractive, professional and ultra-functional website cannot be overstated.  Prospective Associate Members and customers may judge a company which they have not visited by the design of that company’s website.  The Associate Members’ and IADs websites are likely to be their most important marketing tool.





Customers and Target Market


Our customer base could potentially include everyone who admires fine art, sports, movie, music, or a celebrity of any kind.  Our management believes that when we release a new edition of fine art, collectible or autographed and numbered collectible, a new customer base is created. Our management believes that our customer base could span the globe.  We will reach a variety of markets through the use of Artfest Direct’s personal selling method moving internationally, Internet marketing supporting access to the product base through an IADs web site, Art Channel Network programming and advertising educating the consumer and sales channel, and the Artfest Galleries’ brick and mortar galleries in locations around the world supporting the other sales channels with a physical presence.





8


Pricing Strategy


Pricing must reflect our unique product position, competition, perceived value as well as reasonable return on investment. Our management believes that we are positioned as a high quality collectible art, sport memorabilia and celebrity brand.  We want to position our products as a completely new opportunity for our customers.  Other companies sell products which have an inflated price to support their marketing plan.  We intend to market a product which we hope will have a very personal appeal to each customer, in limited editions, with only quality processes and raw materials, generally signed by the artist, and in the near future, RFID technology to support authenticity, all of which will in turn increase the value of our product to the customers. Implementation of an auction format will allow for an alternate and specialized channel for our educated consumers to re-market their art products as their needs change.





Product Packaging


Our Products will be packaged in a black high-quality art shipping tube with a heavy duty vinyl seal for tamper-proof protection.  Our products are also available in two canvas stretching versions: museum stretched or gallery stretched and are also available in a selection of custom framing options. The acquisition of CSD was important to add framing, a vertical service, that will increase the average sale price of our product. Our Products will be shipped worldwide utilizing an international shipping company.





Brand Image


Brand image is very important to our overall and long-term success.  We already have over 40 artists under exclusive contract, and most of these artists have also become AMs or IADs.  Celebrity and artist involvement is an important part of brand image.  These artists will make personal appearances at live events and trade shows to help promote awareness of our brand name.  There are other considerations including logos, containers, label design, color schemes, website designs, and marketing which we will utilize to take advantage of our relationships with celebrities. The brand will be supported in all aspects of our marketing, including social media, in order to position the company having a unique business opportunity with quality products within the art community.





Customer Acquisition


We will acquire customers using promotion of our Company through our art content broadcasts, our direct sales AMs and IADs contacting potential buyers, participation of artists and consumers at our sponsored events, social media marketing using the internet, select media and search purchases. The direct sales channel shifts expenses from the traditional business, where the customer acquisition cost is expended prior to the customer purchasing a product. Most of our customer acquisition costs are paid after the sale of product as noted above.  Nevertheless, there are expenditures which must be made prior to the sale in order to optimize the potential sales opportunity.  The most significant outlay will be in technology implementation, live promotional events and television advertising.





Market Penetration – Geographic Considerations


One of the advantages of our business model is that there is no geographic exclusivity given to any Associate Member or Independent Art Dealer.  Each AM or IAD will be able to sell our Products to any customer no matter what the customer’s location and utilize the world class payment and settlement products that the company is deploying to support the AM and IAD activities.





The market penetration will also be dependent upon the success of our Internet marketing.  The creation of a state-of-the-art website which utilizes artist and celebrity name recognition, utilization of search and social media tools to drive traffic, and back-office tools for the AM and IAD will be key to our successful market penetration and dominance. Attraction of key distributors will also significantly impact our growth rate and market penetration. Leaders in the dirct sales industry frequently have sales forces that are particularly strong in geographic regions, so their attraction may boost sales in those regions.





9


Artfest International, successfully negotiated a distribution contract with its strategic partner , Luxor International, and with a Russian distributor , New Media Corp. This relationship will open new markets in Russia and other former Soviet Union Republics.





Competition


Essentially all home-based businesses and Internet-based marketing opportunities are our competitors as we vie for the attention and resources of a finite number of prospective distributors.  Other direct competition includes direct sales and marketing organizations, such as Mary Kay, Blythe and Tupperware that sell their exclusive products through their direct sales network. Although there is may be nothing that disallows a member of Mary Kay to become a member of Artfest, and vice versa, becoming members of these other similar direct sales companies compete with the members’ time in putting forth efforts in selling art through Artfest. We will also compete with internet based companies that sell artwork via their corporate sites on the internet as well as individual artist’s websites.





Results of Operations





Three Months Ended June 30, 2010 compared to Three Months Ended June 30, 2009





Revenues. The Company generated operating revenues of $571,980 for the three months ended June 30, 2010, representing an increase of $535,080, or  1450%, as compared to revenues of $36,900 during the three months ended June 30, 2009. The increase in revenues is mainly attributed to those revenues as received by the Company’s wholly owned subsidiary, CSD and through the sales of its product through IAD’s.





Selling, General and Administrative Expenses (“SG&A).Our SG&A for the three months ended June 30, 2010 were $1,679,669, an increase of $1,262,280, or 302%, as compared to $417,389 for the three months ended June 30, 2009. The increase is primarily due to expenses attributed to the Company’s wholly owned subsidiary CSD as well as other expenses related to continuous business development, marketing, and other public company related operating expenses.





Net Income (Loss). The Company recorded a net loss from operations of $1,305,972, and increase of $913,183, or 232%, as compared to the operating net loss from operations of $392,789 during the three months ended June 30, 2009.





Six Months Ended June 30, 2010 compared to Six Months Ended June 30, 2009





Revenues. The Company generated operating revenues of $1,424,412 for the six months ended June 30, 2010, representing an increase of $1,256,527, or 748%, as compared to revenues of $167,885 during the six months ended June 30, 2009. The increase in revenues is mainly attributed to those revenues as received by the Company’s wholly owned subsidiary, CSD and through the sales of its product through IAD’s.





Selling, General and Administrative Expenses (“SG&A).Our SG&A for the six months ended June 30, 2010 were $2,868,101, an increase of $2,018,915, or 238%, as compared to $849,186 for the six months ended June 30, 2009. The increase is primarily due to expenses attributed to the Company’s wholly owned subsidiary CSD as well as other expenses related to continuous business development, marketing, and other public company related operating expenses.





Net Income (Loss). The Company recorded a net loss from operations of $2,033,977, and increase of $1,351,676, or 198%, as compared to the operating net loss of $682,301 during the six months ended June 30, 2009.





Liquidity And Capital Resources





Operating activities





Net cash used by operating activities for the six months ended June 30, 2010 was $2,429,909 compared to $37,645 provided in the six months ended June 30, 2009.  This change was mainly due to the acquisition of CSD and the expansion of Artfest’s overall business development initiatives and operations.




10


Investing activities





Net cash used by investing activities was $148,457 for the six months ended June 30, 2010 compared to $-0- used in the six months ended June 30, 2009. The majority of this increase in investing activities is due to the purchases of equipment for the expansion of Artfest’s overall business development initiatives and operations.





Financing activities





Net cash provided by financing activities was $2,591,135 for the six months ended June 30, 2010 compared to $44,586 used in the six months ended June 30, 2009.   The increase was primarily a result of increases in various notes payable and equity purchases from investors in the Company’s common and preferred stock.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





Material Commitments





We have no material commitments during the next twelve (12) months.





The Company issued Luxor 4,000,000 shares in anticipation of the closing of the acquisition, which as of the date of this filing, is still pending the remaining payment of $990,000 in cash. The Company intends to pay this amount over time in an equal monthly payment to be determined by both parties.





Purchase of Significant Equipment





We do not intend to purchase any significant equipment during the next twelve (12) months.





ITEM 3– CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures —The Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer, who also serves as the Company’s Chief Financial Officer, concluded that our disclosure controls and procedures are effective as of June 30, 2010 in all material respects in (a) causing information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) causing such information to be accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.





Changes in Internal Control of Financial Reporting— There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II - OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS.





There were no legal proceedings during the three months ended June 30, 2010.





On July 23, 2010, Mr. Steven Rash, filed a lawsuit in the State of Texas against Artfest International seeking monies owed for services rendered while employed at Artfest from 2008 to 2009. As of the date of this report, Artfest has retained counsel and is working with them to investigate the matter and develop a plan to remedy the issue.





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On August 6, 2010, Parker Midway, LP, Artfest’s former landlord (“Parker”), filed suit in the District Court of Dallas County, Texas against Artfest for its alleged breach of its Lease Contract. Artfest entered into a forty (40) month Lease Agreement with Parker in April, 2009. The suit states that Artfest had vacated the premises prior to the end of the lease term and failed to make payments due under the lease constituting a default and breach of the lease. Artfest contends that the lease was amended to provide for a month-to-month lease in early 2010 and that there was no further obligation to Parker. As of the date of this report, Artfest has retained counsel and is working with them to investigate the matter and develop a plan to remedy the issue.





ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS





Equity Securities Sold Without Registration





There were no shares of the Company’s common stock issued sold without registration during the three months ended June 30, 2010. The Company sold 183,000 shares of its Preferred Stock at $5.00 per share without registration during the three months ended June 30, 2010.





ITEM 3. DEFAULTS UPON SENIOR SECURITIES.





Not Applicable.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





None





ITEM 5. OTHER INFORMATION.





ITEM 6. EXHIBITS





EXHIBIT INDEX 
 ExhibitNumber

Description31.1

Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Artfest International, Inc.Date: August 23, 2010
By:
/s/ Eddie VakserChairman and CEO

(principal executive officer and principal financial officer)




























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