NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
theglobe.com, inc. (the “Company”
or “theglobe”) was incorporated on May 1, 1995 (inception) and commenced operations on that date. Originally,
theglobe was an online community with registered members and users in the United States and abroad. However, due to
the deterioration of the online advertising market, the Company was forced to restructure and ceased the operations of its online
community on August 15, 2001. The Company then sold most of its remaining online and offline properties. The
Company continued to operate its Computer Games print magazine and the associated CGOnline website, as well as the e-commerce games
distribution business of Chips & Bits until their shutdown in March 2007. On June 1, 2002, Chairman Michael S. Egan
and Director Edward A. Cespedes became Chief Executive Officer and President of the Company, respectively. On November
14, 2002, the Company entered into the Voice over Internet Protocol (“VoIP”) business by acquiring certain VoIP assets.
On May 9, 2005, the Company exercised an
option to acquire all of the outstanding capital stock of Tralliance Corporation (“Tralliance”), an entity which had
been designated as the registry for the “.travel” top-level domain through an agreement with the Internet Corporation
for Assigned Names and Numbers (“ICANN”).
As more fully discussed in Note 3 “Discontinued
Operations,” in March 2007, management and the Board of Directors of the Company made the decision to discontinue the operating,
research and development activities of its VoIP telephony services business and terminate all of the remaining employees of that
business.
On September 29, 2008, the Company sold
its Tralliance business and issued 229,000,000 shares of its Common Stock to a company controlled by Michael S. Egan, the Company’s
Chairman and Chief Executive Officer (the “Purchase Transaction”). As a result of the sale of Tralliance, its last
remaining operating business, the Company became a shell company (as defined in Rule 12b-2 of the Securities and Exchange Act of
1934) with no material operations or assets. The Company presently intends to continue as a public company and make
all the requisite filings under the Securities and Exchange Act of 1934. However, certain matters, as more fully discussed
in Note 2, “Liquidity and Going Concern Considerations,” raise substantial doubt about the Company’s ability
to continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the 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. These estimates and assumptions
relate primarily to valuations of accounts payable and accrued expenses.
PREPAID EXPENSES
Prepaid expenses at December 31, 2016 and
2015 consist of prepaid insurance, which is amortized to expense over the policy periods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Accounting Standards Codification
Topic on Fair Value Measurements and Disclosure (“ASC 820”) requires that the Company disclose estimated fair values
of its financial instruments. The carrying amount of certain of the Company's financial instruments, including cash,
accounts payable and accrued expenses, are a reasonable estimate of their fair values at December 31, 2016 and 2015, respectively,
due to their short maturities.
RELATED PARTY OTHER INCOME
Commensurate with the sale of its former
Tralliance business on September 29, 2008, the Company entered into an Earn-out Agreement with Tralliance Registry Management,
the purchaser of Tralliance’s business. Under the terms of the Earn-out Agreement, Tralliance Registry Management agreed
to pay the Company an earn-out equal to 10% of Tralliance Registry Management’s “net revenue” (as defined) derived
from “.travel” names registered by Tralliance Registry Management from September 29, 2008 through May 5, 2015 (the
“Earn-out”). The final prorated Earn-out payment of $37,000 was received by the Company in May 2015 and the Earn-out
Agreement has now expired. The minimum Earn-out amount payable under the Earn-out Agreement was $300,000 in the first year and
increased by $25,000 in each subsequent year (prorated for the final year of the Earn-out). The minimum Earn-out amounts due for
each year were payable to the Company on a quarterly basis. Incremental Earn-out payments were determined on an annual basis to
the extent that 10% of Tralliance Registry Management’s “net revenue” (as defined) exceeds the minimum Earn-out
amount payable for such year. No incremental Earn-out payments were due or paid to the Company during the entire term of the Earn-out
Agreement.
Due to various factors related to the collectability
of Earn-out payments from Tralliance Registry Management, including the weak financial condition of Tralliance Registry Management,
and the fact that such Earn-out payments were payable to theglobe over an extended period of time (originally approximately 6 ½
years), no portion of the Earn-out was included in the purchase price for the Purchase Transaction. Instead, the Company chose
to recognize income related to the Earn-out on a prospective basis as and to the extent that future Earn-out payments are collected.
Since inception of the Earn-out Agreement through May 2015, a total of $2,437,000 in minimum Earn-out payments have been received
by the Company from Tralliance Registry Management and have been recorded as related party other income in the Consolidated Statements
of Operations for all applicable periods therein. During the year ended December 31, 2015, Earn-out payments totaling $149,625
were received and recorded by the Company.
STOCK-BASED COMPENSATION
The Company estimates the fair value of
each stock option at the grant date by using the Black Scholes option-pricing model using the following assumptions: no
dividend yield; a risk-free interest rate based on the U.S. Treasury yield in effect at the time of grant; an expected option life
based on historical and expected exercise behavior; and expected volatility based on the historical volatility of the Company’s
stock price, over a time period that is consistent with the expected life of the option. The portion of the value that
is ultimately expected to vest is recognized as expense over the service period.
INCOME TAXES
The Company accounts for income taxes using
the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and
their respective tax bases for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated results
of operations in the period that the tax change occurs. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
NET INCOME PER COMMON SHARE
The Company reports basic and diluted net
income per common share in accordance with FASB ASC Topic 260, “Earnings Per Share.” Basic earnings per
share is computed using the weighted average number of common shares outstanding during the period. Common equivalent shares consist
of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Common
equivalent shares are excluded from the calculation if their effect is anti-dilutive.
Due to the anti-dilutive effect of potentially
dilutive securities or common stock equivalents that could be issued, such securities were excluded from the diluted net income
or loss calculation for all periods presented. Such potentially dilutive securities and common stock equivalents consisted of the
following for the periods ended:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common stock
|
|
|
—
|
|
|
|
100,000
|
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Management has determined that all recently
issued accounting pronouncements will not have a material impact on the Company’s financial statements or do not apply to
the Company’s operations.
(2) LIQUIDITY AND GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a
going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern. However, for
the reasons described below, Company management does not believe that cash on hand and cash flow generated internally by the Company
will be adequate to fund its limited overhead and other cash requirements beyond a short period of time. These reasons raise significant
doubt about the Company’s ability to continue as a going concern.
Since 2008, the Company was able to continue
operating as a going concern due principally to funding of $500,000 received during 2008 under a Revolving Loan Agreement with
an entity controlled by Michael S. Egan, its Chairman and Chief Executive Officer and total proceeds of approximately $2,437,000
received during 2009 through the second quarter of 2015 under an Earn-out Agreement with an entity also controlled by Mr. Egan
(as more fully discussed below), as well as the forbearance of its creditors. More recently, the Company received fundings of $50,000
each in both March 2016 and November 2016 under Promissory Notes entered into with the same entity that provided funding under
the Revolving Loan Agreement (the “2016 Promissory Notes”). See Note 5, “Debt” in our consolidated financial
statements for further details.
At December 31, 2016, the Company had a
net working capital deficit of approximately $1,923,000. Such working capital deficit included (i) a total of approximately
$1,028,000 in principal and accrued interest owed under the aforementioned Revolving Loan Agreement and Promissory Notes; (ii)
a total of approximately $770,000 in management service fees owed under a Master Services Agreement to an entity controlled by
Mr. Egan; (iii) a total of approximately $131,000 of accrued officer compensation due primarily to Mr. Egan and (iv) an aggregate
of approximately $31,000 in other unsecured accounts payable and accrued expenses owed to non-related parties.
During the second quarter of 2015, a former
VoIP telephony service business vendor agreed to forgive its remaining accounts payable balance of approximately $41,000. Accordingly,
such amount was written off the balance sheet with corresponding gain on forgiveness of debt included within Discontinued Operations
for the year ended December 31, 2015.
During the fourth quarter of 2014 the Company
derecognized approximately $84,000 of old accrued expenses related to its former Tralliance business (including approximately $33,000
of disputed liabilities) based upon the belief that the statute of limitations applicable to enforcement of such liabilities had
lapsed. During the fourth quarter of 2013, the Company derecognized approximately $296,000 of old liabilities of its former Tralliance
business, including approximately $170,000 of disputed accounts payables owed to two (2) former vendors and accrued expenses totaling
approximately $126,000, based also upon the belief that the statute of limitations applicable to enforcement of such liabilities
has lapsed. As more fully described in Note 3, “Discontinued Operations,” the Company derecognized approximately
$1,354,000 of old liabilities of its former VoIP telephony service business, including approximately $1,000,000 of disputed liabilities,
during the fourth quarter of 2012 based also upon our belief that the statute of limitations applicable to enforcement of such
liabilities has lapsed. There can be no assurance that the holders of derecognized liabilities will agree with our application
of statutes of limitation to time bar claims related to such liabilities nor seek to assert a basis to toll or suspend the running
of the otherwise applicable statutes of limitation.
As discussed previously, on September 29,
2008, the Company (i) sold the business and substantially all of the assets of its Tralliance Corporation subsidiary to Tralliance
Registry Management, and (ii) issued 229,000,000 shares of its Common Stock (the “Shares”) to Registry Management (the
“Purchase Transaction”). Tralliance Registry Management and Registry Management are entities controlled by Michael
S. Egan. The closing of the Purchase Transaction resulted in the cancellation of all of the Company’s remaining Convertible
Debt, related accrued interest and rent and accounts payable owed to entities controlled by Mr. Egan as of the date of closing
(totaling approximately $6,400,000). However, the Company continues to be obligated to repay its principal borrowings and accrued
interest due to an entity controlled by Mr. Egan under the aforementioned Revolving Loan Agreement and 2016 Promissory Notes. The
Company currently has no ability to repay these loans should a demand for payment be made by the noteholder. Immediately
after giving effect to the closing of the Purchase Transaction and the issuance of the Shares thereunder, Mr. Egan beneficially
owned approximately 76% of the Company’s Common Stock and continues to beneficially own such amount at December 31, 2016.
As additional consideration under the Purchase
Transaction, Tralliance Registry Management was obligated to pay an earn-out to theglobe equal to 10% (subject to certain minimums)
of Tralliance Registry Management’s net revenue (as defined) derived from “.travel” names registered by Tralliance
Registry Management from September 29, 2008 through May 5, 2015 (the “Earn-out”). The minimum Earn-out payable by Tralliance
Registry Management to theglobe was $300,000 in the first year of the Earn-Out, increasing by $25,000 in each subsequent year (pro-rated
for the final year of the Earn-out). The final Earn-out payment of $37,000 was made in May 2015 and the Earn-out Agreement has
now expired.
In connection with the closing of the Purchase
Transaction, the Company also entered into a Master Services Agreement with an entity controlled by Mr. Egan whereby for a fee
of $20,000 per month ($240,000 per annum) such entity will provide personnel and services to the Company so as to enable it to
continue its existence as a public company without the necessity of any full-time employees of its own. Additionally, commensurate
with the closing of the Purchase Transaction, Termination Agreements with each of its current executive officers, which terminated
their previous and then existing employment agreements, were executed. Notwithstanding the termination of these employment agreements,
each of our current executive officers and directors remain as executive officers and directors of the Company.
Immediately following the closing of the
Purchase Transaction, theglobe became a shell company with no material operations or assets, and no source of income other than
under the Earn-out. As a shell company, theglobe’s operating expenses have consisted primarily of and are expected to continue
to consist primarily of expenses incurred under the aforementioned Master Services Agreement and other customary public company
expenses, including legal, audit and other miscellaneous public company costs.
MANAGEMENT PLANS
On a short term liquidity basis, the Company
must receive the continued indulgence of its primary creditor, Mr. Egan, including the continued forbearance of Mr. Egan and related
entities in making demand for payment for amounts outstanding under the Revolving Loan Agreement, the 2016 Promissory Notes and
the Master Services Agreement, in order to continue as a going concern.
It is the Company’s preference to
avoid filing for protection under the U.S. Bankruptcy Code. However, based upon the Company’s current financial condition
as discussed above, management believes that additional debt or equity capital will need to be raised in order for theglobe to
continue to operate as a going concern on a long-term basis. Any such capital would likely come from Mr. Egan, as the Company currently
has no access to credit facilities and has traditionally relied on borrowings from related parties to meet short-term liquidity
needs. Any such equity capital would likely result in very substantial dilution in the number of outstanding shares of the Company’s
Common Stock. Given theglobe’s current financial condition, it currently has no intent to seek to acquire or start any new
businesses. The Company intends to use the proceeds from the 2016 Promissory Notes and seek other loans from Mr. Egan and related
entities, if necessary, to fund its public company operating costs while it explores its options related to the future of theglobe.
On March 29, 2017, the Company borrowed
an additional $50,000 under a promissory note from an entity controlled by Mr. Egan (see Note 9, “Subsequent Events”
for further details.)
(3) DISCONTINUED OPERATIONS
In March 2007, management and the Board
of Directors of the Company decided to discontinue the operating, research and development activities of its VoIP telephony services
business and terminate all of the remaining employees of the business.
The Company’s decision to discontinue
the operations of its VoIP telephony services business was based primarily on the historical losses sustained by this business,
management’s expectations of continued losses for the foreseeable future and estimates of the amount of capital required
to successfully monetize this business. All elements of its VoIP telephony services business shutdown plan were completed by the
Company in 2007 except for the resolution of certain disputed vendor accounts payables, totaling approximately $1,000,000, and
the payment of remaining non-disputed accounts payable. The disputed accounts payables related primarily to telecommunications
network service fees charged by various former telecommunication vendors during the period from 2004 to 2007. These charges were
disputed by the Company primarily due to such items as incorrect quantities, rates, in-service dates, regulatory fees/charges,
late fees and contract termination charges.
During the fourth quarter of 2012, the
Company re-evaluated all remaining liabilities of its VoIP telephony services business in light of the passage of time and applicable
state statute of limitation laws. Based upon this re-evaluation, the Company derecognized accounts payable liabilities related
to six (6) former telecommunication vendors totaling approximately $1,354,000, including the disputed liabilities of approximately
$1,000,000 discussed earlier. During the second quarter of 2015, a former VoIP telephony service vendor agreed to forgive its remaining
non-disputed accounts payable balance of $41,000. Accordingly, such amount was written off the balance sheet with a corresponding
gain on forgiveness of debt included within Discontinued Operations for the year ended December 31, 2015. There are no “Liabilities
of Discontinued Operations” at December 31, 2016 and 2015.
(4) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of
the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued legal and audit expense
|
|
$
|
30,500
|
|
|
$
|
26,000
|
|
(5) DEBT
Debt consists of notes payables due to
a related party, as summarized below:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
2008 Revolving Loan Notes due to a related party; due on demand
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
March 2016 Promissory Note due to a related party; due on demand
|
|
|
50,000
|
|
|
|
—
|
|
November 2016 Promissory Note due to a related party; due on demand
|
|
|
50,000
|
|
|
|
—
|
|
|
|
|
600,000
|
|
|
|
500,000
|
|
On June 6, 2008, the Company and its subsidiaries,
as guarantors, entered into a Revolving Loan Agreement with Dancing Bear Investments, Inc. (“Dancing Bear”), pursuant
to which Dancing Bear may loan up to $500,000 to the Company on a revolving basis (the “Credit Line”). Dancing
Bear is controlled by Michael S. Egan, our Chairman and Chief Executive Officer. In connection with its entry into the Credit
Line, the Company borrowed $100,000 under the Credit Line. Subsequently, during the remainder of 2008, the Company made
additional borrowings totaling the final $400,000 available under the Credit Line. As of December 31, 2016 and 2015,
outstanding principal of $500,000 and accrued interest of $423,233 and $373,234, respectively, related to this Credit Line have
been reflected as current liabilities in our Consolidated Balance Sheet. Related Party Interest Expense related to the
Credit Line of $50,000 was recognized in our Consolidated Statement of Operations during both the years ended December 31, 2016
and 2015, respectively.
On May 7, 2009, the Company entered into
a Note and Modification Agreement with Dancing Bear, which amended the repayment terms of the Revolving Loan Agreement. Under
the terms of the Note Modification Agreement, from and after June 6, 2009 (the original maturity date of the Credit Line), all
amounts due under the Revolving Loan Agreement, including principal and accrued interest, will be due and payable by the Company
in one lump sum on the earlier of (i) five (5) business days following any demand for payment, which demand can be made by Dancing
Bear at any time; or (ii) upon the occurrence of an event of default, as defined in the Revolving Loan Agreement. All
funds borrowed under the Credit Line may be prepaid in whole or in part, without penalty, at any time during the term of the Credit
Line.
In connection with the Credit Line, the
Company executed and delivered a promissory note to Dancing Bear in the amount of $500,000 bearing interest at ten percent (10%)
per annum on the principal amount then outstanding. The Company’s subsidiaries unconditionally guaranteed the Credit Line
by entering into an Unconditional Guaranty Agreement. All amounts outstanding from time to time under the Credit Line are secured
by a lien on all assets of the Company and its subsidiaries pursuant to a Security Agreement with Dancing Bear.
On March 23, 2016, the Company entered
into a $50,000 promissory note (the “March 2016 Promissory Note”) with, and borrowed the full amount of such promissory
note from, Dancing Bear. The promissory note is unsecured and initially matured and was due on the first to occur of (i) September
22, 2016, or (ii) an event of default as defined under the promissory note. On September 20, 2016, the Company entered into a Note
and Modification Agreement with Dancing Bear. Under the terms of the Note Modification Agreement, from and after September 22,
2016 (the original maturity date of promissory note) all amount due under the promissory note, including principal and accrued
interest, will be due and payable on the earlier of (i) five (5) business days following any demand for payment, which demand can
be made by Dancing Bear at any time; or (ii) an event of default as defined under the promissory note. Interest at a rate of 10%
per annum is payable by the Company on all unpaid borrowings under the promissory note. The Company used the proceeds from the
promissory note to pay its public company operating costs from March 2016 to September 2016. For the period from March 23, 2016
until December 31, 2016, the Company accrued $3,891 of interest expense on the promissory note.
On November 7, 2016, the Company entered
into a second $50,000 promissory note (the “November 2016 Promissory Note”) with, and borrowed the full amount of such
promissory note from, Dancing Bear. The promissory note is unsecured and matures with all amounts due, including principal and
accrued interest, on the earlier of (i) five (5) business days following any demand for payment, which demand can be made by Dancing
Bear at any time; or (ii) an event of default as defined under the promissory note. The Company used the proceeds from the promissory
note to pay its public company operating costs from November 2016 to March 2017. For the period from November 7, 2016 until December
31, 2016, the Company accrued $754 of interest expense on the promissory note.
The Company has no ability to repay any
of the loans discussed above should Dancing Bear demand payment.
(6) STOCK OPTION PLANS
As of December 31, 2016, all of the Company’s
stock option plans have terminated and there are no shares for grant under these plans. Remaining stock options outstanding and
exercisable expired in August 2016.
No stock options were granted by the Company
or exercised during the years ended December 31, 2016 and 2015.
Stock option activity during the years ended December 31, 2016
and December 31, 2015 was as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
100,000
|
|
|
$
|
0.14
|
|
|
0.6 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Expired
|
|
|
100,000
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
—
|
|
|
$
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
—
|
|
|
$
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available at December 31, 2016
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
4,000,000
|
|
|
$
|
0.12
|
|
|
0.3 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Expired
|
|
|
3,900,000
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
100,000
|
|
|
$
|
0.14
|
|
|
0.6 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
100,000
|
|
|
$
|
0.14
|
|
|
0.6 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available at December 31, 2015
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
No employee stock compensation expense
was charged to operating expenses during the years ended December 31, 2016 or 2015. At December 31, 2016, there was no unrecognized
compensation expense related to unvested stock options.
(7) INCOME TAXES
The provision (benefit) for income taxes is summarized as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
—
|
|
|
$
|
—
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The provision (benefit) for income taxes attributable to continuing
operations was as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current :
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The following is a reconciliation of the
federal income tax provision at the federal statutory rate to the Company’s tax provision attributable to continuing operations:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
Change in tax rate
|
|
|
—
|
|
|
|
—
|
|
Nondeductible items
|
|
|
—
|
|
|
|
—
|
|
State income taxes, net of federal benefit
|
|
|
3.96
|
|
|
|
3.96
|
|
Change in valuation allowance
|
|
|
(37.96
|
)
|
|
|
(37.96
|
)
|
AMT tax credit adjustment
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are presented below.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
62,959,000
|
|
|
$
|
62,903,000
|
|
Issuance of warrants
|
|
|
1,447,000
|
|
|
|
1,447,000
|
|
AMT and other tax credits
|
|
|
352,000
|
|
|
|
352,000
|
|
Accrued expenses
|
|
|
335,000
|
|
|
|
244,000
|
|
Depreciation and amortization
|
|
|
15,000
|
|
|
|
15,000
|
|
Total gross deferred tax assets
|
|
|
65,108,000
|
|
|
|
64,961,000
|
|
Less: valuation allowance
|
|
|
(65,108,000
|
)
|
|
|
(64,961,000
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Because of the Company's lack of earnings
history, the net deferred tax assets have been fully offset by a 100% valuation allowance. The valuation allowance for net deferred
tax assets was $65,108,000 and $64,961,000 as of December 31, 2016 and 2015, respectively. The net change in the total valuation
allowance was $147,000 and $78,000 for the years ended December 31, 2016 and 2015, respectively.
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets, which consist of tax benefits primarily from net operating loss carryforwards,
is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. Of the total valuation allowance of $65,108,000 as of December 31, 2016, subsequently recognized tax
benefits, if any, in the amount of $6,400,000 will be applied directly to contributed capital.
At December 31, 2016, the Company had net
operating loss carryforwards available for U.S. tax purposes of approximately $165,849,000. These carryforwards expire through
2036. Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of net operating
loss carryforwards may be limited under the change in stock ownership rules of the Code. Due to various significant changes in
our ownership interests, as defined in the Internal Revenue Code of 1986, as amended, the Company may have limited the availability
of its net operating loss carryforwards. There can be no assurance that the Company will be able to avail itself of any net operating
loss carryforwards.
(8) RELATED PARTY TRANSACTIONS
Certain directors of the Company also serve
as officers and directors of and own controlling interests in Dancing Bear Investments, Inc., E&C Capital Partners LLLP, E&C
Capital Partners II, LLLP, The Registry Management Company, LLC, Tralliance Registry Management Company, LLC, Labigroup Holdings,
LLC and License Holdings, LLC. Dancing Bear Investments, Inc., E&C Capital Partners, LLLP and E&C Capital Partners
II, LLLP are stockholders of the Company and are entities controlled by our Chairman.
On September 29, 2008, the Company (i)
sold the business and substantially all of the assets of its Tralliance Corporation subsidiary to Tralliance Registry Management
Company LLC (“Tralliance Registry Management”) and (ii) issued 229,000,000 shares of its Common Stock (the “Shares”)
to The Registry Management Company, LLC (“Registry Management”) (the “Purchase Transaction”). Tralliance
Registry Management and Registry Management are entities directly or indirectly controlled by Michael S. Egan, our Chairman and
Chief Executive Officer and principal stockholder, and each of our two remaining executive officers and Board members, Edward A.
Cespedes, our President, and Robin Segaul Lebowitz, our Vice President of Finance, own a minority interest in Registry Management. After
giving effect to the closing of the Purchase Transaction and the issuance of the Shares thereunder, Mr. Egan beneficially owned
approximately 76% of the Company’s Common Stock and continues to beneficially own such amount at December 31, 2016.
In connection with the Purchase Transaction,
the Company received (i) forgiveness of debt consideration totaling approximately $6,400,000, and (ii) an earn-out equal to 10%
(subject to certain minimums) of Tralliance Registry Management’s “net revenue” (as defined) derived from “.travel”
names registered by Tralliance Registry Management from September 29, 2008 through May 5, 2015 (the “Earn-out”).
The final prorated Earn-out payment of $37,000 was received by the Company in May 2015 and the Earn-out Agreement has now expired.
The minimum Earn-out payable by Tralliance Registry Management to theglobe was $300,000 in the first year of the Earn-out
Agreement, and increased by $25,000 in each subsequent year (pro-rated for the final year of the Earn-out). During 2016
and 2015, the Company received Earn-out installment payments totaling $0 and $149,625, respectively, from Tralliance Registry Management,
which have been recorded as Related Party Other Income in our Consolidated Statements of Operations for such years.
In connection with the closing of the Purchase
Transaction, the Company also entered into a Master Services Agreement (“Services Agreement”) with Dancing Bear Investments,
Inc. (“Dancing Bear”), an entity which is controlled by Mr. Egan. Under the terms of the Services Agreement,
for a fee of $20,000 per month ($240,000 per annum), Dancing Bear provides personnel and services to the Company so as to enable
it to continue its existence as a public company without the necessity of any full-time employees of its own. The Services
Agreement had an initial term of one year. The Services Agreement now automatically renews for additional one year terms unless
notice is given by either party of the intent not to renew, and has currently been renewed through September 2017. The
Services Agreement may be terminated under certain events. Services under the Services Agreement include, without limitation,
accounting, assistance with financial reporting, accounts payable, treasury/financial planning, record retention and secretarial
and investor relations functions. Related party transactions expense related to the Master Services Agreement of $240,000
was recognized in our Consolidated Statement of Operations during both the years ended December 31, 2016 and 2015. No payments
related to the Services Agreement were made by the Company to Dancing Bear in 2016 and 2015. A balance of $769,570 related
to the Services Agreement is owed by the Company to Dancing Bear and is accrued on our Balance Sheet at December 31, 2016.
As more fully discussed in Note 5 “Debt,”
on June 6, 2008, the Company and its subsidiaries, as guarantors, entered into a Revolving Loan Agreement with Dancing Bear, pursuant
to which Dancing Bear may loan up to $500,000 to the Company on a revolving basis (the “Credit Line”). In
connection with its entry into the Credit Line, the Company borrowed $100,000 under the Credit Line. Subsequently, during
the remainder of 2008, the Company made additional borrowings totaling $400,000 under the Credit Line. As of December 31, 2016
and 2015, outstanding principal of $500,000 and accrued interest of $423,233 and $373,234, respectively, related to the Credit
Line have been reflected as current liabilities in our Consolidated Balance Sheet. Related Party Interest Expense related to the
Credit Line of $50,000 was recognized in our Consolidated Statement of Operations during both the years ended December 31, 2016
and 2015.
As discussed earlier in Note 5, “Debt,”
during 2016 the Company borrowed a total of $100,000 from Dancing Bear under two separate promissory notes. Interest expense totaling
$4,645 has been recorded by the Company during 2016, and is accrued on its balance sheet at December 31, 2016 related to these
promissory notes.
In order to help the Company make it through
a liquidity crisis in 2008, Michael S. Egan, our Chairman and Chief Executive Officer, agreed to defer receiving a portion of his
2008 salary, totaling $105,769, until a future undetermined point in time. Additionally, Robin S. Lebowitz, our Vice President
of Finance agreed to defer receiving an aggregate of $25,000 in car allowance payable during 2006, 2007 and 2008 to a future undetermined
point in time. The aforementioned deferred payments were accrued by the Company during the years that such compensation was earned,
with the total amount of $130,769 classified as Accrued Compensation Due to Related Parties in our Consolidated Balance Sheets
at both December 31, 2016 and 2015.
(9) SUBSEQUENT EVENTS
The Company’s management evaluated
subsequent events through the time of the filing of this report on Form 10-K. The Company’s management is not aware of any
significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a
material impact on its consolidated financial statements, except for the following. On March 29, 2017 the Company entered into
a $50,000 promissory note with, and borrowed the full amount of such promissory note from, Dancing Bear Investments, Inc., an entity
controlled by Michael S. Egan, its Chairman and Chief Executive Officer. The promissory note is unsecured and matures with all
amounts due, including principal and accrued interest, on the earlier of (i) five business days following any demand for payment,
which demand can be made by Dancing Bear at any time; or (ii) an event of default as defined under the promissory note. The Company
intends to use the proceeds from the promissory note to pay its public company operating costs over a short period of time.