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| TGLO.OB > SEC Filings for TGLO.OB > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms. In addition, these forward-looking statements include, but are not limited to, statements regarding:
· the outcome of pending litigation;
· our ability to negotiate favorable settlements with unsecured creditors;
· our ability to successfully resolve disputed liabilities;
· our estimates or expectations of continued losses;
· our expectations regarding future income (and in particular, income from an earn-out due from an affiliate) and expenses;
· our ability to raise sufficient capital; and
· our ability to continue to operate as a going concern.
These statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are not required to and do not intend to update any of the forward-looking statements after the date of this Form 10-Q or to conform these statements to actual results. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might not occur. Actual results, levels of activity, performance, achievements and events may vary significantly from those implied by the forward-looking statements. A description of risks that could cause our results to vary appears under "Risk Factors" and elsewhere in this Form 10-Q. The following discussion should be read together in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto and the audited consolidated financial statements and notes to those statements contained in the Annual Report on Form 10-K for the year ended December 31, 2008.
OVERVIEW
As more fully discussed in Note 3, "Sale of Tralliance and Share Issuance" in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements, on September 29, 2008, theglobe.com, inc. consummated the sale of the business and substantially all of the assets of its Tralliance Corporation subsidiary to Tralliance Registry Management Company, LLC, an entity controlled by Michael S. Egan, the Company's Chairman and Chief Executive Officer. As a result of and on the effective date of the sale of its Tralliance business, which was theglobe's remaining operating business, theglobe became a "shell company," as that term is defined in Rule 12b-2 of the Exchange Act, with no material operations or assets.
As part of the consideration for the sale of its Tralliance business, theglobe received earn-out rights from Tralliance Registry Management ("Earn-Out"), which constitutes the only source of revenue for theglobe as a shell company. theglobe's operating expenses as a shell company consist of customary public company expenses, including accounting, financial reporting, legal, audit and other related public company costs.
In connection with the sale of its Tralliance business and Share Issuance, the Company entered into a Master Services Agreement with Dancing Bear Investments, Inc., an entity which is controlled by Mr. Egan. Under the terms of the Services Agreement, for a fee of $20 thousand per month ($240 thousand 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. 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.
In March 2007, management and the Board of Directors of the Company made the decision to cease all activities related to its computer games and VoIP telephony services businesses. Results of operations for the computer games and VoIP telephony services businesses have been reported separately as "Discontinued Operations" in the accompanying condensed consolidated statements of operations for all periods presented. The assets and liabilities of the computer games and VoIP telephony services businesses have been included in the captions, "Assets of Discontinued Operations" and "Liabilities of Discontinued Operations" in the accompanying condensed consolidated balance sheets.
BASIS OF PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We received a report from our independent registered public accountants, relating to our December 31, 2008 audited financial statements, containing an explanatory paragraph regarding our ability to continue as a going concern. As a shell company, management believes that theglobe will not be able to generate operating cash flows sufficient to fund its operations and pay its existing current liabilities (including those liabilities related to its discontinued operations) in the foreseeable future. Based upon our current limited cash resources and without the infusion of additional capital and/or the continued indulgence of its creditors, management does not believe the Company can operate as a going concern beyond a short period of time. See "Future and Critical Need for Capital" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further details.
Our condensed 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, our condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Due to the Sale of our Tralliance business and Share Issuance on September 29, 2008, we have no continuing business operations. Accordingly, the results of our operations for the three and six months ended June 30, 2009 and the three and six months ended June 30, 2008 are not necessarily comparable.
NET REVENUE. Net revenue totaled $0 thousand for the three months ended June 30, 2009 as compared to $547 thousand for the three months ended June 30, 2008.
COST OF REVENUE. Cost of revenue was $0 for the three months ended June 30, 2009, compared to approximately $117 thousand for the three months ended June 30, 2008.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries and related expenses of sales and marketing personnel, commissions, consulting, advertising and marketing costs, public relations expenses and promotional activities. Sales and marketing expenses totaled $0 for the three months ended June 30, 2009 versus approximately $87 thousand for the same period in 2008.
GENERAL AND ADMINISTRATIVE EXPENSES. Prior to the Sale of Tralliance, general and administrative expenses consisted primarily of salaries and other personnel costs related to management, finance and accounting functions, facilities, outside legal and audit fees, insurance, and general corporate overhead costs. Subsequent to the sale of Tralliance, general and administrative expenses include only those customary public company expenses, including outside legal and audit fees, insurance and other related public company costs. Expenses relating to management, finance and accounting functions that were previously included within the general and administrative expense caption are now included within the related party transactions expense caption. General and administrative expenses totaled approximately $24 thousand in the second quarter of 2009 as compared to approximately $655 thousand for the same quarter of the prior year.
RELATED PARTY TRANSACTIONS. Related party transaction expense totaled $60 thousand for the three months ended June 30, 2009 as compared to approximately $130 thousand for the same period of 2008, a decrease of approximately $70 thousand. Subsequent to the Sale of Tralliance, the Company's related party expenses consist of management services fees payable to Dancing Bear for accounting, finance, administrative and managerial support. During 2008, the Company's related party expenses consisted of related party charges for the leasing of office space, and the outsourcing of customer service, human resources and payroll processing functions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $0 for the three months ended June 30, 2009 as compared to $50 thousand for the three months ended June 30, 2008.
RELATED PARTY INTEREST EXPENSE. Related party interest expense for the second quarter of 2009 was $12 thousand as compared to approximately $115 thousand for the same quarter of 2008, reflecting the decrease in outstanding related party debt resulting from the Sale of Tralliance and Share Issuance.
INTEREST INCOME (EXPENSE). Interest expense of $116 was reported for the second quarter of 2009 compared to interest income of $454 reported for the second quarter of the prior year.
RELATED PARTY OTHER INCOME. Related party other income consists of the minimum Earn-Out payable quarterly by Tralliance Registry Management to the Company as further discussed in Note 3, "Sale of Tralliance and Share Issuance" in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements. Related party other income for the three months ended June 30, 2009 was $75 thousand.
INCOME TAXES. No tax benefit was recorded for the losses incurred during the second quarter of 2009 or the second quarter of 2008 as we recorded a 100% valuation allowance against our otherwise recognizable deferred tax assets due to the uncertainty surrounding the timing or ultimate realization of the benefits of our net operating loss carryforwards in future periods.
Discontinued operations generated a net loss of approximately $24 thousand for the second quarter of 2009 as compared to a net income of $21 thousand during the second quarter of 2008. The 2009 loss was due principally to interest expenses accrued in connection with an ongoing tax audit of a former subsidiary company. The 2008 income was due principally to revenue recognized upon the collection of old and outstanding accounts receivables related to the Company's former Computer Games business.
NET REVENUE. Net revenue totaled $0 thousand for the six months ended June 30, 2009 as compared to 1.1 million for the six months ended June 30, 2008.
COST OF REVENUE. Cost of revenue was $0 for the six months ended June 30, 2009, compared to approximately $149 thousand for the six months ended June 30, 2008.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries and related expenses of sales and marketing personnel, commissions, consulting, advertising and marketing costs, public relations expenses and promotional activities. Sales and marketing expenses totaled $0 for the six months ended June 30, 2009 versus approximately $296 thousand for the same period in 2008.
GENERAL AND ADMINISTRATIVE EXPENSES. Prior to the Sale of Tralliance, general and administrative expenses consisted primarily of salaries and other personnel costs related to management, finance and accounting functions, facilities, outside legal and audit fees, insurance, and general corporate overhead costs. Subsequent to the sale of Tralliance, general and administrative expenses include only those customary public company expenses, including outside legal and audit fees, insurance and other related public company costs. Expenses relating to management, finance and accounting functions that were previously included within the general and administrative expense caption are now included within the related party transactions expense caption. General and administrative expenses totaled approximately $48 thousand through the second quarter of 2009 as compared to approximately $1.2 million for the same period of 2008.
RELATED PARTY TRANSACTIONS. Related party transaction expense totaled $120 thousand for the six months ended June 30, 2009 as compared to approximately $283 thousand for the same period of 2008, a decrease of approximately $163 thousand. Subsequent to the Sale of Tralliance, the Company's related party expenses consist of management services fees payable to Dancing Bear for accounting, finance, administrative and managerial support. During 2008, the Company's related party expenses consisted of related party charges for the leasing of office space, and the outsourcing of customer service, human resources and payroll processing functions
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $0 for the six months ended June 30, 2009 as compared to $101 thousand for the six months ended June 30, 2008.
RELATED PARTY INTEREST EXPENSE. Related party interest expense for the second quarter of 2009 was $25 thousand as compared to approximately $231 thousand for the same period of 2008, reflecting the decrease in outstanding related party debt resulting from the Sale of Tralliance and Share Issuance.
INTEREST INCOME (EXPENSE). Interest expense of $140 was reported for the six months ended June 30, 2009 compared to interest income of approximately $3 thousand reported through the second quarter of 2008.
RELATED PARTY OTHER INCOME. Related party other income consists of the minimum Earn-Out payable quarterly by Tralliance Registry Management to the Company as further discussed in Note 3, "Sale of Tralliance and Share Issuance" in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements. Related party other income for the six months ended June 30, 2009 was $150 thousand.
INCOME TAXES. No tax benefit was recorded for the losses incurred during the first half of 2009 or the first half of 2008 as we recorded a 100% valuation allowance against our otherwise recognizable deferred tax assets due to the uncertainty surrounding the timing or ultimate realization of the benefits of our net operating loss carryforwards in future periods..
The loss from discontinued operations, net of income taxes totaled approximately $27 thousand in the first half of 2009 as compared to income of approximately $22 thousand during the first six months of 2008. The 2009 loss was due principally to interest expenses accrued in connection with an ongoing tax audit of a former subsidiary company. The 2008 income was due principally to revenue recognized upon the collection of old and outstanding accounts receivables related to the Company's former Computer Games business.
CASH FLOW ITEMS
As of June 30, 2009, theglobe had approximately $13 thousand in cash and cash equivalents as compared to approximately $90 thousand as of December 31, 2008. Net cash flows used in operating activities of continuing operations totaled approximately $38 thousand and $755 thousand, for the six months ended June 30, 2009 and 2008, respectively, a decrease of approximately $717 thousand. Such decrease was attributable primarily to a lower net loss from continuing operations for the six months ended June 30, 2009 compared to the six months ended June 30, 2008.
Approximately $38 thousand in net cash flows were used in the operating activities of discontinued operations during the first half of 2009 as compared to approximately $8 thousand of net cash flows provided by the operating activities of discontinued operations during the same period of the prior year.
During the six months ended June 30, 2008, the Company borrowed $200 thousand from Dancing Bear under the Revolving Loan Agreement.
FUTURE AND CURRENT CRITICAL NEED FOR CAPITAL
For the reasons described below, Company management does not believe that cash on hand and cash flows generated internally by the Company will be adequate to fund the operation of its business beyond a short period of time. Additionally, we have received a report from our independent registered public accountants, relating to our December 31, 2008 audited financial statements, containing an explanatory paragraph stating that our recurring losses from operations and our accumulated deficit raise substantial doubts about our ability to continue as a going concern.
During its recent past, the Company was able to continue operating as a going concern due principally to funding of $500 thousand received during 2008 under a Revolving Loan Agreement with an entity controlled by Michael S. Egan, its Chairman and Chief Executive Officer (See Note 5, "Debt" in the Notes to Unaudited Condensed Consolidated Financial Statements for further details) and funding of $225 thousand received during the first half of 2009 under an Earn-out Agreement with an entity also controlled by Mr. Egan (See Note 3, "Sale of Tralliance and Share Issuance" in the Notes to Unaudited Condensed Consolidated Financial Statements for further details).
At June 30, 2009, the Company had a net working capital deficit of approximately $3.1 million, inclusive of a cash and cash equivalents balance of approximately $13 thousand. Such working capital deficit included (i) a total of approximately $548 thousand in principal and accrued interest owed under the aforementioned Revolving Loan Agreement to an entity controlled by Mr. Egan, and (ii) an aggregate of approximately $2.6 million in unsecured accounts payable and accrued expenses owed to vendors and other non-related third parties (of which approximately $1.8 million relates to liabilities of our VoIP telephony service discontinued business, with a significant portion of such liabilities related to charges which have been disputed by theglobe). theglobe believes that its ability to continue as a going concern for any significant length of time in the future will be heavily dependent, among other things, on its ability to prevail and avoid making any payments with respect to such disputed vendor charges and/or to negotiate favorable settlements (including discounted payment and/or payment term concessions) with the aforementioned creditors.
As more fully discussed in Note 3, "Sale of Tralliance and Share Issuance" 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 million 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 $6.4 million). However, the Company continues to be obligated to repay its principal borrowings totaling $500 thousand, plus accrued interest at the rate of 10% per annum, due to an entity controlled by Mr. Egan under the aforementioned Revolving Loan Agreement. All unpaid borrowings under the Revolving Loan Agreement, as amended on May 7, 2009, including accrued interest, are due and payable by the Company in one lump sum on the earlier of (i) five business days following demand for payment, which demand can be made at anytime, or (ii) the occurrence of an event of default as defined in the Revolving Loan Agreement. The Company currently has no ability to repay this loan should a demand for payment be made by the noteholder. All borrowings under the Revolving Loan Agreement are secured by a pledge of all of the assets of the Company and its subsidiaries. After giving effect to the closing of the Purchase Transaction and the issuance of the Shares thereunder, Mr. Egan now beneficially owns approximately 77% of the Company's issued and outstanding Common Stock.
As additional consideration under the Purchase Transaction, Tralliance Registry Management is 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 will be at least $300 thousand in the first year, increasing by $25 thousand in each subsequent year (pro-rated for the final year of the Earn-out).
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 thousand per month ($240 thousand per annum) such entity 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. 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 revenue other than under the Earn-out. It is expected that theglobe's future operating expenses as a public shell company will 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.
As a shell company, management believes that theglobe will most likely continue to incur net and cash flow losses for the foreseeable future. However, assuming that no significant unplanned costs are incurred, management believes that theglobe's future losses will be limited. Further, in the event that Registry Management is successful in substantially increasing net revenue derived from ".travel" name registrations (and as the result maximizing theglobe's Earn-out revenue) in the future, theglobe's prospects for achieving profitability will be enhanced. To date theglobe has received only minimum payments under the Earn-out.
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. Such capital will be needed both to (i) fund its expected limited future net losses and (ii) repay the $548 thousand of secured debt and related accrued interest due under the Revolving Loan Agreement and a portion of the $2.6 million unsecured indebtedness (assuming theglobe is successful in favorably resolving and settling certain disputed and non-disputed vendor charges related to such unsecured indebtedness). Any such capital would likely come from Mr. Egan, or affiliates of Mr. Egan, as the Company currently has no access to credit facilities and had traditionally relied upon borrowings from related parties to meet short-term liquidity needs. Any such capital raised would likely result in very substantial dilution in the number of outstanding shares of the Company's Common Stock.
On a short-term liquidity basis, the Company must be successful in collecting the quarterly Earn-out payments contractually due from Tralliance Registry Management on a timely basis, and must receive the continued indulgence of substantially all of its creditors, in order to continue to operate as a going concern during the remainder of fiscal 2009. Given theglobe's current financial condition and the state of the current United States capital markets and economy, it has no current intent to seek to acquire, or start, any other businesses.
Management believes that inflation has not had a significant effect on our results of operations during 2009 and 2008.
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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. At June 30, 2009 and December 31, 2008, a significant portion of our net liabilities of discontinued operations relate to charges that have been disputed by the Company and for which estimates have been required. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, valuation of accounts receivables and payables and valuation of other long-lived assets.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 establishes principles and requirements for subsequent events. In particular, this Statement sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this SFAS 165 did not have a material effect on the Company's financial condition, results of operations or cash flows; see Note 9 "Subsequent Events."
APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)" applies to convertible . . .
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