NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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(1)
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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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DESCRIPTION OF THEGLOBE.COM
theglobe.com, inc. (the “Company”
or “theglobe”) was incorporated on May 1, 1995 (inception) and commenced operations on that date. Originally,
theglobe.com 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. As a result of the sale of its Tralliance 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. 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 condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries from their respective dates of acquisition. All significant
intercompany balances and transactions have been eliminated in consolidation.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited interim condensed consolidated
financial statements of the Company as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016
included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934,
as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and note disclosures
normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations relating to interim condensed consolidated financial statements.
In the opinion of management, the accompanying
unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company at September 30, 2017 and the results of its operations and its
cash flow for the three and nine months ended September 30, 2017 and 2016. The results of operations and cash flows for such periods
are not necessarily indicative of results expected for the full year or for any future period.
USE OF ESTIMATES
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management 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. Our estimates, judgments and assumptions are continually
evaluated based upon available information and experience. Because of estimates inherent in the financial reporting process, actual
results could differ from those estimates. See Note 2, “Liquidity and Going Concern Considerations” for a discussion
of the Company’s derecognition of certain accounts payable and accrued expenses.
NET INCOME PER 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.
RECENT 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.
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(2)
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LIQUIDITY AND GOING CONCERN CONSIDERATIONS
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The accompanying 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, the condensed 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 well as the forbearance of its creditors. The Earn-out period expired on May 5, 2015, with the final pro-rated payment of $37,000
received by the Company in May 2015. More recently, as more fully discussed in Note 4, “Debt,” in March 2016, November
2016 and March 2017, the Company received fundings of $50,000 each under three (3) promissory notes entered into with the same
entity that provided funding under the Revolving Loan Agreement (the “Promissory Notes”). Additionally, on November
10, 2017, the Company entered into a fourth $50,000 promissory note (the “November 2017 Promissory Note”) with Dancing
Bear and intends to use the proceeds from such promissory note to fund its public company operating costs while it explores options
related to the future of theglobe (see Note 7, Subsequent Events for further details).
At September 30, 2017, the Company had a net
working capital deficit of approximately $2,224,000. Such working capital deficit included (i) a total of approximately $1,125,000
in principal and accrued interest owed under the aforementioned Revolving Loan Agreement and Promissory Notes; (ii) a total of
approximately $950,000 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
$25,000 in other unsecured accounts payable and accrued expenses owed to non-related parties.
During the fourth quarter of 2014, the Company
derecognized approximately $84,000 of old accrued expenses related to its former Tralliance business (including $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 payable owed to 2 former vendors and accrued expenses totaling approximately
$126,000, based upon the belief that the statute of limitations applicable to enforcement of such liabilities had 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 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 account payables will agree with our application of statutes of limitation to
time bar claims related to such payables 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 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 September 30, 2017.
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, increasing by $25,000 in each subsequent year (pro-rated for the
final year of the Earn-out). As discussed earlier, the final Earn-out payment of approximately $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 revenue 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’S PLANS
On a short term liquidity basis, the Company
must receive the continued indulgence of its primary creditor, Mr. Egan, including the continued forebearance of Mr. Egan and related
entities in making demand for payment for amounts outstanding under the Revolving Loan Agreement, the 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. The Company currently has no access to credit facilities and has traditionally relied
on borrowings from related parties to meet short-term liquidity needs, including to fund its public company operating costs while
it explores its options related to the future of theglobe. Any such equity capital raised would likely result in very substantial
dilution in the number of outstanding shares of the Company’s Common Stock and, if raised from anyone other than Mr. Egan
or his related entities, would likely result in a change in control of theglobe. Given theglobe’s current financial condition,
it has no intent to seek to acquire or start any new businesses. It is possible, however, that the Company could become a party
to a “reverse merger” or similar transaction whereby a privately owned operating company would be merged into, or otherwise
acquired by, the Company or a subsidiary thereof, in exchange for the issuance of shares of capital stock to the owners of the
private company that would then represent substantially all of the then outstanding capital stock of the Company. There can be
no assurance that any such reverse merger or similar transaction will be pursued or consummated, or that the Company will continue
as a going concern.
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(3)
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DISCONTINUED OPERATIONS
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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 $1,000,000
discussed earlier, from its balance sheet at December 31, 2012. There are no Discontinued Operations assets or liabilities at September
30, 2017.
Debt consists of notes payables due to a related party, as summarized
below:
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September 30, 2017
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December 31, 2016
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2008 Revolving Loan Notes due to a related party; due on demand
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$
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500,000
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$
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500,000
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March 2016 Promissory Note due to a related party; due on demand
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50,000
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50,000
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November 2016 Promissory Note due to a related party; due on demand
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50,000
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50,000
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March 2017 Promissory Note due to a related party; due on demand
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50,000
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—
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$
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650,000
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$
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600,000
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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 September 30, 2017 and December 31, 2016, outstanding principal
of $500,000 and accrued interest of $460,631 and $423,233 respectively, related to this Line of Credit have been reflected as current
liabilities in our Consolidated Balance Sheet. Related Party Interest Expense related to the Credit Line of $37,397 was recognized
in our Consolidated Statement of Operations during both the nine months ended September 30, 2017 and 2016, respectively.
On May 7, 2009, the Company entered into a
Note and Modification Agreement with Dancing Bear Investments, Inc., 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 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. The Company currently has no ability
to repay this loan should Dancing Bear demand payment.
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 October 2016.
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.
On March 29, 2017, the Company entered into
a third $50,000 promissory note (the “March 2017 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 intends to use the proceeds from the promissory
note to pay its public company operating costs over a short period of time.
As of September 30, 2017 and December 31, 2016,
accrued interest totaling $14,671 and $4,645, respectively, related to the March 2016, November 2016 and March 2017 Promissory
Notes has been reflected as current liabilities on our Condensed Consolidated Balance Sheet. Related Party Interest Expense related
to the March 2016, November 2016 and March 2017 Promissory Notes totaling $10,028 and $2,630 was recognized in our Consolidated
Statement of Operations during the nine months ended September 30, 2017 and 2016, respectively.
The Company has no ability to repay any of
the loans discussed above should Dancing Bear demand payment.
As of September 30, 2017, all of the Company’s
stock option plans have been terminated and there are no shares available for grant under these plans. Remaining stock options
outstanding and exercisable expired in August 2016.
There were no stock option grants or exercises
during each of the nine months ended September 30, 2017 and 2016.
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(6)
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RELATED PARTY TRANSACTIONS
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The Company’s Condensed Consolidated Balance Sheets at September
30, 2017 and December 31, 2016 includes certain related party debt liabilities owed to Dancing Bear, an entity controlled by Michael
S. Egan, our Chairman and Chief Executive Officer, as summarized below:
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September 30, 2017
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December 31, 2016
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Notes payable due to related parties
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$
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650,000
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$
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600,000
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Accrued interest due to related parties
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475,303
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427,878
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Total principal and accrued interest
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$
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1,125,303
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$
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1,027,878
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Related party interest expense associated with such debt totaling
$47,425 and $40,027 has been recognized in our Condensed Consolidated Statement of Operations for the nine months ended September
30, 2017 and 2016, respectively. See Note 4, “Debt,” for a more complete discussion of related party debt.
During both the nine months ended September
30, 2017 and 2016, the Company accrued management services fee expenses totaling $180,000 payable to Dancing Bear under a Master
Services Agreement entered into on September 29, 2008 by and between Dancing Bear and the Company. No management service
fees were paid during either the nine months ended September 30, 2017 or the nine months ended September 30, 2016. At September
30, 2017 and December 31, 2016, a total of approximately $949,570 and $769,570, respectively, in management service fees remained
unpaid and are accrued on the Company’s condensed consolidated balance sheet.
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 September 30, 2017 and December 31, 2016.
The Company’s management evaluated subsequent
events through the time of the filing of this report on Form 10-Q. 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 November 10, 2017 the Company entered
into a fourth $50,000 promissory note (the “November 2017 Promissory Note”) with Dancing Bear. The promissory
note, which bears interest at the rate of 10% per annum, is unsecured and matures with all the 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 intends to use the proceeds from the promissory note to pay its public company operating costs over a short period of
time while it explores its options related to the future of theglobe.