Attached files
Exhibit 99.1
Report of Independent Registered Public Accounting
Firm
Board
of Directors and Stockholders
pair
Networks, Inc.
We have
audited the accompanying consolidated balance sheets of pair
Networks, Inc. and subsidiary as of December 31, 2016 and 2015, and
the related consolidated statements of income and retained
earnings, and cash flows for each of the years in the two-year
period ended December 31, 2016. These financial statements are the
responsibility of the entity's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
pair Networks, Inc. and subsidiary as of December 31, 2016 and
2015, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2016, in
conformity with accounting principles generally accepted in the
United States of America.
The
consolidated summaries of operating expenses have been subjected to
audit procedures performed in conjunction with the audit of pair
Networks, Inc.’s financial statements. The consolidated
summaries of operating expense is the responsibility of the
entity’s management. Our audit procedures included
determining whether the consolidated summaries of operating
expenses reconciles to the financial statements and performing
procedures to test the completeness and accuracy of the information
presented in the consolidated summaries of operating expenses. In
forming our opinion on the consolidated summaries of operating
expenses, we evaluated whether the consolidated summaries of
operating expenses, including its form and content, is presented in
conformity with accounting principles generally accepted in the
United States of America. In our opinion, the consolidated
summaries of operating expenses is fairly stated, in all material
respects, in relation to the financial statements as a
whole.
As
discussed in Note 3 to the consolidated financial statements, the
retained earnings as of January 1, 2015, has been restated to
correct a misstatement relating to the recognition of revenue. Our
opinion is not modified with respect to this matter.
/s/GOFF
BACKA SLFERA & COMPANY, LLC
GOFF
BACKA ALFERA & COMPANY, LLC
Pittsburgh, Pennsylvania
October 31, 2017
pair Networks, Inc. and Subsidiary
Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
pair Networks, Inc. and Subsidiary Consolidated Financial
Statements Years Ended December 31, 2016 and 2015
Table of Contents
|
Page
|
Consolidated Balance Sheets
|
1
|
Consolidated Statements of Income and Retained
Earnings
|
2
|
Consolidated Statements of Cash Flows
|
3
|
Notes to the Consolidated Financial Statements
|
4-15
|
Supplementary information:
|
|
Consolidated Summaries of Operating Expenses
|
17
|
pair Networks, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2016 and 2015
Assets
|
2016
|
2015
|
|
|
|
Current Assets
|
|
|
Cash
and Cash Equivalents
|
$756,076
|
$755,417
|
Accounts
Receivable
|
90,826
|
130,701
|
Prepaid
Domain Name Registry Fees
|
574,062
|
593,269
|
Prepaids
and Other Current Assets
|
74,209
|
100,103
|
Total Current Assets
|
1,495,173
|
1,579,490
|
Fixed Assets, Net
|
3,281,581
|
3,890,465
|
Other Assets
|
|
|
Note
Receivable - Stockholder
|
13,652,102
|
13,978,000
|
Prepaid
Domain Name Registry Fees, Net of Current Portion
|
684,819
|
729,538
|
Other
Assets
|
2,314
|
5,479
|
Total Other Assets
|
14,339,235
|
14,713,017
|
Total Assets
|
$19,115,989
|
$20,182,972
|
Liabilities and Stockholder's Equity
|
|
|
Current Liabilities
|
|
|
Accounts
Payable
|
$130,723
|
$173,059
|
Current
Portion of Deferred Revenue
|
3,107,461
|
3,329,797
|
Accrued
Payroll, Related Taxes and Withholdings
|
384,682
|
331,254
|
Current
Portion of Notes Payable and Capital Lease
|
495,778
|
461,746
|
Other
Current Liabilities
|
20,691
|
23,084
|
Total Current Liabilities
|
4,139,335
|
4,318,940
|
Long Term Liabilities
|
|
|
Deferred
Revenue, Net of Current Portion
|
1,295,743
|
1,363,294
|
Notes
Payable, Net of Current Portion
|
300,178
|
670,329
|
Capital
Lease, Net of Current Portion
|
143,061
|
208,752
|
Total Long Term Liabilities
|
1,738,982
|
2,242,375
|
Total Liabilities
|
5,878,317
|
6,561,315
|
Stockholder's Equity
|
|
|
Common
stock, no par value, 1,000,000 shares authorized, 800,000 shares
issued & outstanding
|
25,100
|
25,100
|
Retained
Earnings
|
13,212,572
|
13,596,557
|
Total Stockholder's Equity
|
13,237,672
|
13,621,657
|
Total Liabilities and Stockholder's Equity
|
$19,115,989
|
$20,182,972
|
The accompanying notes are an integral part of the consolidated
financial statements.
1
pair Networks, Inc. and Subsidiary
Consolidated Statements of Income and Retained
Earnings
Years Ended December 31, 2016 and 2015
|
2016
|
2015
|
Income
|
|
|
Sales,
Net
|
$12,233,107
|
$12,916,831
|
Less:
Operating Expenses (See Summaries)
|
10,799,382
|
11,526,483
|
Operating
Income
|
1,433,725
|
1,390,348
|
Other
Income (Expenses)
|
|
|
Interest
Income
|
2,410
|
1,713
|
Interest Income -
Shareholder
|
100,652
|
64,087
|
Legal
Settlement
|
-
|
(6,313)
|
Capital
Gains
|
53
|
-
|
Referral
Fees
|
9,649
|
11,349
|
Cost of Abandoned
Transaction
|
(190,000)
|
|
Interest
Expense
|
(42,990)
|
(49,290)
|
Gain on Sale of
Asset
|
|
5,859
|
Miscellaneous Income
(Expenses)
|
2,766
|
(76)
|
Total
Other Income (Expenses)
|
(117,460)
|
27,329
|
Net
Income
|
1,316,265
|
1,417,677
|
Retained
Earnings - Beginning
|
|
|
(As
Restated for 2015)
|
13,596,557
|
15,770,555
|
Distributions
|
(1,700,250)
|
(3,591,675)
|
Retained
Earnings - Ending
|
$13,212,572
|
$13,596,557
|
The accompanying notes are an integral part of the consolidated
financial statements.
2
pair Networks, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016 and 2015
|
2016
|
2015
|
Cash Flows from Operating Activities
|
|
|
Net
Income
|
$1,316,265
|
$1,417,677
|
Adjustments
to Reconcile Net Income to Net Cash
|
|
|
Provided
by (Used in) Operating Activities:
|
|
|
Depreciation
|
903,615
|
1,296,218
|
(Gain)
/ Loss on Sale of Asset
|
|
(5,859)
|
Changes
in Assets and Liabilities:
|
|
|
Accounts
Receivable (Increase) Decrease
|
39,875
|
23,236
|
Prepaids
and Other Assets (Increase) Decrease
|
92,985
|
76,865
|
Accounts
Payable Increase (Decrease)
|
(42,336)
|
31,525
|
Deferred
Revenue Increase (Decrease)
|
(289,888)
|
(190,893)
|
Accrued
Expense and Other Liabilities Increase (Decrease)
|
51,035
|
(88,459)
|
Total Adjustments
|
755,286
|
1,142,633
|
Net Cash Provided by (Used in) Operating Activities
|
2,071,551
|
2,560,310
|
Cash Flows Provided by (Used in) Investing Activities
|
|
|
Repayment
of Note Receivable - Stockholder, Net
|
325,898
|
263,586
|
Purchase
of Property and Equipment
|
(213,039)
|
(333,266)
|
Proceeds
from the Sale of Assets
|
|
7,000
|
Advances
to SkiPunk, LLC
|
|
(361,807)
|
Net Cash Provided by (Used in) Investing Activities
|
112,859
|
(424,487)
|
Cash Flows from Financing Activities
|
|
|
Proceeds
from Bank Loan
|
|
300,000
|
Repayments
of Bank Loans
|
(421,178)
|
(380,248)
|
Designated
Principal Payments on Capital Lease
|
(62,323)
|
(61,249)
|
Stockholder's
Distributions
|
(1,700,250)
|
(2,135,705)
|
Net Cash Provided by (Used in) Financing Activities
|
(2,183,751)
|
(2,277,202)
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
659
|
(141,379)
|
Cash and Cash Equivalents at Beginning of Year
|
755,417
|
896,796
|
Cash and Cash Equivalents at End of Year
|
756,076
|
$755,417
|
Additional Information
|
|
|
Interest
Paid
|
$43,331
|
$48,411
|
Supplemental Schedule of Non-cash Activities
In
2016 equipment costing $81,691 was purchased through an equipment
finance company loan (See Note 7)
In
2015 equipment costing $332,324 was obtained and financed through a
capital lease (See Note 8).
In
2015, as described in Note 13, a balance of $1,455,970 was
transferred from Advance to Ski Punk, LLC and recorded as a
Stockholder's Distribution.
The accompanying notes are an integral part of the consolidated
financial statements.
3
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1
Organization and Operations
pair
Networks, Inc. and subsidiary (the Company) provides web hosting
services and domain name registrations for entities in the United
States and abroad. Services include shared web hosting, e-commerce,
fully-managed virtual private and dedicated servers, customer
self-managed dedicated servers, domain-name registration,
co-location and content-delivery networks.
The
Company began operations in August 1995. It incorporated in the
state of Pennsylvania in August 1998. For income tax purposes, it
is recognized as an S Corporation for both Federal and state
purposes.
Ryousha
Kokusai, LLC (d/b/a pair International), a wholly owned
single-member limited liability company subsidiary of pair
Networks, Inc., was formed on January 1, 2015. The sales to
European Union countries subject to the Value Added Tax (VAT) in
Europe are recorded and handled through this LLC. For income tax
purposes, this LLC is treated as a disregarded entity.
The
Company's principal operations are conducted at a site in
Pittsburgh, PA. It also has an operating site located in Denver, CO
and remote site back-up location in Pittsburgh, PA. Approximately
79% of revenues are generated from customers in the United States.
The remainder is split up internationally among approximately 150
countries. No single customer accounts for more than 1% of
sales.
Note 2
Summary of Significant Accounting Policies
Principles of Consolidation
These
consolidated financial statements include the accounts of pair
Networks, Inc. and its wholly-owned subsidiary Ryousha Kokusai,
LLC. All significant intercompany transactions and balances have
been eliminated.
Cash and Cash Equivalents
The
Company considers all demand deposits and money market funds with
an original maturity of three months or less to be cash
equivalents.
Concentration of Risk
The
majority of the Company's cash and cash equivalents are maintained
at one financial institution, the balance of which normally exceeds
federally insured limits. The Company does not believe that it is
exposed to any significant credit risk because of this
situation.
4
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 2
Summary of Significant Accounting Policies (Cont.)
Accounts Receivable, Revenue Recognition and Allowance for Doubtful
Accounts
The
Company recognizes revenue when there is persuasive evidence that
an arrangement exits, the service period has elapsed or the product
has been delivered and collection is reasonably
assured.
Web
Hosting - Services are provided for a specific contract period and
are usually paid for in advance of that service period. The
consideration received is recorded as deferred revenue at the time
of the sale and recognized as income ratable over the service
period.
Domain
Name Registration - These registrations are sold to customers and
provide the customer with exclusive used of a domain name for a
specific period, usually one to ten years. Payments for the full
term of the registration are paid for in advance and are recorded
as deferred revenue and then recognized as earned ratably over the
term of the registration period. Domain registration fees are
non-refundable.
An
allowance for doubtful accounts is not provided for by the Company
because it is considered to be immaterial. As accounts are deemed
uncollectable, they are written off against sales.
Prepaid Domain Name
Registry Fees
Prepaid
domain name registry fees represent amounts charged by a registry
at the time a domain is registered or renewed. These amounts are
amortized and expensed over the same period revenue is recognized
for the related domain registration contracts.
Internally Developed Software
The
Company internally developed much of the software necessary to
operate the business and account for customer activity, including
new customer sign-up, initiating and terminating service, billing,
collection, etc. A significant portion of this software was
developed early on in the startup phase of the Company, including a
period prior to the incorporation of the business.
Generally
Accepted Accounting Standards normally requires that costs (mainly
labor), associated with the development of software applications,
be capitalized and amortized over an estimated useful life.
Post-implementation costs, normally maintenance and minor upgrades,
are to be expensed when incurred.
5
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 2 Summary of
Significant Accounting Policies (Cont.)
Internally Developed Software (Cont.)
The
Company's policy has been to expense, rather than capitalize, the
cost to develop internal use software. In 2016, 2015 and in the
previous five years, the Company believes that software development
costs that would require capitalization would have been
insignificant and that the vast majority of software development
costs in those years would have been post implementation costs that
would not require capitalization.
Equipment and Property
Equipment
and property are stated at cost. Depreciation is provided for on a
straight-line basis over the following estimated useful
lives:
Equipment
|
|
5
to 10 years
|
Leasehold
Improvements
|
|
39
to 40 years
|
Software
|
|
3
years
|
Furniture & Fixtures
|
|
7
to 10 years
|
Expenditures
for maintenance and repairs are charged against earnings in the
year incurred. Expenditures for any equipment individually costing
less than $500 are expensed in the year incurred.
Paid Time Off (PTO)
PTO
(vacation and sick days) vests with the employee as they earn it.
The PTO can be accumulated over years and there is no requirement
to use it or lose it if not used by a certain date. The Company
maintains a system to track such time and, as such, recognizes a
liability for earned, but unused PTO at the end of the year. The
accrual for PTO at December 31, 2016 and 2015 was $157,641 and
$148,844, respectively.
Advertising Costs
Advertising
costs are expensed as incurred.
Income Taxes
Effective
January 1, 2005, the Company, with the consent of its stockholders,
elected under the Internal Revenue Code to be taxed as an S
corporation. In lieu of Federal and state corporate income taxes,
the stockholder of an S corporation is taxed on his proportionate
share of the Company's taxable income. Therefore, no provision for
Federal or state income taxes has been included in these financial
statements.
6
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 2
Summary of Significant Accounting Policies (Cont.)
Income Taxes (Cont.)
The
Company is required to file and does file an S Corporation tax
return with the Internal Revenue Service and state taxing
authorities. The income tax returns of the S Corporation are
subject to examination by income tax authorities generally for
three years after the due date of the tax return. Accordingly, the
tax returns for the year ended December 31, 2013 through the
present are still subject to examination.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the
estimates.
Fair Value of Financial Instruments
The
carrying amount of financial instruments, include cash,
receivables, short term investments, accounts payable, accrued
liabilities and lines of credit approximated fair value due to the
short maturity of these instruments. The carrying amount of long
term debt approximates fair value because the interest rates
offered to the Company for debt with similar terms and maturities
approximate current market interest.
Variable Interest Entities
Generally
accepted accounting principles (GAAP) in the United States normally
requires consolidation of variable interest entities (VIE) in the
financial statement of their primary beneficiary when the reporting
entity has controlling financial interest in the VIE.
A
subsequent amendment to GAAP permitted a private company, under
certain circumstances, to elect to forego consolidation of a VIE
that acts as a lessor of property to the reporting entity and
provides for alternative disclosure.
As
explained in Note 13, it was determined that a planned lessor
entity (SkiPunk, LLC) was a VIE entity to the Company. The Company
believes it qualifies for the alternative disclosure in connection
with this arrangement and, as such, has elected not to consolidate
the VIE's income, expenses, assets or liabilities in these
financial statements. Rather it has provided for the alternative
disclosure set forth in the note referred to above.
7
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 2
Summary of Significant Accounting Policies (Cont.)
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from
Contracts with Customers (Topic 605), requiring an entity to recognize the amount of
revenue to which it expects to be entitled for the transfer of
promised goods & services. The updated standard will replace
most existing revenue recognition guidance in U.S. GAAP when it
becomes effective and permits the use of either a full
retrospective or retrospective with cumulative effect transition
methods. Early adoption is not permitted. The updated standard will
be effective for annual reporting beginning after December 15, 2018
and interim periods within annual periods beginning after December
15, 2019. The Company has not yet selected a transition method and
is currently evaluating the effect that the updated standard will
have on the consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topics 842),
which dramatically changes the manner in which financial statements
present, among other things, operating leases by lessees. Under
this recently issued ASU, companies must reflect operating lease
obligations on their balance sheets. Income statement treatment of
operating leases is similar to the current rules which require
straight line reporting of the lease expenses. For private
companies, the new rules on lease reporting is effective for fiscal
years beginning after December 15, 2019 and interim periods
beginning the following year. Early adoption is permitted. The
Company is currently evaluating the effects, if any, the adoption
of this guidance will have on its consolidated financial
statements.
Note 3 Prior-period Adjustment for Change in Accounting for Sale of
Domain Name Registrations
Prior
to 2015, the Company would recognize as earned in the year sold,
the fees paid by customers for domain name registrations and
expense the fees charged by the registry for the domain at the time
of the sale. The registrations provide exclusive use of a domain
name for a specific contract period, usually one to ten
years.
This
procedure was utilized because a contract arrangement existed, the
product (the domain name) had been delivered and the non-refundable
fees were paid by the customer at the time of the sale. The service
obligations during the contract period were deemed not to be of a
nature significant enough to require deferral of both the revenue
and the cost and the subsequent ratable recognition of each over
the term of the contract period.
Based
on a review of industry practices employed by companies that sell
domain registrations, it was determined that the industry had
adopted an accounting procedure whereby the revenue from the sale
of domains and the related cost of registry fees for those domains
were deferred at the time of the sale and amortized ratably to
income
8
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 3
Prior-period Adjustment for Change in Accounting for Sale of Domain
Name Registrations (Cont.)
and
expense over the contract period. The industry has apparently
concluded that the service obligation over the term of the domain
registration period is significant enough to require the deferral
method of accounting.
Accordingly,
effective beginning on January 1, 2015, the Company has adopted the
industry accepted method of accounting for the sale of domain name
registrations as more fully described in Note 2 to these financial
statements.
The
cumulative effect of the change on retained earnings as of the
beginning of 2015 is as follows:
Retained
earnings as of December 31, 2014 as previously
reported
|
$16,666,086
|
|
|
Cumulative
effect through December 31, 2014 of the accounting
change
|
(895,531)
|
|
|
Restated
retained earnings as of December 31, 2014 and as of the beginning
of 2015
|
$15,770,555
|
The
effect of the change on the 2016 and 2015 consolidated statements
of income by using the deferral method of accounting for sales and
costs of domains in contrast to the immediate recognition of the
sale and expense of domains at the time of the sale is as
follows:
|
2016
|
2015
|
Sales,
Net - increase (decrease)
|
$106,532
|
$30,255
|
Operating
Expenses — Cost of
|
|
|
Domains
Sold — increase (decrease)
|
$63,926
|
$1,836
|
Net
Income — increase (decrease)
|
$42,606
|
$28,419
|
The
effect of the change on the consolidated balance sheets as of
December 31, 2016 and 2015 was to increase Total Assets by
$1,258,881 and $1,322,807, respectively, consisting of the current
and long-term portions of the Prepaid Domain Name Registry Fees as
set forth on the balance sheets and to increase Total Liabilities
by $2,083,387 and $2,189,919, respectively, consisting of the
current and long-term portions of deferred revenue related to
domains as set forth in Note 6 to the consolidated financial
statements.
9
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4 Property and Equipment,
Net
Property and equipment consisted of:
|
2016
|
2015
|
Computer/Telecommunication
|
|
|
Equipment
|
$6,604,163
|
$7,018,655
|
Software
|
5,196
|
5,116
|
Furniture
and Fixtures
|
672,975
|
672,975
|
Equipment-Capital
Lease
|
332,324
|
332,324
|
Leasehold
Improvement
|
2,618,350
|
2,618,350
|
Property
and Equipment, at Cost
|
10,233,008
|
10,647,420
|
Less:
Accumulated Depreciation
|
(6,951,427)
|
(6,756,955)
|
Property
and Equipment, net
|
$3,281,581
|
$3,890,465
|
Depreciation
expense for the years 2016 and 2015 were $903,615 and $1,296,218,
respectively.
Note 5 Loan
to Stockholder
The
Company periodically advances funds to the sole stockholder under
terms of a demand note. There is no fixed repayment schedule.
Interest is computed annually using the blended Applicable Federal
Rate for demand loans. In 2016 and 2015 the blended rates were .73%
and .45%, respectively. Interest imputed at these rates amounted to
$100,652 and $64,087 in 2016 and 2015, respectively. The imputed
interest was added to the loan balance.
Note 6 Deferred Revenue
Deferred
Revenue consisted of the following:
|
December
31,
|
|
|
2016
|
2015
|
Current:
|
|
|
Hosting
|
$2,094,760
|
$2,302,211
|
Domains
|
1,012,701
|
1,027,586
|
|
3,107,461
|
3,329,797
|
Noncurrent:
|
|
|
Hosting
|
225,057
|
200,961
|
Domains
|
1,070,686
|
1,162,333
|
|
$1,295,743
|
$1,363,294
|
10
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 7 Notes Payable
The
Company borrowed $1,500,000 in October 2013 from a bank. The loan
was to be repaid in 60 monthly installments of $25,000 plus
interest beginning November 16, 2013. Interest was determined at a
variable rate equal to 2.5 percentage points above the Daily LIBOR
Rate.
The
Company borrowed $300,000 in February 2015 from a bank to be repaid
in 36 equal monthly installments of $8,802 commencing in March
2015. The monthly installment amount includes interest at an annual
rate of 3.542%.
The
Company financed in February 2016 the purchase of equipment costing
$81,691 through the equipment financing affiliate of the bank
involved with the two aforementioned loans. Terms of the financing
arrangement involved repayment of the loan with 36 monthly payments
of $2,391 beginning March 2016. The monthly installment amount
includes interest at an annual rate of 3.430%.
The
balances outstanding on the above bank loans can be summarized as
follows:
|
2016
|
2015
|
Bank
Loan- $1,500,000
|
$550,000
|
$850,000
|
Bank
Loan- $300,000
|
120,329
|
219,752
|
Equipment
Financing Loan
|
59.936
|
-
|
|
730,265
|
1,069,752
|
Less:
Current Portion
|
(430,087)
|
(399,423)
|
|
$300,178
|
$670,329
|
Aggregate
principal payments due on the notes payable as of December 31 ,2016
during the following years are:
2017
|
$430,087
|
2018
|
295,309
|
2019
|
4,869
|
|
$730,265
|
All of the Company's current and future assets served as
security for these loans. The sole stockholder of the Company
served as the guarantor for the loans.
The
above borrowings required that the Company maintain certain
financial covenants including minimum tangible net worth and a debt
service coverage ratio. These covenant levels were not met in
either 2015 or 2016. However, as indicated in Note 15, these loans
were paid off with the subsequent new financing in February 2017.
The lender never made an attempt to enforce any remedies for the
covenant violations as provided for under the terms of the
loans.
11
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 8
Capital Lease
In
February 2015, the Company entered into a capital lease to obtain
battery equipment used in connection with its back-up generator
system. The cost of the equipment (including sales tax) amounted to
$332,324. The lease required 60 monthly payment of $6,261, with
partial monthly payments in the first and last months of the lease
term and a $1 buy out at the end of the term. The interest was
imputed at an annual rate of 5.276%.
The
balance outstanding on the above capital lease can be summarized as
follows:
|
December
31,
|
|
|
2016
|
2015
|
Capital
Lease-Battery Equipment
|
$208,752
|
$271,075
|
Less:
Current Portion
|
(65,691)
|
(62,323)
|
|
$143,061
|
$208,752
|
|
|
|
Scheduled
future minimum lease payments during the following years
are:
2017
|
$75,132
|
2018
|
75,132
|
2019
|
75,132
|
2010
|
835
|
|
226,231
|
Less:
Imputed interest
|
$(17,479)
|
|
$208,752
|
Note 9 Bank Loan Joint Borrowing
In
connection with the purchase of land in Colorado (See Note 13) by
SkiPunk, LLC (SkiPunk), the Company and SkiPunk, individually and
collectively, entered into a bank loan agreement and borrowed
$1,000,000 to help finance the purchase of the land by
SkiPunk.
Since
the $1,000,0000 was used to purchase the land, which is solely in
the name of SkiPunk, the bank loan was not reflected in the
financial statements of pair Networks. Inc.
Under
the terms of the SkiPunk loan, interest only payments were due
monthly through the maturity date. The loan carried a variable
interest rate. Such rate was the greater of the prime rate or the
daily LIBOR rate plus 1%. Funding of the monthly interest payments
was provided for by the Company as advances to
SkiPunk.
In
February 2015, this loan was paid off when the land was sold. See
Note 13 for additional information.
12
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10 Facility Lease
The
Company leases its office and data center space under a rental
agreement currently requiring base monthly lease payments of
$34,400 during the period October 1, 2015 through September 30,
2021. Prior to the current lease term, the monthly payments were
$32,922. In addition, the Company annually pays an assessment for
increases in its share of real estate taxes and operating expenses
since a base year, which is calendar year 2001 for real estate
taxes and calendar year 2000 for operating expenses.
For
2016 and 2015, the billings for the real estate tax increase
amounted to $19,522 and $20,672, respectively. The billings for
increased operating expenses amounted to $47,757 and $46,839,
respectively. These amounts were accrued for and included as
Facility Rent expense in the years to which they
related.
The
Company has an option to extend the lease for additional six-year
term at a base rental rate equal to 95% of the fair market rental
rate then in effect for similar space in the surrounding
area.
Annual
fixed non-cancelable future minimum rental payments under the terms
of the facility lease described above are as follows:
Year Ending December 31,
|
|
2017
|
$412,802
|
2018
|
412,802
|
2019
|
412,802
|
2020
|
412,802
|
2021
|
309,601
|
Total
|
$1,960,809
|
Note 11 Service Agreement Commitments
The
Company has a service agreement with a supplier to provide it with
internet access services and remote back-up site location services.
Internet access is, in turn,
provided
through connections with three separate internet service
providers.
The
current commitment is for a period of 36 months ending on October
31, 2017. Payments under this service agreement are currently
$78,723 a month and have been at that level since the end of 2015.
That monthly payment is expected to continue through the service
contract expiration in October 2017. Prior to that, the monthly
payment commitment was originally $84,481 and was reduced
periodically as certain services were either discontinued or
amended. At the end of the service term in October 2017, the
Company has made arrangements and contracted with two
other
13
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 11 Service Agreement Commitments (Cont.)
service
providers to replace the existing provider. Significant savings of
in excess of $50,000 a month are expected under the new
arrangements.
Effective
in February 2014, the Company entered into an agreement with a data
center supplier to provide internet access services and colocation
space for the Company's servers in Colorado. The term of the
original commitment was for 39 months. Monthly fees for the
colocation and internet services ranged from $6,081 to
$7,659.
In
December 2016, the internet service with this supplier was replaced
with a new, less expensive provider. Currently, the monthly
colocation fee amounts to $6,235 under a contract in effect through
May 3, 2020.
Note 12 Retirement Plan
The
Company maintains a 401k plan for the benefit of its employees. The
Company's contribution consisted of a 50% match of employee
contributions up to 6% of an employee's pay. However, effective
June 30, 2016 the company discontinued the matching contribution.
Employees become eligible to participate in the plan after they
have completed one year of service. The Company's matching
contributions for 2016 and 2015 amounted to $40,613 and $94,600,
respectively.
Note 13 Related Parties
SkiPunk,
LLC is a single member LLC with its sole member also being the sole
stockholder of the Company.
This
LLC purchased land in 2013 for $2,022,908 in Boulder, Colorado. The
plan was to build a data center on the land. That data center would
then have been leased to the Company and used to service customers
who were closer to the western part of the United States. The plan
to build the data center was later abandoned.
In
February 2015, SkiPunk sold the land for $700,000. The sale
resulted in a loss of $1,370,452, which was recognized by SkiPunk.
No loss was recognized by the Company. Since the sales proceeds
were insufficient to pay off the bank loan (See Note 9), the
Company had to advance to the LLC $359,009 to cover the
shortfall.
Upon
the subsequent liquidation of SkiPunk in 2015, this advance, as
well as all other monies owed to the Company ($1,096,961) by
SkiPunk were recharacterized and recorded as a Stockholder
Distribution.
Replay
Foundation is a 501(c)(3) private operating foundation. The
Company's sole shareholder is on the Board of the Foundation. In
both 2015 and 2016, the Company paid $100,000 to the Foundation for
exclusive promotional rights at a multiple-day festival held
annually by the Foundation.
14
pair Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 14 Contingency
The
Company is currently evaluating whether it may be subject to a
franchise tax liability in certain states where sufficient nexus
could possibly exist to cause a liability, despite having no
physical presence in those states.
No
final determination has yet been made. However, if it is concluded
that sufficient nexus exists within the states in question, the
range of the potential liability at December 31, 2016 is estimated
to be between $50,000 and $90,000.
Note 15 Subsequent Events
In
February 2017, the Company entered into a loan agreement with
another bank for $3,800,000. Of those proceeds, $668,256 were used
to pay off the three existing bank loans described in Note 5. Also,
$2,706,635 was used to pay off personal debt of the Shareholder and
was treated as an additional advance under the current Shareholder
note receivable. Finally, $394,179 of the proceeds were deposited
into a Company bank account for general business purposes. The
remainder of the proceeds were used to pay for bank and legal fees
in connection with this financing.
Management
has evaluated subsequent events and transactions for potential
recognition or disclosure in the financial statements through
October 31, 2017, the day the financial statements were approved
and authorized for issue.
15
SUPPLEMENTARY INFORMATION
16
pair Networks, Inc. and Subsidiary
Consolidated Summaries of Operating Expenses
For the Years Ended December 31, 2016 and 2015
|
2016
|
2015
|
Operating Expenses
|
|
|
Advertising
|
$224,737
|
$502,380
|
Cost
of Domains Sold
|
729,200
|
870,636
|
Cost
of Secure Licenses Sold
|
48,579
|
63,244
|
Cost
of Shopping Carts Sold
|
58,412
|
57,975
|
Cost
of Domains Purchased (Internal Use)
|
54,253
|
10,069
|
Credit
Card Fees
|
288,770
|
288,471
|
Depreciation
Expense
|
903,615
|
1,296,218
|
Dues
and Subscriptions
|
20,806
|
21,556
|
Employee
Insurance and Other Benefits
|
556,668
|
569,268
|
Equipment
Costing Less than $500
|
46,729
|
14,148
|
Facility
Rentals
|
550,573
|
549,603
|
Insurance
|
57,168
|
56,046
|
Internet
Service Fees
|
993,583
|
948,255
|
Legal
and Other Professional Fees
|
208,755
|
333,878
|
Repairs
and Maintenance
|
56,879
|
76,345
|
Taxes,
Including Payroll Taxes
|
417,035
|
378,609
|
Telecommunication
Fees
|
36,040
|
46,863
|
Travel
& Entertainment
|
55,621
|
33,568
|
Wages
- Shareholder
|
530,769
|
605,193
|
Wages
- Other
|
4,537,096
|
4,362,808
|
Utilities
|
339,636
|
343,682
|
Other
Operating Expenses
|
84,458
|
97,668
|
Total Operating Expenses
|
$10,799,382
|
$11,526,483
|
The accompanying notes are an integral part of the consolidated
financial statements.
17