SANSWIRE CORP.
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SANSWIRE CORP. AND SUBSIDIARIES
SANSWIRE CORP. AND SUBSIDIARIES
SANSWIRE CORP. AND SUBSIDIARIES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
From 2002 to 2007, Sanswire Corp. (formerly known as GlobeTel Communications Corp.) ("Sanswire" or the “Company”) was involved in the following business sectors: stored value card services; wholesale telecommunications services; voice over IP; wireless broadband; and high altitude airships. These business units operated through various subsidiaries. The Company has discontinued operations in all but the high altitude airship sector that is conducted through the Company’s consolidated joint venture, Sanswire-TAO (for more information see notes 2 and 6 below).
The opportunities associated with Sanswire are related to the Lighter Than Air (LTA) Unmanned Aerial Vehicle (UAV) market. Sanswire seeks to build and run a UAV business that includes low-, mid- and high-altitude, lighter-than-air vehicles. Sanswire intends to provide customers seamless wireless broadband capabilities and surveillance sensor suites utilizing its High Altitude Airship technology.
Sanswire’s main products will be airships, which provide a platform to transmit wireless capabilities from air to ground. The High Altitude class of prospective airships are generally referred to as HAAs (High Altitude Airships) but have also been called HAPs and HALEs (High Altitude Platforms, High Altitude Long Endurance). They have been designed to be able to keep a station in one location in the stratosphere, at approximately 65,000 ft for durations of 30 days or more.
On April 14, 2009, the Company arranged for financing for Sanswire-TAO to construct its first 34 meter unmanned autonomously controlled mid-altitude airship and entered into a contract with its joint venture partner TAO Technologies to construct the airship platform.
The accompanying unaudited condensed consolidated financial statements of Sanswire Corp. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation SX for scaled disclosures for smaller reporting companies. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year.
The condensed consolidated balance sheet information as of December 31, 2008 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-KA filed with the SEC on September 22, 2009. These interim financial statements should be read in conjunction with that report.
The Company applied the provision of Financial Accounting Standards Board (“FASB”) ASC 810-10. “Consolidation of Variable Interest Entities (revised December 2003)” (“FIN 46R”) to its investment in Sanswire-TAO. Under ASC 810, a variable interest entity (VIE) is subject to consolidation if the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. As of September 30, 2009, the Company determined that that consolidation of Sanswire-TAO was appropriate. Inter-company accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company had a net loss of $9,241,853 and used cash in operating activities of $1,454,006 for the nine months ended September 30, 2009, and had a working capital deficit of $18,241,839 and a stockholders’ deficit of $15,808,939 at September 30, 2009. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company anticipates that a net loss will continue for the balance of 2009.
Additional cash will still be needed to support operations. Management believes it can continue to raise capital from various funding sources, which will be sufficient to sustain operations at its current level through December 31, 2009. However, if budgeted sales levels are not achieved and/or if significant unanticipated expenditures occur, or if it is unable to obtain the necessary funding, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for all or part of its assets to continue as a going concern. As of the date of this report the Company has continued to raise capital to sustain its current operations which have been reduced since January 1, 2008. The Company will need to periodically seek investment to provide cash for operations until such time that operations provide sufficient cash flow to cover expenditures.
On May 2, 2008, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the United States District Court for the Southern District of Florida against GlobeTel Communications Corp. (the “Company”) and three former officers of the Company, Timothy J. Huff, Thomas Y. Jimenez and Lawrence E. Lynch. The SEC alleges, among other things, that the Company recorded $119 million in revenue on the basis of fraudulent invoices created by Joseph Monterosso and Luis Vargas, two individuals formerly employed by the Company who were in charge of its wholesale telecommunications business. The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Company intends to vigorously defend itself in this action. The Staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of Company’s securities pursuant to Section 12(j) of the Exchange Act (also see note 8).
The Company considers all highly liquid debt instruments with an original maturity of three months or less at the date of purchase to be cash equivalents.
At September 30, 2009 the Company has no registration rights agreement requiring penalties to be recorded.
Income taxes are computed under the provisions of the Financial Accounting Standards Board (FASB) ASC 740, “Accounting for Income Taxes”. ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of the difference in events that have been recognized in the Company's financial statements compared to the tax returns.
FASB ASC 820, “Fair Value Measurements”, establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2009 (unaudited):
The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors, and are classified within Level 3 of the valuation hierarchy. There were no changes in the valuation techniques during the three or nine months ended September 30, 2009.
Financial instruments, including cash, accounts payable, accrued expenses and notes payable are carried at amounts which reasonably approximate their fair value due to the short-term nature of these amounts or due to variable rates of interest which are consistent with market rates.
The process of preparing financial statements in conformity with generally accepted accounting principles in the United States requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
Basic and diluted net loss per common share has been computed based upon the weighted average number of shares of common stock outstanding during each period. The basic and diluted net loss is computed by dividing the net loss by the weighted average number of common shares outstanding during each period. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. If all outstanding options, warrants and convertible shares were to be converted or exercised as of September 30, 2009, the shares outstanding would be 315,088,127. The Company's Articles of Incorporation currently allow for issuance of a maximum of 250,000,000 shares of common stock. On November 2, 2009, holders of a majority of our voting shares of our company, Sanswire Corp., acted by written consent in lieu of a special meeting of shareholders to an adopt amendment to our articles of incorporation to increase the number of shares of common stock which we are authorized to issue from 250,000,000 shares to 500,000,000 shares. As of November 2, 2009, we had 249,115,902 shares of our common stock outstanding. The Company is obligated under various existing agreements, options and warrants to issue additional shares of our common stock.
The Company follows FASB ASC 360, "Accounting for the Impairment of Long-Lived Assets." ASC 360 requires that long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.
Intangible assets are related to the Company's consolidated joint venture Sanswire-TAO (see Note 6). Intangible assets with finite lives are amortized over their estimated useful lives, which are three years for patents and intellectual property. In addition to amortization, intangible assets are tested at least annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount should be assessed. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. The Company generally measures fair value by considering sales prices for similar assets or by discounting estimated future net cash flows from such assets using a discount rate reflecting the Company's average cost of capital.
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees using ASC 718 effective January 1, 2006, and for all share-based payments granted based on the requirements of ASC 718. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with ASC 505: "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and ASC 505 “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.
In April 2009, the FASB issued additional application guidance and enhanced disclosures regarding fair value measurements and impairment of securities. The guidance includes how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased. Enhanced disclosure requirements include the following: 1) interim disclosures regarding the fair values of financial instruments that are not currently reflected on the balance sheet at fair value; and 2) disclosure on the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes of the methods and significant assumptions from prior periods. We adopted the additional guidance and disclosure requirements as of our third quarter ended September 30, 2009. The adoption did not have a material effect on our financial condition or results of operations.
In May 2009, the FASB issued its pronouncement regarding subsequent events which provides guidance to establish general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In connection with preparation of the consolidated financial statements, we evaluated subsequent events after the balance sheet date of September 30, 2009 through November 12, 2009, the date the financial statements were issued.
In June 2009, the FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the SEC, have been superseded by the Codification. All non-grandfathered, non-SEC accounting literature not included in the Codification has become non-authoritative. The Codification does not change GAAP, but instead introduces a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for our September 30, 2009 financial statements and impacts financial statement disclosures as all references to authoritative accounting literature are referenced in accordance with the Codification.
NOTE 2. DISCONTINUED OPERATIONS
The Company decided to close several of its operations relating to its telecom and wireless activities during 2007 and has presented certain activities as discontinued operations as of September 30, 2009 and December 31, 2008.
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS
The effects of the restatement on the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2008 and as of December 31, 2008 are shown below (note: see table of adjustment descriptions at end of this section):
NOTE 4. NOTES AND CONVERTIBLE NOTES PAYABLE
| | | September 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | (Unaudited) | | | | |
| (A) Notes payable | | $ | 5,997,030 | | | $ | 5,997,030 | |
| (B) Convertible notes payable | | | — | | | | 80,000 | |
| (C) Convertible promissory notes, net of unamortized discount of $0 and $134,423 | | | — | | | | 2,016,913 | |
| Total | | | 5,997,030 | | | | 8,093,943 | |
| Accrued Interest | | | 1,293,250 | | | | 1,170,789 | |
| Total | | $ | 7,290,280 | | | $ | 9,264,732 | |
(A) NOTES PAYABLE
Notes payable are made up of two separate notes.
As of September 30, 2009, a balance of $4,997,130 remains through an unsecured promissory note with no formal terms of repayment on the first note. The Company has accrued interest at a rate of 7% per annum, which totals $1,078,604 as of September 30, 2009.
As of September 30, 2009, a balance of $999,900 remains through an unsecured promissory note with no formal terms of repayment on the second note. The Company has accrued interest at a rate of 7% per annum, which totals $214,646 as of September 30, 2009.
(B) CONVERTIBLE NOTES PAYABLE
During May 2009, the balance of $80,000 of principal and $33,416 of accrued interest payable was converted into 1,127,907 shares of Company common stock. In addition, the Company issued 580,862 shares in settlement of any penalties associated with the remaining notes.
(C) CONVERTIBLE PROMISSORY NOTES
On February 17, 2009, the Company entered into subscription agreements with accredited investors. The Company sold $110,000 of the Company’s 7% Convertible Debentures, 3-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture shares of the Company’s common stock at an exercise price of $0.315. The Debentures are convertible into shares of the Company’s common stock at $.105 per share.
The Company determined that the total fair value of the warrants was $22,252 based upon the relative value of the Black Scholes valuation of the warrants and the underlying debt amount. For the Black Scholes calculation, the Company assumed no dividend yield, a risk free interest rate ranging from 1.31% to 1.40%, expected volatility of 169.01% and an expected term of the warrants of 3 years. The initial calculated fair value of warrants of $22,252 was reflected by the Company as a valuation discount and an offset to the carrying value of the Notes, and is being amortized by the straight line method over the term of the Notes. As of September 30, 2009, the Company amortized $22,252 of the valuation discount, which is reflected as interest expense in the Company’s consolidated statements of operations. During the quarter ended September 30, 2009, all principal and interest has been converted as part of an overall conversion request that includes all outstanding notes from this noteholder. On September 30, 2009, the balance of $1,633,869 of principal and $199,648 of interest were converted into 17,462,080 shares of Company common stock.
On April 29, 2009, the Company agreed to extend the expiration of certain warrants associated with the notes. A charge of $399,707 was recorded for the change in the fair value of the warrants at the time of modification.
On February 17, 2009, the Company entered into subscription agreement with an accredited investor. The Company sold $30,000 of the Company’s 7% Convertible Debentures, 3-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture shares of the Company’s common stock at an exercise price of $0.315. The Debentures are convertible into shares of the Company’s common stock at $.105 per share pursuant to the following terms.
The Company determined that the total fair value of the warrants was $5,807 based upon the relative value of the Black Scholes valuation of the warrants and the underlying debt amount. For the Black Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 1.22%, expected volatility of 169.01% and an expected term of the warrants of 3 years. The initial calculated fair value of warrants of $5,807 was reflected by the Company as a valuation discount and offset to the carrying value of the Notes, and is being amortized by the straight line method over the term of the Notes. As of September 30, 2009, the Company amortized $5,807 of the valuation discount, which is reflected as interest expense in the Company’s consolidated statements of operations. During the quarter ended September 30, 2009, all principal and interest has been converted as part of an overall conversion request that includes all outstanding notes from this noteholder. On September 30, 2009, the balance of $130,000 of principal and $10,558 of interest were converted into 1,338,651 shares of Company common stock.
On April 29, 2009, the Company agreed to extend the expiration of certain warrants associated with the notes. A charge of $41,121 was recorded for the change in the fair value of the warrants at the time of modification.
Through September 2009, the Company made payments totaling $42,630 to reduce a previously entered into note. On September 30, 2009, the balance of $119,836 of principal and $9,084 of interest were converted into 1,227,810 shares of Company common stock.
In October 2008, the Company entered into a new financing agreement for a convertible promissory note payable totaling $25,000. On February 11, 2009, $25,438 of principal and interest was converted into 238,096 shares of the Company’s common stock.
During May 2009, the Company converted a previously entered into note totaling $290,000 of principal and $5,921 of interest into 2,447,790 shares of Company common stock.
In September 2008, the Company entered into a new financing agreement for a convertible promissory note payable totaling $50,000. On February 12, 2009, the Company issued 250,000 shares, valued at $9,500, as a penalty to extend the maturity to an unspecified date. On March 30, 2009, the investor foreclosed on its lien and security interest based on the previously entered into pledge agreement. The note was secured by 1,000,000 shares of common stock of the Company held by the Company’s CEO. As a result, the holder acknowledged that by virtue of its ownership of the shares, the note was deemed satisfied in full.
On April 17, 2009, the Company entered into an amendment to the Subscription Agreement, dated September 17, 2008 pursuant to which the Company agreed (i) to extend the expiration date of both the Series A Warrant and Series B Warrant issued from October 15, 2010 to December 31, 2010 and (ii) extend the final date that the holder may make up to two additional purchases of the Company’s securities, from October 15, 2008 and December 15, 2008, respectively, until December 31, 2010 and December 31, 2010, respectively. A charge of $2,477 was recorded for the change in the fair value of the warrants at the time of modification.
NOTE 5. INVENTORIES
Inventories are related to the Company's consolidated joint venture Sanswire-TAO (see Note 6). Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Inventories consist of the following at:
| | | September 30, 2009 | | | December 31, 2008 | |
| | | (unaudited) | | | | |
| Work in process | | $ | 1,110,700 | | | $ | — | |
| Total inventories | | | 1,110,700 | | | | — | |
NOTE 6. JOINT VENTURE AND INTANGIBLE ASSETS
On June 3, 2008, the Company restructured a previous agreement with TAO Technologies GmbH and Professor Bernd Kroplin. The new agreement called for the establishment of a new 50/50 US-based joint venture company to be called Sanswire-TAO that was to be owned equally by TAO and Sanswire Corp., through its wholly-owned subsidiary Sanswire Corp.—Florida. The agreement required TAO Technologies and Kroplin to transfer the patents and intellectual property of TAO Technologies and Kroplin in the United States to Sanswire-TAO for a payment of $3,229,000. A remaining balance of $2,185,000 due for the investment is included in accrued expenses as of September 30, 2009.
The Company applied the provision of FASB ASC 810 “Consolidation of Variable Interest Entities (revised December 2003)” to its investment in Sanswire-TAO. Under ASC 810, a variable interest entity (VIE) is subject to consolidation if the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. On April 14, 2009, the Company arranged for financing for Sanswire-TAO to construct its first 34 meter unmanned autonomously controlled mid-altitude airship and entered into a contract with TAO Technologies to construct the airship platform. As of September 30, 2009, the Company determined that consolidation of Sanswire-TAO was appropriate. In April, 2009, Sanswire-TAO entered into a services agreement whereas the Company issued 833,333 shares during the quarter ended September 30, 2009..
The useful life of the patents and intellectual property is estimated to be 3 years and is being amortized on a straight-line basis. Amortization expense for the three and nine months ended September 30, 2009 was $242,175 and $807,250, respectively. These assets are tested for impairment annually or if certain circumstances indicate a possible impairment may exist. As of September 30, 2009 there was no impairment.
NOTE 7. DERIVATIVE LIABILITIES
In 2007, the Company adopted FASB ASC 815 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and FASB ASC 815 "Accounting for Derivative Instruments and Hedging Activities," as amended by FASB ASC 815 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB ASC 815," collectively referred to as FASB ASC 815. FASB ASC 815 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income.
The derivative liabilities were valued using the Black-Scholes option pricing model and the following assumptions:
| | | September 30, 2009 | | | December 31, 2008 | |
| Conversion feature: | | | | | | |
| Risk-free interest rate | | | — | | | | 0.27 – 0.76 | % |
| Expected volatility | | | — | | | | 118 - 134 | % |
| Expected life (in years) | | | — | | | | 0.33 - 1.76 | |
| Expected dividend yield | | | — | | | | — | |
| | | | | | | | | |
| Warrants: | | | | | | | | |
| Risk-free interest rate | | | 0.14 – 1.45 | % | | | 0.11 – 1.00 | % |
| Expected volatility | | | 22 - 171 | % | | | 28 - 167 | % |
| Expected life (in years) | | | 0.12 – 3.00 | | | | 0.01 – 2.74 | |
| Expected dividend yield | | | — | | | | — | |
| Fair value: | | | | | | | | |
| Conversion feature | | $ | — | | | $ | 495,805 | |
| Warrants | | $ | 2,633,367 | | | $ | 252,439 | |
The risk-free interest rate was based on rates established by the Federal Reserve. In 2009, the Company’s expected volatility was based upon the historical volatility for its common stock. The expected life of the Debentures’ conversion option was based on the maturity of the Debentures and the expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
NOTE 8. CONTINGENCIES
Securities and Exchange Commission
On September 28, 2006, the Company received a formal order of investigation from the SEC. The formal order only named the Company and was not specific to any particular allegations. Through the use of subpoenas, the SEC has requested documentation from certain officers and directors of the Company. In subsequent subpoenas, the SEC has asked for additional documents and information.
On October 5, 2007, the Company received a "Wells Notice" from the SEC in connection with the SEC’s ongoing investigation of the Company. The Wells Notice provides notification that the staff of the SEC intends to recommend to the Commission that it bring a civil action against the Company for possible violations of the securities laws including violations of Sections 5 and 17(a) of the Securities Act of 1933; Sections 10(b), 13(a), and 13(b)(2)(A) & (B) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and seeking as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of Company’s securities pursuant to Section 12(j) of the Exchange Act.
On May 2, 2008, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the United States District Court for the Southern District of Florida against GlobeTel Communications Corp. (the “Company”) and three former officers of the Company, Timothy J. Huff, Thomas Y. Jimenez and Lawrence E. Lynch. The SEC alleges, among other things, that the Company recorded $119 million in revenue on the basis of fraudulent invoices created by Joseph Monterosso and Luis Vargas, two individuals formerly employed by the Company who were in charge of its wholesale telecommunications business.
The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Commission subsequently consolidated this action with another pending action involving former officers of the Company. The Commission has also moved to amend its complaint against the Company to include additional allegations of wrongdoing beginning in 2002, but which does not add any new defendants. The Company has been vigorously defending itself in this action.
Hudson Bay Fund LP et al.
Hudson Bay Fund LP and Hudson Bay Overseas Fund Ltd. filed an action against the Company relating to the warrants attached to a Subscription Agreement between those entities and the Company. The Hudson Bay entities are seeking to reprice the warrants, increase the number of shares they can purchase pursuant to the warrants, certain equitable remedies, and unspecified damages. The Company has retained outside counsel and has filed an answer and affirmative defenses in the case. The Company intends to vigorously defend the action, but the outcome of the action cannot be predicted.
Former Consultants
The Company is a defendant in two lawsuits filed by Matthew Milo and Joseph Quattrocchi, two former consultants, filed in the Supreme Court of the State of New York (Richmond County, Case no. 12119/00 and 12118/00). These matters were subsequently consolidated as a result of an Order of the court and now bear the singular index number 12118/00. The original lawsuits were for breach of contract. The complaint demands the delivery of 10,000,000 pre split shares of ADGI stock to Milo and 10,000,000 to Quattrocchi. The Company was entered into the action as ADGI was the predecessor of the Company. The suit also requests an accounting for the sales generated by the consultants and attorneys fees and costs for the action.
The lawsuits relate to consulting services that were provided by Mr. Milo and Mr. Quattrocchi and a $50,000 loan advanced by these individuals, dated May 14, 1997, of which $35,000 has been repaid.
The Company entered into an agreement with Mr. Milo and Mr. Quattrocchi as consultants on June 25, 1998. The agreement was amended on August 15, 1998. On November 30, 1998, both Mr. Milo and Mr. Quattrocchi resigned from their positions as consultants to the Company without fulfilling all of their obligations under their consulting agreement. The Company issued 3 million pre split shares each to Mr. Milo and Mr. Quattrocchi as consideration under the consulting agreement. The Company has taken the position that Mr. Milo and Mr. Quattrocchi received compensation in excess of the value of the services that they provided and the amounts that they advanced as loans.
Mr. Milo and Mr. Quattrocchi disagreed with the Company’s position and commenced action against us that is pending in the Supreme Court of the State of New York. Mr. Milo and Mr. Quattrocchi claim that they are entitled to an additional 24,526,000 pre split shares of common stock as damages under the consulting agreement and to the repayment of the loan balance. The Company believes that it has meritorious defenses to the Milo and Quattrocchi action, and the Company has counterclaims against Mr. Milo and Mr. Quattrocchi.
With regard to the issues related to original index number 12119/00, as a result of a summary judgment motion, the plaintiffs were granted a judgment in the sum of $15,000. The rest of the plaintiff's motion was denied. The court did not order the delivery of 24,526,000 pre split shares of ADGI common stock as the decision on that would be reserved to time of trial.
An Answer and Counterclaim had been interposed on both of these actions. The Answer denies many of the allegations in the complaint and is comprised of eleven affirmative defenses and five counterclaims alleging damages in the sum of $1,000,000. The counterclaims in various forms involve breach of contract and breach of fiduciary duty by the plaintiffs. For the most part, the summary judgment motions that plaintiffs brought clearly stated that their theories of recovery and the documents that they will rely on in prosecuting the action. The case was assigned to a judicial hearing officer and there was one week of trial. The trial has been since adjourned with no further trial dates having been set.
It is still difficult to evaluate the likelihood of an unfavorable outcome at this time in light of the fact that there has been no testimony with regard to the actions. However, the plaintiffs have prevailed with regard to their claim of $15,000 as a result of the lawsuit bearing the original index Number 12119/00.
This case went before a Judicial Hearing Officer on July 6 and 7, 2006. No resolution occurred during the July hearing and the Judicial Hearing Officer has asked for written statements of facts and law. The outcome cannot be projected with any certainty. However, the Company does not believe that it will be materially adversely affected by the outcome of the proceeding. The Company has not been informed of any further developments since the hearing.
Joseph Monterosso
In October 2007 the Company filed a lawsuit in the Circuit Court for Broward County, Florida against Joseph J. Monterosso alleging Libel, Slander and Defamation, Tortuous Interference, Violations of FS § 836.05 (Threats Extortion) and violations of FS §517 (Securities Fraud). Mr. Monterosso has not yet been served with the complaint pending additional information arising from the SEC lawsuit. This action has been dismissed for lack of prosecution but may be refilled by the Company in the future.
Mitchell Siegel v. GlobeTel
On February 2, 2007, The Company was sued in the Circuit Court for Broward County, Florida entitled Mitchell Siegel v. GlobeTel Communications Corp. , Case no. 0702456 (“the Siegel Lawsuit”). In this action, Siegel sued the Company for breach of contract in regards to a Key Executive Employment Agreement. On February 15, 2008, both parties entered into a settlement agreement whereas Mr. Siegel would receive $175,000 worth of stock, payable over 12 months, and 50% of the gross proceeds, up to a total amount of $300,000, received from an October 2006 agreement. During 2009, the Company paid the remaining $43,750 in the Company’s common stock.
Trimax Wireless
On April 6, 2009, the Company entered into a settlement agreement with Ulrich Altvater, a former employee, and his company, Trimax Wireless. As per the terms of the settlement, Mr. Altvater will return 1,640,000 shares of the Company’s common stock and certain equipment that was held by Trimax Wireless. The Company has received the shares and certain equipment pursuant to the settlement and the matter has been dismissed.
NOTE 9. COMMON STOCK TRANSACTIONS
During the nine month period ended September 30, 2009, the Company issued an aggregate of 64,286,887 shares of common stock for cash, debt, board compensation, and consulting agreements including 1,000,000 shares for the replacement of shares lost when an investor foreclosed on its lien and security interest based on the previously entered into pledge agreement. Of the shares issued, 12,050,000 shares, or 30.1% were issued to insiders and affiliates as restricted securities and in accordance with SEC Rule 144. The common stock issued was valued at prices ranging from $0.038 to $0.14 per share, based on the closing market prices on the date the board of directors authorized the issuances. Subsequent to September 30, 2009, the Company issued an aggregate of 125,000 shares of common stock for previously entered into agreements.
On November 2, 2009, holders of a majority of our voting shares of our company, Sanswire Corp., acted by written consent in lieu of a special meeting of shareholders to an adopt amendment to our articles of incorporation to increase the number of shares of common stock which we are authorized to issue from 250,000,000 shares to 500,000,000 shares.
NOTE 10. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During the nine months ended September 30, 2009, the Company issued 19,672,222 options to acquire common stock. The Company recorded $0 and $1,707,780 of compensation expense related to these options to acquire common stock in the three and nine months ended September 30, 2009, respectively.
The fair value of grants issued in the three and nine months ended September 30, 2009 were determined using a Black-Scholes option pricing model with the following assumptions: 1.5% average risk-free interest rate; 184% expected volatility; three year expected term, and 0% dividend yield.
Employee options vest according to the terms of the specific grant and expire from 3 to 5 years from date of grant. As of September 30, 2009, all options issued and outstanding have fully vested. Stock option activity as of September 30, 2009 was as follows:
| | | Number of Options (in shares) | | | Weighted Average Exercise Price | |
| Outstanding at December 31, 2008 | | | 15,982,752 | | | $ | .350 | |
| Options Granted | | | 19,672,222 | | | | .059 | |
| Options Exercised | | | (250,000 | ) | | | .105 | |
| Options Cancelled | | | (293,760 | ) | | | 1.773 | |
| Outstanding at September 30, 2009 | | | 35,111,214 | | | $ | .177 | |
The following table summarizes information about stock options outstanding as of September 30, 2009:
| | | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (in years) | | | | | | Weighted Average Exercise Price | |
| $ | 0.045 to $0.37 | | | | 35,111,214 | | | $ | 0.177 | | | | 1.58 | | | | 35,111,214 | | | $ | 0.177 | |
| | | | | | 35,111,214 | | | | | | | | | | | | 35,111,214 | | | | | |
WARRANTS
The following table summarizes certain information about the Company’s stock purchase warrants (including the warrants discussed in note 4).
| | | Warrants Class A | | | Warrants Class B | | | Weighted Average Exercise Price | |
| Outstanding at December 31, 2008 | | | 13,987,204 | | | | 9,634,763 | | | $ | 0.253 | |
| Warrants Granted | | | 4,444,998 | | | | 4,413,252 | | | | 0.252 | |
| Warrants Expired | | | (3,305,382 | ) | | | (2,203,588 | ) | | | (0.252 | ) |
| Outstanding at September 30, 2009 | | | 15,126,820 | | | | 11,844,427 | | | $ | 0.253 | |
The aggregate intrinsic value of 35,111,214 options and 15,126,820 Class A and 11,844,427 Class B warrants outstanding and exercisable as of September 30, 2009 was $5,321,551. The aggregate intrinsic value for the options is calculated as the difference between the price of the underlying awards and quoted price of the Company’s common shares for the options that were in-the-money as of September 30, 2009. At September 30, 2009, all warrant shares were vested. Therefore there is no unamortized cost to be recognized in future periods.
NOTE 11. PREFERRED STOCK
On May 3, 2009, the Board of Directors approved the creation of a Series E Preferred Stock. The terms of the Series E Preferred Stock were subsequently amended on May 14, 2009. The Series E Preferred Stock, as amended, does not pay dividends but each holder of Series E Preferred Stock shall be entitled to 21.5 votes for each share of common stock that the Series E Preferred Stock shall be convertible into. The Series E Preferred Stock, as amended, has a conversion price of $0.105 and a stated value of $6.26. Each share of Series E Preferred Stock is convertible, at the option of the holder, into such number of shares of common stock of the Company as determined by dividing the Stated Value by the Conversion Price. The Series E Preferred Stock has no liquidation preference. The Company also cancelled all the authorized shares associated with the Series A, B, C, and D of Preferred Stock.
As of September 30, 2009, the Company has 100,000 shares of Series E Preferred Stock outstanding.
NOTE 12. INCOME TAXES
The Company has accumulated net operating losses, which can be used to offset future earnings. Accordingly, no provision for income taxes is recorded in the financial statements. A deferred tax asset for the future benefits of net operating losses and other differences is offset by a 100% valuation allowance due to the uncertainty of the Company's ability to utilize the losses. These net operating losses begin to expire in the year 2021.
NOTE 13. SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through November 16, 2009, the date the accompanying financial statements were issued.
The following are material subsequent events:
Changes in Registrant’s Certifying Accountant
On October 19, 2009, the Company dismissed Weinberg & Co., as its independent certifying accountant. The Company’s Board of Directors approved of the dismissal on October 20, 2009. There were no disputes or disagreements between Weinberg & Co. and the Company during the previous two fiscal years. Except for the provision of a “Going Concern” opinion, the reports of Weinberg & Co. on the Company’s financial statements for the years ended December 31, 2008 and 2007 did not contain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle.
Change in Independent Registered Public Accounting Firm
On October 20, 2009, the Company engaged Rosen Seymour Shapss Martin & Company LLP (“RSSM”), as its independent registered public accounting firm, to audit the Company’s financial statements. The decision to engage RSSM was approved by the Company’s Board of Directors at a Board meeting called for such purpose.
Majority Shareholder Action
On August 6, 2009, our Board of Directors authorized and approved, subject to shareholder approval, an increase in our authorized common stock from 250,000,000 shares to 500,000,000 shares, which our Board of Directors deemed to be in the best interests of our company and our shareholders. Our Board of Directors further authorized the preparation and circulation of this Information Statement and a shareholders' consent to the holders of a majority of our outstanding voting capital stock.
On November 2, 2009, holders of a majority of our voting shares of our company, Sanswire Corp., acted by written consent in lieu of a special meeting of shareholders to an adopt amendment to our articles of incorporation to increase the number of shares of common stock which we are authorized to issue from 250,000,000 shares to 500,000,000 shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Information
This quarterly report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements relate to future events or to our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. There are a number of factors that could cause our actual results to differ materially from those indicated by such forward-looking statements. See our annual report on Form 10-K for the year ended December 31, 2008.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, we do not assume responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results.
General
Sanswire Corp. ("Sanswire," "GlobeTel", “we”, “us”, “our”, or the “Company”) is focused on the design, construction and marketing of various aerial vehicles most of which would be capable of carrying payloads that provide persistent surveillance and security solutions at various altitudes. The airships and auxiliary products are intended for end users that include military, defense and government-related entities.
From 2002 to 2007, the Company was involved in the following business sectors:
| · | stored value card services; |
| | |
| · | wholesale telecommunications services; |
| | |
| · | wireless broadband; and |
| | |
| · | high altitude airships. |
These businesses were run through various subsidiaries. The Company discontinued operations in all but the high altitude airship sector.
On September 22, 2008, we effected a name change to Sanswire Corp. in recognition of the entity that contained our sole business focus. Thus, moving forward, the Company is Sanswire Corp., whose primary business is the design, construction and marketing of a variety of aerial vehicles through a joint venture with TAO Technologies, Stuttgart, Germany, named Sanswire-TAO Corp.
The High Altitude class of prospective airships are generally referred to as HAAs (High Altitude Airships) but have also been called HAPs and HALEs (High Altitude Platforms, High Altitude Long Endurance). They have been designed to be able to keep a station in one location in the Stratosphere, at approximately 65,000 ft for durations of 30 days or more.
RESULTS OF OPERATIONS
The following discussion and analysis summarizes the results of operations of the Company for the three and nine month periods ended September 30, 2009 and 2008.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
REVENUES. The Company had no revenue for the three months ended September 30, 2009 and 2008.
OPERATING EXPENSES. Our operating expenses consist primarily of payroll and related taxes, professional and consulting services, expenses for executive and administrative personnel and insurance, telephone and communications, facilities expenses, travel and related expenses, and other general corporate expenses. Our operating expenses for the three month period ended September 30, 2009 were $1,546,560 compared to the three month period ended September 30, 2008 which had operating expenses of $766,819 an increase of $779,741 or 101.7%. The increase was primarily due to charges associated with stock and employee stock options issuances.
During the three month period ended September 30, 2009 and 2008, Sanswire and its subsidiaries incurred payroll tax liabilities during the normal course of business. During 2008, the Company has reported its payroll tax liabilities on a timely basis; however the Company failed to deposit the appropriate withholding amounts during 2008. For 2009, the Company has engaged a third party to process its payroll information, including appropriate payroll taxes and has thus has been timely and is current in its payroll tax payments. In addition, the Company has recognized its past issue and contacted the IRS accordingly to make arrangement to pay any taxes due, which is currently estimated to be at least $200,000 including liabilities associated with the Company’s subsidiaries that are classified in discontinued operations. The Company may be subject to penalties and interest from the IRS.
LOSS FROM OPERATIONS. We had an operating loss of $1,546,560 for the three month period ended September 30, 2009 as compared to an operating loss of $766,819 for the three month period ended September 30, 2008, primarily due to charges associated with stock and employee option issuances as described above, including lower operating costs and reductions of our various programs.
OTHER INCOME (EXPENSE). We had net other income totaling $53,886 during the three month period ended September 30, 2009 compared to other income of $333,136 for the three month period ended September 30, 2008. This variance was due primarily to the non cash gains related to derivatives of $251,031 during 2009 compared to $751,833 during 2008.
Interest expense for the three month period ended September 30, 2009 was $197,145 compared to $418,697 for the three month period ended September 30, 2008. Interest expense decrease was primarily due to an decrease in non cash charges related to the Company’s convertible debentures as well as note conversions that occurred during 2009.
LOSS FROM DISCONTINUED OPERATIONS. During the three month periods ended September 30, 2009 and 2008, we had no activity related to our discontinued operations.
NET LOSS. We had a net loss of $1,492,674 in the three month period ended September 30, 2009 compared to $433,683 in the three month period ended September 30, 2008. The increase in net loss is primarily attributable to the increase in the operating expenses as discussed above.
REVENUES. The Company had no revenue for the nine months ended September 30, 2009 and 2008.
OPERATING EXPENSES. Our operating expenses consist primarily of payroll and related taxes, professional and consulting services, expenses for executive and administrative personnel and insurance, telephone and communications, facilities expenses, travel and related expenses, and other general corporate expenses. Our operating expenses for the nine month period ended September 30, 2009 were $6,272,789 compared to the nine month period ended September 30, 2008 which had operating expenses of $2,515,386 an increase of $3,757,403 or 149.4%. The increase was primarily due to charges associated with stock and employee stock options issuances.
During the three month period ended September 30, 2009 and 2008, Sanswire and its subsidiaries incurred payroll tax liabilities during the normal course of business. During 2008, the Company has reported its payroll tax liabilities on a timely basis; however the Company failed to deposit the appropriate withholding amounts during 2008. For 2009, the Company has engaged a third party to process its payroll information, including appropriate payroll taxes and has thus has been timely and is current in its payroll tax payments. In addition, the Company has recognized its past issue and contacted the IRS accordingly to make arrangement to pay any taxes due, which is currently estimated to be at least $200,000 including liabilities associated with the Company’s subsidiaries that are classified in discontinued operations. The Company may be subject to penalties and interest from the IRS.
LOSS FROM OPERATIONS. We had an operating loss of $6,272,789 for the nine month period ended June 30, 2009 as compared to an operating loss of $2,515,386 for the nine month period ended September 30, 2008, primarily due to charges associated with stock and employee option issuances as described above, including lower operating costs and reductions of our various programs.
OTHER INCOME (EXPENSE). We had net other expenses totaling $2,969,064 during the nine month period ended September 30, 2009 compared to $1,244,160 for the nine month period ended September 30, 2008. This variance was due primarily to the non cash charges related to the modifications of warrants of $443,305 and non cash charges related to derivatives of $1,885,123 during 2009 compared to the non cash charges related to the modifications of our convertible debentures of $1,096,650 in 2008.
Interest expense for the nine month period ended September 30, 2009 was $1,083,941 compared to $856,218 for the nine month period ended September 30, 2008. Interest expense increase was primarily due to an increase in non cash charges related to the Company’s convertible debentures.
LOSS FROM DISCONTINUED OPERATIONS. During the nine month period ended September 30, 2009 we had no activity related to our discontinued operations compared to a loss of $196 during the nine month period ended September 30, 2008.
NET LOSS. We had a net loss of $9,241,853 in the nine month period ended September 30, 2009 compared to $3,759,742 in the nine month period ended September 30, 2008. The increase in net loss is primarily attributable to the increase in the operating expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
ASSETS. At September 30, 2009, the Company had total assets of $3,557,698 compared to total assets of $3,240,215 as of December 31, 2008.
Current assets at September 30, 2009, were $1,124,798 compared to $11,215 at December 31, 2008 which were comprised of $7,692 in cash and cash equivalents and $1,110,700 in work in process/inventory.
The Company had $2,421,750 in intangible assets as of September 30, 2009 compared to none as of December 31, 2008.
LIABILITIES. At September 30, 2009, the Company had total liabilities of $19,366,637 compared to total liabilities of $18,692,369 as of December 31, 2008. The increase of $674,268 was principally due to $1,885,123 in changes associated with the derivative liabilities (see note 7 of the financial statements.)
CASH FLOWS. Our cash used in operating activities was $1,454,006 compared to $397,736 for the comparative period. The increase was primarily due to the increased level of operations and operating activities and changes in our current assets and liabilities.
Net cash provided by financing activities was $1,468,039 principally from the proceeds of the sale of common stock, as compared to $757,140 for the nine months ended September 30, 2008.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company had a net loss of $9,241,853 and used cash in operating activities of $1,454,006 for the nine months ended September 30, 2009, and had a working capital deficit of $18,241,839 and a stockholders’ deficit of $15,808,939 at September 30, 2009. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company anticipates that a net loss will continue for the balance of 2009.
Throughout 2008 and continuing into 2009, the Company has been dependent upon monthly funding from its existing debt holders. Funding decisions have typically not extended beyond thirty days at any given time, and the Company does not currently have a defined funding source. Funding delays and uncertainties have seriously damaged vendor relationships, new product development and revenues. In the absence of continued monthly funding by its current debt holders, the Company would have insufficient funds to continue operations. There is no assurance that additional funding from the current debt holders will be available or available on terms and conditions acceptable to the Company.
Subsequent to September 30, 2009, the Company has raised $100,000 from investors; however this is not adequate funding to cover the Company’s working capital deficit or the operating loss for the three month period ended September 30, 2009 of approximately $1,546,560.
As reflected in the accompanying financial statements, during the nine month period ended September 30, 2009 we had a net loss of $9,241,853 compared to a net loss of $3,759,742 during the three month period ended September 30, 2008. Consequently, there is an accumulated deficit of $134,544,435 at September 30, 2009 compared to $125,302,582 at December 31, 2008.
The Company's Articles of Incorporation currently allow for issuance of a maximum of 250,000,000 shares of common stock. As of November 3, 2009, the Company has approximately 249,115,902 shares outstanding, leaving an unissued balance of authorized shares that is not sufficient to service the maximum requirements of all of its convertible securities. On November 2, 2009, holders of a majority of our voting shares of our company, Sanswire Corp., acted by written consent in lieu of a special meeting of shareholders to an adopt amendment to our articles of incorporation to increase the number of shares of common stock which we are authorized to issue from 250,000,000 shares to 500,000,000 shares. As of November 2, 2009, we had 249,115,902 shares of our common stock outstanding. The Company is obligated under various existing agreements, options and warrants to issue additional shares of our common stock.
Critical Accounting Policies and Use of Estimates
Estimates
The preparation of condensed consolidated financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts and classification of expense, and the disclosure of contingent assets and liabilities. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Accounting for stock options
We believe that it is important for investors to be aware that there is a high degree of subjectivity involved in estimating the fair value of stock-based compensation, that the expenses recorded for stock-based compensation in the Company’s financial statements may differ significantly from the actual value (if any) realized by the recipients of the stock awards, and that the expenses recorded for stock-based compensation will not result in cash payments from the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Regulation S-K, the Company is not required to provide information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (the “Reviewing Officers”), of the effectiveness of the Company's disclosure controls and procedures as of September 30, 2009 (the “Quarter”). In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, the Company's management was required to apply its reasonable judgment. Furthermore, in the course of this evaluation, management considered certain internal control areas, including those discussed below, in which we have made and are continuing to make changes to improve and enhance controls. Based upon the required evaluation, the Reviewing Officers concluded that as of the end of the Quarter, the Company's disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, except for the establishment of the audit committee as contemplated below.
Initially, on May 4, 2007 the Company determined that the Company had ineffective controls over revenue recognition. On September 3, 2009, the Company then also determined that it has not properly accounted for various derivative liabilities resulting in this restatement.
We have categorized our efforts to address our material weaknesses into two phases. In the first phase of the program, already completed as of September 30, 2007, we hired consultants and accounting consultants to review our financial statements and prepare the restatement of our financial statements. Our remediation measures relating to revenue recognition include a review by management of revenue items other than normal sales and also the discontinuation of the operations of our Centerline Communications LLC subsidiary for which we had previously restated revenue.
In the second phase of the program, we have commenced to and continue to implement certain new policies and procedures such as:
a. Seeking to recruit board members independent of management;
b. Granting Board committees standing authority to retain counsel and special or expert advisors of their own choice;
c. Seeking outside review of acquisition transactions
d. Establishment of an audit committee
e. Upon adequate funding, hiring additional staff leading to the segregation of duties to enable a better control environment
Our remediation efforts in light of the improper accounting of our derivative liabilities include restating our financial statements for March 31, June 30, September 30 and December 31, 2008 as well as March 31, 2009.
Changes in Internal Control Over Financial Reporting
Except as set forth above, there have been no changes in our internal control over financial reporting that occurred during the Quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Securities and Exchange Commission
On September 28, 2006, the Company received a formal order of investigation from the SEC. The formal order only named the Company and was not specific to any particular allegations. Through the use of subpoenas, the SEC has requested documentation from certain officers and directors of the Company. In subsequent subpoenas, the SEC has asked for additional documents and information.
On October 5, 2007, the Company received a "Wells Notice" from the SEC in connection with the SEC’s ongoing investigation of the Company. The Wells Notice provides notification that the staff of the SEC intends to recommend to the Commission that it bring a civil action against the Company for possible violations of the securities laws including violations of Sections 5 and 17(a) of the Securities Act of 1933; Sections 10(b), 13(a), and 13(b)(2)(A) & (B) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and seeking as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of Company’s securities pursuant to Section 12(j) of the Exchange Act.
On May 2, 2008, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the United States District Court for the Southern District of Florida against GlobeTel Communications Corp. (the “Company”) and three former officers of the Company, Timothy J. Huff, Thomas Y. Jimenez and Lawrence E. Lynch. The SEC alleges, among other things, that the Company recorded $119 million in revenue on the basis of fraudulent invoices created by Joseph Monterosso and Luis Vargas, two individuals formerly employed by the Company who were in charge of its wholesale telecommunications business.
The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Commission subsequently consolidated this action with another pending action involving former officers of the Company. The Commission has also moved to amend its complaint against the Company to include additional allegations of wrongdoing beginning in 2002, but which does not add any new defendants. The Company has been vigorously defending itself in this action.
Hudson Bay Fund LP et al.
Hudson Bay Fund LP and Hudson Bay Overseas Fund Ltd. filed an action in Supreme Court of the State of New York, New York County (Case No. 650366/09 against the Company claiming declaratory judgment, specific performance, and breach of contract relating to the warrants it acquired in connection with its investment. The Hudson Bay entities are seeking to reprice the warrants, increase the number of shares they can purchase pursuant to the warrants, certain equitable remedies, and unspecified damages. The Company has retained outside counsel and has filed an answer and affirmative defenses in the case. The Company intends to vigorously defend the action, but the outcome of the action cannot be predicted.
Former Consultants
The Company is a defendant in two lawsuits filed by Matthew Milo and Joseph Quattrocchi, two former consultants, filed in the Supreme Court of the State of New York (Richmond County, Case no. 12119/00 and 12118/00). These matters were subsequently consolidated as a result of an Order of the court and now bear the singular index number 12118/00. The original lawsuits were for breach of contract. The complaint demands the delivery of 10,000,000 pre split shares of ADGI stock to Milo and 10,000,000 to Quattrocchi. The Company was entered into the action as ADGI was the predecessor of the Company. The suit also requests an accounting for the sales generated by the consultants and attorneys fees and costs for the action. The lawsuits relate to consulting services that were provided by Mr. Milo and Mr. Quattrocchi and a $50,000 loan advanced by these individuals, dated May 14, 1997, of which $35,000 has been repaid.
The Company entered into an agreement with Mr. Milo and Mr. Quattrocchi as consultants on June 25, 1998. The agreement was amended on August 15, 1998. On November 30, 1998, both Mr. Milo and Mr. Quattrocchi resigned from their positions as consultants to the Company without fulfilling all of their obligations under their consulting agreement. The Company issued 3 million pre split shares each to Mr. Milo and Mr. Quattrocchi as consideration under the consulting agreement. The Company has taken the position that Mr. Milo and Mr. Quattrocchi received compensation in excess of the value of the services that they provided and the amounts that they advanced as loans.
Mr. Milo and Mr. Quattrocchi disagreed with the Company’s position and commenced action against us that is pending in the Supreme Court of the State of New York. Mr. Milo and Mr. Quattrocchi claim that they are entitled to an additional 24,526,000 pre split shares of common stock as damages under the consulting agreement and to the repayment of the loan balance. The Company believes that it has meritorious defenses to the Milo and Quattrocchi action, and the Company has counterclaims against Mr. Milo and Mr. Quattrocchi.
With regard to the issues related to original index number 12119/00, as a result of a summary judgment motion, the plaintiffs were granted a judgment in the sum of $15,000. The rest of the plaintiff's motion was denied. The court did not order the delivery of 24,526,000 pre split shares of ADGI common stock as the decision on that would be reserved to time of trial.
An Answer and Counterclaim had been interposed on both of these actions. The Answer denies many of the allegations in the complaint and is comprised of eleven affirmative defenses and five counterclaims alleging damages in the sum of $1,000,000. The counterclaims in various forms involve breach of contract and breach of fiduciary duty by the plaintiffs.
For the most part, the summary judgment motions that plaintiffs brought clearly stated that their theories of recovery and the documents that they will rely on in prosecuting the action. The case was assigned to a judicial hearing officer and there was one week of trial. The trial has been since adjourned with no further trial dates having been set.
It is still difficult to evaluate the likelihood of an unfavorable outcome at this time in light of the fact that there has been no testimony with regard to the actions. However, the plaintiffs have prevailed with regard to their claim of $15,000 as a result of the lawsuit bearing the original index Number 12119/00.
This case went before a Judicial Hearing Officer on July 6 and 7, 2006. No resolution occurred during the July hearing and the Judicial Hearing Officer has asked for written statements of facts and law. The outcome cannot be projected with any certainty. However, the Company does not believe that it will be materially adversely affected by the outcome of the proceeding. The Company has not been informed of any further developments since the hearing.
Joseph Monterosso
In October 2007 the Company filed a lawsuit in the Circuit Court for Broward County, Florida against Joseph J. Monterosso alleging Libel, Slander and Defamation, Tortuous Interference, Violations of FS § 836.05 (Threats Extortion) and violations of FS §517 (Securities Fraud). Mr. Monterosso has not yet been served with the complaint pending additional information arising from the SEC lawsuit. This action has been dismissed for lack of prosecution but may be refilled by the Company in the future.
Mitchell Siegel v. GlobeTel
On February 2, 2007, GlobeTel was sued in the Circuit Court for Broward County, Florida entitled Mitchell Siegel v. GlobeTel Communications Corp. , Case no. 0702456 (“the Siegel Lawsuit”). In this action, Siegel sued the Company for breach of contract in regards to a Key Executive Employment Agreement. On February 15, 2008, both parties entered into a settlement agreement whereas Mr. Siegel would receive $175,000 worth of stock, payable over 12 months, and 50% of the gross proceeds, up to a total amount of $300,000, received from an October 2006 agreement. During 2008, the Company paid $131,250 in the Company’s common stock associated with the settlement agreement. During 2009, the Company paid the remaining $43,750 in the Company’s common stock.
Trimax Wireless
On July 3, 2007 the Company filed suit against its former employee Ulrich Altvater and his company Trimax Wireless seeking the return of certain equipment held at the former GlobeTel Wireless offices and for the return of $175,000 lent to Altvater by the Company. The replevin action against Trimax was dismissed on the basis of venue. In August 2007, Altvater and Trimax filed suit against the Company alleging, defamation, conversion, breach of contract and seeking injunctive relief. On April 6, 2009, the parties entered into a settlement agreement. As per the terms of the settlement, Mr. Altvater will return 1,640,000 shares of the Company’s common stock and certain equipment that was held by Mr. Altvater’s company, Trimax Wireless.
Item 1A. Risk Factors
As a “smaller reporting company” as defined by Regulation S-K, the Company is not required to provide information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three month period ended September 30, 2009, the Company issued an aggregate of 24,307,127 shares of common stock for cash, debt, and consulting agreements. Of the shares issued, no shares were issued to insiders and affiliates as restricted securities and in accordance with SEC Rule 144. The common stock issued was valued at prices ranging from $0.105 to $0.14 per share, based on the closing market prices on the date the board of directors authorized the issuances. Subsequent to September 30, 2009, the Company issued an aggregate of 125,000 shares of common stock for previously entered into agreements.
The above securities were issued pursuant to an exemption under Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| Exhibit 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.1 | Certification of the Chief Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| Exhibit 32.1 | Certification of the Chief Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | SANSWIRE CORP. | |
| | | | |
| By: | /s/ David A. Christian | |
| | | David A. Christian, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | |
| | SANSWIRE CORP. | |
| | | | |
| By: | /s/ Thomas Seifert | |
| | | Thomas Seifert, Chief Financial Officer (Principal Accounting and Financial Officer) | |
