UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No.1)
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(D) Of The Securities
Exchange Act Of 1934
For The Quarterly Period Ended SEPTEMBER 30, 2006
[ ] Transition Report Pursuant To Section 13 Of 15(D) Of The Securities
Exchange Act Of 1934
For The Transition Period From ___________ To ___________
Commission file number 0-25703
GTC TELECOM CORP.
(Exact Name of Registrant as Specified in its Charter)
NEVADA 88-0318246
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
3151 AIRWAY AVE., SUITE P-3, COSTA MESA, CALIFORNIA 92626
(Address of Principal Executive Offices) (Zip Code)
714-549-7700
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address And Former Fiscal Year,
If Changed Since Last Report)
---------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of each class of Common Stock Outstanding at December 15, 2006
----------------------------------- --------------------------------
Common Stock, $0.001 par value 30,169,740
Transitional Small Business Disclosure Format
(Check one);
Yes [ ] No [X]
INDEX.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at September 30, 2006 (Unaudited) - As Restated
Condensed Consolidated Statements of Operations and Other Comprehensive Loss
(Unaudited) for the three months ended September 30, 2006 and 2005 - As Restated
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended
September 30, 2006 and 2005 - As Restated
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
EXPLANATORY NOTE
This First Amended Quarterly Report on Form 10-QSB/A discloses and discusses the
impact and effect of a restatement of our previously filed financial statements
for the quarter ended September 30, 2006; and amends Items 1 and 2 of Part I of
our Quarterly Report on Form 10-QSB previously filed on December 20, 2006. This
restatement is necessary due to the fact that in our original filing, the stock
of our subsidiary, Perfexa India, that is owned by our principals and employees
was classified as affiliate-owned and included with majority-owned stock.
However, upon further review by our management, we believe a more accurate
classification of this stock ownership is as unaffiliated stock and included
with minority owned stock. As a result, our management decided to restate our
financial statements to reflect this reclassification
This First Amended Quarterly Report on Form 10-QSB/A for the quarter ended
September 30, 2006 amends and restates only those items of the previously filed
Quarterly Report on Form 10-QSB which have been affected by the restatement. In
order to preserve the nature and character of the disclosures set forth in such
items as originally filed, no attempt has been made in this amendment (i) to
modify or update such disclosures except as required to reflect the effects of
the restatement or (ii) to make revisions to the Notes to the Consolidated
Financial Statements except for those which are required by or result from the
effects of the restatement. For additional information regarding the
restatement, see Note 12 to our Consolidated Financial Statements included in
Part I - Item I. No other information contained in our previously filed Form
10-QSB for the quarter ended September 30, 2006 has been updated or amended.
ITEM 1. FINANCIAL STATEMENTS
GTC TELECOM CORP.
CONDENSED CONSOLIDATED BALANCE SHEET -AS RESTATED
September 30,
2006
---------------
(Unaudited)
ASSETS
Cash $ 8,612
Accounts receivable, net of allowance for doubtful accounts of
approximately $6,000 at
September 30, 2006 390,768
Deposits 30,822
Prepaid expenses 46,510
---------------
Total current assets 476,712
Property and equipment, net 303,087
Other assets 77,039
---------------
Total assets $ 856,838
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 2,655,012
Accrued payroll and related taxes 517,552
Obligation under capital leases 11,705
Notes payable, net of discounts totaling $375,524 2,854,678
Deferred income 42,060
---------------
Total current liabilities 6,081,007
Long-term liabilities:
Obligation under capital leases, net of current portion 26,151
Notes payable, net of current portion and discounts totaling $975 208,141
---------------
Total Liabilities 6,315,299
Commitments and contingencies
Minority interest in consolidated subsidiaries 307,250
Stockholders' deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized;
none issued and outstanding --
Common stock, $0.001 par value; 100,000,000 shares authorized;
30,169,740 shares issued and outstanding at
September 30, 2006 30,170
Additional paid-in-capital 11,666,670
Note receivable officer (60,306)
Accumulated other comprehensive income 63,160
Accumulated deficit (17,465,405)
---------------
Total stockholders' deficit (5,765,711)
---------------
Total liabilities and stockholders' deficit $ 856,838
===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GTC TELECOM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS -AS RESTATED
(UNAUDITED)
Three Months Ended
September 30,
--------------------------
2006 2005
--------------------------
Revenues:
Telecommunications $ 1,142,695 $ 1,695,640
Internet services 58,174 124,015
BPO services 201,096 66,871
--------------------------
Total revenues 1,401,965 1,886,526
--------------------------
Cost of sales:
Telecommunications 447,553 817,101
Internet services 19,581 33,161
BPO services 120,232 35,645
--------------------------
Total cost of sales 587,366 885,907
--------------------------
Gross profit 814,599 1,000,619
--------------------------
Operating expenses:
Payroll and related 669,025 684,757
Selling, general, and administrative 417,673 940,300
--------------------------
Total operating expenses 1,086,698 1,625,057
--------------------------
Operating loss (272,099) (624,438)
Interest expense, net (including amortization of debt discounts) (488,029) (480,055)
Other income, net 17,299 (21,736)
--------------------------
Loss before provision for income taxes and minority interest (742,829) (1,126,229)
Provision for income taxes 2,574 2,045
--------------------------
Loss before minority interest (745,403) (1,128,274)
Minority interest in loss of consolidated subsidiaries, net
of taxes (14,533) 2,683
--------------------------
Net loss available to common stockholders (759,936) (1,125,591)
Foreign currency translation adjustment (40) (14,022)
--------------------------
Comprehensive loss $ (759,976) $(1,139,613)
==========================
Basic and diluted net loss available to common
stockholders per common share $ (0.03) $ (0.04)
==========================
Basic and diluted weighted average common shares
outstanding 30,169,740 29,523,320
==========================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GTC TELECOM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - AS RESTATED
(UNAUDITED)
Three Months Ended
September 30,
-------------------------
2006 2005
-------------------------
Cash Flows From Operating Activities:
Net loss $ (759,936) $(1,125,591)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 48,976 78,598
Bad debt expense 11,577 203,435
Amortization of debt discount 371,894 368,961
Loss on sale of equipment 13,873 15,134
Foreign currency transaction loss 10,701 21,736
Estimated fair market value of stock issued for services (13,390) --
Share-based compensation 12,250 --
Change in fair value of derivative (28,000) --
Minority interest in loss of consolidated subsidiaries 14,533 (2,683)
Estimated fair market value of stock in subsidiary issued
to employees for compensation -- 93,715
Changes in operating assets and liabilities:
Accounts receivable and other current assets (7,824) 77,021
Accounts payable and accrued expenses 171,666 (463,862)
Accrued payroll and related taxes 85,489 4,817
Deferred income (2,820) --
-------------------------
Net cash used in operating activities (71,011) (728,719)
-------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (1,369) (1,612)
-------------------------
Net cash used in investing activities (1,369) (1,612)
-------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of stock of subsidiary 44,000 91,100
Principal repayments on notes payable (85,494) (133,209)
Principal payments under capital lease obligations (4,541) (2,835)
Principal borrowings on notes payable 51,710 775,425
-------------------------
Net cash provided by financing activities 5,675 730,481
-------------------------
Effect of exchange rate on cash (3,354) (150)
-------------------------
Net decrease in cash (70,059) --
Cash at beginning of period 78,671 500
-------------------------
Cash at end of period $ 8,612 $ 500
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,978 $ 5,810
=========================
Income taxes $ 2,574 $ 2,046
=========================
Non-Cash Investing and Financing Activities:
During the three months ended September 30, 2006, the Company financed the
purchase of equipment totaling $21,245 with capital lease.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - MANAGEMENT'S REPRESENTATION:
The management of GTC Telecom Corp. and its subsidiaries (the "Company" or
"GTC") without audit has prepared the condensed consolidated financial
statements included herein. The accompanying unaudited condensed financial
statements consolidate the accounts of the Company and its wholly and/or
majority owned subsidiaries and have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. Certain information and note disclosures normally
included in the condensed consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted. In the opinion of the management of the Company, all
adjustments considered necessary for fair presentation of the condensed
consolidated financial statements have been included and were of a normal
recurring nature, and the accompanying condensed consolidated financial
statements present fairly the financial position as of September 30, 2006, the
results of operations for the three months ended September 30, 2006 and 2005,
and cash flows for the three months ended September 30, 2006 and 2005.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the audited consolidated financial statements and notes for
the year ended June 30, 2006, as amended, included in the Company's Form 10-KSB
filed with the Securities and Exchange Commission on October 16, 2006. The
interim results are not necessarily indicative of the results for a full year.
NOTE 2 - DESCRIPTION OF BUSINESS:
GTC - GTC provides various services including, telecommunication services, which
includes wireless and long distance telephone, Internet related services,
including Internet Service Provider access, and business process outsourcing
("BPO") services. GTC Telecom Corp. was organized as a Nevada Corporation on
May 17, 1994 and is currently based in Costa Mesa, California. The Company is
quoted on the Over-The-Counter Bulletin Board under the symbol "GTCC".
The Company has formed four wholly owned subsidiaries, of which two are active
(see below), that offer different products and services. They are managed
separately because each business requires different technology and/or marketing
strategies.
The four subsidiaries are: CallingPlanet.com, Inc., ecallingcards.com, Inc.,
Shine Wireless, Inc., and Perfexa Solutions, Inc.
CallingPlanet.com, Inc. was set up to offer international calling using a PC to
phone connection. It is currently inactive. ecallingcards.com, Inc. was set up
to offer prepaid calling cards purchased over the internet. It is currently
inactive. Shine Wireless, Inc., is active and offers telecommunications and
Internet related service needs through direct sales marketing. Perfexa
Solutions, Inc., is active and offers business process outsourcing services.
PERFEXA - Perfexa Solutions, Inc. ("Perfexa" or "Perfexa-U.S."), a majority
owned subsidiary of the Company, currently provides customer service for the
Company's telecommunication and Internet users. Perfexa's Information Technology
("IT") group currently develops IT solutions for GTC's customer care needs and
the integration of GTC's customer care system with those of Perfexa's New Delhi
Center. Additionally, Perfexa offers outsourced call center and IT development
services to third parties.
WIRELESS TELEPHONE SERVICE - The Company provides wireless telephone service
under the name GTC Wireless, and through its majority-owned subsidiary Shine
Wireless, Inc. ("Shine Wireless"). The Company offers a variety of plans for its
wireless service and offers the same plans under both GTC Wireless and Shine
Wireless. These services are available to both consumer and business users and
are both serviced through the same third party provider. The Company's wireless
telephone services are billed using the same methods as those used for billing
its long distance telecommunication services. GTC's wireless telephone services
are provided pursuant to contracts with third-party providers, who
remain competitors with the Company. By contracting with third-party providers
to purchase large quantities of usage volumes, the Company is able to secure
significant discounts, allowing it to offer these services to its end-users at
rates equal to or less than its competitors.
GTC Wireless' services are offered directly by the Company and GTC Wireless.
The Company acquires new customers for GTC Wireless through telemarketing,
Internet advertising, and marketing to its long distance customers. Shine
Wireless' services are offered by Shine Wireless and are sold through a network
of independent sales agents. Based on the different methods used to acquire new
customers for GTC Wireless and Shine Wireless, we do not believe these two
services will directly compete for customers.
NOTE 3 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GOING CONCERN - The accompanying condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. As of September 30, 2006, the
Company has negative working capital of $5,604,295, an accumulated deficit of
$17,465,405, a stockholders' deficit of $5,765,711, and the Company is in
default on several notes payable (see Note 5). In addition, through September
30, 2006, the Company historically had losses from operations and a lack of
profitable operational history, among other matters, that raise doubt about its
ability to continue as a going concern. The Company will attempt to increase
revenues from additional revenue sources, such as the introduction of wireless
services through Shine Wireless, Inc., and/or increase profit margins through
continued negotiations with Sprint (see Note 7) and other cost cutting measures,
such as payroll cost reductions. In the absence of significant increases in
revenues and margins, the Company intends to fund operations through additional
debt and equity financing arrangements. The successful outcome of future
activities cannot be determined at this time and there are no assurances that if
achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
These circumstances raise doubt about the Company's ability to continue as a
going concern. The accompanying condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
PRINCIPLES OF CONSOLIDATION - The accompanying condensed consolidated financial
statements include the accounts of GTC Telecom Corp. and its subsidiaries,
CallingPlanet.com, Inc., ecallingcards.com, Inc., Shine Wireless, Inc., and
Perfexa Solutions, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
MINORITY INTEREST - Minority interest represents the minority stockholders'
proportionate share of the equity of Perfexa Solutions, Inc. and Perfexa India.
At September 30, 2006 and June 30, 2006, the Company owned approximately 97% of
Perfexa Solutions, Inc.'s common stock. In addition, Perfexa owned approximately
75% of Perfexa India's common stock at September 30, 2006 and June 30, 2006.
The Company owned 99.5% and 100% of Shine Wireless, Inc.'s common stock at
September 30, 2006 and June 30, 2006, respectively. The Company's controlling
interest requires that Perfexa, Perfexa India and Shine Wireless, Inc. be
included in the condensed consolidated financial statements of the Company.
Interests not owned by the Company are reported as minority interest in
consolidated subsidiaries in the accompanying condensed consolidated financial
statements.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates made by management are,
among others, provisions for losses on accounts receivable, realizability of
long-lived assets, estimates for income tax asset valuations and the valuation
of securities options, and warrants issued.
COMPREHENSIVE INCOME - SFAS 130, "Reporting Comprehensive Income," establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Total comprehensive loss
represents the net change in stockholders' equity during
a period from sources other than transactions with stockholders and as such,
includes net earnings. For the Company, the components of other comprehensive
loss are the changes in the cumulative foreign currency translation adjustments
and are recorded as components of stockholders' deficit.
TRANSLATION OF FOREIGN CURRENCIES - GTC uses the U.S. dollar as its functional
and reporting currency while the Company's foreign subsidiary uses the Indian
Rupee as its functional currency. Assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at year-end or period-end exchange
rates, and revenues and expenses are translated at average rates prevailing
during the year or other period presented. In accordance with SFAS No. 52,
"Foreign Currency Translation", net exchange gains or losses resulting from such
translation are excluded from net loss, but are included in comprehensive loss
and accumulated in a separate component of stockholders' deficit. The Company
recorded a foreign translation loss of $40 and $14,022 for the three months
ended September 30, 2006 and 2005, respectively. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other that the functional currency are included in the results of
operations as incurred. Foreign currency transaction losses included in other
income on the accompanying condensed consolidated statements of operations
totaled $10,701 and $21,736 for the three months ended September 30, 2006, and
2005, respectively.
STOCK-BASED COMPENSATION - At September 30, 2006, the Company had two approved
stock-based employee compensation plans:
2001 Stock Incentive Plan: On October 17, 2001, the Company's Board approved the
GTC Telecom Corp. Stock Incentive Plan (the "SIP Plan"), effective January 1,
2002. The SIP Plan was approved and ratified by the shareholders on December
13, 2001 at the Company's 2001 annual shareholder's meeting. The SIP Plan
provides for the grant of various types of equity based incentives, including
qualified and non-qualified stock options, stock appreciation rights, restricted
stock, bonuses, and other awards. A maximum of 5,000,000 shares of the
Company's common stock may be issued pursuant to the SIP Plan. The SIP plan is
administered by the Board of Directors.
1999 Stock Option Plan: On September 20, 1999, the Company's Board approved the
GTC Telecom Corp. 1999 Omnibus Stock Option Plan, effective October 1, 1999.
The exercise price for each option shall be equal to 25% to 100% of the fair
market value of the common stock on the date of grant, as defined, and shall
vest over a five-year period. Upon the approval and ratification of the SIP
Plan, the Company elected to terminate the 1999 Omnibus Stock Option Plan.
Effective July 1, 2006, the company adopted SFAS No. 123 (revised 2004), "Share
Based Payment," ("SFAS No. 123(R)") which revises SFAS No. 123 and supersedes
APB 25. SFAS No. 123(R) requires that all share-based payments to employees be
recognized in the financial statements based on their fair values at the date of
grant. The calculated fair value is recognized as expense (net of any
capitalization) over the requisite service period, net of estimated forfeitures,
using the straight-line method under SFAS No. 123(R). The Company considers many
factors when estimating expected forfeitures, including types of awards,
employee class and historical experience. The statement was adopted using the
modified prospective method of application which requires compensation expense
to be recognized in the financial statements for all unvested stock options
beginning in the quarter of adoption. No adjustments to prior periods have been
made as a result of adopting SFAS No. 123(R). Under this transition method,
compensation expense for share-based awards granted prior to July 1, 2006, but
not yet vested as of July 1, 2006, will be recognized in the Company's financial
statements over their remaining service period. The cost will be based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123. As required by SFAS No. 123(R), compensation expense recognized in
future periods for share-based compensation granted prior to adoption of the
standard will be adjusted for the effects of estimated forfeitures.
No stock options or other share based payments have been granted since the
adoption of SFAS No. 123(R).
For the three month period ended September 30, 2006, the impact of adopting SFAS
No. 123(R) on the Company's condensed statements of operations was an increase
in salaries and benefits expense of $12,250, with a corresponding increase in
the Company's loss from continuing operations, loss before provision for income
taxes and net loss resulting from the first-time recognition of compensation
expense associated with employee stock options.
The adoption of SFAS No. 123(R) had no significant effect on net cash flow.
The following table illustrates the pro forma net income and earnings per share
that would have resulted in the three month period ended September 30, 2005 from
recognizing compensation expense associated with accounting for employee
stock-based awards under the provisions of SFAS No. 123(R). The reported and pro
forma net income and earnings per share for the three month period ended
September 30, 2006 are provided for comparative purposes only, since stock-based
compensation expense is recognized in the financial statements under the
provisions of SFAS No.123(R)
Three Months Ended
September 30,
------------------------
2006 2005
------------------------
Net loss available to common stockholders:
As reported $(759,936) $(1,125,591)
Add total stock-based employee compensation expense
included in net loss 12,250 --
Deduct total stock-based employee compensation expense
determined under fair based method for all awards (12,250) (33,000)
------------------------
Pro-forma $(759,936) $(1,158,591)
========================
Basic and diluted net loss available to common stockholders
per common share
As reported $ (0.03) $ (0.04)
========================
Pro-forma $ (0.03) $ (0.04)
========================
LOSS PER SHARE - Statement of Financial Accounting Standards ("SFAS") No. 128
("SFAS 128"), "Earnings Per Share" requires that basic earnings per share be
computed by dividing income available to common shareholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive (using the treasury stock method, no shares were potential additional
common shares as of September 30, 2006 and 2005, respectively). Pro forma per
share data has been computed using the weighted average number of common shares
outstanding during the periods. For the three months ended September 30, 2006
and 2005, respectively, because the Company had incurred net losses, basic and
diluted loss per share are the same as additional potential common shares.
The following table sets forth the computation of basic and diluted loss per
common share:
Three Months Ended
September 30,
--------------------------
2006 2005
--------------------------
Net loss available to common stockholders $ (759,936) $(1,125,591)
==========================
Weighted average number of common shares outstanding 30,169,740 29,523,320
Incremental shares from the assumed exercise of dilutive stock
options and warrants -- --
--------------------------
Dilutive potential common shares 30,169,740 29,523,320
==========================
Basic and diluted net loss available to common stockholders per
common share $ (0.03) $ (0.04)
==========================
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS - Other than the adoption of SFAS
No. 123(R) (see Stock-Based Compensation above), recent accounting
pronouncements discussed in the notes to the June 30, 2006, as amended audited
financial statements, filed previously with the Securities and Exchange
Commission in Form 10-KSB, that were required to be adopted during the year
ending June 30, 2007, did not have or are not expected to have a significant
impact on the Company's 2007 financial statements.
NOTE 4 - RELATED PARTY TRANSACTIONS:
NOTE RECEIVABLE OFFICER
As of September 30, 2006, the Company has net advances to an officer of $60,306
made prior to the enactment of the Sarbanes-Oxley Act. The advances accrue
interest at 10% (no interest income has been recorded as of September 30, 2006)
and are due on demand. The Company has classified the note receivable as an
increase to stockholders' deficit in the accompanying condensed consolidated
balance sheet at September 30, 2006.
NOTE 5 - NOTES PAYABLE AND CAPITAL LEASES:
On August 22, 2006, the Company borrowed $50,000 from an unrelated third party,
for working capital purposes. The note provides for the Company to repay a
total of $60,000 by making eight weekly payments of $7,500 beginning the week of
September 18, 2006. The total outstanding balance was $37,500 and is included
in notes payable in the accompanying condensed consolidated balance sheet at
September 30, 2006. As of the date of this report, we have made all payments as
required in this note.
On May 9, 2006, the Company borrowed $100,000, bearing no interest, from an
unrelated third party, for working capital purposes. The note provides for the
Company to repay $25,000 on May 19, 2006, $25,000 on May 26, 2006, and the
balance of $50,000 on August 5, 2006. We are currently in discussions with the
noteholder to restructure the remaining payments. The total outstanding balance
was $75,000 and is included in notes payable in the accompanying condensed
consolidated balance sheet at September 30, 2006.
In March 2006, the Company converted $140,000 of a payable due to a third party
into a term note payable. The note provides for the Company to make monthly
payments of $6,500, including interest at a rate of 9.1%, until repaid. The
total outstanding balance was approximately $117,000 and is included in notes
payable in the accompanying condensed consolidated balance sheet at September
30, 2006. As of the date of this report, we have made all payments as required
in this note.
In May 2005, the Company entered into subscription agreements, as amended, with
certain third party investors for the sale of convertible notes, $1,088,235
principal amount along with certain shares of our common stock warrants,
resulting in gross proceeds of $925,000, less offering costs of $78,563. The
notes accrue simple interest of 12% per annum and may be converted into shares
of our common stock at $0.135 per share. Under the terms of the notes, the
Company must begin repayment of principal and interest in September 2005 and all
unpaid principal and interest are due on November 23, 2006. In July 2005, the
Company entered into additional subscription agreements with the same investors
for principal of $911,765. Such borrowings have terms that are substantially
the same as those described above. In May 2006, the Company entered into an
additional subscription agreement with a member from the same investor group for
principal of $117,647. This borrowing has terms that are substantially the same
as those described above. Currently, the Company is in default under the terms
of some of these convertible notes. As a result of our default, the holder has
the option to make all sums of principal and interest then remaining unpaid
under the note and all other amounts payable thereunder immediately due and
payable by the Company. For the notes that the Company is currently in default,
one holder has agreed to a forbearance until December 23, 2006, and the
remaining holders have orally agreed to defer payments due under those notes
while the Company attempts to renegotiate the repayment terms of the notes with
the holders. However, in exchange for agreeing to defer these payments, two of
the holders will require that all amounts in arrears will bear interest at 18%,
in accordance with the terms of the note.
The Company evaluated the debt and equity securities issued under the
aforementioned subscription agreements in accordance with the provisions of EITF
No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," and SFAS No. 133, as amended.
Because of registration rights related to the May 2006 borrowing, the Company
has bifurcated the embedded conversion feature and recorded it as a derivative
at fair value. At the time of the borrowing, fair value was estimated to
approximate $73,000. The remaining proceeds from the debt were allocated between
the BCF, warrants and common stock on the relative fair value basis. The Company
has estimated that the fair value of such derivative at September 30, 2006 to
approximate $15,000, which is included in accounts payable and accrued
liabilities on the accompanying condensed consolidated
balance sheets. The change in fair value of $28,000 has been included in other
income on the accompanying condensed consolidated statements of operations for
the three months ended September 30, 2006.
In August 2004, the Company restructured $725,000 in total principal on two past
due notes payable plus corresponding interest into a new short term note
payable, principal of $816,395. Such note required principal plus interest of
$73,350 be repaid by November 30, 2004, and the Company issued 250,000 shares of
its restricted common stock to the lender, valued at approximately $17,000
(based on the grant date fair value). In May 2005, the Company restructured such
$816,395 past-due note payable plus corresponding accrued interest and penalties
into a new long term note payable, principal amount $1,200,000. In connection
with the new debt, the Company issued 2,400,000 shares of restricted common
stock to the lender. The new note accrues simple interest in the amount of 12%
per annum. The Company is obligated to pay accrued interest monthly, but then
only if, after deducting all then current obligations, the Company at that time
has at least $300,000 in available cash. The $1,200,000 debt is convertible at
$0.13 per share, which resulted in a BCF of $185,000, which is amortized over
the life of the debt. In accordance with EITF No. 96-19, "Debtor's Accounting
for a Modification or Exchange of Debt Instruments," the $816,395 debt was
considered extinguished in this restructuring, and a loss on extinguishment of
approximately $670,000 was recorded.
On June 8, 2004, the Company borrowed $50,000 for working capital purposes from
an unrelated third party. The note was originally to be repaid plus interest of
$7,500 on September 7, 2004. On November 18, 2005, the Company restructured the
note. Under the new terms of the note, the Company is required to make monthly
payments of $1,000 plus simple interest of 10% until all principal and accrued
interest is repaid. The total outstanding balance was approximately $16,000 and
is included in notes payable in the accompanying condensed consolidated balance
sheet at September 30, 2006.
On October 2, 2002, the Company borrowed $100,000 for working capital purposes
from an unrelated third party. In November 2005, the Company restructured the
note. Under the revised terms, the Company is required to make weekly payments
of $1,000 until the outstanding balance is repaid. The total outstanding
balance was $1,000 and is included in notes payable in the accompanying
condensed consolidated balance sheet at September 30, 2006.
The Company maintains a revolving line of credit of $45,000 to finance the
purchase of computer equipment. The revolving line of credit provides for us to
make monthly payments of $669, including interest at a rate of approximately
14.9% and is secured by the related computer equipment. The total outstanding
balance on the revolving line of credit was $25,104 and is included in notes
payable in the accompanying condensed consolidated balance sheet at September
30, 2006. As of the date of this report, the Company has made all payments as
required in the revolving line of credit.
With the exception of the Equipment Line of Credit, all of the above notes are
unsecured.
NOTE 6 - STOCKHOLDERS' DEFICIT:
In January 2006, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company agreed to issue to the investor relations company 350,000
shares of our restricted common stock valued at $44,625 (based on the fair
market value on the date of grant) according to the following schedule: i)
150,000 shares upon the signing of the agreement, ii) 100,000 shares on the date
six months after the date of the agreement, and iii) 100,000 on the date one
year after the date of the agreement. The value of the stock, subject to
adjustments required by EITF Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," will be amortized and recorded as investor
relations expense under selling, general, and administrative expenses over the
12 months of the agreement. At September 30, 2006, the Company estimated that
the fair value of the issued shares to approximate $12,000; therefore
approximately $24,000 has been recorded as an adjustment to investor relations
expense for the three month period ended September 30, 2006.
NOTE 7 - CONTRACTS AND CONTINGENCIES:
The Company does not own its own long distance network and currently depends
upon third parties to provide for the transmission of phone calls by its
customers and to provide the call detail records upon
which the Company bases its customer's billings. Pursuant to the terms of its
agreement with Sprint, as amended, the Company is obligated to a monthly minimum
of $25,000 through July 26, 2006. For any period during which the Company fails
to meet its monthly minimum, the Company would be liable for 25% of the
difference between the Company's actual usage and the stated minimum. The
Company may terminate the agreement upon ninety (90) days written notice
provided that the Company pays a termination fee equal to 50% of the aggregate
minimum revenue requirement for the remaining term of the contract if the
Company terminates for convenience or by default of the Company prior to the
expiration date. Sprint may terminate the agreement upon thirty (30) days
written notice and then only in the event that the Company is in material breach
of the agreement. However, in cases of nonpayment, Sprint may elect to
immediately terminate the Agreement. Our contract with Sprint expired August
31, 2006. We are currently in discussions with Sprint to negotiate a new
contract. While we negotiate a new contract with Sprint, the terms and pricing
of our service remain the same as the expired contract.
GTC does not currently own its own wireless network. Currently, the Company
provides its wireless telecommunications services pursuant to an agreement with
a third party company for the provisioning of the Company's wireless
telecommunications service. The Company is not obligated to any monthly minimums
under its agreement with its underlying wireless telecommunications provider.
GTC does not currently have its own Internet Network. Currently, the Company
provides its Internet Service Provider Access services pursuant to an agreement
with a third party company for the provisioning of the Company's Internet
Service Provider Access service. The Company is not obligated to any monthly
minimums under its agreement with its underlying Internet service provider.
NOTE 8 - PERFEXA SUBSIDIARY:
CONTINGENT LIABILITY
Office Maintenance - Perfexa India is in dispute with its landlord contending
that the contractual amount for maintenance services is excessive to the actual
amount the landlord incurred for these services. Per the building maintenance
agreement, the landlord is required to supply audited financial statements to
support the amounts charged for maintenance services. To date, the landlord has
not provided this support. The difference between what we have been billed and
what we have paid and recorded amounts to approximately $85,000. We believe that
it is not probable that we will have to pay this additional amount, so we have
not included this liability in the accompanying condensed consolidated financial
statements.
NOTE PAYABLE
On October 18, 2006, Perfexa India borrowed 1,890,000 Rs (approximately $42,000)
for working capital purposes from an unrelated third party. The note provides
for weekly interest payments of 47,250 Rs (approximately $1,050) beginning
October 23, 2006 until the note is repaid upon maturity at January 15, 2007. In
the event of default, the noteholder shall be entitled to weekly interest
payments of 94,500 Rs (approximately $2,100) until the note is repaid.
NOTE 9 - SHINE WIRELESS:
On August 28, 2006, Shine Wireless initiated a private placement offering of
1,000,000 shares of Shine Wireless's restricted common stock at a price of $1.00
per share. As of the date of this filing, Shine Wireless has sold 100,000
shares pursuant to this offering, resulting in cash of $88,000, net of offering
costs of $12,000, which was transferred to GTC as partial repayment of accrued
advances. The offering is being conducted without general solicitation or
advertising and offered only to "accredited" investors pursuant to Rule 506 of
Regulation D of the Securities Act of 1933.
Marketing revenues are generated by the sale of materials, training and support
services to assist Shine Wireless independent sales agents in selling new retail
customers and enrolling other representatives in the Shine Wireless marketing
program. Marketing revenues are reflected as deferred income on the Company's
balance sheet and are recognized over the succeeding twelve months. Shine
Wireless cost of sales include bonuses paid to independent sales agents for
acquiring new retail wireless customers, as well as the cost of sales materials,
salaries and wages of marketing department personnel, services
required to support the independent sales agents, and other directly
identifiable support costs. Shine Wireless general and administrative costs
consist of residual commissions paid on continuing wireless telephone usage, and
typical indirect cost allocations, such as floor space and supporting
departments.
NOTE 10 - BUSINESS SEGMENT INFORMATION:
Segment and geographical information is assigned by region based upon management
responsibility for such items. The following table presents information about
the Company's operations by geographical area for the three months ended
September 30, 2006 and 2005.
Three Months Ended
September 30,
-------------------------
2006 2005
-------------------------
REVENUES
--------
Telecommunications and Internet $ 1,200,869 $1,819,655
BPO
Perfexa-U.S. 201,096 66,871
Perfexa-India -- --
-------------------------
Total $ 1,401,965 $1,886,526
=========================
COST OF SALES
-------------
Telecommunications and Internet $ 467,134 $ 850,262
BPO
Perfexa-U.S. 120,232 35,645
Perfexa-India -- --
-------------------------
Total $ 587,366 $ 885,907
=========================
OPERATING INCOME/(LOSS)
-----------------------
Telecommunications and Internet $ 47,761 $ 9,845
BPO
Perfexa-U.S. (350,846) (669,460)
Perfexa-India 30,986 35,177
-------------------------
Total $ (272,099) $ (624,438)
=========================
CAPITAL EXPENDITURES
--------------------
Telecommunications and Internet $ 21,245 $ --
BPO
Perfexa-U.S. -- --
Perfexa-India 1,369 1,612
-------------------------
Total $ 22,614 $ 1,612
=========================
Identifiable assets are assigned by region based upon management responsibility.
The following table presents information about the Company's identifiable assets
by geographic region:
September 30, 2006 June 30, 2006
----------------------------------
ASSETS
------
Telecommunications and Internet $ 333,500 $ 517,827
BPO
Perfexa-U.S. 171,921 67,254
Perfexa-India 351,417 393,191
----------------------------------
Total $ 856,838 $ 978,272
==================================
NOTE 11 - SUBSEQUENT EVENTS:
On December 4, 2006, the Company's Board granted, pursuant to the SIP Plan,
Incentive Stock Options (as defined by the SIP Plan), to purchase an aggregate
of 1,675,000 shares of the Company's common stock at an exercise price of $0.04
per share (the fair market value of the Company's common stock on
the day of grant), to certain employees of the Company. The options vest; (i)
1/3 when the Company has $750,000 of monthly revenue, (ii) 1/3 when the Company
has $1,000,000 of monthly revenue, and (iii) 1/3 when the Company has $1,500,000
of monthly revenue.
On December 4, 2006, the Company's Board granted options to purchase an
aggregate of 1,675,000 shares of the Company's restricted common stock at an
exercise price of $0.04 per share (the fair market value of the Company's common
stock on the day of grant), to certain employees of the Company. The options
vest; (i) 1/3 when the Company has $750,000 of monthly revenue, (ii) 1/3 when
the Company has $1,000,000 of monthly revenue, and (iii) 1/3 when the Company
has $1,500,000 of monthly revenue.
NOTE 12 - RESTATEMENT:
Subsequent to February 21, 2007 and after the Company had filed its Quarterly
Report on Form 10-QSB for the three month periods ended September 30, 2006 and
2005, management determined the stock of Perfexa India, one of the Company's
subsidiaries, that is owned by its principals and employees should be included
with minority interest. Additionally, we noted that certain of those shares were
issued to such employees for services and the fair value of such services was
not correctly recorded. Finally, the Company was not correctly recording foreign
currency transactions gains and losses for receivables and payables denominated
in foreign currencies. The effect of these corrections increased the minority
interest capital balances and correspondingly allocated additional amounts to
these minority interest holders. These corrections resulted in changes to net
loss before minority interest, minority interest in consolidated subsidiaries,
the minority interest holders balance, accumulated other comprehensive loss, and
accumulated deficit. Accordingly, the accompanying consolidated balance sheets
and statements of operations for the periods described in the preceding sentence
have been retroactively adjusted as summarized below:
As Previously Retroactive As Restated
Effect of Correction of Minority Interest Reported Adjustment
- ---------------------------------------------------- ---------------------------------------------
At September 30, 2006
- ---------------------
- Minority interest in consolidated subsidiaries $ 66,172 $ 241,078 $ 307,250
- Accumulated other comprehensive income $ 117,666 $ (54,506) $ 63,160
- Accumulated deficit $ (17,278,833) $ (186,572) $(17,465,405)
- Total stockholder's deficit $ (5,524,633) $ (241,078) $ (5,765,711)
At September 30, 2005
- ---------------------
- Minority interest in consolidated subsidiaries $ 77,847 $ 193,837 $ 271,684
- Accumulated other comprehensive income $ 151,857 $ (59,569) $ 92,288
- Accumulated deficit $ (14,289,150) $ (134,268) $(14,423,418)
- Total stockholder's deficit $ (2,553,638) $ (193,837) $ (2,747,475)
Three Months Ended September 30, 2006
- -------------------------------------
- Net loss before minority interest $ (728,364) $ (17,039) $ (745,403)
- Minority interest $ 14,825 $ (29,358) $ (14,533)
---------------------------------------------
- Net loss available to common stockholders $ (713,539) $ (46,397) $ (759,936)
- Foreign currency translation $ (17,078) $ 17,038 $ (40)
---------------------------------------------
- Comprehensive loss $ (730,617) $ (29,359) $ (759,976)
- Loss Per Share $ (0.02) $ (0.01) $ (0.03)
Three Months Ended September 30, 2005
- -------------------------------------
- Net loss before minority interest $ (1,021,504) $ (106,770) $ (1,128,274)
- Minority interest $ 13,253 $ (10,570) $ 2,683
---------------------------------------------
- Net loss available to common stockholders $ (1,008,251) $ (117,340) $ (1,125,591)
- Foreign currency translation $ (22,965) $ 8,943 $ (14,022)
---------------------------------------------
- Comprehensive loss $ (1,031,216) $ (108,397) $ (1,139,613)
- Loss Per Share $ (0.03) $ (0.01) $ (0.04)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company intends that such
forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly, to
the extent that this Quarterly Report contains forward-looking statements
regarding the financial condition, operating results, business prospects or any
other aspect of the Company, please be advised that the Company's actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by the Company in forward-looking
statements. The differences may be caused by a variety of factors, including but
not limited to adverse economic conditions, intense competition, including
intensification of price competition and entry of new competitors and products,
adverse federal, state and local government regulation, inadequate capital,
unexpected costs and operating deficits, increases in general and administrative
costs, lower sales and revenues than forecast, loss of customers, customer
returns of products sold to them by the Company, disadvantageous currency
exchange rates, termination of contracts, loss of suppliers, technological
obsolescence of the Company's products, technical problems with the Company's
products, price increases for supplies and components, inability to raise
prices, failure to obtain new customers, litigation and administrative
proceedings involving the Company, the possible acquisition of new businesses
that result in operating losses or that do not perform as anticipated, resulting
in unanticipated losses, the possible fluctuation and volatility of the
Company's operating results, financial condition and stock price, inability of
the Company to continue as a going concern, losses incurred in litigating and
settling cases, adverse publicity and news coverage, inability to carry out
marketing and sales plans, loss or retirement of key executives, changes in
interest rates, fluctuations in foreign currency, inflationary factors and other
specific risks that may be alluded to in this Quarterly Report or in other
reports issued by the Company. In addition, the business and operations of the
Company are subject to substantial risks that increase the uncertainty inherent
in the forward-looking statements. The inclusion of forward looking statements
in this Quarterly Report should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
GENERAL OVERVIEW
Our principal line of business is to provide wireless and long distance
telephone and value-added services for small and medium-sized businesses and
residential customers throughout the United States. Our strategy has been to
build a subscriber base without committing capital or management resources to
construct our own network and transmission facilities. This strategy has
allowed us to add customers without being limited by capacity, geographic
coverage, or configuration of any particular network that we might have
developed.
During fiscal year ended June 30, 2006, we experienced significant bad debt
and reduced margins on the local telephone product. As a result, we have exited
the local telephone market. There were no significant expenses in relation to
exiting this line of business. We anticipate that this move will increase our
cash flows from operating activities.
We also provide a number of Internet related services such as Internet
access via Dial-Up. Our services are marketed nationwide, through sales
affiliates, affinity groups, independent sales agents and telemarketing.
Our revenues consist of revenues from the sale of telecommunications,
Internet, and BPO services. Telecommunication revenues are generated primarily
from monthly recurring charges for wireless service and when customers make
wireless and long distance telephone calls from their business or residential
telephones. Marketing revenues are generated by the sale of materials, training
and support services to assist Shine Wireless independent sales agents in
selling new retail customers and enrolling other representatives in the Shine
Wireless marketing program. Marketing revenues are reflected as deferred income
on the Company's balance sheet and are recognized over the succeeding twelve
months. Internet related services are typically billed at a flat rate and are
billed in advance.
Revenues are recognized in the period earned. BPO services revenues are billed
each month based on a client contract that provides for either a dedicated or
per minute rate as the services are rendered.
Cost of sales consists of telecommunications service costs and the costs of
providing Internet access, and BPO services. Wireless and long distance
telecommunications service costs are based on our customers' wireless and long
distance usage. We pay our carriers based on the type of call, time of call,
duration of call, the terminating telephone number, and terms of our contract in
effect at the time of the call. Shine Wireless cost of sales include bonuses
paid to independent sales agents for acquiring new retail wireless customers, as
well as the cost of sales materials, salaries and wages of marketing department
personnel, services required to support the independent sales agents, and other
directly identifiable support costs. BPO service cost of sales consists of
labor and its related support costs directly associated with a service contract.
General and administrative expenses consist of the cost of customer acquisition
(including costs paid for third-party verification), customer service, billing,
cost of information systems and personnel required to support our operations and
growth. Shine Wireless general and administrative expenses consist of residual
commissions paid on continuing wireless telephone usage, and typical indirect
cost allocations, such as floor space and supporting departments.
Depending on the extent of our future growth, we may experience significant
strain on our management, personnel, and information systems. We will need to
implement and improve operational, financial, and management information
systems. In addition, we are implementing new information systems that will
provide better record keeping, customer service and billing. However, there can
be no assurance that our management resources or information systems will be
sufficient to manage any future growth in our business, and the failure to do so
could have a material adverse effect on our business, results of operations and
financial condition.
RESULTS OF OPERATIONS OF THE COMPANY
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005
REVENUES - Revenues decreased by $484,561 or 25.7% to $1,401,965 in the
three months ended September 30, 2006 from $1,886,526 in the three months ended
September 30, 2005. The decrease was due to a decrease in telecommunications
revenues of $552,945 and a decrease in Internet revenues of $65,841, offset
partially by the increase in BPO revenues of $134,225. As of September 30,
2006, the Company had 51,992 telecommunications customers and 1,417 Internet
customers, with usage of long distance services of approximately 15,726,000
minutes for the three months ended September 30, 2006 as compared with 95,600
long distance customers and 2,896 Internet customers as of September 30, 2005,
with usage of long distance services of approximately 21,959,000 minutes for the
three months ended September 30, 2005.
We believe that the reduction in minutes are a result of several recent
competitive pressures including: the increase in the number of low-priced long
distance calling plans currently available, the expansion of bundled local/long
distance services offered by Local Exchange Carriers and/or Competitive Local
Exchange Carriers, and the migration of traditional long distance usage to
cellular long distance and internet usage. In an effort to increase revenue, we
have stepped up our outbound telemarketing campaigns.
Additionally, we are continuing to focus on developing third party revenue
for our Perfexa subsidiary. In 2004, we began widespread marketing of our BPO
services to third parties and have begun securing client contracts for these
services. Perfexa generated third-party revenues of $201,096 and $66,871 for
the three months ended September 30, 2006 and 2005, respectively.
COST OF SALES - Cost of sales decreased by $298,541 or 33.7% to $587,366 in
the three months ended September 30, 2006 from $885,907 in the three months
ended September 30, 2005. The decrease was primarily due to the decrease in
carrier costs associated with decreased telecommunications service revenues of
$369,548. In addition, for the three months ended September 30, 2006, the costs
associated with Internet services decreased $13,580 and the costs associated
with BPO services increased $84,587. As a percentage of revenue, cost of sales
decreased to 41.9% from 47.0%, resulting in a gross margin of 58.1% as compared
to 53.0% for the three months endedSeptember 30, 2006 and 2005, respectively.
Perfexa incurred third-party cost of sales of $120,232 and $35,645 for the
three months ended September 30, 2006 and 2005, respectively.
OPERATING EXPENSES - Operating expenses decreased by $538,359 or 33.1% to
$1,086,698 in the three months ended September 30, 2006 from $1,540,023 in the
three months ended September 30, 2005 primarily due to our reduction in bad
debt expense as well as reductions in headcount resulting in lower salaries.
Operating expenses, individually net of Perfexa related costs, for the
three months ended September 30, 2006 were comprised primarily of $211,279 in
payroll and related expenses paid to employees; billing related costs of
$115,006; rent of $31,317; bad debt of $11,577; depreciation expense of $12,209;
and $304,586 of other operating expenses, primarily sales commissions, internal
telephone usage, costs of third party verification for newly acquired customers,
internet support costs and audit and legal costs.
Perfexa related operating expenses for the three months ended September 30,
2006 were comprised primarily of $457,746 in payroll and related expenses paid
to employees; rent of $65,374; depreciation expense of $36,767; and $63,638 of
other operating expenses, primarily, office maintenance and supplies, offset
primarily by corporate expense allocations of $222,801.
Operating expenses, individually net of Perfexa related costs, for the
three months ended September 30, 2005 were comprised primarily of $241,749 in
payroll and related expenses paid to employees; billing related costs of
$152,997; rent of $44,066; bad debt of $203,311; depreciation expense of
$20,383; and $297,042 of other operating expenses, primarily sales commissions,
internal telephone usage, costs of third party verification for newly acquired
customers, internet support costs and audit and legal costs.
Perfexa related operating expenses for the three months ended September 30,
2005 were comprised primarily of $443,008 in payroll and related expenses paid
to employees; rent of $60,540; depreciation expense of $58,215; and $103,746 of
other operating expenses, primarily corporate expense allocations, and office
maintenance and supplies.
INTEREST EXPENSE - Net interest expense increased by $7,974 to $488,029 for
the three months ended September 30, 2006 from $480,055 for the three months
ended September 30, 2005. The increase was primarily due to debt discounts
being amortized to interest expense totaling $371,894 for the three months ended
September 30, 2006 compared to $368,961 during the same period in fiscal year
2005.
NET LOSS - Net loss was $759,936 or $0.03 loss per common share for the
three months ended September 30, 2006, from a net loss of $1,125,591, or $0.04
loss per common share, for the three months ended September 30, 2005, a change
of $365,655.
ASSETS AND LIABILITIES - Assets decreased by $121,434 to $856,838 as of
September 30, 2006 from $978,272 as of June 30, 2006. The decrease was due to
net decreases in accounts receivable of $17,064, cash of $70,059, and property
and equipment of $36,807, net of an increase in prepaid expenses of $104, and
other assets of $2,392. Liabilities increased by $581,148 to $6,315,299 as of
September 30, 2006 from $5,734,151 as of June 30, 2006. The increase was due to
increases in accounts payable and accrued expenses of $171,666, primarily for
amounts owed to Sprint (associated with customer usage), payroll and payroll
related liabilities of $85,489, notes payable of $310,110, and obligations under
capital lease of $16,703, net of decreases in deferred income of $2,820;
associated with the decrease in telecommunications service costs, internet
service provider access fees and customer services operations as a result of the
decrease in customers.
STOCKHOLDERS' DEFICIT - Stockholders' deficit increased by $761,115 to
$5,765,711 as of September 30, 2006 from $5,004,596 as of June 30, 2006. The
increase was attributable to a net loss of $759,936 in the three months ended
September 30, 2006; a cumulative translation adjustment of $40, and a decrease
in additional paid-in capital related to an adjustment to the estimated value of
common shares previously issued to a consultant for services being provided
through the current quarter of $13,389, net of an increase related to employee
share-based compensation of $12,250.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL - We do not have sufficient cash flow from operations to meet all
of our monthly operating expenses, service our outstanding debts, or to fund our
contingent liabilities. Over the past year, we have relied upon short-term
financings to meet our cash requirements. Currently, we have short-term debt of
approximately $3,300,000. We will need to either restructure this debt on more
favorable terms, increase revenues in order to meet these obligations, or
acquire alternative financing.
CASH FLOWS FROM OPERATING ACTIVITIES - Net cash used in operating activities of
$71,011 for the three months ended September 30, 2006 was primarily due to net
loss of $759,936, change in fair value of derivative of $28,000, and the fair
market value of stock issued for services of $13,390, offset partially by
changes in operating assets and liabilities, principally increases in accounts
payable and accrued expenses of $171,666 and accrued payroll and related taxes
of $85,489, and decreases in accounts receivable and other current assets of
$7,824, and deferred income of $2,820; offset partially by the loss on sale of
equipment of $13,873; the amortization of debt discount of $371,894;
depreciation and amortization expense of $48,976; minority interest of $14,533;
foreign currency transactions loss of $10,701; the increase in bad debt expense
related to accounts receivable of $11,577, and $12,250 related to employee
share-based compensation.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing
activities of $1,369 for the three months ended September 30, 2006 funded
purchases of property and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash provided by financing
activities of $5,675 in the three months ended September 30, 2006 was primarily
due to borrowing on notes payable of $51,710, and net proceeds from the issuance
of stock of subsidiary totaling $44,000, offset by principal repayments on notes
payable of $85,494, and principal repayments under capital lease obligations of
$4,541.
OUTSTANDING DEBT OBLIGATIONS AND RECENT DEBT RESTRUCTURINGS - On August 22,
2006, we borrowed $50,000 from an unrelated third party, for working capital
purposes. The note provides that we will repay a total of $60,000 by making
eight weekly payments of $7,500 beginning the week of September 18, 2006. As of
the date of this report, we have made all payments as required by this note.
On May 9, 2006, we borrowed $100,000, bearing no interest, from an
unrelated third party, for working capital purposes. The note provides that we
will repay $25,000 on May 19, 2006, $25,000 on May 26, 2006, and the balance of
$50,000 on August 5, 2006. We are currently in discussions with the noteholder
to restructure the remaining payments. As of the date of this filing, there is
$75,000 outstanding under the note.
In March 2006, we converted $140,000 of a payable due to a third party into
a term note payable. The note provides that we will make monthly payments of
$6,500, including interest at a rate of 9.1%, until repaid. As of the date of
this report, we have made all payments as required by this note.
In May and July 2005, we entered into subscription agreements, as amended,
with certain third party investors for the sale of convertible notes, $2,000,000
principal amount along with shares of our common stock and warrants, resulting
in gross proceeds of $1.7 million, less offering costs of $141,825. The notes
accrue simple interest of 12% per annum and may be converted into shares of our
common stock. In May 2006, we entered into an additional subscription agreement
with a member from the same investor group for principal of $117,647. This
borrowing has terms that are substantially the same as those described above.
Currently, we are in default under the terms of some of these convertible notes.
Under these notes in default, as a result of our default, the holder has the
option to make all sums of principal and interest then remaining unpaid under
the note and all other amounts payable thereunder immediately due and payable by
us. For the notes that we are currently in default, one holder has agreed to a
forbearance until December 23, 2006, and the remaining holders have orally
agreed to defer payments due under those notes while we attempt to renegotiate
the repayment terms of the notes with the holder. However, in exchange for
agreeing to defer these payments, two of the holders will require that all
amounts in arrears will bear interest at 18%, in accordance with the terms of
the note.
In May 2005, we restructured $927,524 in amounts due on a past due note
payable and corresponding accrued interest and penalties into a new long term
note payable, principal amount
$1,200,000. The new note accrues simple interest in the amount of 12% per
annum. We are obligated to pay accrued interest monthly, but then only if,
after deducting all then current obligations, we at that time have at least
$300,000 in available cash.
On June 8, 2004, we borrowed $50,000 for working capital purposes from an
unrelated third party. The note was originally to be repaid plus interest of
$7,500 on September 7, 2004. In November 2005, we restructured the note. Under
the revised terms, we are required to make weekly payments of $1,000 plus simple
interest of 10% until all principal and accrued interest is repaid. As of the
date of this report, there is approximately $16,000 outstanding under the note.
On October 2, 2002, we borrowed $100,000 for working capital purposes from
an unrelated third party. In November 2005, we restructured the note. Under
the revised terms, we are required to make weekly payments of $1,000 until the
outstanding balance is repaid. As of the date of this filing, there is $1,000
outstanding under the note.
We maintain a revolving line of credit of $45,000 to finance the purchase
of computer equipment. The revolving line of credit provides for us to make
monthly payments of $669, including interest at a rate of approximately 14.9%.
The total outstanding balance on the revolving line of credit was $25,104 and is
included in notes payable in the accompanying condensed consolidated balance
sheet at June 30, 2006. As of the date of this report, we have made all
payments as required in the revolving line of credit.
EQUITY FINANCING - In January 2006, we entered into a one year agreement
with an outside consultant for investor and public relations services. Pursuant
to the agreement, we agreed to issue to the investor relations company 350,000
shares of our restricted common stock valued at $44,625 (based on the fair
market value on the date of grant) according to the following schedule: i)
150,000 shares upon the signing of the agreement, ii) 100,000 shares on the date
six months after the date of the agreement, and iii) 100,000 on the date one
year after the date of the agreement. The value of the stock, subject to
adjustments required by EITF Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," will be amortized and recorded as investor
relations expense under selling, general, and administrative expenses over the
12 months of the agreement. At September 30, 2006, the Company estimated the
current value of the shares to be $11,900.
INTERCOMPANY ACTIVITIES
Perfexa Subsidiary - Since inception, Perfexa-U.S. and its Indian
subsidiary Perfexa-India have relied upon us for funding and for administrative
services required in the development of their business plan. Perfexa is
obligated to reimburse us for such advances and their share of such expenses. As
of September 30, 2006, we have advanced Perfexa-U.S. $7,295,927 in cash and
equipment, of which $661,504 was for the purchase of equipment and $6,634,423
for operating expenses. In addition, we have allocated $2,080,503 of shared
administrative expenses to Perfexa-U.S. Cash and equipment advances accrue
interest of 10% per annum and are due upon demand. Shared administrative
expenses accrue no interest and are also due upon demand.
Pursuant to a Master Services Agreement between Perfexa-US and us, Perfexa
provides call center and IT development services to us on a cost plus 5% basis.
As of September 30, 2006, Perfexa-U.S. has billed us $4,600,144 for such
services.
As of September 30, 2006, Perfexa-U.S. owes us $4,341,596, net of $434,690
repaid by Perfexa-U.S. from funds raised and $4,600,144 in amounts billed for
services rendered.
Shine Wireless - Since inception, Shine Wireless has relied upon us and
Perfexa for funding and for administrative services required in the development
of their business plan. Shine Wireless is obligated to reimburse Perfexa and us
for such advances and their share of such expenses. As of September 30, 2006,
Perfexa and us have advanced Shine Wireless $816 and $155,776, respectively, for
operating expenses. In addition, Perfexa and us have allocated $102,569 and
$242,896, respectively, of shared administrative expenses to Shine Wireless.
Cash and equipment advances accrue interest of 10% per annum and are due upon
demand. Shared administrative expenses accrue no interest and are also due upon
demand.
Pursuant to a Master Services Agreement between Shine Wireless and
Perfexa-US, Perfexa provides call center and IT development services to Shine
Wireless on a cost plus 5% basis. As of September 30, 2006, Perfexa-U.S. has
billed Shine Wireless $103,385 for such services. No amounts have been repaid.
Pursuant to a Master Services Agreement between Shine Wireless and us, we
provide general management services. As of September 30, 2006, we have billed
Shine Wireless $398,672 for such services.
As of September 30, 2006, Shine Wireless owes us $358,672, net of $40,000
repaid by Shine Wireless from funds raised and $398,672 in amounts billed for
services rendered.
All significant intercompany balances and transactions have been eliminated in
consolidation.
PERFEXA SOLUTIONS
CONTINGENT LIABILITY - Office Maintenance - Perfexa India is in dispute
with its landlord contending that the contractual amount for maintenance
services is excessive to the actual amount the landlord incurred for these
services. Per the building maintenance agreement, the landlord is required to
supply audited financial statements to support the amounts charged for
maintenance services. To date, the landlord has not provided this support. The
difference between what we have been billed and what we have paid and recorded
amounts to approximately $85,000. We believe that it is not probable that we
will have to pay this additional amount, so we have not included this
liability in the accompanying condensed consolidated financial statements.
NOTE PAYABLE - On October 18, 2006, Perfexa India borrowed 1,890,000 Rs
(approximately $42,000) for working capital purposes from an unrelated third
party. The note provides for weekly interest payments of 47,250 Rs
(approximately $1,050) beginning October 23, 2006 until the note is repaid upon
maturity at January 15, 2007. In the event of default, the noteholder shall be
entitled to weekly interest payments of 94,500 Rs (approximately $2,100) until
the note is repaid.
SHINE WIRELESS
On August 28, 2006, Shine Wireless initiated a private placement offering
of 1,000,000 shares of Shine Wireless's restricted common stock at a price of
$1.00 per share. As of the date of this filing, Shine Wireless has sold 100,000
shares pursuant to this offering, resulting in cash of $88,000, net of offering
costs of $12,000, which was transferred to us as partial repayment of accrued
advances. The offering is being conducted without general solicitation or
advertising and offered only to "accredited" investors pursuant to Rule 506 of
Regulation D of the Securities Act of 1933.
CAPITAL EXPENDITURES
We expect to purchase approximately $100,000 of additional equipment on top
of the purchases already made in connection with the expansion of our business.
In addition, as previously discussed, we expanded our operations into the
Republic of India through our Perfexa subsidiary. We expect to continue funding
this expansion with an additional $100,000 to Perfexa primarily for leasehold
improvements, equipment (computer and telephone), furniture and fixtures, and
deposits. Because we presently do not have the capital for such expenditures,
we will have to raise these funds. (See Financing in this section).
STOCK OPTIONS
On December 4, 2006, our Board granted, pursuant to our Stock Incentive
Plan ("SIP"), Incentive Stock Options (as defined by the SIP Plan), to purchase
an aggregate of 1,675,000 shares of our common stock at an exercise price of
$0.04 per share (the fair market value of our common stock on the day of grant),
to certain of our employees. The options vest; (i) 1/3 when we have $750,000 of
monthly revenue, (ii) 1/3 when we have $1,000,000 of monthly revenue, and (iii)
1/3 when we have $1,500,000 of monthly revenue.
On December 4, 2006, our Board granted options to purchase an aggregate of
1,675,000 shares of our restricted common stock at an exercise price of $0.04
per share (the fair market value of our common stock on the day of grant), to
certain of our employees. The options vest; (i) 1/3 when we have $750,000 of
monthly revenue, (ii) 1/3 when we have $1,000,000 of monthly revenue, and (iii)
1/3 when we have $1,500,000 of monthly revenue.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements.
SUBSIDIARIES
We have formed four wholly owned subsidiaries, of which two are active (see
below), that offer different products and services. They are managed separately
because each business requires different technology and/or marketing strategies.
The four subsidiaries are: CallingPlanet.com, Inc., ecallingcards.com,
Inc., Shine Wireless, Inc., and Perfexa Solutions, Inc.
CallingPlanet.com, Inc. was set up to offer international calling using a
PC to phone connection. It is currently inactive. ecallingcards.com, Inc. was
set up to offer prepaid calling cards purchased over the internet. It is
currently inactive. Shine Wireless, Inc., is active and offers
telecommunications and Internet related service needs through direct sales
marketing. Perfexa Solutions, Inc., is active and offers business process
outsourcing services.
GOING CONCERN
The Company's independent registered public accounting firm has stated in
their report included in the Company's 2006 Form 10-KSB, that we have incurred
operating losses in the last two years, have a working capital deficit and have
a significant stockholders' deficit. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
INFLATION
We believe that inflation has not had a material effect on our results of
operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
amounts reported in our condensed consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported on our
balance sheet and the amounts of revenues and expenses reported for each of our
fiscal periods are affected by estimates and assumptions, which are used for,
but not limited to, the accounting for revenue recognition, accounts receivable,
doubtful accounts, deferred tax asset valuation allowances, and valuation of
securities, options, and warrants issued. Actual results could differ from these
estimates. The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used in the preparation of the financial
statements:
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Significant estimates made by us are, among others,
provisions for losses on accounts receivable, realization of long-lived assets
and estimates for deferred income tax asset valuations, and valuation estimates
for securities, options, and warrants issued.
REVENUE AND RELATED COST RECOGNITION - We recognize revenue during the
month in which services or products are delivered, as follows:
TELECOMMUNICATIONS RELATED SERVICES
Our telecommunications service revenues are generated primarily when
customers make long distance telephone calls from their business or
residential telephones for long distance service, monthly recurring charges
for local service, or by using any of our telephone calling cards.
Telecommunication services cost of sales consists of the cost of long
distance service provided by Sprint based on usage and on a per line basis
for local service.
INTERNET RELATED SERVICES
Internet service revenues consist of monthly fees charged to subscribers
for Internet access and are recognized in the period service access is
provided. Internet service cost of sales consists of the cost of providing
Internet access.
BPO SERVICES
BPO service revenues consist of amounts billed each month based on a
client contract that provides for either a dedicated or per minute rate as
the services are rendered. BPO service cost of sales consists of labor and
its related support costs directly associated with a service contract.
SHINE WIRELESS SERVICES
Marketing revenues are generated by the sale of materials, training
and support services to assist Shine Wireless independent sales agents in
selling new retail customers and enrolling other representatives in the
Shine Wireless marketing program. Marketing revenues are reflected as
deferred income on the Company's balance sheet and are recognized over the
succeeding twelve months. Shine Wireless cost of sales include bonuses paid
to independent sales agents for acquiring new retail wireless customers, as
well as the cost of sales materials, salaries and wages of marketing
department personnel, services required to support the independent sales
agents, and other directly identifiable support costs. Shine Wireless
general and administrative costs consist of residual commissions paid on
continuing wireless telephone usage, and typical indirect cost allocations,
such as floor space and supporting departments
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provide guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. SAB 101 was later superseded by SAB 104. Management believes the
Company's revenue recognition policies conform to SAB 104.
STOCK-BASED COMPENSATION - At September 30, 2006, the Company had two
approved stock-based employee compensation plans.
Effective July 1, 2006, the company adopted SFAS No. 123 (revised 2004), "Share
Based Payment," ("SFAS No. 123(R)") which revises SFAS No. 123 and supersedes
APB 25. SFAS No. 123(R) requires that all share-based payments to employees be
recognized in the financial statements based on their fair values at the date of
grant. The calculated fair value is recognized as expense (net of any
capitalization) over the requisite service period, net of estimated forfeitures,
using the straight-line method under SFAS No. 123(R). The Company considers many
factors when estimating expected forfeitures, including types of awards,
employee class and historical experience. The statement was adopted using the
modified prospective method of application which requires compensation expense
to be recognized in the financial statements for all unvested stock options
beginning in the quarter of adoption. No adjustments to prior periods have been
made as a result of adopting SFAS No. 123(R). Under this transition method,
compensation expense for share-based awards granted prior to July 1, 2006, but
not yet vested as of July 1, 2006, will be recognized in the Company's financial
statements over their remaining service period. The cost will be based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123. As required by SFAS No. 123(R), compensation expense recognized in
future periods for
share-based compensation granted prior to adoption of the standard will be
adjusted for the effects of estimated forfeitures.
For the three month period ended September 30, 2006, the impact of adopting SFAS
No. 123(R) on the Company's condensed statements of operations was an increase
in salaries and benefits expense of $12,250, with a corresponding increase in
the Company's loss from continuing operations, loss before provision for income
taxes and net loss resulting from the first-time recognition of compensation
expense associated with employee stock options.
The adoption of SFAS No. 123(R) had no significant effect on net cash flow.
TRANSLATION OF FOREIGN CURRENCIES - We use the U.S. dollar as its
functional and reporting currency while our foreign subsidiary uses the Indian
Rupee as its functional currency. Assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at year-end or period-end exchange rates, and
revenues and expenses are translated at average rates prevailing during the year
or other period presented. In accordance with SFAS No. 52, "Foreign Currency
Translation", net exchange gains or losses resulting from such translation are
excluded from net loss, but are included in comprehensive loss and accumulated
in a separate component of stockholders' deficit.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of September 30, 2006, to ensure that information
required to be disclosed by us in the reports filed or submitted by us under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities Exchange Commission's rules and forms,
including to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that as
of September 30, 2006, our disclosure controls and procedures were not effective
at the reasonable assurance level due to the material weaknesses described
below.
In light of the material weakness described below, we performed additional
analysis and other post-closing procedures to ensure our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles. Accordingly, we believe that the consolidated financial statements
included in this report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the
Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. We have identified the following
material weakness which has caused us to conclude that, as of September 30,
2006, our disclosure controls and procedures were not effective at the
reasonable assurance level:
1. During the course of the review of our six months ended December 31,
2006, we discovered an error in our financial statements in our quarterly report
for the period ended December 31, 2006 as disclosed in our Form 8-K filed on
February 20, 2007. As a result of this error, we restated our interim quarters
ended September 30, 2005, December 31, 2005, and March 31, 2006; the fiscal year
ended June 30, 2006; the interim quarter ended September 30, 2006; and the
interim quarter ended December 31, 2006. Our conclusion to restate the above
periods, resulted in the Company recognizing that its controls and procedures
were not effective as of the period ended September 30, 2006 and constituted a
material weakness.
To address this material weakness, we performed additional analyses and
other procedures to ensure that the financial statements included herein fairly
present, in all material respects, our financial position, results of operations
and cash flows for the periods presented.
Remediation of Material Weakness
To remediate the material weakness in our disclosure controls and
procedures identified above, in addition to working with our independent
auditors, we have continued to refine our internal procedures to alleviate this
weakness.
Changes in Internal Control over Financial Reporting
Except as noted above, there were no changes in our internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act, during our most recently completed fiscal 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
In the ordinary course of business, we may be, from time-to-time, involved
in various pending or threatened legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon our financial condition and/or results
of operations. However, in the opinion of our management, matters currently
pending or threatened against us are not expected to have a material adverse
effect on our financial position or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 16, 2006, we entered into an additional subscription agreement with
SCG Capital, LLC consisting of $117,647 principal amount in convertible notes,
and warrants to purchase shares of our common stock. Pursuant to the terms of
the subscription Agreement, we issued the following unregistered securities: (i)
$117,647 principal amount of our convertible promissory notes (the "Note" or
"Notes"); (ii) two shares of our common stock for each dollar of Note principal;
and (iii) six Class A warrants for each dollar of Note principal to purchase
shares of our common stock at an exercise price equal to $0.22 per share,
exercisable for a period of four years. The Notes bear simple interest of
twelve (12%) per annum and may be converted into shares of our common stock
pursuant to the terms of the Note. In addition, the note was issued at a
fifteen percent (15%) original issue discount, resulting in gross proceeds of
$100,000 to us. The issuance was an isolated transaction not involving a public
offering
conducted without general solicitation to "accredited investors" pursuant to
Rule 506 and Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As previously discussed, at September 30, 2006, we have convertible notes
in the amount of $2,117,647. Currently, we are in default under the terms of
some of these convertible notes. Under these notes in default, as a result of
our default, the holder has the option to make all sums of principal and
interest then remaining unpaid under the note and all other amounts payable
thereunder immediately due and payable by us. For the notes that we are
currently in default, the holders have orally agreed to defer payments due under
those notes while we attempt to renegotiate the repayment terms of the notes
with the holder. However, in exchange for agreeing to defer these payments, two
of the holders will require that all amounts in arrears will bear interest at
18%, in accordance with the terms of the note. However, there can be no
guarantees that we will be successful in our efforts to renegotiate the terms of
the Note. Failure to successfully restructure the note will have a material
adverse effect on our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders for a vote during the
three month period ended September 30, 2006.
ITEM 5. OTHER INFORMATION
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.
(1) Merger Involving Independent Accountants
(i) On December 5, 2006, we were informed by Squar, Milner,
Miranda & Williamson, LLP ("Squar Milner"), the independent registered public
accounting firm for GTC Telecom Corp. (the "Company"), as follows:
(1) Squar Milner has consummated a merger with Peterson &
Co., LLP ("Peterson"). Peterson is located in San Diego, California, and is
also registered with the Public Company Accounting Oversight Board (United
States). The name of the post-merger firm is Squar, Milner, Peterson, Miranda &
Williamson, LLP ("Squar Milner Peterson").
(2) We are required to file this Form 8-K as notification
that Squar Milner Peterson succeeds Squar Milner as our independent registered
auditor.
(ii) Squar Milner's reports on our consolidated financial
statements as of and for the years ended June 30, 2005 and 2006 did not contain
an adverse opinion or a disclaimer of opinion, nor was either such report
qualified or modified as to uncertainty, audit scope or accounting principles.
(iii) Neither of the reports of Squar Milner on the Company's
financial statements for the two most recent fiscal years contained an adverse
opinion or a disclaimer of opinion, nor was either such report qualified or
modified as to uncertainty, audit scope or accounting principles.
(1) During the Company's two most recent fiscal years and
through December 5, 2006, there were no disagreements with Squar Milner on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Squar Milner, would have caused them to make reference thereto
in their reports on the financial statements for such years.
(2) During the Company's two most recent fiscal years and
through December 5, 2006, there have been no reportable events (as defined in
Regulation S-B Item 304(a)(1)(iv)(B)).
(iv) The Company has requested that Squar Milner furnish it with a
letter addressed to the Securities and Exchange Commission stating whether or
not Squar Milner agrees with the above statements. A copy of Squar Milner's
letter required by Item 304(a)(3) of Regulation S-B is filed as Exhibit 16 to
this Form 10-QSB.
(2) During the Company's two most recent fiscal years and through
December 5, 2006, neither the Company, nor anyone on its behalf, consulted with
Peterson regarding either the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements; or any
matter that was either a subject of disagreement (as defined in Item
304(a)(1)(iv)(A) of Regulation S-B and the related instructions to that Item) or
a reportable event (as described in Item 304(a)(1)(iv)(B) of Regulation S-B).
(3) We have notified the members of our Audit Committee of the facts
set forth in this report on Form 8-K, including the appointment of Squar Milner
Peterson as our independent registered auditor and no member has disapproved of
this appointment.
ITEM 6. EXHIBITS
Exhibits
16. Letter Regarding Change in Certifying Accountants
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
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.
GTC TELECOM CORP.
By: /s/ S. Paul Sandhu
----------------------
S. Paul Sandhu
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Gerald A. DeCiccio
-------------------------
Gerald A. DeCiccio
Chief Financial Officer
(Principal Accounting Officer)
Dated: April 10,2007