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 DECEMBER 31, 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 February 12, 2007
----------------------------------- --------------------------------
Common Stock, $0.001 par value 32,255,456
Transitional Small Business Disclosure Format
(Check one);
Yes [_] No [X]
INDEX.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet (Unaudited) at December 31, 2006 - As Restated
Condensed Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited)
for the three and six months ended December 31, 2006 and 2005- As Restated
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended
December 31, 2006 and 2005- As Restated
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation
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 December 31, 2006; and amends Items 1
and 2 of Part I of our Quarterly Report on Form 10-QSB previously filed on
February 20, 2007. 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
December 31, 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 December 31, 2006 has been updated or amended.
ITEM 1. FINANCIAL STATEMENTS
GTC TELECOM CORP.
CONDENSED CONSOLIDATED BALANCE SHEET - AS RESTATED
(UNAUDITED)
December 31,
2006
--------------
ASSETS
Cash $ 19,054
Accounts receivable, net of allowance for doubtful accounts of
approximately $2,000 at December 31, 2006 412,804
Deposits 30,822
Prepaid expenses 47,658
--------------
Total current assets 510,338
Property and equipment, net 287,562
Other assets 79,878
--------------
Total assets $ 877,778
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 3,068,348
Accrued payroll and related taxes 564,857
Obligation under capital leases 13,245
Notes payable, net of discounts totaling $93,138 3,078,402
Deferred income 48,980
--------------
Total current liabilities 6,773,832
Long-term liabilities:
Obligation under capital leases, net of current portion 27,902
Notes payable 189,556
--------------
Total Liabilities 6,991,290
Commitments and contingencies
Minority interest in consolidated subsidiaries 488,976
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 December 31, 2006 30,170
Additional paid-in-capital 11,678,897
Note receivable officer (60,306)
Accumulated other comprehensive loss 101,604
Accumulated deficit (18,352,853)
--------------
Total stockholders' deficit (6,602,488)
--------------
Total liabilities and stockholders' deficit $ 877,778
==============
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 Six Months Ended
December 31, December 31,
------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------
Revenues:
Telecommunications $ 1,095,200 $ 1,575,031 $ 2,296,069 $ 3,394,686
BPO services 199,982 97,803 401,078 164,674
------------------------------------------------------
Total revenues 1,295,182 1,672,834 2,697,147 3,559,360
------------------------------------------------------
Cost of sales:
Telecommunications 450,926 659,889 918,060 1,510,151
BPO services 110,244 61,411 230,476 97,056
------------------------------------------------------
Total cost of sales 561,170 721,300 1,148,536 1,607,207
------------------------------------------------------
Gross profit 734,012 951,534 1,548,611 1,952,153
------------------------------------------------------
Operating expenses:
Payroll and related 560,861 640,464 1,104,772 1,325,221
Selling, general, and administrative 481,464 533,917 1,024,251 1,494,277
------------------------------------------------------
Total operating expenses 1,042,325 1,194,441 2,129,023 2,819,498
------------------------------------------------------
Operating loss (308,313) (242,907) (580,412) (867,345)
Interest expense, net (including amortization of debt discounts) (500,856) (497,360) (988,885) (977,415)
Other income, net (27,576) 9,671 (10,277) (12,065)
------------------------------------------------------
Loss before provision for income taxes and minority interest (836,745) (730,596) (1,579,574) (1,856,825)
Provision for income taxes 977 5,751 3,551 7,796
------------------------------------------------------
Loss before minority interest (837,722) (736,347) (1,583,125) (1,864,621)
Minority interest in profit/(loss) of consolidated subsidiaries,
net of taxes (49,726) 14,953 (64,259) 17,636
------------------------------------------------------
Net loss available to common stockholders (887,448) (721,394) (1,647,384) (1,846,985)
Foreign currency translation adjustment 38,444 (22,792) 38,404 (36,814)
------------------------------------------------------
Comprehensive loss $ (849,004) $ (744,186) $(1,608,980) $(1,883,799)
======================================================
Basic and diluted net loss available to common
stockholders per common share $ (0.03) $ (0.03) $ (0.05) $ (0.06)
======================================================
Basic and diluted weighted average common shares
outstanding 30,169,740 29,646,083 30,169,740 29,584,701
======================================================
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)
Six Months Ended
December 31,
--------------------------
2006 2005
--------------------------
Cash Flows From Operating Activities:
Net loss $(1,647,384) $(1,846,985)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 82,623 147,920
Bad debt expense 17,510 274,293
Amortization of debt discount 655,255 737,919
Loss on sale of equipment 13,873 10,286
Foreign currency transaction Loss 70,064 12,066
Estimated fair market value of stock issued for services (10,412) --
Share-based compensation 21,500 --
Change in fair value of derivative (31,000) --
Estimated fair market value of options granted to employees -- 4,705
for compensation
Estimated fair market value of stock in subisdiary issued
to employees for compensation -- 93,715
Minority interest in loss of consolidated subsidiaries 64,249 (17,636)
Changes in operating assets and liabilities:
Accounts receivable and other current assets (60,690) 39,553
Accounts payable and accrued expenses 585,002 (160,248)
Accrued payroll and related taxes 132,794 49,689
Deferred income 4,100 --
--------------------------
Net cash used in operating activities (102,516) (654,723)
--------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (1,724) (1,612)
--------------------------
Net cash used in investing activities (1,724) (1,612)
--------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of stock of subsidiary 176,000 93,315
Principal repayments on notes payable (160,716) (222,490)
Principal payments under capital lease obligations (8,251) (5,394)
Principal borrowings on notes payable 51,710 775,425
--------------------------
Net cash provided by financing activities 58,743 640,856
--------------------------
Effect of exchange rate on cash (14,120) 15,479
--------------------------
Net decrease in cash (59,617) --
Cash at beginning of period 78,671 500
--------------------------
Cash at end of period $ 19,054 $ 500
==========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 16,749 $ 10,993
==========================
Income taxes $ 3,549 $ 7,796
==========================
Non-Cash Investing and Financing Activities:
During the six months ended December 31, 2006, the Company financed the purchase
of equipment totaling $28,245 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 December 31, 2006, the
results of operations for the three and six months ended December 31, 2006 and
2005, and cash flows for the six months ended December 31, 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, 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 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 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 acquires new customers through telemarketing, Internet advertising,
and marketing to the Company's long distance customers. Shine Wireless offers
its wireless services 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 December 31, 2006, the
Company has negative working capital of $6,263,494, an accumulated deficit of
$18,352,853, a stockholders' deficit of $6,602,488, and the Company is in
default on several notes payable (see Note 5). In addition, through December
31, 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., Perfexa India, and
Shine Wireless, Inc. At December 31, 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 December 31,
2006 and June 30, 2006. The Company owned 98% and 100% of Shine Wireless,
Inc.'s common stock at December 31, 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 gain of $ 38,404 and a translation loss of $36,
814 for the six months ended December 31, 2006 and 2005, respectively.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than 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 $70,064 and $12, 066 for the six months ended
December 31, 2006, and 2005, respectively.
STOCK-BASED COMPENSATION - At December 31, 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.
For the three and six months ended December 31, 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 $9,250 and $21,500, respectively,
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 and six months ended December 31, 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 and six months ended
December 31, 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 Six Months Ended
December 31, December 31,
----------------------------------------------------
2006 2005 2006 2005
----------------------------------------------------
Net loss available to common stockholders:
As reported $ (887,448) $ (721,394) $(1,647,384) $(1,846,985)
Add total stock-based employee compensation expense
included in net loss 9,250 -- 21,500 --
Deduct total stock-based employee compensation expense
determined under fair based method for all awards (9,250) (33,000) (21,500) (66,000)
----------------------------------------------------
Pro-forma $ (887,448) $ (754,394) $(1,647,384) $(1,912,985)
====================================================
Basic and diluted net loss available to common stockholders
per common share
As reported $ (0.03) $ (0.02) $ (0.05) $ (0.06)
====================================================
Pro-forma $ (0.03) $ (0.03) $ (0.05) $ (0.06)
====================================================
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 December 31, 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 and six months ended December 31,
2006 and 2005, respectively, because the Company had incurred net losses, basic
and diluted loss per share are the same as inclusion of additional potential
common shares would be anti-dilutive.
The following table sets forth the computation of basic and diluted loss per
common share:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------
Net loss available to common stockholders $ (887,448) $ (721,394) $(1,647,384) $(1,846,985)
======================================================
Weighted average number of common shares outstanding 30,169,740 29,646,083 30,169,740 29,584,701
Incremental shares from the assumed exercise of dilutive stock
options and warrants -- -- -- --
------------------------------------------------------
Dilutive potential common shares 30,169,740 29,646,083 30,169,740 29,584,701
======================================================
Basic and diluted net loss available to common stockholders per
common share $ (0.03) $ (0.02) $ (0.05) $ (0.06)
======================================================
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS - On February 15, 2007, the FASB
issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115." This standard
permits an entity to measure many financial instruments and certain other items
at estimated fair value. Most of the provisions of SFAS No. 159 are elective;
however, the amendment to SFAS No. 115 ("Accounting for Certain Investments in
Debt and Equity Securities") applies to all entities that own trading and
available-for-sale securities. The fair value option created by SFAS No. 159
permits an entity to measure eligible items at fair value as of specified
election dates. Among others, eligible items exclude (1) financial instruments
classified (partially or in total) as permanent or temporary stockholders'
equity (such as a convertible debt security with a non-contingent beneficial
conversion feature) and (2) investments in subsidiaries and interests in
variable interest entities that must be consolidated. A for-profit business
entity will be required to report unrealized gains and losses on items for which
the fair value option has been elected in its statements of operations at each
subsequent reporting date. The fair value option (a) may generally be applied
instrument by instrument, (b) is irrevocable unless a new election date occurs,
and (c) must be applied to the entire instrument and not to only a portion of
the instrument. SFAS No. 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of the previous fiscal year provided that the entity (i) makes
that choice in the first 120 days of that year, (ii) has not yet issued
financial statements for any interim period of such year, and (iii) elects to
apply the provisions of SFAS No. 157 ("Fair Value Measurements"). The adoption
of SFAS No. 159 is not expected to have a significant impact on future
consolidated financial statements.
Other than the adoption of SFAS No. 123(R) (see Stock-Based Compensation above)
and SFAS No. 159 (see Fair Value Financial Instruments 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.
RECLASSIFICATIONS - Certain reclassifications have been made to the December 31,
2005 financial statements in order for them to be in conformity with the
December 31, 2006 presentation.
NOTE 4 - RELATED PARTY TRANSACTIONS:
NOTE RECEIVABLE OFFICER
As of December 31, 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 December 31, 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 December 31, 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. We are currently in default on the note and we are in
discussions with the noteholder to restructure the remaining payments. The
total outstanding balance was $11,250 and is included in notes payable in the
accompanying condensed consolidated balance sheet at December 31, 2006.
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 default and we are 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 December 31, 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 $100,000 and is included in notes
payable in the accompanying condensed consolidated balance sheet at December 31,
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, resulting in gross proceeds of $775,000, less
offering costs of $63,262. 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, resulting in gross proceeds of $100,000. This borrowing
has terms that are substantially the same as those described above. Currently,
the Company is in default under the terms of these convertible notes
("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
Convertible Note and all other amounts payable thereunder immediately due and
payable by the Company. The note holders have orally agreed to defer payments
due under the Convertible 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, the note holders will require that all amounts
in arrears will bear interest at 18%, in accordance with the terms of the note.
On February 1, 2007, due to the fact we were in default under the terms of the
Convertible Notes, we agreed to allow each of the holders of the Class A
Warrants to exercise up to 20% of their Class A Warrants at an exercise price of
$0.03 per share on a cashless exercise basis. Under this special provision, the
holders had until the close of business on Friday, February 2, 2007, to give us
an executed notice of exercise evidencing their intent to exercise the warrants
under this provision. Six of the warrant holders sent us executed notices of
exercise evidencing their intent to exercise a portion of their Class A Warrants
into a total of 2,400,000 shares of our common stock. These exercises were
executed at an
exercise price of $0.03 and on a cashless basis, therefore, after taking into
account the cashless exercise, the warrant holders received a total of 1,885,716
shares of our common stock. The issuances were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, and the note holders are
accredited investors.
We are currently in discussions with the Convertible Note holders to allow them
to exercise up to an additional 15% of the Class A Warrants at an exercise price
of $0.03 per share on a cashless basis.
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 December 31,
2006 to approximate $12,000, which is included in accounts payable and accrued
liabilities on the accompanying condensed consolidated balance sheets. The
change in fair value of $3,000 and $31,000 has been included in other income on
the accompanying condensed consolidated statements of operations for the three
and six months ended December 31, 2006, respectively. There was no change in
fair value of derivatives for the three and six months ended December 31, 2005.
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. We are currently in default on the note
and we are in discussions with the noteholder to restructure the terms of the
note.
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 December 31, 2006. We are currently in default on the note and we are
in discussions with the noteholder to restructure the remaining payments.
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 December 31, 2006. We are currently in
default on the note and we are in discussions with the noteholder to restructure
the remaining payments.
The Company maintains a revolving line of credit of $70,000 to finance the
purchase of computer equipment. The revolving line of credit provides for us to
make monthly payments of $418, including interest at a rate of approximately
14.6% and is secured by the related computer equipment. The total outstanding
balance on the revolving line of credit was $23,137 and is included in notes
payable in the accompanying condensed consolidated balance sheet at December 31,
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 Convertible Notes and 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 December 31, 2006, the Company estimated that
the fair value of the issued shares to approximate $12,000; therefore
approximately $29,000 has been recorded as an adjustment to investor relations
expense for the six months ended December 31, 2006.
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. No compensation expense has been recorded pursuant to these
option grants as the vesting contingencies have not been met.
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. No compensation expense has been recorded
pursuant to these option grants as the vesting contingencies have not been met.
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.
During the three months ended December 31, 2006, due to the reduced
profitability of our dial-up Internet access product, the underlying provider of
our Internet services began servicing our Internet customers. As a result, we
have exited the dial-up Internet access market and the underlying carrier has
forgiven the full amount outstanding to them of $28,766. A gain on
extinguishment in the same amount is included in
other income on the accompanying condensed consolidated statements of operations
and comprehensive loss. There were no significant expenses in relation to
exiting this line of business.
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 $103,000. 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. We are
currently in default on this note and we are in discussions with the noteholder
to restructure the note. The note is unsecured and no payments have been made.
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 400,000
shares pursuant to this offering, resulting in cash of $352,000, net of offering
costs of $48,000 (200,000 shares resulting in net cash of $172,000 through
December 31, 2006), 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 and six months ended
December 31, 2006 and 2005.
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------------------------
2006 2005 2006 2005
--------------------------------------------------
REVENUES
-----------------------
Telecommunications $1,095,200 $1,575,031 $2,296,069 $3,394,686
BPO
Perfexa-U.S. 199,982 97,803 401,078 164,674
Perfexa-India -- -- -- --
--------------------------------------------------
Total $1,295,182 $1,672,834 $2,697,147 $3,559,360
==================================================
COST OF SALES
-----------------------
Telecommunications $ 450,926 $ 659,889 $ 918,060 $1,510,151
BPO
Perfexa-U.S. 110,244 61,411 230,476 97,056
Perfexa-India -- -- -- --
--------------------------------------------------
Total $ 561,170 $ 721,300 $1,148,536 $1,607,207
==================================================
OPERATING INCOME/(LOSS)
-----------------------
Telecommunications $ 4,826 $ 233,909 $ 52,587 $ 243,754
BPO
Perfexa-U.S. (356,215) (496,156) (707,061) (1,165,616)
Perfexa-India 43,076 19,340 74,062 54,517
--------------------------------------------------
Total $ (308,313) $ (242,907) $ (580,412) $ (867,345)
==================================================
CAPITAL EXPENDITURES
-----------------------
Telecommunications $ 7,000 $ -- $ 28,245 $ --
BPO
Perfexa-U.S. -- -- -- --
Perfexa-India 355 1,612 1,724 1,612
--------------------------------------------------
Total $ 7,355 $ 1,612 $ 29,969 $ 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:
December 31, 2006 June 30, 2006
----------------------------------
ASSETS
------------------
Telecommunications $ 366,093 $ 517,827
BPO
Perfexa-U.S. 178,846 67,254
Perfexa-India 332,839 393,191
----------------------------------
Total $ 877,778 $ 978,272
==================================
NOTE 11 - SUBSEQUENT EVENTS:
On January 11, 2007, the Company, and The Health Network, Inc. ("THN") signed a
Letter of Intent to enter into a business combination whereby THN will own
approximately 78% and GTC will own approximately 22% of the combined "pre-money"
equity of the surviving GTC entity. It is anticipated that a definitive
agreement will be entered into during the first quarter of calendar 2007 with
the business combination to be consummated before June 30, 2007.
On January 31, 2007, the Company's Board of Directors ("Board") issued, pursuant
to the Company's 2001 Stock Incentive Plan, 100,000 shares of common stock
valued at $13,500 (the fair market value of the Company's Common Stock on the
day of grant) to The Lebrecht Group, the Company's securities counsel in
exchange for legal services rendered. The issuance was an isolated transaction
not involving a public offering pursuant to section 4(2) of the Securities Act
of 1933.
Other subsequent events are disclosed elsewhere in these notes to the condensed
consolidated financial statements.
NOTE 12 - RESTATEMENT:
Subsequent to February 21, 2007 and after the Company had filed its Quarterly
Report on Form 10-QSB for the three and six month periods ended December 31,
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
Effect of Correction of Minority Interest Reported Adjustment As Restated
- ---------------------------------------------------- --------------- ------------- -------------
At December 31, 2006
- --------------------
- Minority interest in consolidated subsidiaries $ 176,000 $ 312,976 $ 488,976
- Accumulated other comprehensive income/(loss) $ (71,026) $ 172,630 $ 101,604
- Accumulated deficit $ (17,867,247) $ (485,606) $(18,352,853)
- Total stockholder's deficit $ (6,289,512) $ (312,976) $ (6,602,488)
At December 31, 2005
- --------------------
- Minority interest in consolidated subsidiaries $ 66,421 $ 192,525 $ 258,946
- Accumulated other comprehensive income $ 133,225 $ (63,729) $ 69,496
- Accumulated deficit $ (15,016,016) $ (128,796) $(15,144,812)
- Total stockholder's deficit $ (3,294,431) $ (192,525) $ (3,486,956)
Three Months Ended December 31, 2006
- ------------------------------------
- Net loss before minority interest $ (789,740) $ (47,982) $ (837,722)
- Minority interest $ -- $ (49,726) $ (49,726)
--------------- ------------- -------------
- Net loss available to common stockholders $ (789,740) $ (97,708) $ (887,448)
- Foreign currency translation $ (9,539) $ 47,983 $ 38,444
--------------- ------------- -------------
- Comprehensive loss $ (799,279) $ (49,725) $ (849,004)
- Loss Per Share $ (0.03) $ -- $ (0.03)
Six Months Ended December 31, 2006
- ----------------------------------
- Net loss before minority interest $ (1,518,104) $ (65,021) $ (1,583,125)
- Minority interest $ -- $ (64,259) $ (64,259)
--------------- ------------- -------------
- Net loss available to common stockholders $ (1,518,104) $ (129,280) $ (1,647,384)
- Foreign currency translation $ (205,770) $ 244,174 $ 38,404
--------------- ------------- -------------
- Comprehensive loss $ (1,723,874) $ 114,894 $ (1,608,980)
- Loss Per Share $ (0.05) $ -- $ (0.05)
Three Months Ended December 31, 2005
- ------------------------------------
- Net loss before minority interest $ (740,507) $ 4,160 $ (736,347)
- Minority interest $ 79,938 $ (63,985) $ 14,953
--------------- ------------- -------------
- Net loss available to common stockholders $ (661,569) $ (59,825) $ (721,394)
- Foreign currency translation $ (18,632) $ (4,160) $ (22,792)
--------------- ------------- -------------
- Comprehensive loss $ (680,201) $ (63,985) $ (744,186)
- Loss Per Share $ (0.03) $ 0.01 $ (0.02)
Six Months Ended December 31, 2005
- ----------------------------------
- Net loss before minority interest $ (1,762,011) $ (102,610) $ (1,864,621)
- Minority interest $ 164,811 $ (147,175) $ 17,636
--------------- ------------- -------------
- Net loss available to common stockholders $ (1,597,200) $ (249,785) $ (1,846,985)
- Foreign currency translation $ (41,597) $ 4,783 $ (36,814)
--------------- ------------- -------------
- Comprehensive loss $ (1,638,797) $ (245,002) $ (1,883,799)
- Loss Per Share $ (0.05) $ (0.01) $ (0.06)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. Our
services are marketed nationwide, through sales affiliates, affinity groups,
independent sales agents and telemarketing.
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.
During the three months ended December 31, 2006, due to the reduced
profitability of our dial-up Internet access product, the underlying provider of
our Internet services began servicing our Internet customers. As a result, we
have exited the dial-up Internet access market. There were no significant
expenses in relation to exiting this line of business.
Our revenues consist of revenues from the sale of telecommunications, 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. 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 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. 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 DECEMBER 31, 2006 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2005
REVENUES - Revenues decreased by $377,652 or 22.6% to $1,295,182 in the
three months ended December 31, 2006 from $1,672,834 in the three months ended
December 31, 2005. The decrease was due to a decrease in telecommunications
revenues of $479,831, offset partially by the increase in BPO revenues of
$102,179. As of December 31, 2006, we had 50,003 telecommunications customers
with usage of long distance services of approximately 15,101,000 minutes for the
three months ended December 31, 2006 as compared with 84,992 long distance
customers as of December 31, 2005, with usage of long distance services of
approximately 20,147,000 minutes for the three months ended December 31, 2005.
We believe that the reduction in customer counts and 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 $199,982 and $97,803 for the
three months ended December 31, 2006 and 2005, respectively.
COST OF SALES - Cost of sales decreased by $160,130 or 22.2% to $561,170 in
the three months ended December 31, 2006 from $721,300 in the three months ended
December 31, 2005. The decrease was primarily due to the decrease in carrier
costs associated with decreased telecommunications service revenues of $208,963.
In addition, for the three months ended December 31, 2006, the costs associated
with BPO services increased $48,833. As a percentage of revenue, cost of sales
decreased to 43.3% from 43.1%, resulting in a gross margin of 56.7% as compared
to 56.9% for the three months ended December 31, 2006 and 2005, respectively.
Perfexa incurred third-party cost of sales of $110,244 and $61,411 for the
three months ended December 31, 2006 and 2005, respectively.
OPERATING EXPENSES - Operating expenses decreased by $152,116 or 12.7% to
$1,042,325 in the three months ended December 31, 2006 from $1,188,930 in the
three months ended December 31, 2005 primarily due to our reduction in bad debt
expense as well as a reduction in our number of employees resulting in lower
salaries.
Operating expenses, individually net of Perfexa related costs, for the
three months ended December 31, 2006 were comprised primarily of $248,336 in
payroll and related expenses paid to employees; billing related costs of
$103,032; rent of $35,740; bad debt of $5,933; depreciation expense of $8,721;
and $237,686 of other operating expenses, primarily sales commissions, internal
telephone usage, costs of third party verification for newly acquired customers,
and audit and legal costs.
Perfexa related operating expenses for the three months ended December 31,
2006 were comprised primarily of $312,525 in payroll and related expenses paid
to employees; rent of $66,960; depreciation expense of $24,926; and $153,164 of
other operating expenses, primarily, office maintenance and supplies, offset
primarily by corporate expense allocations of $154,698.
Operating expenses, individually net of Perfexa related costs, for the
three months ended December 31, 2005 were comprised primarily of $233,407 in
payroll and related expenses paid to employees; billing related costs of
$135,011; rent of $24,779; bad debt of $70,982; depreciation expense of $13,112;
and $203,942 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 December 31,
2005 were comprised primarily of $407,057 in payroll and related expenses paid
to employees; rent of $58,386; depreciation expense of $56,210; and $(8,445) of
other operating expenses, primarily corporate expense allocations, and office
maintenance and supplies.
INTEREST EXPENSE - Net interest expense increased by $3,496 to $500,856 for
the three months ended December 31, 2006 from $497,360 for the three months
ended December 31, 2005. The increase was primarily due to additional interest
associated with our default on our convertible notes.
NET LOSS - Net loss was $887,448 or $0.03 loss per common share for the
three months ended December 31, 2006, from a net loss of $721,394, or $0.03 loss
per common share, for the three months ended December 31, 2005, a change of
$166,054.
ASSETS AND LIABILITIES - Assets decreased by $100,494 to $877,778 as of
December 31, 2006 from $978,272 as of June 30, 2006. The decrease was due to net
decreases in cash of $59,617, and property and equipment of $52,332, net of
increases in accounts receivable of $4,972, prepaid expenses of $1,252, and
other assets of $5,231. Liabilities increased by $1,257,139 to $6,991,290 as of
December 31, 2006 from $5,734,151 as of June 30, 2006. The increase was due to
increases in accounts payable and accrued expenses of $585,002, primarily for
amounts owed to Sprint (associated with customer usage), payroll and payroll
related liabilities of $132,794, notes payable of $515,249, obligations under
capital lease of $19,994, and deferred income of $4,100; associated with the
decrease in telecommunications service costs, and customer services operations
as a result of the decrease in customers.
STOCKHOLDERS' DEFICIT - Stockholders' deficit increased by $1,597,892 to
$6,602,488 as of December 31, 2006 from $5,004,596 as of June 30, 2006. The
increase was attributable to a net loss of $1,647,384 in the six months ended
December 31, 2006; 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 $10,412,
net of an increase related to a cumulative translation adjustment of $38,404,
and employee share-based compensation of $21,500.
SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2005
REVENUES - Revenues decreased by $862,213 or 24.2% to $2,697,147 in the six
months ended December 31, 2006 from $3,559,360 in the six months ended December
31, 2005. The decrease was due to a decrease in telecommunications revenues of
$1,098,617, offset partially by the increase in BPO
revenues of $236,404. As of December 31, 2006, we had 50,003 telecommunications
customers with usage of long distance services of approximately 30,827,000
minutes for the six months ended December 31, 2006 as compared with 84,992 long
distance customers as of December 31, 2005, with usage of long distance services
of approximately 42,106,000 minutes for the six months ended December 31, 2005.
We believe that the reduction in customer counts and 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 $401,078 and $164,674 for
the six months ended December 31, 2006 and 2005, respectively.
COST OF SALES - Cost of sales decreased by $458,671 or 28.5% to $1,148,536
in the six months ended December 31, 2006 from $1,607,207 in the six months
ended December 31, 2005. The decrease was primarily due to the decrease in
carrier costs associated with decreased telecommunications service revenues of
$592,091 for the six months ended December 31, 2006. In addition, for the six
months ended December 31, 2006, the costs associated with BPO services increased
$133,420. As a percentage of revenue, cost of sales decreased to 42.6% from
45.2% resulting in a gross margin of 57.4% as compared to 54.8% for the six
months ended December 31, 2006 and 2005, respectively.
Perfexa incurred third-party cost of sales of $230,476 and $97,056 for the
six months ended December 31, 2006 and 2005, respectively.
OPERATING EXPENSES - Operating expenses decreased by $690,475 or 24.5% to
$2,129,023 in the six months ended December 31, 2006 from $2,819,498 in the six
months ended December 31, 2005 primarily due to the Company's shift of customer
service and information technology development to its Perfexa subsidiary.
Operating expenses, individually net of Perfexa related costs, for the six
months ended December 31, 2006 were comprised primarily of $459,615 in payroll
and related expenses paid to employees; billing related costs of $218,038; rent
of $67,057; bad debt of $17,510; depreciation expense of $20,930; and $542,272
of other operating expenses, primarily sales commissions, internal telephone
usage, costs of third party verification for newly acquired customers, and audit
and legal costs.
Perfexa related operating expenses for the six months ended December 31,
2006 were comprised primarily of $645,157 in payroll and related expenses paid
to employees; rent of $132,334; depreciation expense of $61,693; and $341,916 of
other operating expenses, primarily office maintenance and supplies, offset
primarily by corporate expense allocations of $377,499.
Operating expenses, individually net of Perfexa related costs, for the six
months ended December 31, 2005 were comprised primarily of $475,156 in payroll
and related expenses paid to employees; billing related costs of $288,008; rent
of $68,845; bad debt of $274,293; depreciation expense of $33,495; and $500,984
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 six months ended December 31,
2005 were comprised primarily of $850,065 in payroll and related expenses paid
to employees; rent of $118,926; depreciation expense of $114,425; and $95,301 of
other operating expenses, primarily corporate expense allocations, and office
maintenance and supplies.
INTEREST EXPENSE - Net interest expense increased by $11,470 to $988,885
for the six months ended December 31, 2006 from $977,415 for the six months
ended December 31, 2005. The increase was primarily due to additional interest
associated with our default on our convertible notes.
NET LOSS - Net loss decreased $199,601 to $1,647,384 or $0.05 loss per
common share for the six months ended December 31, 2006, from a net loss of
$1,846,985, or $0.06 loss per common share, for the six months ended December
31, 2005.
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 $3,100,000. 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 $102,516 for the six months ended December 31, 2006 was primarily
due to net loss of $1,647,384, change in fair value of derivative of $31,000,
and the fair market value of stock issued for services of $10,412, offset
partially by changes in operating assets and liabilities, principally increases
in accounts payable and accrued expenses of $585,002, accrued payroll and
related taxes of $132,794, and deferred income of $4,100, and a decrease in
accounts receivable and other current assets of $60,690, offset partially by the
loss on sale of equipment of $13,873; the amortization of debt discount of
$655,255; depreciation and amortization expense of $82,623; foreign currency
transaction loss of $ 70,064; the increase in bad debt expense related to
accounts receivable of $17,510, minority interest of $64,249, and $21,500
related to employee share-based compensation.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing
activities of $1,724 for the six months ended December 31, 2006 funded purchases
of property and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash provided by financing
activities of $58,743 in the six months ended December 31, 2006 was primarily
due to borrowing on notes payable of $51,710, and net proceeds from the issuance
of stock of subsidiary totaling $176,000, offset by principal repayments on
notes payable of $160,716, and principal repayments under capital lease
obligations of $8,251.
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. We are
currently in default on this note and we are in discussions with the noteholder
to restructure the remaining payments. As of the date of this filing, there is
$11,250 outstanding under the 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 default on this note and we are
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, resulting
in gross proceeds of $100,000. 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. 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. The note holders have orally agreed to defer payments due under
the Convertible 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, the note holders will require that all amounts in arrears will bear
interest at 18%, in accordance with the terms of the note.
On February 1, 2007, due to the fact we were in default under the terms of
the Convertible Notes, we agreed to allow each of the holders of the Class A
Warrants to exercise up to 20% of their Class A Warrants at an exercise price of
$0.03 per share on a cashless exercise basis. Under this special provision, the
holders had until the close of business on Friday, February 2, 2007, to give us
an executed notice of exercise evidencing their intent to exercise the warrants
under this provision. Six of the warrant holders sent us executed notices of
exercise evidencing their intent to exercise a portion of their Class A Warrants
into a total of 2,400,000 shares of our common stock. These exercises were
executed at an exercise price of $0.03 and on a cashless basis, therefore, after
taking into account the cashless exercise, the warrant holders received a total
of 1,885,716 shares of our common stock. The issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, and the
note holders are accredited investors.
We are currently in discussions with the Convertible Note holders to allow
them to exercise up to an additional 15% of the Class A Warrants at an exercise
price of $0.03 per share on a cashless basis.
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. We are currently in default
on this note and we are in discussions with the noteholder to restructure the
terms of the note.
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.
We are currently in default on this note and we are in discussions with the
noteholder to restructure the remaining payments.
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 are currently in default on this note and we are
in discussions with the noteholder to restructure the remaining payments.
We maintain a revolving line of credit of $70,000 to finance the purchase
of computer equipment. The revolving line of credit provides for us to make
monthly payments of $418, including interest at a rate of approximately 14.6%.
The total outstanding balance on the revolving line of credit was $23,137 and is
included in notes payable in the accompanying condensed consolidated balance
sheet at December 31, 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 December 31, 2006, the Company estimated the
current value of the shares to be $11,900.
On January 31, 2007, the Company's Board of Directors ("Board") issued,
pursuant to the Company's 2001 Stock Incentive Plan, 100,000 shares of common
stock valued at $13,500 (the fair market value of the Company's Common Stock on
the day of grant) to The Lebrecht Group, the Company's securities
counsel in exchange for legal services rendered. The issuance was an isolated
transaction not involving a public offering pursuant to section 4(2) of the
Securities Act of 1933.
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 December 31, 2006, we have advanced Perfexa-U.S. $7,513,687 in cash and
equipment, of which $661,504 was for the purchase of equipment and $6,852,183
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 December 31, 2006, Perfexa-U.S. has billed us $5,013,253 for such
services.
As of December 31, 2006, Perfexa-U.S. owes us $4,146,247, net of $434,690
repaid by Perfexa-U.S. from funds raised and $5,013,253 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 December 31, 2006,
Perfexa and us have advanced Shine Wireless $816 and $158,049, respectively, for
operating expenses. In addition, Perfexa and us have allocated $147,023 and
$403,593, 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 December 31, 2006, Perfexa-U.S. has
billed Shine Wireless $147,839 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 December 31, 2006, we have billed
Shine Wireless $561,642 for such services.
As of December 31, 2006, Shine Wireless owes us $406,642, net of $155,000
repaid by Shine Wireless from funds raised and $561,642 in amounts billed for
services rendered.
All significant intercompany balances and transactions have been eliminated in
consolidation.
BUSINESS COMBINATION
On January 11, 2007, the Company, and The Health Network, Inc. ("THN")
signed a Letter of Intent to enter into a business combination whereby THN will
own approximately 78% and GTC will own approximately 22% of the combined
"pre-money" equity of the surviving GTC entity. It is anticipated that a
definitive agreement will be entered into during the first quarter of calendar
2007 with the business combination to be consummated before June 30, 2007.
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 $103,000. 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. We are currently in default on this note and we are in
discussions with the noteholder to restructure the note. The note is unsecured
and no payments have been made.
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 400,000
shares pursuant to this offering, resulting in cash of $352,000, net of offering
costs of $48,000, 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. No compensation expense has
been recorded pursuant to these option grants as the vesting contingencies have
not been met.
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. No compensation expense has
been recorded pursuant to these option grants as the vesting contingencies have
not been met.
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.
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 December 31, 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 and six months ended December 31, 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 $9,250 and $21,500,
respectively, 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 December 31, 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 December 31, 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 December 31, 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 December 31, 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
There have been no other issuances of unregistered securities during the
period covered by this Report except as previously disclosed on Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As previously discussed, at December 31, 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, 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 December 31, 2006.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
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