UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The
Securities Exchange Act Of 1934
For The Quarterly Period Ended MARCH 31, 2007
[ ] 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 May 11, 2007
----------------------------------- ---------------------------
Common Stock, $0.001 par value 34,797,918
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 March 31, 2007
Condensed Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited)
for the three and nine months ended March 31, 2007 and 2006
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended
March 31, 2007 and 2006
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
ITEM 1. FINANCIAL STATEMENTS
GTC TELECOM CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
2007
-------------
ASSETS
Cash $ 500
Accounts receivable, net of allowance for doubtful accounts of
approximately $2,500 at March 31, 2007 357,312
Deposits 30,822
Prepaid expenses 47,942
-------------
Total current assets 436,576
Property and equipment, net 275,546
Other assets 81,436
-------------
Total assets $ 793,558
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 3,368,418
Accrued payroll and related taxes 600,030
Obligation under capital leases 13,436
Notes payable, net of discounts totaling
$65,198 - current portion 3,221,901
Deferred income 4,560
-------------
Total current liabilities 7,208,345
Long-term liabilities:
Obligation under capital leases, net of current portion 24,310
Notes payable, net of current portion 72,207
-------------
Total Liabilities 7,304,862
Commitments and contingencies
Minority interest in consolidated subsidiaries 692,094
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;
33,473,918 shares issued and outstanding at March 31, 2007 33,474
Additional paid-in-capital 12,139,693
Note receivable officer (60,306)
Accumulated other comprehensive income 114,704
Accumulated deficit (19,430,963)
-------------
Total stockholders' deficit (7,203,398)
-------------
Total liabilities and stockholders' deficit $ 793,558
=============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GTC TELECOM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended Nine months Ended
March 31, March 31,
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
(Restated) (Restated)
Revenues:
Telecommunications $ 1,075,765 $ 1,459,511 $ 3,371,834 $ 4,854,197
BPO services 170,205 157,875 571,283 322,549
--------------------------------------------------------------
Total revenues 1,245,970 1,617,386 3,943,117 5,176,746
--------------------------------------------------------------
Cost of sales:
Telecommunications 428,926 625,229 1,346,986 2,135,380
BPO services 116,044 75,939 346,520 172,995
--------------------------------------------------------------
Total cost of sales 544,970 701,168 1,693,506 2,308,375
--------------------------------------------------------------
Gross profit 701,000 916,218 2,249,611 2,868,371
--------------------------------------------------------------
Operating expenses:
Payroll and related 498,510 602,533 1,603,282 1,740,414
Selling, general, and administrative 653,262 701,715 1,677,513 2,383,332
--------------------------------------------------------------
Total operating expenses 1,151,772 1,304,248 3,280,795 4,123,746
--------------------------------------------------------------
Operating loss (450,772) (388,030) (1,031,184) (1,255,375)
Interest expense, net (including amortization of debt discounts) (178,863) (472,033) (1,167,748) (1,449,448)
Warrant inducement expense (387,000) - (387,000) -
Other income, net (33,632) 13,540 (43,909) 1,475
--------------------------------------------------------------
Loss before provision for income taxes and minority interest (1,050,267) (846,523) (2,629,841) (2,703,348)
Provision for income taxes 725 907 4,276 8,703
--------------------------------------------------------------
Loss before minority interest (1,050,992) (847,430) (2,634,117) (2,712,051)
Minority interest in loss (income) of consolidated subsidiaries,
net of taxes (27,118) (16,024) (91,377) 1,612
--------------------------------------------------------------
Net loss attributable to common stockholders (1,078,110) (863,454) (2,725,494) (2,710,439)
Foreign currency translation adjustment 13,100 12,955 51,504 (23,859)
--------------------------------------------------------------
Comprehensive loss $ (1,065,010) $ (850,499) $ (2,673,990) $ (2,734,298)
==============================================================
Basic and diluted net loss attributable to common
stockholders per common share $ (0.03) $ (0.03) $ (0.09) $ (0.09)
==============================================================
Basic and diluted weighted average common shares
outstanding 31,986,215 29,960,557 30,828,116 29,708,587
==============================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GTC TELECOM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months Ended
March 31,
----------------------------
2007 2006
----------------------------
(Restated)
Cash Flows From Operating Activities:
Net loss $ (2,725,494) $ (2,710,439)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 116,304 217,663
Bad debt expense 27,057 328,171
Amortization of debt discount 683,195 1,106,874
Foreign currency transaction loss 91,270 16,943
Estimated fair market value of stock issued for services 20,938 11,156
Warrant inducement expense 387,000 --
Share-based compensation 67,250 --
Change in fair value of derivative (20,000) --
Loss on sale of equipment -- 10,286
Estimated fair market value of stock issued in connection
with notes payable -- 4,705
Estimated fair market value of stock in subsidiary issued to
employees for compensation -- 93,715
Minority interest in loss of consolidated subsidiaries 91,377 (1,612)
Changes in operating assets and liabilities:
Accounts receivable and other current assets (24,803) 95,489
Accounts payable and accrued expenses 885,072 110,032
Accrued payroll and related taxes 167,967 94,981
Deferred income (40,320) --
----------------------------
Net cash used in operating activities (273,187) (622,036)
----------------------------
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets 54,671 --
Purchases of property and equipment (6,300) (15,025)
----------------------------
Net cash provided by/(used in) investing activities 48,371 (15,025)
----------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of stock of subsidiary 352,000 93,315
Principal repayments on notes payable (229,840) (334,879)
Principal payments under capital lease obligations (11,652) (7,848)
Principal borrowings on notes payable 51,710 875,425
----------------------------
Net cash provided by financing activities 162,218 626,013
Effect of exchange rate on cash (15,573) 11,048
----------------------------
Net decrease in cash (78,171) --
Cash at beginning of period 78,671 500
----------------------------
Cash at end of period $ 500 $ 500
============================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 23,164 $ 14,184
============================
Income taxes $ 4,276 $ 8,703
============================
Non-Cash Investing and Financing Activities:
During the nine months ended March 31, 2007, the Company financed the purchase
of equipment totaling $84,579 with capital leases and notes payable.
In January 2007, the Company issued 100,000 shares of common stock, valued at
$13,500, to a consultant in exchange for consultation and legal services
rendered.
In March 2006, the Company converted $140,000 of accounts payable into a term
note.
During the nine month period ended March 31, 2006, the Company financed the
purchase of equipment totaling $30,874 with notes payable.
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 March 31, 2007, the
results of operations for the three and nine months ended March 31, 2007 and
2006, and cash flows for the nine months ended March 31, 2007 and 2006.
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, included in the Company's Form 10-KSB/A filed with
the Securities and Exchange Commission on April 23, 2007. 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 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 March 31, 2007, the Company
has negative working capital of $6,771,769, an accumulated deficit of
$19,430,963, a stockholders' deficit of $7,203,398, and the Company is in
default on several notes payable (see Note 5). In addition, through March 31,
2007, 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 March 31, 2007, 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 March 31, 2007. The Company owned 96% of
Shine Wireless, Inc.'s common stock at March 31, 2007. 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 equity instruments issued.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards ("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 income 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 income 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 $51,504 and a translation loss of $23,859
for the nine months ended March 31, 2007 and 2006, 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 $91,270 and $16,943 for the nine months ended March 31, 2007
and 2006, respectively.
STOCK-BASED COMPENSATION - At March 31, 2007, 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 nine months ended March 31, 2007, 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 $10,750 and $32,250, respectively, with a
corresponding increase in the Company's loss from 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 nine months ended March 31, 2006 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 nine months ended
March
31, 2007 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 Nine months Ended
March 31, March 31,
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
Net loss attributable to common stockholders:
As reported $ (1,078,110) $ (863,454) $ (2,725,494) $ (2,710,439)
Add total stock-based employee compensation expense
included in net loss 10,750 -- 32,250 --
Deduct total stock-based employee compensation expense
determined under fair based method for all awards (10,750) (33,000) (32,250) (99,000)
-------------- -------------- -------------- --------------
Pro-forma $ (1,078,110) $ (896,454) $ (2,725,494) $ (2,809,439)
============== ============== ============== ==============
Basic and diluted net loss attributable to common stockholders
per common share
As reported $ (0.03) $ (0.03) $ (0.09) $ (0.09)
============== ============== ============== ==============
Pro-forma $ (0.03) $ (0.03) $ (0.09) $ (0.09)
============== ============== ============== ==============
LOSS PER SHARE - SFAS No. 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 March 31, 2007 and 2006, 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 nine months ended March 31,
2007 and 2006, 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 Nine months Ended
March 31, March 31,
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
Net loss attributable to common stockholders $ (1,078,110) $ (863,454) $ (2,725,494) $ (2,710,439)
==============================================================
Weighted average number of common shares outstanding 31,986,215 29,960,557 30,828,116 29,708,587
Incremental shares from the assumed exercise of dilutive stock
options and warrants -- -- -- --
--------------------------------------------------------------
Dilutive potential common shares 31,986,215 29,960,557 30,828,116 29,708,587
==============================================================
Basic and diluted net loss attributable to common stockholders per
common share $ (0.03) $ (0.03) $ (0.09) $ (0.09)
============== ============== ============== ==============
Reclassifications - Certain reclassifications have been made to the prior
periods' financial statements to conform to the current period presentation.
These reclassifications had no effect on previously reported results of
operations or accumulated deficit.
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.
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting
for Uncertainty in Income Taxes," which supplements Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes," by defining the
confidence level that a tax position must meet in order to be recognized in the
financial statements. FIN 48 requires the tax effect of a position to be
recognized only if it is "more-likely-than-not" to be sustained based solely on
its technical merits as of the reporting date. If a tax position is not
considered more-likely-than-not to be sustained based solely on its technical
merits, no benefits of the position are recognized. This is a different standard
for recognition than was previously required. The more-likely-than-not threshold
must continue to be met in each reporting period to support continued
recognition of a benefit. At adoption, companies must adjust their financial
statements to reflect only those tax positions that are more-likely-than-not to
be sustained as of the adoption date. Any necessary adjustment is recorded
directly to opening retained earnings in the period of adoption and reported as
a change in accounting principle. The Company will adopt the provisions of FIN
48 on July 1, 2007. Management is currently evaluating the effects that adopting
this standard will have on its future consolidated financial statements.
Other than the adoption of SFAS No. 123(R) (see Stock-Based Compensation above)
and SFAS No. 159 (see above), recent accounting pronouncements discussed in the
notes to the June 30, 2006 audited financial statements, filed previously with
the Securities and Exchange Commission in Form 10-KSB/A, that were required to
be adopted during the year ending June 30, 2007, did not have or are not
expected to have a significant impact on the Company's 2007 financial
statements.
NOTE 4 - RELATED PARTY TRANSACTIONS:
NOTE RECEIVABLE OFFICER
As of March 31, 2007, 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 March 31, 2007) 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 March 31, 2007.
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 March 31, 2007.
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 March 31, 2007.
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 $88,000 and is included in notes
payable in the accompanying condensed consolidated balance sheet at March 31,
2007. 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. The
total outstanding balance was $1,889,706 (not including approximately $509,000
of accrued interest payable) and is included in notes payable in the
accompanying condensed consolidated balance sheet at March 31, 2007.
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 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. Due to the repricing of the exercise
price of the warrants, the Company recorded warrant inducement expense of
$187,000. The issuances were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, and the note holders are accredited investors.
On February 22, 2007 due to the fact we continue to be 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 15% of their remaining Class A Warrants at an
exercise price of $0.01 per share on a cashless exercise basis. Under this
special provision, the holders had until the close of business on Friday,
February 26, 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 1,440,000 shares of our common
stock. These exercises were executed at an exercise price of $0.01 on a cashless
basis, therefore, after taking into account the cashless exercise, the warrant
holders received a total of 1,218,462 shares of our common stock. Due to the
repricing of the exercise price of the warrants, the Company recorded warrant
inducement expense of $2000,000. The issuances were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, and the note holders are
accredited investors.
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
warrants and common stock on the relative fair value basis. The Company has
estimated that the fair value of such derivative at March 31, 2007 to
approximate $23,000, which is included in accounts payable and accrued
liabilities on the accompanying condensed consolidated balance sheets. The
change in fair value of $11,000 and $20,000 has been included in other income on
the accompanying condensed consolidated statements of operations for the three
and nine months ended March 31, 2007, respectively. There was no change in fair
value of derivatives for the three and nine months ended March 31, 2006.
In August 2004, the Company restructured $725,000 in total principal on two past
due notes payable plus corresponding interest into a new short term note
payable, principal of $816,395. Such note required principal plus interest of
$73,350 be repaid by November 30, 2004, and the Company issued 250,000 shares of
its restricted common stock to the lender, valued at approximately $17,000
(based on the grant date fair value). In May 2005, the Company restructured such
$816,395 past-due note payable plus corresponding accrued interest and penalties
into a new long term note payable, principal amount $1,200,000. In connection
with the new debt, the Company issued 2,400,000 shares of restricted common
stock to the lender. The new note accrues simple interest in the amount of 12%
per annum. The Company is obligated to pay accrued interest monthly, but then
only if, after deducting all then current obligations, the Company at that time
has at least $300,000 in available cash. The $1,200,000 debt is convertible at
$0.13 per share, which resulted in a BCF of $185,000, which is amortized over
the life of the debt. In accordance with EITF No. 96-19, "Debtor's Accounting
for a Modification or Exchange of Debt Instruments," the $816,395 debt was
considered extinguished in this restructuring, and a loss on extinguishment of
approximately $670,000 was recorded. 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 March 31, 2007. 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 March 31, 2007. 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 $21,044 and is included in notes
payable in the accompanying condensed consolidated balance sheet at March 31,
2007. 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 March 2007, the Company's Chief Executive Officer, President, and Chief
Financial Officer cancelled a total of 770,000 incentive stock options
previously granted pursuant to the Company's 2001 Stock Incentive Plan. As a
result of the cancellation of the stock options, the Company recorded
compenstion expense of $35,000.
In February 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 a portion of their Class A Warrants on a cashless exercise
basis. After taking into account the cashless exercise, the warrant holders
received a total of 3,104,178 shares of our common stock. See Note 5 above.
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.
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 January 19, 2007, the Company estimated
that the fair value of the issued shares was $29,750; therefore approximately
$7,438 has been recorded as an adjustment to investor relations expense for the
nine months ended March 31, 2007.
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 additional 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 was obligated to a monthly minimum of $25,000 through July
26, 2006. For any period during which the Company failed to meet its monthly
minimum, the Company was 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 $120,000. 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, 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 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 second quarter of calendar 2007 with
the business combination to be consummated before September 30, 2007.
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 nine months
ended March 31, 2007 and 2006.
Three Months Ended Nine months Ended
March 31, March 31,
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
REVENUES
--------
Telecommunications $ 1,075,765 $ 1,459,511 $ 3,371,834 $ 4,854,197
BPO
Perfexa-U.S. 170,205 157,875 571,283 322,549
Perfexa-India -- -- -- --
-------------- -------------- -------------- --------------
Total $ 1,245,970 $ 1,617,386 $ 3,943,117 $ 5,176,746
============== ============== ============== ==============
COST OF SALES
-------------
Telecommunications $ 428,926 $ 625,229 $ 1,346,986 $ 2,135,380
BPO
Perfexa-U.S. 116,044 75,939 346,520 172,995
Perfexa-India -- -- -- --
-------------- -------------- -------------- --------------
Total $ 544,970 $ 701,168 $ 1,693,506 $ 2,308,375
============== ============== ============== ==============
OPERATING INCOME/(LOSS)
-----------------------
Telecommunications $ (88,161) $ 98,393 $ (35,574) $ 342,147
BPO
Perfexa-U.S. (404,738) (111,577) (1,111,799) (569,224)
Perfexa-India 42,127 (374,846) 116,189 (1,028,298)
-------------- -------------- -------------- --------------
Total $ (450,772) $ (388,030) $ (1,031,184) $ (1,255,375)
============== ============== ============== ==============
CAPITAL EXPENDITURES
-----------------------
Telecommunications $ -- $ -- $ 28,245 $ --
BPO
Perfexa-U.S. -- -- -- --
Perfexa-India 60,910 13,413 62,634 15,025
-------------- -------------- -------------- --------------
Total $ 60,910 $ 13,413 $ 90,879 $ 15,025
============== ============== ============== ==============
Identifiable assets are assigned by region based upon management responsibility.
The following table presents information about the Company's identifiable assets
by geographic region:
March 31, 2007 June 30, 2006
-------------------------------
ASSETS
------
Telecommunications $ 276,327 $ 517,827
BPO
Perfexa-U.S. 180,056 67,254
Perfexa-India 337,175 393,191
--------------- --------------
Total $ 793,558 $ 978,272
=============== ==============
NOTE 11 - SUBSEQUENT EVENTS:
In April 2007, the Company's Chief Executive Officer, President, Chief Financial
Officer exercised options to purchase a total of 574,000 shares of the Company's
common stock in lieu of salary of $87,460.
On April 13, 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.
On April 13, 2007, the Company's Board of Directors ("Board") issued, pursuant
to the Company's 2001 Stock Incentive Plan, 650,000 shares of common stock
valued at $87,750 (the fair market value of the Company's Common Stock on the
day of grant) to three (3) third party individuals, in exchange for consultation
services. 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. As a result, the
consolidated balance sheets and statements of operations were restated for
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.
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 second quarter 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 MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
REVENUES - Revenues decreased by $371,416 or 23.0% to $1,245,970 in the
three months ended March 31, 2007 from $1,617,386 in the three months ended
March 31, 2006. The decrease was due to a decrease in telecommunications
revenues of $383,746, offset partially by the increase in BPO revenues of
$12,330. As of March 31, 2007, we had 47,835 telecommunications customers with
usage of long distance services of approximately 13,918,000 minutes for the
three months ended March 31, 2007 as compared with 71,000 long distance
customers as of March 31, 2006, with usage of long distance services of
approximately 18,085,000 minutes for the three months ended March 31, 2006.
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 $170,205 and $157,875 for
the three months ended March 31, 2007 and 2006, respectively.
COST OF SALES - Cost of sales decreased by $156,198 or 22.3% to $544,970 in
the three months ended March 31, 2007 from $701,168 in the three months ended
March 31, 2006. The decrease was primarily due to the decrease in carrier costs
associated with decreased telecommunications service revenues of $196,303. In
addition, for the three months ended March 31, 2007, the costs associated with
BPO services increased $40,105. As a percentage of revenue, cost of sales
increased to 43.7% from 43.4%, resulting in a gross margin of 56.3% as compared
to 56.6% for the three months ended March 31, 2007 and 2006, respectively.
Perfexa incurred third-party cost of sales of $116,404 and $75,939 for the
three months ended March 31, 2007 and 2006, respectively.
OPERATING EXPENSES - Operating expenses decreased by $152,476 or 11.7% to
$1,151,772 in the three months ended March 31, 2007 from $1,304,248 in the three
months ended March 31, 2006 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 March 31, 2007 were comprised primarily of $209,839 in
payroll and related expenses paid to employees; billing related costs of
$126,289; rent of $49,698; bad debt of $9,547; depreciation expense of $8,128;
and $331,449 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 March 31,
2007 were comprised primarily of $288,671 in payroll and related expenses paid
to employees; rent of $68,859; depreciation expense of $25,553; and $2,710 of
other operating expenses, primarily, office maintenance and supplies, and
corporate expense allocations of $30,979.
Operating expenses, individually net of Perfexa related costs, for the
three months ended March 31, 2006 were comprised primarily of $205,762 in
payroll and related expenses paid to employees; billing related costs of
$123,992; rent of $33,550; bad debt of $53,754; depreciation expense of $12,101;
and $306,730 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 March 31,
2006 were comprised primarily of $396,771 in payroll and related expenses paid
to employees; rent of $67,037; depreciation expense of $57,642; and $47,376 of
other operating expenses, primarily corporate expense allocations, and office
maintenance and supplies.
INTEREST EXPENSE - Net interest expense decreased by $293,170 to $178,863
for the three months ended March 31, 2007 from $472,033 for the three months
ended March 31, 2006. The decrease was primarily due to notes maturing
resulting in a reduction in amortization of discounts.
NET LOSS - Net loss was $656,110 or $0.02 loss per common share for the
three months ended March 31, 2007, from a net loss of $863,454, or $0.03 loss
per common share, for the three months ended March 31, 2006, a change of
$207,344.
ASSETS AND LIABILITIES - Assets decreased by $184,714 to $793,558 as of
March 31, 2007 from $978,272 as of June 30, 2006. The decrease was due to net
decreases in cash of $78,171, property and equipment of $64,348, and accounts
receivable of $50,520, net of increases in prepaid expenses of $1,536, and other
assets of $6,789. Liabilities increased by $1,570,711 to $7,304,862 as of March
31, 2007 from $5,734,151 as of June 30, 2006. The increase was due to increases
in accounts payable and accrued expenses of $885,072, primarily for amounts owed
to Sprint (associated with customer usage), payroll and payroll related
liabilities of $167,967, notes payable of $541,399, obligations under capital
lease of $16,593, and net of a decrease in deferred income of $40,320;
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 $2,198,802 to
$7,203,398 as of March 31, 2007 from $5,004,596 as of June 30, 2006. The
increase was attributable to a net loss of $2,725,494 in the nine months ended
March 31, 2007; net of warrant inducement expense of $387,000, an increase 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 $20,938, a cumulative translation adjustment of
$51,504, and employee share-based compensation of $67,250.
NINE MONTHS ENDED MARCH 31, 2007 COMPARED TO NINE MONTHS ENDED MARCH 31, 2006
REVENUES - Revenues decreased by $1,233,629 or 23.8% to $3,943,117 in the
nine months ended March 31, 2007 from $5,176,746 in the nine months ended March
31, 2006. The decrease was due to a decrease in telecommunications revenues of
$1,482,363, offset partially by the increase in BPO revenues of $248,734. As of
March 31, 2007, we had 47,835 telecommunications customers with usage of long
distance services of approximately 44,745,000 minutes for the nine months ended
March 31, 2007
as compared with 71,000 long distance customers as of March 31, 2006, with usage
of long distance services of approximately 60,191,000 minutes for the nine
months ended March 31, 2006.
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 $571,283 and $322,549 for
the nine months ended March 31, 2007 and 2006, respectively.
COST OF SALES - Cost of sales decreased by $614,869 or 26.6% to $1,693,506
in the nine months ended March 31, 2007 from $2,308,375 in the nine months ended
March 31, 2006. The decrease was primarily due to the decrease in carrier costs
associated with decreased telecommunications service revenues of $788,394 for
the nine months ended March 31, 2007. In addition, for the nine months ended
March 31, 2007, the costs associated with BPO services increased $173,525. As a
percentage of revenue, cost of sales decreased to 42.9% from 44.6% resulting in
a gross margin of 57.1% as compared to 55.4% for the nine months ended March 31,
2007 and 2006, respectively.
Perfexa incurred third-party cost of sales of $346,520 and $172,995 for the
nine months ended March 31, 2007 and 2006, respectively.
OPERATING EXPENSES - Operating expenses decreased by $842,951 or 20.4% to
$3,280,795 in the nine months ended March 31, 2007 from $4,123,746 in the nine
months ended March 31, 2006 primarily due to our reduction in bad debt expense
as well as a reduction in our number of employees resulting in lower salaries,
depreciation as our equipment becomes fully depreciated, and billing costs
associated with the decrease in customers and customer usage.
Operating expenses, individually net of Perfexa related costs, for the nine
months ended March 31, 2007 were comprised primarily of $669,454 in payroll and
related expenses paid to employees; billing related costs of $344,327; rent of
$116,755; bad debt of $27,057; depreciation expense of $29,058; and $873,771 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 nine months ended March 31, 2007
were comprised primarily of $933,828 in payroll and related expenses paid to
employees; rent of $201,193; depreciation expense of $87,246; and $344,626 of
other operating expenses, primarily office maintenance and supplies, offset
primarily by corporate expense allocations of $346,520.
Operating expenses, individually net of Perfexa related costs, for the nine
months ended March 31, 2006 were comprised primarily of $680,918 in payroll and
related expenses paid to employees; billing related costs of $412,000; rent of
$102,395; bad debt of $328,171; depreciation expense of $45,596; and $807,590 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 nine months ended March 31, 2006
were comprised primarily of $1,059,496 in payroll and related expenses paid to
employees; rent of $185,963; depreciation expense of $172,067; and $329,550 of
other operating expenses, primarily corporate expense allocations, and office
maintenance and supplies.
INTEREST EXPENSE - Net interest expense decreased by $281,700 to $1,167,748
for the nine months ended March 31, 2007 from $1,449,448 for the nine months
ended March 31, 2006. The decrease was primarily due to additional interest
associated with our default on our convertible notes.
NET LOSS - Net loss decreased $406,945 to $2,303,494 or $0.07 loss per
common share for the nine months ended March 31, 2007, from a net loss of
$2,710,439, or $0.09 loss per common share, for the nine months ended March 31,
2006.
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 $273,187 for the nine months ended March 31, 2007 was primarily
due to net loss of $2,725,494, change in fair value of derivative of $20,000,
offset partially by changes in operating assets and liabilities, principally
increases in accounts payable and accrued expenses of $885,072, and accrued
payroll and related taxes of $167,967, offset partially by deferred income of
$40,320, and accounts receivable and other current assets of $24,803, offset
partially by the amortization of debt discount of $683,195; warrant inducement
expense of $387,000, depreciation and amortization expense of $116,304; the
increase in bad debt expense related to accounts receivable of $27,057, minority
interest of $91,377, foreign currency transaction loss of $91,270, $67,250
related to employee share-based compensation, and the fair market value of stock
issued for services of $20,938.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash provided by investing
activities of $48,371 for the nine months ended March 31, 2007 was primarily due
to proceeds from the sale of fixed assets of $54,671, offset partially by
purchases of property and equipment of $6,300.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash provided by financing
activities of $162,218 in the nine months ended March 31, 2007 was primarily due
to borrowing on notes payable of $51,710, and net proceeds from the issuance of
stock of subsidiary totaling $352,000, offset by principal repayments on notes
payable of $229,840, and principal repayments under capital lease obligations of
$11,652.
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. The total outstanding
balance was $1,889,706 (not including approximately $509,000 of accrued interest
payable) and is included in notes payable in the accompanying condensed
consolidated balance sheet at March 31, 2007.
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. Due to the repricing of the exercise
price of the warrants, we recorded inducement expense of $187,000. The issuances
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, and the note holders are accredited investors.
On February 22, 2007 due to the fact we continue to be 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 15% of their remaining Class A Warrants at an
exercise price of $0.01 per share on a cashless exercise basis. Under this
special provision, the holders had until the close of business on Friday,
February 26, 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 1,440,000 shares of our common
stock. These exercises were executed at an exercise price of $0.01 and on a
cashless basis, therefore, after taking into account the cashless exercise, the
warrant holders received a total of 1,218,462 shares of our common stock. Due to
the repricing of the exercise price of the warrants, we recorded warrant
inducement expense of $200,000. The issuances were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, and the note holders are
accredited investors.
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 $21,044 and is
included in notes payable in the accompanying condensed consolidated balance
sheet at March 31, 2007. As of the date of this report, we have made all
payments as required in the revolving line of credit.
EQUITY FINANCING - On April 13, 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.
On April 13, 2007, the Company's Board of Directors ("Board") issued,
pursuant to the Company's 2001 Stock Incentive Plan, 650,000 shares of common
stock valued at $87,750 (the fair market value of the Company's Common Stock on
the day of grant) to three third party individuals, in exchange for consultation
services. The issuance was an isolated transaction not involving a public
offering pursuant to section 4(2) of the Securities Act of 1933.
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.
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 January 19, 2007, the Company estimated the current value of the
shares to be $29,750.
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 March 31, 2007, we have advanced Perfexa-U.S. $7,833,795 in cash and
equipment, of which $661,504 was for the purchase of equipment and $7,172,291
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 March 31, 2007, Perfexa-U.S. has billed us $5,580,234 for such services.
As of March 31, 2007, Perfexa-U.S. owes us $3,967,374, net of $434,690
repaid by Perfexa-U.S. from funds raised and $5,580,234 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 March 31, 2007,
Perfexa and us have advanced Shine Wireless $816 and $166,409, 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 March 31, 2007, 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 March 31, 2007, we have billed Shine
Wireless $570,002 for such services.
As of March 31, 2007, Shine Wireless owes us $267,002, net of $303,000
repaid by Shine Wireless from funds raised and $570,002 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 second quarter of calendar
2007 with the business combination to be consummated before September 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 $120,000. 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 April 23, 2007, our Chief Executive Officer, President, Chief Financial
Officer exercised options to purchase a total of 574,000 shares of our common
stock in lieu of salary of $87,460.
On March 9, 2007, our Chief Executive Officer, President, and Chief
Financial Officer cancelled a total of 770,000 incentive stock options
previously granted pursuant to our 2001 Stock Incentive Plan. As a result oc
cancellation of the stock options, we recorded compensation expense of $35,000.
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/A, 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 March 31, 2007, 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 nine months ended March 31, 2007, 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 $10,750 and $32,250, 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 March 31, 2007, 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 March 31, 2007, 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 March 31, 2007,
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, on April 23, 2007, 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 March 31, 2007 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 March 31, 2007, we have convertible notes in
the amount of $1,889,706. 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 March 31, 2007.
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: May 21, 2007