UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number 0-23532
GLOBETEL COMMUNICATIONS CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 88-0292161
- ---------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation
or organization)
9050 Pines Blvd. Suite 110 Pembroke Pines Fl 33024
(Address of principal executive offices)
954-241-0590
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_|
As of August 8, 2005, we had issued and outstanding 77,108,788 common stock,
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 29
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2005 (Unaudited)
and December 31, 2004 (audited) 4
Consolidated Statements of Operations (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited) 8
Notes to Consolidated Financial Statements (Unaudited) 10
3
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2005 2004
- ---------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,536,535 $ 601,559
Restricted Cash 172,000 --
Accounts receivable, less allowance for doubtful accounts of $1,867,628 1,076,232 1,740,883
and $1,505,731
Advances to employees 1,500 6,885
Prepaid expenses 130,074 58,900
Inventory 60,976 63,976
Deposits on equipment purchase 104,993 88,994
Deferred tax asset, less valuation allowance of $5,962,651 and $4,529,043 -- --
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,082,310 2,561,197
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PROPERTY AND EQUIPMENT, net of accumulated depreciation of 6,382,929 445,756
$348,867 and $270,002
- ---------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Investment in unconsolidated foreign subsidiary - Consolidated Global 352,300 352,300
Investments, Ltd.
Advances to related party - HotZone Wireless 21,658 --
Intangible assets - Sanswire Networks, LLC 2,778,000 2,778,000
Deposits 52,036 50,712
Prepaid expenses -- 8,012
- ---------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 3,203,994 3,189,024
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 14,669,233 $ 6,195,977
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 783,776 $ 456,248
Current portion of capital lease obligations 2,960 2,846
Due to related party - Carrier Services, Inc. 454,922 --
Advances from unconsolidated foreign subsidiary - CGI, for Sanswire 1,454,015 --
licensing rights
Accrued officers' salaries 171,704 198,333
Accrued expenses and other liabilities 139,982 93,436
Deferred revenues 13,984 46,319
Related party payables 117,500 117,500
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,138,843 914,682
- ---------------------------------------------------------------------------------------------------------------
4
LONG-TERM LIABILITIES
Capital lease obligations -- 4,718
- ---------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES -- 4,718
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,138,843 919,400
- ---------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Series A Preferred stock, $.001 par value, 10,000,000 shares authorized;
18,000 and 96,500 shares issued and outstanding: -- 97
Additional paid-in capital - Series A Preferred stock -- 697,403
Series B Preferred stock, $.001 par value, 35,000 shares authorized;
35,000 and 0 shares issued and outstanding: 35 35
Additional paid-in capital - Series B Preferred stock 14,849,965 14,849,965
Series C Preferred stock, $.001 par value, 5,000 shares authorized;
750 shares issued and outstanding: 1 1
Additional paid-in capital - Series C Preferred stock 749,999 749,999
Series D Preferred stock, $.001 par value, 5,000 shares authorized;
1,000 shares issued and outstanding: 1 1
Additional paid-in capital - Series D Preferred stock 999,999 999,999
Common stock, $.00001 par value, 100,000,000 shares authorized;
78,713,150 and 63,389,976 shares issued and outstanding 787 634
Additional paid-in capital 51,123,240 39,889,479
Stock subscriptions receivable:
Series B Preferred Stock (6,414,800) (11,500,000)
Series D Preferred Stock (500,000) (750,000)
Common Stock (60,364) --
Accumulated deficit (49,218,473) (39,661,036)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 11,530,390 5,276,577
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,669,233 $ 6,195,977
===============================================================================================================
See accompanying notes.
5
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months For the Three Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
REVENUES EARNED $ 37,711,175 $ 7,000,419 $ 19,700,531 $ 3,790,085
COST OF REVENUES EARNED 37,066,480 6,814,712 19,782,516 3,688,110
- -----------------------------------------------------------------------------------------------------------------------
GROSS MARGIN (LOSS) 644,695 185,707 (81,985) 101,975
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EXPENSES
Payroll and related taxes 1 ,473,956 185,965 903,365 109,677
Consulting and Professional fees 4,346,320 477,608 3,062,862 245,063
Officers' and Directors' compensation 555,488 682,260 245,938 165,594
Bad debts 383,560 429,031 289,469 30,282
Investment banking and financing fees 449,550 169,066 9,835 169,066
Investor and public relations 193,597 73,904 167,867 73,904
Commissions expense - related party
Carrier Services, Inc. 724,513 -- -- --
Research and development - Sanswire 818,460 16,277 374,535 16,277
Other operating expenses 350,694 77,693 243,152 34,056
Telephone and communications 63,781 34,292 41,834 18,415
Travel and related expenses 281,266 93,873 155,086 49,981
Rents 143,251 31,858 73,292 17,867
Insurance and employee benefits 355,105 44,027 291,689 22,843
Depreciation and amortization 50,240 24,616 31,838 12,900
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- -----------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 10,189,781 2,340,470 5,890,762 965,925
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LOSS BEFORE OTHER INCOME
(EXPENSE) AND INCOME TAXES (9,545,086) (2,154,763) (5,972,747) (863,950)
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Net gains on settlement of liabilities -- 3,515 -- --
Net gain on discontinued operations -- -- -- --
Interest income 21,813 971 15,618 235
Interest expense (34,110) (10,593) (200) (3,642)
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NET OTHER INCOME (EXPENSE) (12,297) (6,107) 15,418 (3,407)
- -----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (9,557,383) (2,160,870) (5,957,329) (867,357)
INCOME TAXES
Provision for income taxes -- -- -- --
Tax benefit from utilization of net
operating loss carryforward -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (9,557,383) $ (2,160,870) $ (5,957,329) $ (867,357)
- -----------------------------------------------------------------------------------------------------------------------
6
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 70,570,901 46,761,179 75,003,707 46,670,993
DILUTED 116,114,729 46,761,179 120,547,535 46,670,993
=======================================================================================================================
NET LOSS PER SHARE
BASIC $ (0.14) $ (0.05) $ (0.08) $ (0.02)
DILUTED $ (0.08) $ (0.05) $ (0.05) $ (0.02)
=======================================================================================================================
See accompanying notes.
7
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30,
2005 2004
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,557,383) $ (2,160,870)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 86,264 107,254
Bad debt expense (383,560) 429,031
Common stock exchanged for services 3,473,899 600,566
(Increase) decrease in assets:
Accounts receivable 1,048,212 (450,360)
Advances to employees 5,385 --
Prepaid expenses (243,175) (138,358)
Inventory 3,000 (86,060)
Deposits (1,324) (33,714)
Prepaid expenses - other assets 180,012
Increase (decrease) in liabilities:
Accounts payable 327,475 (270,855)
Due to related payable - Carrier Services, Inc. 454,922 --
Accrued officers' salaries and bonuses (26,629)
Accrued expenses and other liabilities 46,545 1,411
Deferred revenues (32,335) (13,863)
Deferred revenues - related party -- (10,744)
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (4,618,692) (2,026,562)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (5,923,437) (52,758)
Advances to affiliate - HotZone Wireless (21,658) --
Deposit on equipment (16,000) (50,000)
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (5,961,095) (102,758)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock - Series A -- 1,132,060
Sale of preferred stock - Series B 5,085,200 850,000
Sale of preferred stock - Series C -- 125,000
Sale of preferred stock - Series D 250,000 --
Sale of common stock 5,102,152 --
Proceeds from convertible notes payable 1,800,000 --
Proceeds from loan payable to unconsolidated foreign subsidiary - CGI 1,514,015 --
Payments loan payable to unconsolidated foreign subsidiary - CGI (60,000) --
Proceeds from capital lease financing -- (1,322)
Payments on capital lease financing (4,604) --
Proceeds from notes and loans payable -- 375,000
Payments for Letters of Credit (172,000)
Payments on notes and loans payable -- (200,000)
Proceeds from related party payables -- 60,000
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,514,763 2,340,738
- ----------------------------------------------------------------------------------------------------------------
8
NET INCREASE IN CASH AND EQUIVALENTS 2,934,976 211,418
CASH AND EQUIVALENTS - BEGINNING 601,559 224,994
- ----------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS - ENDING $ 3,536,535 $ 436,412
================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 34,110 $ 10,540
Income taxes $ -- $ --
In addition to amounts reflected above, common stock was issued for:
Shares issued for services $ 3,473,899 $ 600,566
Shares issued for convertible notes payable $ 1,800,000 $ --
Shares issued for payment on equipment purchase $ 100,000 $ --
Conversion of Series A preferred stock to common stock $ 697,500 $ --
Payment of Series B preferred stock subscriptions receivable for $ 4,835,200 $ --
equipment
Additional shares issued to investors, pursuant to anti-dilutive
provision in agreement; 291,317 shares issued and
recorded at par value
Non-cash Financing Activities:
On April 27, 2004, $15,000,000 of Series B preferred stock was issued. A
stock subscription receivable of $6,414,800 was outstanding as of June 30,
2005.
On April 27, 2004, $1,000,000 of Series C preferred stock was issued. No
stock subscription receivable was outstanding as of June 30, 2005.
On July 28, 2004, $1,000,000 of Series D preferred stock was issued. A
stock subscription receivable of $500,000 was outstanding as of June 30,
2005
- --------------------------------------------------------------------------------
See accompanying notes.
9
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim financial statements
The accompanying unaudited financial statements reflect all adjustments, which,
in the opinion of management, are necessary for a fair presentation of the
financial position and the results of operations and cash flows for the interim
periods presented. All adjustments are of a normal recurring nature. The results
of operations for the six months ended June 30, 2005, are not necessarily
indicative of the results to be expected for the year ending December 31, 2005.
Certain financial information and footnote disclosures which are normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, but which are not
required for interim reporting purposes, have been condensed or omitted. The
accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements in its annual report on Form 10-KSB
for the year ended December 31, 2004. The accompanying financial statements
should be read in conjunction with the financial statements and notes. However,
to assist the users of these financial statements, accounting policies for
certain significant accounts and transactions are repeated below,
notwithstanding the absence of any significant changes in any policies since the
last reported period.
Basis of Presentation
The financial statements include the accounts of GlobeTel Communication
Corp.(the "Company" or "Globetel") and its wholly-owned subsidiaries, Sanswire,
LLC and Centerline Communications, LLC, and its wholly-owned subsidiaries, EQ8,
LLC, EnRoute Telecom, LLC, G Link Solutions, LLC, Volta Communications, LLC, and
Lonestar Communications, LLC, as well as the accounts GTCC de Mexico, S.A. de
C.V, which is owned 99% by GlobeTel.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform to the current year presentation.
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles in the United States requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
All material intercompany balances and transactions were eliminated in the
consolidation.
Nature of Operations
GlobeTel Communications Corp. is engaged in the business of diversified
Telecommunications and Financial Services Company. GlobeTel operates
business units in Stored Value debit cards, as a certified MasterCard
processor, the sale of Carrier grade VOIP of Long Distance to major Long
Distance re-sellers, VOIP Technology, Wireless radio technology. These
self-contained business units were developed to operate independently of
each other. Operating on a global basis, GlobeTel has, historically
focused its business development on markets outside of the United States.
Current operations and business relationships exist in Asia, Europe, South
America, Mexico and the Caribbean.
10
In addition, its subsidiary, Sanswire Networks, LLC, is developing a
National Wireless Broadband Network utilizing high-altitude airships
called Stratellites that will be used to provide wireless voice, video,
and data services.
A Stratellite (TM) is a high-altitude airship that when in place in the
stratosphere (approximately 65,000 feet) will provide a stationary
platform for transmitting various types of wireless communications
services currently transmitted from cell towers and satellites. The
Stratellite (TM) is similar to a satellite in concept, but is stationed in
the stratosphere rather than in orbit. The Stratellite (TM) will allow
subscribers to easily communicate in "both directions" using readily
available wireless devices.
Organization and Capitalization
On May 6, 2005, the Board of Directors approved a reverse split of the Company's
shares of common stock on a one for fifteen (1:15) basis, in anticipation of the
Company's move to the American Stock Exchange (Amex) on May 23, 2005. The
reverse was subsequently approved by written consent of the majority vote of its
common shares. All common stock amounts in this report have been retroactively
restated to account for the reverse stock split, unless otherwise noted.
Move To American Stock Exchange
The American Stock Exchange (Amex) granted approval for the Company to list is
shares on the exchange and the Company began trading on the Amex under the
symbol GTE on May 23, 2005.
Accounts Receivable and Allowance for Doubtful Accounts
Trade and other accounts receivable are reported at face value less any
provisions for uncollectible accounts considered necessary. Accounts receivable
primarily includes trade receivables from customers and, in connection with our
Mexico network, Mexican tax refunds receivable. The Company estimates doubtful
accounts on an item-to-item basis and includes over-aged accounts as part of
allowance for doubtful accounts, which are generally balances that are
ninety-days overdue. Bad debt expense for the six months ended June 30, 2005 and
for the year 2004 were $383,560 and $429,031, respectively.
Concentration of Credit Risk and Economic Dependence
Financial instruments, which potentially subject the Company to a concentration
of credit risk, are cash and cash equivalents and accounts receivable. The
Company currently maintains a substantial portion of its day-to-day operating
cash balances at a single financial institution. As of June 30, 2005 and
December 31, 2004, the Company had $3,364,483 and $462,690, respectively, in
excess of federally insured limits.
The Company had restricted cash of $172,000 as of June 30, 2005, for letters of
credits to suppliers.
The Company operates worldwide. Consequently, the Company's ability to collect
the amounts due from customers may be affected by economic fluctuations in each
of the geographical locations in which the Company provides its services,
principally Central and South America and Asia. The Company is dependent upon
certain major customers, key suppliers, and contractual agreements, the absence
of which may affect the Company's ability to operate its telecommunications
business at current levels.
Intangible Assets
It is the Company's policy to test for impairment of intangible assets no less
than quarterly, or when conditions occur, which may indicate an impairment. The
Company's intangible assets, which consist primarily of intellectual property,
including technology and know-how, were evaluated by management, initially and
as of June 30, 2005 and determined to have an indefinite useful life and are not
subject to amortization. The Company also tested the assets for impairment and
determined that no adjustment for impairment was necessary as of June 30, 2005
whereas the fair value of the intangible assets exceed its carrying amount.
11
NOTE 2 - ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATION OF CREDIT
RISK AND ECONOMIC DEPENDENCE
As of June 30, 2005, three customers accounted for 87% of the Company's accounts
receivable, including 56% attributable to the Brazil network customer, 24%
related to the Mexico network customer, and 7% related to the Philippines
network customer.
One customer accounted for 12% and 16% of the Company's sales for the three and
six months ended June 30, 2005, respectively, attributable to our Philippines
network (not related to the Mexico network).
Sales attributable to foreign operations for the three and six months ended June
30, 2005 were $19,700,532 or 100% and $37,451,981 or 99% of total sales,
respectively. Revenue is attributable to various foreign countries, since calls
either originate or terminate in these countries. All transactions were
accounted for in U.S. currency, and no gain or loss was recorded on fluctuations
in foreign currency.
NOTE 3 - INVESTMENT IN AND ADVANCES FROM UNCONSOLIDATED FOREIGN SUBSIDIARY - CGI
Notwithstanding the Company's 73.15% ownership interest and control of
Consolidated Global Investments (CGI)'s Board of Directors, the Company has not
consolidated CGI into its accounts, whereas CGI is a foreign subsidiary of the
Company, with no current operations. Furthermore, the primary asset of CGI as of
June 30, 2005, consists of the 10.5 (pre-split) million shares of the Company's
stock. Such consolidation is not required by generally accepted accounting
principles in the United States.
The Company's stock issuances to acquire its interest in CGI, as described in
our December 31, 2004, Form 10-KSB, were recorded at par value, and the carrying
value of the Company's investment in the unconsolidated foreign subsidiary is
$352,000, representing the sum of cash advanced by the Company to CGI through
June 30, 2005.
As of June 30, 2005, CGI's shares were not trading on the Australian Stock
Exchange, or any other exchange. However, CGI expects the shares to be re-listed
in the near-term. The Company intends to make CGI into an operating company,
with operations in Telecommunications and Sanswire projects, expanding the
Company's presence in the Asian market, and resulting in the marketability of
CGI's stock and potential income from the subsidiary. Upon the occurrence of
such events, the Company may adjust the carrying value of and/or consolidate the
subsidiary in accordance with generally accepted accounting principles used in
the United States.
In addition, the Company has agreed with the Liquidator of CGI's former UK
subsidiary to acquire telecommunication equipment owned by that former
subsidiary valued by the Company at $128,210.
Through June 30, 2005, CGI sold a total of 7 million shares (466,667 after
consideration of the 1:15 stock split) of GlobeTel stock, resulting in total net
proceeds of $1,553,961. These proceeds were advanced to GlobeTel. CGI had
acquired the shares during its course of business prior to becoming an affiliate
of GlobeTel. A net balance advanced from CGI of $1,454,015 as of June 30, 2005.
The amounts advanced from CGI to GlobeTel are to be applied towards CGI's
pending acquisition of certain licensing rights for Sanswire, the terms of which
the parties are currently negotiating. An additional 20,000 shares (post-split)
were sold in July 2005 for net proceeds of $53,184, which was also advanced to
GlobeTel.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Mexico Associate and Customer Litigation
GlobeTel is in the process of taking legal actions against its associate and
customer in Mexico, GTCC Qualnet Mexico, for non-payment of amounts owed and
non-payment to carrier (supplier / vendor) in Mexico. The customer, however, has
been cooperating and continues to work with the Company. The customer has
Mexican tax refunds receivable and the Company has filed a motion to be the
first assigned payee to receive the tax refunds which the customer expects to
receive in 2005. The customer also has telecommunications equipment and existing
working networks and customers, which the Company is taking over its operations.
The Company and its associate / customer, through the court system, are working
towards continuing the operations together reaping the full benefits of the
working network until the balance due has been paid in full.
12
As a result of the non-payment and because the outcome of the motion cannot be
determined, the Company wrote off as bad debt, accounts receivable of $938,792
for 2004 and $312,918 for the six months ended June 30, 2005, for a total
write-off of $1,251,710.
Contingent Consideration - Sanswire Asset Acquisition
In accordance with the Sanswire and Stratodyne agreements a total of 28 million
shares (before the 1:15 reverse stock split) were issued, as discussed in our
December 31, 2004, Form 10-KSB. On February 5, 2005, GlobeTel filed a
registration statement to register shares associated with these agreements. An
additional 200 million (13,333,333 after 1:15 reverse stock split) shares were
to be issued pursuant to the terms and conditions of the "successful commercial
launch" of a commercial communications platform aboard an airship developed by
Sanswire and Stratodyne by the December 31, 2005 closing date. The Stratodyne
agreement provides that 50 million (3,333,333 after 1:15 reverse stock split) of
the 200 million (13,333,333 after 1 to 15 reverse stock split) additional shares
will be issued to Stratodyne or its assignee(s) and the remaining 150 million
(10 million after 1:15 reverse stock split) shares to Sanswire Technologies,
Inc.
For purposes of the Sanswire purchase agreement, a "successful commercial
launch" was to be deemed to have occurred if all the conditions in the agreement
have been satisfied and all other conditions deemed material by GlobeTel are
satisfied, as determined by GlobeTel in its sole discretion. A "successful
commercial launch" will occur if (i) an airship (dirigible) is flown for a
period of 90 consecutive days at an approximate altitude of 70,000 feet, without
technical difficulty, (ii) a customer is able to receive both voice and Internet
services at the same time when it uses the "Stratellite service", at a
customer-premises equipment (CPE) cost of approximately $100, and (iii) at least
250,000 paying customers must be able to use the Stratellite service based on
agreed upon engineering specifications. For these purposes, it is also assumed
that the cost of each airship used in the Stratellite service will not exceed $3
million, the cost of each tracking earth station will not exceed $7 million and
that each earth station (if more than one) will have the ability to cover
several deployed airships at one time. If the cost of any airship or earth
station exceeds $3 million or $7 million, respectively, at the time that the
"commercial launch" is being implemented, the project will not be deemed to be
commercially viable and a "successful commercial launch" will not have occurred.
An amended agreement modified the definition of a "successful" commercial launch
by eliminating the CPE cost provisions described in (ii) above, and eliminated
all of the provisions of (iii) above, except that it is assumed that the cost of
each airship used in the Stratellite service will not exceed $3 million. The
other provisions above remain the same in the Stratodyne agreement.
As of to date the conditions precedent to the entitlement to the issuance of the
additional shares have not yet been fulfilled.
Due To Related Party - Carrier Services, Inc.
As described in the Company's December 31, 2004, Form 10-KSB, the Company
entered into an agreement with Carrier Services, Inc. (CSI) in 2004 whereby CSI,
upon the Company's subsidiary, Centerline, achieving $25 million in revenues,
will receive 5 million (333,333 after 1:15 reverse stock split) shares of the
company's publicly traded stock.
The required revenues were achieved in January 2005 and CSI became entitled to
the shares. The Company and CSI mutually decided to conclude their joint
business operations as of February 6, 2005, and thereafter completed reconciling
and agreeing upon the final amount due to CSI. The parties agreed that the
payment source for the shares compensation due to CSI was the proceeds from the
sale of 5 million shares of the Company stock sold by CGI and advanced to
GlobeTel, as described above. The net proceeds from the 5 million shares
(333,333 after 1:15 reverse stock split) for CSI were $1,063,686.
13
After offsetting amounts due to CSI against amounts due from CSI, consisting of
the amounts due for accounts receivable collected by CSI on behalf of Centerline
and for accounts receivable, pre-paid expenses and accounts payable assumed by
CSI, and payments made by the Company on behalf of CSI, net of any payments made
by CSI on behalf of the Company and paying CSI approximately $178,000, the
balance due to CSI was $454,922 as of June 30, 2005.
In connection with the CSI agreement, the Company recorded commission expenses
of $724,513 for the three months ended March 31, 2005 and $0 for the three
months ended June 30, 2005.
In addition, GlobeTel purchased telecommunications equipment for its Centerline
subsidiary from CSI for $500,000. As payment, 33,334 shares of GlobeTel common
stock (post-split) valued at $100,000 were issued, and the balance was paid with
cash. The purchase agreement also required GlobeTel to provide $150,000 for the
reconstruction and establishment of a new telecom switch site in Los Angeles,
CA. GlobeTel has complied with this provision.
Joint Venture Agreement - Englewood Corporation
On May 3, 2004, the Company entered into a Joint Venture Agreement and Stock
Option Plan with Englewood Corporation and respectively with Joseph Seroussi an
individual (Agreement). Under the agreement, Englewood gives to the Company all
of its current and new products and services in the telephony, financial and non
financial services fields; all market contacts and relationships and existing
and future telecommunications; non financial and financial contracts; and to
develop the processing capabilities for transactions on networks in conjunction
with ATM, debit and credit cards including but not limited to, the financial
networks of MasterCard, MasterCard International, VISA and private banking ATM
networks; along with the ability to market such products and services through
strategic partners in various countries around the world. Subject to the terms
and conditions of the Agreement, the Company will earn 100% of all revenues and
profits. During the three-year term of this Agreement Englewood at its sole
discretion may elect to have a third party independent appraiser, mutually
agreed to by both parties, determine the fair market value of the Joint Venture.
The Englewood portion of the value of the Joint Venture will be equal to 20% of
the fair market value of the Joint Venture.
At Englewood's sole discretion, Englewood may elect in whole or in part to
exchange in whole or a portion of its interest in the Joint Venture for cashless
options granted by the Company. The options granted by the company shall be at
..02 cents per share (.30 after consideration of the 1:15 stock split) of the
Company's common stock. Once exercised, the options shall be distributed to
Englewood over a three-year period in 12 equal parts. Englewood will have piggy
back registration rights for a period of two years following the grant of each
block of options.
Additionally, at the time of the Agreement, Seroussi will continue to serve as a
consultant to the Company for a minimum period of three years. Subsequently
Seroussi and the Company have entered in an Agreement whereby Seroussi has given
up his consulting contract and on October 1, 2004, joined the Company as its
Chief Technical Officer. All of the terms and conditions of the Agreement with
Englewood remain the same.
For the three and six months ended June 30, 2005, there were no transactions
requiring recording in the financial statements related to this joint venture.
Use of Proceeds from Preferred Stock Subscriptions Receivable
During the six months ended June 30, 2005, the Company received $250,000 and
equipment totaling $4,835,000 in payment of Series B Preferred Stock
subscriptions receivable for a total of $5,085,000.
During the remainder of 2005, the Company anticipates receiving the balance due
from the stock subscriptions of the $6,414,800 of which substantially all is
committed to capital expenditures for equipment for our stored value program.
Leases and Rents
The Company leases office facilities at 9050 Pines Blvd., Suite 110, Pembroke
Pines, Florida 33024, as of April 1, 2004. This lease will expire in June 2009,
and has an initial monthly rent of $5,462 with increases of 4% per year.
14
In November 2004, the Company leased additional adjacent space at the Pembroke
Pines, Florida location under the same terms and period as the existing lease,
which increased the total monthly rent to $9,186.
In January 2005, GlobeTel signed a lease agreement with the San Bernardino
International Airport Authority for hanger space at the airport in San
Bernardino, California for the purpose of assembling and storing the Stratellite
prototype. The term of the agreement is from January 15, 2005 through March 31,
2005, at a monthly lease rate of $9,767. Three months prepaid rent totaling
$29,302 was paid in December 2004. The agreement provides that with the consent
of the lessor we may remain on a month-to-month basis, and the Company remained
in the space until moving to its new facility in Palmdale, California on June 1,
2005. The lease for the Palmdale facility is for a term of three months with a
monthly rent of $19,990.
Sanswire Technologies, Inc., the company from which we purchased our Sanswire
Networks, LLC intangible assets, had an office space lease in Dekalb County,
Georgia. The lease term was from April 1, 2004 through March 31, 2005, with
monthly rent of $2,628. Although not directly obligated on this lease, the
Company paid the monthly rent from May 2004 through March 2005, whereas
employees of our subsidiary, Sanswire Networks, LLC, utilized the premises. The
employees have since vacated the premises and the lease expired as of March
2005.
NOTE 5 - STOCKHOLDERS' EQUITY
Convertible Notes Payable
In January 2005, the Company entered into financing agreements for convertible
promissory notes payable totaling $1.8 million. Net proceeds of $1,579,487 were
received, after deducting costs and expenses related to the transaction. Under
the agreements the notes were convertible into common stock of the Company at
$.08 (or $1.20 after 1:15 reverse stock split) per share. Prior to any notice of
conversion, the Company had the right to redeem the note(s) at a premium,
subject to a 3-day right to convert by the investor.
In addition, there were two types of warrants to purchase additional shares of
common stock. There were 12,500,000 Class A Warrants exercisable at $.12 (or
$1.80 after 1:15 reverse stock split) per share and Redemption Warrants were to
be provided in the event that the Company sought to redeem more than 50% of the
principal of the note. They were given on the basis of 1,111 warrants for each
$1,000 in principal the Company sought to redeem over $900,000. These Warrants
are identical to the Class A Warrants except that they have an exercise price of
$ .11 (or $1.65 after 1:15 reverse stock split) per share.
In February 2005, the note holders elected to convert all of the notes in the
amount of $1.8 million, plus accrued interest of $5,969. Pursuant to the
conversion, total shares issued were 23,074,615 (or 1,538,308 after 1:15 reverse
stock split) including 500,000 (or 33,333 after 1:15 reverse stock split) shares
as commission to a promoter.
At the same time in February 2005, the 12,500,000 Class A Warrants were
exercised at $ .11 (or $1.65 after 1:15 reverse stock split) per share, except
for one million shares at $ .1227 (or $1.84 after 1:15 reverse stock split) as
agreed by the parties. Total net proceeds of $1,442,650 were received and
commissions totaling $80,208 were paid.
Upon agreement of the parties, in lieu of the Company exercising its redemption
rights, an additional $1,237,500 was received in connection with the conversion,
increasing the per share price to $ .19 (or $2.85 after 1:15 reverse stock
split).
On February 5, 2005, GlobeTel filed a registration statement with the Securities
and Exchange Commission on Form SB-2 to register shares offered, plus additional
shares totaling 75% of the underlying convertible notes and warrants to ensure
that shares are available for conversion under all contingencies.
Private Placements
On May 9, 2005, the Company entered into a private placement with a number of
accredited investors, whereby these investors have purchased $2,357,960 of our
common shares at a price of $ .1924 ($ 2.886 after 1:15 reverse stock split),
with warrants to purchase up to an additional 8,578,856 (571,924 after 1:15
reverse stock split) shares of common stock at an exercise price of $ .3395 ($
5.0925 after 1:15 reverse stock split).
15
On May 23, 2005, the Company accepted an additional subscription from one of the
initial investors increasing their investment by $250,000 on the same terms and
conditions as all the other investors.
We received net proceeds of $2,328,481 from the above transactions, after fees
and costs of $279,471 related to the issuance.
The Company entered into a Registration Rights Agreement with the investors and
was obligated to register the shares purchased by investors and the shares
underlying the investors' warrants. The Company subsequently registered those
shares on Form S-3 which has been declared effective by the Securities and
Exchange Commission.
In May 2005, the Company issued an additional 4,369,748 (291,317 after 1:15
reverse stock split) unrestricted shares to an institutional investor that
received shares for cash in private placements during 2004, pursuant to an
anti-dilutive provision in the original agreement. These shares were recorded at
par value. As previously disclosed, Timothy M. Huff, CEO of GlobeTel, held a 40%
interest in this investment, and accordingly received 1,747,899 shares (116,526
after 1:15 reverse stock split).
Stock for Services
In March 2005, the Company issued a total of 2.4 million (or 160,000 after 1:15
reverse stock split) shares for consulting and professional services, valued at
$716,400, based on $ .2985 (or $4.4775 after 1 to 15 reverse stock split) per
share, the closing price of the shares on the date of issuance.
Also in March 2005, the Company issued 3 million (or 200,000 after 1:15 reverse
stock split) shares to a vendor for costs of sales in connection with our
Philippines network, initially valued at $450,000 based on $ .30 (or $4.50 after
1 to 15 reverse stock split) per share, the closing price of the shares on the
date of issuance. Subsequently the Company applied the $450,000 against accounts
receivable also related to the Philippines network and reduced the value of the
stock issued to par value.
In May 2005, the Company issued 250,000 (post-split) shares for consulting
services, valued at $905,000, based on $3.62 per share, the closing price of the
shares on the date of issuance. In June 2005, the Company issued an additional
350,000 (post-split) shares for consulting services, valued at $969,500, based
on $2.77 per share, the closing price of the shares on the date of issuance.
Also in June 2005, the Company issued 170,000 (post-split) shares for
professional services, valued at $493,000, based on $2.90 per share, the closing
price of the shares on the date of issuance.
Registration of Stock Options per Employee Benefit Plan
A registration statement on Form S-8 for 32,400,000 (or 2,160,000 after 1:15
reverse stock split) shares was filed in March 2005, registering 27 million (or
1.8 million after 1:15 reverse stock split) of the options issued in 2004
(allocated pro-rata among the holders of the 129,225,064 (or 8,615,004 after 1
to 15 reverse stock split) total option shares issued in 2004), plus the 5.4
million (or 360,000 after 1:15 reverse stock split) share issued in March 2005
for services above.
Bonuses To Sanswire Employees Paid with GlobeTel Stock
In March 2005, Sanswire entered into employment agreements with certain Sanswire
personnel. In order to attract key employees, and in connection with these
employment agreements, the Company recorded $300,000 in signing bonuses payable
with GlobeTel stock. In June 2005, a total of 82,541 (post-split) shares of
common stock (restricted - Rule 144), at a recorded prices of $ 3.60 per share
for 280,000 shares and $4.20 per share for 20,000 shares, were issued in payment
of this obligation.
16
Also, in June 2005, the Company issued a total of 27,231 (post-split) shares of
common stock (restricted - Rule 144), at a recorded prices averaging
approximately of $3.30 per share, for a total of $90,000, to other Sanswire
employees as a performance bonus.
NOTE 6 - PREFERRED STOCK
Conversion of Series A Preferred Shares
During the three and six months ended June 30, 2005, Series A Preferred
Shareholders converted a total of 46,750,000 (or 3,116,667 after 1:15 reverse
stock split) and 129,170,000 (or 8,611,334 after 1:15 reverse stock split)
shares, respectively, with a recorded values totaling $112,500 and $697,000,
respectively. . Series B Preferred Stock Conversion Rights
The Series B Preferred Stock subscription agreement originally provided that,
beginning on the first anniversary after the first closing date and expiring two
years thereafter, Caterham and its nominees may convert (in whole or in part)
its Series B Preferred Stock into GlobeTel common stock. Each 1,000 share
increment of Series B Preferred Stock, as a class, issued to Caterham and its
nominees shall be convertible into that number of shares of the Company's common
stock equal to 1% of GlobeTel then issued and outstanding shares (the "Aggregate
Conversion Shares") as determined on the date in which Caterham, or one of its
nominees, first converts its Series B Preferred Stock into the Company's common
stock (the "First Conversion Date"). In March 2005, the Company and Caterham
amended the agreement to revise conversion rights to provide issuance of
5,542,000 (or 369,467 after 1:15 reverse stock split) shares of GlobeTel common
stock per 1,000 Series B Preferred Shares. Each holder of the Series B Preferred
Stock will receive shares of GlobeTel aggregate conversion shares based on his
pro-rata ownership of the Series B Preferred Stock. Three years after the first
closing date, all of the shares of GlobeTel's Series B Preferred Stock which
have not converted into GlobeTel common stock will be automatically converted
into shares of GlobeTel's common stock.
No Series B Preferred shares were converted through the date of this report.
As per the original agreement, the Series B Preferred Stock issued to Caterham
and its nominees will have voting rights equal to 50% plus one share of the
Company's authorized shares of common stock for a period of three years
beginning on the first closing date and ending three years thereafter, provided
that Caterham and/or its nominee have not converted more than 15% of their
Series B Preferred Stock into the Company's common stock during this time
period. In March 2005 the Company and Caterham amended the agreement to revise
voting rights to specify and provide that at least 85% of the Series B Preferred
Stock remains outstanding, the holders of the Series B Preferred Stock, voting
as a group, will have voting rights equal to 50% plus one shares of the
Company's authorized shares of common stock for a period up to and including
April 30, 2005. Thereafter the holders shall have one vote for each share of
common stock for which the Series B Preferred Stock may be converted, regardless
of the percentage of Series B Preferred Stock outstanding.
Series C Preferred Stock Conversion Rights
The Series C Preferred Stock subscription agreement provided that the preferred
shares have not been converted, the holders of the Series C Preferred Stock,
voting as a group, will have voting rights equal to the current conversion share
amount at the time of the vote of GlobeTel's authorized shares of common stock
for a period of three years from the first closing date.
For a period of one year after the first closing date, the Series C Preferred
Stock shall not be convertible into shares of GlobeTel common stock. Beginning
on the first anniversary of the first closing date and for a period of two years
thereafter, holder may convert (in whole or part) its Series C Preferred Stock
into GlobeTel common stock. Each 1,000 shares of Series C Preferred Stock will
represent 2% of the GlobeTel common in their converted state. The Series C
Preferred Stock shall be convertible in at least 100 share increments, each
increment, at the time of conversion, will represent one tenth of 2% of the
issued and outstanding shares of GlobeTel common stock. On the third anniversary
of the First Closing Date, all shares of Series C Preferred Stock will
automatically be converted into GlobeTel common stock (to the extent such shares
have not been converted into common stock prior to this date). Except for the
aforementioned voting rights and conversion rights, each share of Series C
Preferred Stock shall have rights that are identical to that of GlobeTel's
common stock.
17
In April 2005, the parties agree to modify the conversion terms above as
follows: For a period of one year after the first closing date, the Series C
Preferred Stock shall not be convertible into shares of GlobeTel common stock.
Beginning on the first anniversary of the first closing date and for a period of
two years thereafter, the purchases may convert (in whole or part) its Series C
Preferred Stock into GlobeTel common stock in at least 250 share increments.
Each increment, at the time of conversion, will represent 7.5 million (or
500,000 shares after the 1:15 reverse stock split ) shares of GlobeTel common
stock. On the third anniversary of the First Closing Date, all shares of Series
C Preferred Stock will automatically be converted into GlobeTel common stock (to
the extent such shares have not been converted into common stock prior to this
date).
No Series C Preferred shares were converted through the date of this report.
Series D Preferred Stock Conversion Rights
On July 28, 2004, the Company agreed to sell 1,000 shares of Series D Preferred
Stock of GlobeTel Communications Corp. ("GTE") to Mitchell A. Siegel, Vice
President of Business Development of the Company. The Company intends to use $1
million of this investment for working capital and purchase of equipment
necessary to expand the Company's stored value card programs.
Mitchell A. Siegel agreed to advance $1 million to GlobeTel in four (4)
quarterly installments beginning August 2004. The agreement was subsequently
modified for the installment period to be semi-annual and to begin in October
2004. Mr. Siegel has remitted the initial $250,000 in 2004, an additional
$250,000 in June 2005, and expects to remit the remaining amounts.
Provided that the preferred shares have not been converted, the Holders of the
Series D Preferred Stock, voting as a group, will have voting rights equal to
the current conversion share amount at the time of the vote of GlobeTel's
authorized shares of common stock for a period of three years from the first
closing date.
For a period of two years after the first closing date, the Series D Preferred
Stock shall not be convertible into shares of GlobeTel common stock. Beginning
on the second anniversary of the first closing date and for a period of one year
thereafter, Mitchell A. Siegel may convert (in whole or part) its Series D
Preferred Stock into GlobeTel common stock. The 1000 shares of Series D
Preferred Stock will represent 2% of the GlobeTel common in their converted
state. The Series D Preferred Stock shall be convertible in at least 100 share
increments, each increment, at the time of conversion, will represent one tenth
of 2% of the issued and outstanding shares of GlobeTel common stock. On the
third anniversary of the first closing date, all shares of Series D Preferred
Stock owned by Mitchell A. Siegel will automatically be converted into GlobeTel
common stock (to the extent such shares have not been converted into common
stock prior to this date). Except for the aforementioned voting rights and
conversion rights, each share of Series D Preferred Stock shall have rights that
are identical to that of GlobeTel's common stock.
In April 2005, the parties agreed to modify the conversion terms above as
follows: For a period of two years after the first closing date, the Series D
Preferred Stock shall not be convertible into shares of GlobeTel common stock.
Beginning on the second anniversary of the first closing date and for a period
of one year thereafter, the purchaser may convert (in whole or part) its Series
D Preferred Stock into GlobeTel common stock in at least 250 share increments.
Each increment, at the time of conversion, will represent 8.75 million (or
583,333 shares after the 1:15 reverse stock split) shares of GlobeTel common
stock. On the third anniversary of the First Closing Date, all shares of Series
D Preferred Stock will automatically be converted into GlobeTel common stock (to
the extent such shares have not been converted into common stock prior to this
date).
No Series D Preferred shares were converted through the date of this report.
18
NOTE 7 - NET LOSS PER SHARE
Basic net loss per common share has been computed based upon the weighted
average number (after the 1:15 reverse stock split) of shares of common stock
outstanding during each period. The basic net loss is computed by dividing the
net loss by the weighted average number of common shares outstanding during each
period. The Company had 116,114,729 fully diluted shares as of June 30, 2005.
NOTE 8 - SEGMENT INFORMATION
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment sales prices are
market based. The Company evaluates performance based on operating earnings of
the respective business units, segregated into telecommunications services
(international wholesale carrier traffic, networks, prepaid calling services,
internet telephony, stored value services and Super Hubs (TM)) and the Sanswire
Stratellite project. The "Unallocated" column includes expenses incurred by and
net other income realized by the parent corporation, GlobeTel, including
corporate operating expenses, not specifically allocated to either operating
segment. Segment information for the six month period is as follows:
Telecom Sanswire Unallocated Totals
------------ ------------ ------------ ------------
Revenues Earned $ 37,711,174 $ -- $ -- $ 37,711,174
Costs of Revenues Earned 37,066,479 -- -- 37,066,479
------------ ------------ ------------ ------------
Gross Margin (Loss) 644,695 -- -- 644,695
Expenses 1,123,225 2,472,640 6,593,916 10,189,781
------------ ------------ ------------ ------------
Loss Before Other Income (Expense)
and Income Taxes (478,530) (2,472,640) (6,593,916) (9,545,086)
Other Income (Expense) -- -- (12,297) (12,297)
------------ ------------ ------------ ------------
Loss Before Income Taxes (478,530) (2,472,640) (6,606,213) (9,557,383)
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $ (478,530) $ (2,472,640) $ (6,606,213) $ (9,557,383)
============ ============ ============ ============
Segment reported was not applicable for the prior period.
NOTE 9 - SUBSEQUENT EVENTS
Joint Ventures
On July 12, 2005, the Company announced that they had entered into a joint
venture that will lead to the deployment of the Company's high altitude
communications platforms known as Stratellites, throughout Europe, the Middle
East, Africa, and the countries of the former Soviet Union. The joint venture is
between Sanswire Networks LLC, a wholly-owned subsidiary of GlobeTel, and a
venture headed by Leo A. Daly III and J. Randolph Dumas, noted international
businessmen. Sanswire will own 55% of the joint venture entity.
On July 14, 2005, the Company announced that their wholly-owned subsidiary,
Sanswire Networks, LLC has entered into a Joint Venture Agreement to deploy
Stratellites throughout the country of Colombia. The agreement with
Florida-based Apogeo Enterprises Corporation calls for a total of five
Stratellites to be launched over the Latin American country to build a wireless
broadband network that would be the first of its kind in the world.
19
Cooperative Research and Development Agreement
On July 13, 2005, the Company announced that their wholly-owned subsidiary
Sanswire Networks, LLC has signed a Cooperative Research and Development
Agreement (CRDA) with Proton Energy Systems, Inc., a subsidiary of Distributed
Energy Systems Corp. Pursuant to the agreement, Proton will provide assistance
in developing a regenerative fuel cell energy storage system for Sanswire's high
altitude Remotely Operated Airship (ROA), or Stratellite. Under the agreement,
Proton will provide prototype regenerative fuel cell (RFC) equipment and
specialized technical support to Sanswire for the Company's development and
flight-testing of the Stratellite via a series of task agreements. Sanswire will
provide the airship platform for testing and engineering inputs to tailor the
RFC solution.
Licensing Agreement
On July 18, 2005, the Company announced that it has entered into a licensing
agreement with RapidMoney Corporation that allows GlobeTel to use and modify the
RapidMoney system. The Company, along with its venture partner, Grupo Ingedigit
of Caracas, Venezuela (GI), will incorporate the current RapidMoney(R) funds
transfer software applications for merchant Point of Sale (POS) terminals into
the our Stored Value International Remittance Services. Furthermore, this
license allows the Company and GI to develop additional applications based on
the RapidMoney(R) system that will be deployed in the retail locations which are
offering their Stored Value Card Program services. GlobeTel expects to test the
new funds transfer services in August at over 2,500 merchant POS locations.
Located in San Antonio, Texas, RapidMoney Corporation developed a system for
personal money transfers on easy-to-use POS terminals.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Update on Activities During the Three Months Ended June 30, 2005
American Stock Exchange
On May 23, 2005, we began trading our stock, after a 1:15 reverse split, on the
American Stock Exchange under our new symbol, GTE. Concurrently, we appointed J.
Streicher & Co. as specialist for GTE shares on the American Stock Exchange.
Founded in 1910, J. Streicher & Co. LLC is a prominent, well capitalized, highly
rated, old-line Specialist firm, which makes markets in securities listed on the
American Stock Exchange. J. Streicher & Co. LLC is a founding member of the
American Stock Exchange and currently makes markets in some 42 diverse equity
securities, such as Crystallex International Corp., DHB Industries, Inc., Pain
Care Holdings, Inc., and Pioneer Drilling Co.
Russell Indexes
On June 24, 2005, we joined the new Russell Microcap(TM) Index as well as the
small-cap Russell 2000(R) Index when the Russell Investment Group reconstituted
its family of U.S. indexes. Russell, a global leader in multi-manager investment
services, provides investment products and services in more than 39 countries.
Russell manages more than $135 billion in assets and advises clients worldwide
representing $2.3 trillion. Founded in 1936, Russell is a subsidiary of
Northwestern Mutual and is headquartered in Tacoma, Wash., with additional
offices in New York, Toronto, London, Paris, Singapore, Sydney, Auckland and
Tokyo.
Los Angeles Telecommunications Facility
On July 8, 2005, we announced that we have upgraded our telecommunications
center in Los Angeles by acquiring additional state-of-the-art
telecommunications equipment and that we have completed our move to a larger
facility. The new facility has over 6,000 square feet and has the capability of
terminating over 500 million VoIP/TDM minutes per month. In addition to the
ability to accommodate the company's current wholesale carrier traffic, the Los
Angeles network will accommodate the expected volume from the pre-paid calling
card function of its Stored-Value Card program and IP phone operations and still
has expansion capabilities to enable the handling of the wireless traffic from
the Company's Stratellite and HotZone Wireless operations.
20
NASA Agreement and Stratellite Project
On June 13, 2005, we announced that we signed a formal agreement with the
National Aeronautics and Space Administration (NASA). The terms of the agreement
with NASA's Dryden Flight Research Center at Edwards Air Force Basis in
California establish that NASA Dryden will provide assistance in our development
and flight testing of the Stratellite, our high altitude Remotely Operated
Airship (ROA). Under the agreement, NASA Dryden will provide specialized
technical support to our subsidiary, Sanswire Networks LLC, for its development
and flight testing of the Stratellite via a series of task agreements. It is
expected that the first task agreement will call for NASA Dryden to develop
piloted and unpiloted simulations of the Stratellite airship. The simulation
would incorporate the airship's aerodynamics, propulsion and control features
based upon data provided to NASA Dryden by Sanswire. We plan to provide NASA and
other agencies access to the Stratellite for the installation, integration, and
development of NASA-sponsored sensors and other projects. The agreement between
NASA Dryden is authorized under the Space Act of 1958 under which NASA was
established.
We have successfully completed our planned tests at our prior facility in San
Bernardino, CA and on June 1, 2005, our wholly-owned subsidiary, Sanswire
Networks LLC announced that it has finished its planned move from San Bernardino
to Palmdale, California, which borders the air space at Edwards Air Force Base,
in preparation for our high altitude tests that are planned to be carried out
later this year at Edwards Air Force Base. Continued tests will be focused on
the control systems, power systems and high altitude performance criteria. The
new facilities are approximately 66,600 square feet.
HotZone Wireless, LLC Asset Acquisition
On June 6, 2005, we announced that we were acquiring the assets of HotZone
Wireless, LLC (HotZone). HotZone is an advanced developer of WIMAX and extended
range WIFI Systems with operations in the United States and Europe. The
acquisition was paid primarily in our shares and cash. The agreement calls for
certain performances by the sellers to achieve the full consideration. HotZone
is currently developing WIMAX wireless systems for Sanswire's High Altitude
Airship called a Stratellite(TM). This WIMAX system will provide radio
technology for the wireless communications that will cover significant
geographic areas up to 120,000 square miles. The acquisition of HotZone will
provide advanced wireless products and services for terrestrial wide area
networks covering rural and city areas. Upon deployment of the Stratellite(TM),
on a region-by-region and country-by-country basis the communications technology
will deliver high speed voice, data and rich streaming content, as well as other
communications possibilities.
HotZone Wireless develops, manufactures, and installs wireless metropolitan
systems. The main products are wireless routers and customer premises devices.
HotZone networks are operational in several cities in Europe and in the United
States. The HotZone product line includes wireless routers which cover complete
metropolitan areas or regions with wireless services as WiFi (802.11), WIMAX
(802.16), and wireless VoIP services using DECT and PHS Handsets. HotZone
provides the only available integrated outdoor system covering all these
protocols with a single system. HotZone also implements innovative DVB-RCT
Technologies enabling wireless transmission of voice, data and real-time video.
Primary consideration for the purchase is 666,667 GlobeTel common shares paid
yearly for three years upon the successful completion of certain developmental
milestones. Additionally, the HotZone staff are entering into employment
agreements with us.
Forward-Looking Statements
Certain information included in this Form 10-Q and other materials filed or to
be filed by GlobeTel Communications Corp. ("GlobeTel," "we" "us" or "ours") with
the Securities and Exchange Commission as well as information included in oral
or written statements made from time to time by us, may contain forward-looking
statements about our current and expected performance trends, business plans,
goals and objectives, expectations, intentions, assumptions and statements
concerning other matters that are not historical facts. These statements may be
contained in our filings with the Securities and Exchange Commission, in our
press releases, in other written communications, and in oral statements made by
or with the approval of one of our authorized officers. Words or phrases such as
"believe", "plan", "will likely result", "expect", "intend", "will continue",
"is anticipated", "estimate", "project", "may", "could", "would", "should" and
similar expressions are intended to identify forward-looking statements. These
statements, and any other statements that are not historical facts, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, 15 U.S.C.A. Sections 77Z-2 and 78U-5 (SUPP.
1996), as codified in Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended from time to time (the
"Act").
21
Those statements include statements regarding our intent, belief or current
expectations, and those of our officers and directors and the officers and
directors of our subsidiaries as well as the assumptions on which such
statements are based. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results and the timing of certain
events may differ from those contemplated by such forward-looking statements.
Although we believe that the assumptions underlying forward-looking statements
are reasonable, any of the assumptions could be incorrect, and there can be no
assurance that forward-looking statements will prove to be accurate.
Forward-looking statements speak only as of the date on which they are made. We
do not undertake any obligation to modify or revise any forward-looking
statement to take into account or otherwise reflect subsequent events, or
circumstances arising after the date that the forward-looking statement was
made.
General
Three months ended June 30, 2005, ("2005" or "the current period") compared to
the three months ended June 30, 2004 ("2004" or "the prior period").
Results of Operations for the Three Months Ended June 30, 2005 and 2004
Revenues. During the current period, our gross sales were $19,700,531,
representing an increase of 419.8% over the prior period when our gross sales
were $3,790,085. Our revenues increased primarily due to revenues from our
subsidiary, Centerline and its subsidiaries, which recorded consolidated
revenues of $17,051,915 (or 86.6% of total revenues), consisting primarily of
wholesale traffic revenues (telecommunications minutes) and related network
management fees. The remainder of our revenues continued to be predominantly
from telecommunications minutes going through our Philippines network, which
generated $2,397,961 (or 12.2% of gross revenues).
Cost of Sales. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, collocations costs, technical
services, wages, equipment leases, and the costs of telecommunications
equipment. We had cost of sales of $19,782,516 for the current year, compared to
$3,688,110 for the prior period. We expect cost of sales to increase in future
periods to the extent that our sales volume increases.
Gross Margin (Loss). Our gross loss was $81,985 or less than 1% for the current
period, compared to gross margin of $101,975 or 2.7% of total revenues in the
prior period, a decrease of $183,960 or 180.4%. The decrease is primarily due to
the fact that there was lower margin on resale of wholesale minutes related to
the increased cost of the minutes to terminate, especially the Mexico network,
where our margin was less than two percent, and initial activities of
Centerline, where our gross margin was minimal or zero in the prior period. We
expect to derive higher margins once we formally take over the operations of our
customer's Mexico network as described in Part II, Item 1 "Legal Proceedings,"
and commence sales directly to the retail market.
Operating Expenses. Our operating expenses consist primarily of payroll and
related taxes, professional and consulting services, expenses for executive and
administrative personnel and insurance, bad debts, investment banking and
financing fees, investor and public relations, research and development, sales
commissions telephone and communications, facilities expenses, travel and
related expenses, and other general corporate expenses. Our operating expenses
for the current period were $5,890,762 compared to prior period operating
expenses of $965,925 an increase of $4,924,837 or 510%. The increase is
primarily due to the following.
Consulting and professional fees increased to $3,062,862 (including non-cash
compensation of $2,367,500), from $245,063 in the prior period.
In addition, employee payroll and related taxes for the current period were
$903,365 compared to $109,677, an increase of $793,688 or 723.7%. This increase
was due to expansion of our operations, facilities and workforce, related to
additional services required to develop and expand our geographical and product
markets and projects, including, primarily, our Sanswire Project, as well as our
Stored Value Program, and international markets, primarily in Asia and
Australia, as well as increased professional fees in maintaining and expanding a
public company, including our move to the American Stock Exchange.
22
We incurred $374,535 of research and development costs for our Sanswire project
- - development of the Stratellite during the current period, compared to $16,277
in the prior year, whereas the Sanswire assets were acquired in April 2004.
Loss from Operations. We had an operating loss of $5,972,747 for the current
period as compared to an operating loss of $863,950 for the prior period,
primarily due to increased operating expenses as described above, including the
expansion of our various programs. We expect that we will continue to have
higher operating costs as we increase our staffing and continue expanding
operations, programs, projects and operating costs related to our newly acquired
subsidiaries.
Net Loss. We had a net loss of $5,957,329 in the current period compared to a
net loss of $867,357 in the prior period. The net loss is primarily attributable
to the increase in the operating expenses as discussed above.
Results of Operations for the Six Months Ended June 30, 2005 and 2004
Revenues. During the current period, our gross sales were $37,711,175,
representing an increase of 438.7% over the prior period when our gross sales
were $7,000,419. Our revenues increased primarily due to revenues from our
subsidiary, Centerline and its subsidiaries, which recorded consolidated
revenues of $30,451,641 (or 80.8% of total revenues), consisting primarily of
wholesale traffic revenues (telecommunications minutes) and related network
management fees. The remainder of our revenues continued to be predominantly
from telecommunications minutes going through our Philippines network, which
generated $5,889,931 (or 15.7% of gross revenues).
Additional revenues generated included $700,000 from a network built for an
international client (netting in $35,000 of gross profit, after costs of
$665,000).
Cost of Sales. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, collocations costs, technical
services, wages, equipment leases, and the costs of telecommunications
equipment. We had cost of sales of $37,066,480 for the current year, compared to
$6,814,712 for the prior period. We expect cost of sales to increase in future
periods to the extent that our sales volume increases.
Gross Margin. Our gross margin was $644,695 or 1.7% for the current period,
compared to $185,707 or 2.7% of total revenues in the prior period, an increase
of $458,988 or 247.2%. The added margin is primarily due to the increase in
wholesale minutes that was passed. The decrease as a percentage of total revenue
was a result of lower margins, especially the Mexico network, where our margin
was less than two percent, and initial activities of Centerline, where our gross
margin was minimal or zero in the prior period. We expect to derive higher
margins once we formally take over the operations of our customer's Mexico
network as described in Part II, Item 1 "Legal Proceedings," and commence sales
directly to the retail market.
Operating Expenses. Our operating expenses consist primarily of payroll and
related taxes, professional and consulting services, expenses for executive and
administrative personnel and insurance, bad debts, investment banking and
financing fees, investor and public relations, research and development, sales
commissions telephone and communications, facilities expenses, travel and
related expenses, and other general corporate expenses. Our operating expenses
for the current period were $10,189,781 compared to prior period operating
expenses of $2,340,470, an increase of $7,849,311 or 335.4%. The increase is
primarily due to the following.
Consulting and professional fees increased to $4,346,320 (including non-cash
compensation of $3,533,900), from $477,608 in the prior period. Investment
banking and financing fees increased to $499,550 in the current period, related
to obtaining funding of approximately $4.8 million, compared to $169,066 in the
prior period, as well as increased professional fees in maintaining and
expanding a public company.
23
In addition, employee payroll and related taxes for the current period were
$1,473,956 (including non-cash compensation of $390,000) compared to $185,965,
an increase of $1,287,991 or 692.6%. This increase was due to expansion of our
operations, facilities and workforce, related to additional services required to
develop and expand our geographical and product markets and projects, including
our Stored Value Program, our Sanswire Project, and international markets,
primarily in Asia and Australia,.
We incurred $818,460 of research and development costs for our Sanswire project
- - development of the Stratellite during the current period, compared to $16,277
in the prior year, whereas the Sanswire assets were acquired in April 2004.
We incurred $724,513 of sales commissions for our Centerline operations during
the current period, compared to none in the prior year, whereas the Centerline
operations began after the prior period in 2004.
Loss from Operations. We had an operating loss of $9,545,086 for the current
period as compared to an operating loss of $2,154,763 for the prior period,
primarily due to increased operating expenses as described above, including the
expansion of our various programs. We expect that we will continue to have
higher operating costs as we increase our staffing and continue expanding
operations, programs, projects and operating costs related to our newly acquired
subsidiaries.
Net Loss. We had a net loss of $9,557,383 in the current period compared to a
net loss of $2,160,870 in the prior period. The net loss is primarily
attributable to the increase in the operating expenses as discussed above.
Liquidity and Capital Resources
Assets. At June 30, 2005, we had total assets of $14,669,233 compared to total
assets of $7,437,614 as of June 30, 2004.
The current assets at June 30, 2005, were $5,082,310, compared to $3,843,586 at
June 30, 2004. As of June 30, 2005, we had $3,536,535 of cash and cash
equivalents compared to $436,412 as of June 30, 2004. The increase in cash and
cash equivalents is primarily related to private placement funding during the
current period.
Our net accounts receivable were $1,076,232 as of June 30, 2005, compared to
$3,114,756 at the same point in 2004. Approximately 87% of the June 30, 2005,
receivables were attributable to three customers, including 24% or $382,160 (net
of allowance) related to the Mexico network, 56% or $607,251 (net of allowance)
related to the Brazil network and 7% or $77,102 related to the Philippines
network. We have increased our allowance for doubtful accounts by $383,560 for
the year.
Other current assets included $130,074 in prepaid expense, primarily prepaid
minutes with carriers, compared to $205,558_ in 2004; $60,976 inventory of IP
Phones, compared to $86,060 in the prior year; and deposits on equipment
purchases and other current assets of $104,993 compared to none in 2004.
Other assets were $3,203,994 as of June 30, 2005, compared to $3,180,149 as of
June 30, 2004, reflecting no substantial changes. These amount, as of both
periods, include of the Sanswire intangible assets valued at $2,778,000 and
investment in CGI, our unconsolidated foreign subsidiary, totaling $352,300.
Liabilities. At June 30 2005, we had total liabilities of $3,138,844 compared to
total liabilities of $1,480,314 as of June 30, 2004.
The current liabilities at June 30, 2005 were $3,138,843 compared to $1,480,314
at June 30, 2004, an increase of $1,658,530. The increase is principally due to
$1,454,015 due to CGI, our unconsolidated foreign subsidiary, contractual
obligations netting $454,922 due to CSI. There were no significant long-term
liabilities as of June 30, 2005 and 2004.
Cash Flows. Our cash used in operating activities was $4,618,692 for the current
period, compared to $2,026,562 for the prior period. The increase was primarily
due to the increased level of operations and operating activities and changes in
our current assets and liabilities.
24
Our cash used in investing activities includes acquisitions of property and
equipment totaling $5,923,437, relating primarily to our expanding
telecommunication program, compared to $52,758 in the prior year.
Net cash provided by financing activities was $13,514,763, principally from
proceeds from the sale of preferred stock of $5,335,200 for the current period,
compared to $2,107,060 in the prior period; proceeds totaling $1,800,000 (before
related costs) for convertible notes payable; $5,102,152 from sales of common
stock, relating to the exercise of warrants by convertible note holders and
private placements; and proceeds of $1,514,015 from the loan payable to CGI.
In order for us to pay our operating expenses during 2005, including certain
operating expenses of our wholly-owned subsidiaries, Sanswire and Centerline,
and the overall expansion of our operations, we raised approximately $13.75
million during the current period.
As detailed in the financial statements, we have stock subscriptions receivable
for preferred shares that will raise a total of approximately $7 million in cash
in 2005, primarily in the form of financing provided by Series B preferred
shareholders. Of these funds, $5 million is committed to the purchases of
equipment (two data switches) for our stored value program. With this funding,
as well as the additional funding received to-date in 2005, we will have the
existing capital resources necessary to fund our operations and capital
requirements as presently planned over the next twelve months. However, if we do
not receive the full amount, then we may not have the existing capital resources
or credit lines available that are sufficient to fund our operations and capital
requirements and therefore we may have to pursue additional funds through the
issuance of debt and/or equity instruments.
Furthermore, the capital markets have responded favorably to our growth and
business strategies through to-date in 2005, particularly as a result of our
Stratellite project, and increased investment is anticipated in the near term.
As reflected in the accompanying financial statements, during the six month
period ended June 30, 2005, we had a net loss of $9,557,383 compared to a net
loss of $2,160,870 during the prior period. Consequently, there is an
accumulated deficit of $49,218,473 at June 30, 2005, compared to $28,654,792 at
June 30, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of June
30, 2005. In designing and evaluating the Company's disclosure controls and
procedures, the Company and its management recognize that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, the Company's management was
required to apply its reasonable judgment. Furthermore, in the course of this
evaluation, management considered certain internal control areas, including
those discussed below, in which we have made and are continuing to make changes
to improve and enhance controls. Based upon the required evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that as of June 30,
2005, the Company's disclosure controls and procedures were effective (at the
"reasonable assurance" level mentioned above) to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
25
From time to time, the Company and its management have conducted and will
continue to conduct further reviews and, from time to time put in place
additional documentation, of the Company's disclosure controls and procedures,
as well as its internal control over financial reporting. The Company may from
time to time make changes aimed at enhancing their effectiveness, as well as
changes aimed at ensuring that the Company's systems evolve with, and meet the
needs of, the Company's business. These changes may include changes necessary or
desirable to address recommendations of the Company's management, its counsel
and/or its independent auditors, including any recommendations of its
independent auditors arising out of their audits and reviews of the Company's
financial statements. These changes may include changes to the Company's own
systems, as well as to the systems of businesses that the Company has acquired
or that the Company may acquire in the future and will, if made, be intended to
enhance the effectiveness of the Company's controls and procedures. The Company
is also continually striving to improve its management and operational
efficiency and the Company expects that its efforts in that regard will from
time to time directly or indirectly affect the Company's disclosure controls and
procedures, as well as the Company's internal control over financial reporting.
For the year ended December 31, 2004, the Company's independent auditors, Dohan
and Company, CPA's, P.A. ("Dohan") advised management and the Board of Directors
by a letter dated March 19, 2005 that, in connection with its audit of the
Company's consolidated financial statements for the year ended December 31,
2004, it noted certain matters involving internal control and its operation that
it considered to be reportable conditions under standards established by the
American Institute of Certified Public Accountants. Reportable conditions are
matters coming to an independent auditors' attention that, in their judgment,
relate to significant deficiencies in the design or operation of internal
control and could adversely affect the organization's ability to record,
process, summarize, and report financial data consistent with the assertions of
management in the financial statements. Further, a material weakness is a
reportable condition in which the design or operation of one or more internal
control components does not reduce to a relatively low level the risk that
errors or fraud in amounts that would be material in relation to the financial
statements being audited may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions. Dohan
advised management and the Board of Directors that it considered the items that
constitute material weaknesses in internal control and operations. Dohan noted
that these matters were considered by them during their audit and did not modify
the opinion expressed in its independent auditor's report dated March 19, 2005.
The Company is in the process of assessing the findings of its independent
auditors. As noted above, however, the Company has made and is continuing to
make changes in its controls and procedures, including its internal control over
financial reporting, aimed at enhancing their effectiveness and ensuring that
the Company's systems evolve with, and meet the needs of, the Company's
business. As further noted above, the Company is also continually striving to
improve its management and operational efficiency and the Company expects that
its efforts in that regard will from time to time directly or indirectly affect
the Company's controls and procedures, including its internal control over
financial reporting.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation. We have established a financial reporting controls
committee, which meets quarterly to address corporate financial issues and has
added two more employees to its accounting staff, including an experienced
full-time Controller. Furthermore, we are in the process of restructuring
departmental responsibilities and instituting a budgeting process.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Former Consultants
We are a defendant in two lawsuits filed by Matthew Milo and Joseph Quattrocchi,
two former consultants, filed in the Supreme Court of the State of New York
(Richmond County, Case no. 12119/00 and 12118/00). These matters were
subsequently consolidated as a result of an Order of the court and now bear the
singular index number 12118/00. The original lawsuits were for breach of
contract. The complaint demands the delivery of 10,000,000 shares of ADGI stock
to Milo and 10,000,000 to Quattrocchi. GlobeTel was entered into the action, as
ADGI was the predecessor of the Company. The suit also requests an accounting
for the sales generated by the consultants and attorneys fees and costs for the
action.
The lawsuits relate to consulting services that were provided by Mr. Milo and
Mr. Quattrocchi and a $50,000 loan advanced by these individuals, dated May 14,
1997, of which $35,000 has been repaid.
With regard to the issues related to original index number 12119/00, as a result
of a summary judgment motion, the plaintiffs were granted a judgment in the sum
of $15,000. The rest of the plaintiff's motion was denied. The court did not
order the delivery of 24,526,000 shares of ADGI common stock as the decision on
that would be reserved to time of trial.
An Answer and Counterclaim had been interposed on both of these actions. The
Answer denies many of the allegations in the complaint and is comprised of
eleven affirmative defenses and five counterclaims alleging damages in the sum
of $1,000,000. The counterclaims in various forms involve breach of contract and
breach of fiduciary duty by the plaintiffs.
However, we cannot project an outcome with any certainty. We have not entered
into any settlement negotiations with Mr. Milo and Mr. Quattrocchi and we do not
believe that we will be materially adversely affected by the outcome of this
proceeding.
Presently, we are continuing our defense and counterclaims in this matter.
Mexico Associate and Customer
We are taking legal actions against our associate and customer in Mexico for
non-payment of the amount they owe the company. This customer has substantial
assets, including telecommunications equipment, existing working networks and
Mexican tax refunds which they have proposed to turn over to us. The motion
filed in the Mexican courts was necessary to formally request that we become the
assigned payee of the tax refund receivable and formally secure the equipment
and to take over the operations of the existing networks.
In February 2005, the customer agreed that proceeds from the network operations
will be paid totally to GlobeTel, including the customer's portion of the profit
sharing, until the amount they owe us has been fully paid. Upon full payment, we
will begin the sharing profits again in accordance with the contract.
As of the date of this report, we have taken possession and control of the
network operations, along with the substantial portion of the related equipment,
and we anticipate receiving positive cash flow from the network operations, as
well as receipt of the Mexican tax refunds, later in 2005.
This situation with our customer has caused us to record an allowance for bad
debt expense of $1,251,710 and $938,782 through June 30, 2005 and December 31,
2004, respectively. We are not certain of the amounts that, ultimately, we will
realize from our Mexico associate.
Patent Infringement Lawsuit
A case was filed against us for patent infringement. On or about September 1,
2004, Alexsam, Inc. (Alexsam) filed an action for patent infringement against
the company alleging the stored value card and service we are planning to offer
infringes one or more of U.S. Patent No. 6,000,608 (the 608 patent) and U.S.
Patent No. 6,189,787 (the 787 patent), allegedly owned by Alexsam. The actions
were filed in the United States District Court, Eastern District of Texas,
styled Alexsam, Inc. vs. Datastream Card Svc., et al. Case Number 2:03-cv-337.
On January 14, 2005, the court dismissed the lawsuit against the company.
27
On February 8, 2005, we filed suit against Alexsam and Robert Dorf (collectively
the defendants) in the United States District Court for the Southern District of
Florida, Civil Action No. 05-60201, seeking a declaratory judgment from the
court that the 608 and 787 patents are invalid, not enforceable and will not be
infringed by our stored value card offering. We are also seeking recovery for
damages brought on us by Alexsam, the owners of Alexsam and Dorf for breach of
confidential disclosure and trust; intentional interference with business
advantage; and for unfair competition under Sec. 501.204 of the Florida
Statutes. We are currently engaged in settlement discussions with the defendants
and have not yet formally served any of the defendants. At this stage of the
proceeding, our attorneys cannot predict the outcome or the range of possible
loss or gain to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 9, 2005, the Company entered into a private placement with a number of
accredited investors, whereby these investors have purchased $2,357,960 in our
common shares at a price of $ .1924 ($ 2.886 after 1:15 reverse stock split),
with warrants to purchase up to an additional 8,578,856 (571,924 after 1:15
reverse stock split) shares of common stock at an exercise price of $ .3395 ($
5.0925 after 1:15 reverse stock split).
On May 23, 2005, the Company accepted an additional subscription form one of the
initial investors increasing their investment by $250,000 on the same terms and
conditions as all the other investors.
t 0 0 We received net proceeds of $2,328,481 from the above transactions, after
fees and costs of $279,471 related to the issuance.
The Company entered into a Registration Rights Agreement with the investors and
was obligated to register the shares purchased by investors and the shares
underlying the investors' warrants. The Company filed a registration statement
on Form S-3 pursuant to this obligation and the registration statement has been
declared effective by the Securities and Exchange Commission.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 6, 2005, by written consent of the majority vote of its shares, the Board
of Directors approved reverse split of our shares of common stock on a one for
fifteen (1:15) basis, in anticipation of our stock moving to the American Stock
Exchanges on May 23, 2005.
Item 5. Other Information
Form 8-K.
May 10, 2005 describing the private placement of company stock
May 25, 2005 updating the May 10, 2005 submission on Form 8-K with regard to
acceptance of an additional subscription in the amount of $250,000.
None
28
Item 6. Exhibits
(a) Exhibits:
Exhibit No. Document Description
31.1 Certification of the Chief Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLOBETEL COMMUNICATIONS CORP.
Registrant
/s/ Timothy Huff
Timothy Huff, Chief Executive Officer
Date: August 11, 2005
/s/ Thomas Y. Jimenez
Thomas Y. Jimenez, Chief Financial Officer
Date: August 11, 2005
29