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 September 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)
Indicate by check mark whether registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
As of November 11, 2005, we had issued and outstanding 80,702,281 shares of
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 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits 32
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 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
===================================================================================================================
September 30, December 31,
2005 2004
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,419,606 $ 601,559
Restricted cash 1,072,000 --
Accounts receivable, less allowance for doubtful accounts of
$2,017,412 and $1,505,731 927,217 1,740,883
Prepaid expenses 317,737 58,900
Inventory 60,976 63,976
Deposits on equipment purchase 44,800 88,994
Loan to employees -- 6,885
Deferred tax asset, less valuation allowance of
$6,739,886 and $4,529,043 -- --
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,842,336 2,561,197
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$399,205 and $348,867 6,837,031 445,756
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Investment in unconsolidated foreign subsidiary - Consolidated Global
Investments, Ltd. 352,300 352,300
Advances to related party - GlobeTel Wireless Europe, GmbH 50,000 --
Advances to related party - Sanswire European joint venture 18,377 --
Intangible assets 5,002,424 2,778,000
Deposits 52,036 50,712
Prepaid expenses -- 8,012
- -------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 5,475,137 3,189,024
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 18,154,504 $ 6,195,977
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Current portion of capital lease obligations $ 2,844 $ 2,846
Current portion of long-term debt 2,250,000 --
Accounts payable 865,064 456,248
Due to related party - Carrier Services, Inc. 481,363 --
Due to former employee payable in GTE stock 237,600 --
Due to related party, Hotzone Wireless, Inc., payable in GTE Stock 2,253,334 --
Advances from unconsolidated foreign subsidiary - CGI, for Sanswire
licensing rights 1,457,174 --
Accrued officers' and directors' compensation 195,691 198,333
Accrued expenses and other liabilities 422,764 93,436
Deferred revenues 13,984 46,319
Related party payables 57,500 117,500
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 8,237,318 914,682
- -------------------------------------------------------------------------------------------------------------------
4
September 30, December 31,
2005 2004
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
LONG-TERM LIABILITIES
Capital lease obligations -- 4,718
Convertible notes payable 2,250,000 --
- -------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 2,250,000 4,718
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 10,487,318 919,400
- -------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY
Series A Preferred stock, $.001 par value, 10,000,000 shares authorized;
0 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 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, 150,000,000 shares authorized;
80,525,776 and 63,389,976 shares issued and outstanding 805 634
Additional paid-in capital 53,210,048 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 (45,205) --
Accumulated deficit (55,183,662) (39,661,036)
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 7,667,186 5,276,577
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,154,504 $ 6,195,977
===================================================================================================================
See accompanying notes.
5
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
===================================================================================================================================
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES EARNED $ 60,010,691 $ 14,509,624 $ 22,299,516 $ 7,509,206
COST OF REVENUES EARNED 59,456,896 14,524,807 22,390,416 7,709,650
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN (LOSS) 553,795 (15,183) (90,900) (200,444)
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Payroll and related taxes 3,076,467 482,082 1,599,511 296,117
Consulting and professional fees 5,072,183 1,129,202 725,864 651,594
Officers' and directors' compensation 1,105,854 1,215,676 550,366 533,416
Bad debts 533,344 1,074,516 149,784 645,486
Investment banking and financing fees 2,028,820 169,066 1,579,270 --
Investor and public relations 417,902 101,509 224,305 27,605
Commissions expense - related party Carrier
Services, Inc. 724,513 -- -- --
Research and development - Sanswire 977,335 76,586 158,875 60,309
Other operating expenses 577,332 116,872 226,638 39,125
Telephone and communications 121,875 54,565 58,095 20,273
Travel and related expenses 541,074 144,244 259,808 50,816
Rents 314,934 70,140 171,683 38,282
Insurance and employee benefits 403,646 80,148 51,540 36,120
Depreciation and amortization 81,554 39,733 31,315 15,117
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 15,976,833 4,754,339 5,787,054 2,414,260
- -----------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE OTHER INCOME (EXPENSE) AND INCOME TAXES (15,423,038) (4,769,522) (5,877,954) (2,614,704)
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Net gains on settlement of liabilities -- 85,337 -- 81,823
Gain (loss) on disposition of property
and equipment -- (56,804) -- (56,804)
Loss on equipment deposit (80,993) -- (80,993)
Interest income 34,672 1,612 12,859 641
Interest expense (53,267) (10,540) (19,156) --
- -----------------------------------------------------------------------------------------------------------------------------------
NET OTHER (EXPENSE) INCOME (99,588) 19,605 (87,290) 25,660
- -----------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (15,522,626) (4,749,917) (5,965,244) (2,589,044)
INCOME TAXES
Provision for income taxes -- -- -- --
Tax benefit from utilization of net operating
loss carryforward -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
6
===================================================================================================================================
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (15,522,626) $ (4,749,917) $ (5,965,244) $ (2,589,044)
===================================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 72,927,318 48,263,324 77,547,387 46,939,978
DILUTED 121,279,889 48,263,324 125,899,969 46,939,978
===================================================================================================================================
NET LOSS PER SHARE
BASIC $ (0.21) $ (0.10) $ (0.08) $ (0.06)
DILUTED $ (0.21) $ (0.10) $ (0.08) $ (0.06)
===================================================================================================================================
See accompanying notes.
7
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
===========================================================================================================
For the Nine Months Ended
September 30,
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(15,522,626) $ (4,749,917)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 136,549 133,002
Commissions paid to investment bankers 569,783 --
Net gains on settlement of liabilities -- (85,337)
Loss on disposition of property and equipment -- 56,804
Loss equipment deposit 80,993 --
Bad debt expense 533,344 1,074,516
Common stock exchanged for services 5,385,722 1,231,567
Options exchanged for services 55,000
(Increase) decrease in assets:
Restricted cash (1,072,000) --
Accounts receivable 280,322 (252,220)
Due from related party - Carrier Services, Inc. -- (152,896)
Loans to employees 6,885 --
Prepaid expenses (258,837) (441,061)
Inventory 3,000 (84,660)
Deposits (1,324) (33,829)
Prepaid expenses - other assets 8,012 13,000
Increase (decrease) in liabilities:
Accounts payable 408,816 (275,549)
Due to related payable - Carrier Services, Inc. 481,363 --
Due to former employee payable in GTE stock 237,600 --
Accrued officers' salaries and bonuses (2,642) 150,833
Accrued expenses and other liabilities 329,328 (22,423)
Deferred revenues (32,335) (19,859)
Deferred revenues - related party -- (27,023)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (8,373,047) (3,485,052)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (1,416,767) (73,018)
Acquisition of HotZone assets (27,000) --
Advances to affiliates (68,377) --
Deposits on equipment (36,800) --
- -----------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (1,548,944) (73,018)
- -----------------------------------------------------------------------------------------------------------
8
===========================================================================================================
For the Nine Months Ended
September 30,
2005 2004
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock - Series A -- 1,132,060
Sale of preferred stock - Series B 250,000 1,850,000
Sale of preferred stock - Series C -- 350,000
Sale of preferred stock - Series D 250,000 250,000
Sale of common stock 5,117,311 --
Proceeds from convertible notes payable 5,730,217 --
Proceeds from advances made by unconsolidated foreign
subsidiary - CGI 1,607,174 --
Payments loan payable to unconsolidated foreign
subsidiary - CGI (150,000) --
Proceeds from capital lease financing -- 9,554
Payments on capital lease financing (4,664) (1,553)
Proceeds from notes and loans payable -- 375,000
Payments on notes payable and long-term debt -- (398,701)
Proceeds from related party payables -- 60,000
Payments on related party payables (60,000) --
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,740,038 3,626,360
- -----------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS 2,818,047 68,290
CASH AND EQUIVALENTS - BEGINNING 601,559 224,994
- -----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS - ENDING $ 3,419,606 $ 293,284
===========================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 1,040 $ 11,295
Income taxes $ -- $ --
In addition to amounts reflected above, common stock was issued for:
Shares issued for services $ 5,385,722 $ 1,231,567
Shares issued for convertible notes payable $ 6,300,000 $ --
Shares issued for payment on equipment purchase $ 160,000 $ --
Conversion of Series A preferred stock to common stock $ 697,500 $ --
Payment of Series B preferred stock subscriptions
receivable for equipment $ 4,835,200 $ --
Additional shares issued to investors, pursuant to
anti-dilutive provision in agreement; 291,317 shares issued
and recorded at par value $ -- $ --
Other non-cash transactions:
Stock options issued for accrued officers' salaries $ 55,000 $ --
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 September 30, 2005.
On April 27, 2004, $1,000,000 of Series C preferred stock was issued. No stock
subscription receivable was outstanding as of September 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 September 30, 2005.
===========================================================================================================
See accompanying notes.
9
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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 nine months ended September 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 those 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.
All material intercompany balances and transactions were eliminated in the
consolidation.
Basis of Presentation
The financial statements include the accounts of GlobeTel Communication
Corp.(the "Company" or "GlobeTel") and its wholly-owned subsidiaries, GlobeTel
Wireless Corp., Sanswire Networks, 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 and 1%
by a Mexican attorney associated with that entity.
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.
Nature of Operations
GlobeTel Communications Corp. is engaged in the business of diversified
telecommunications and financial services. 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, and 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.
In addition, its subsidiary, Sanswire Networks, LLC, is developing high-altitude
airships, called Stratellites(TM), which will be used to provide wireless voice,
video, and data services.
10
A Stratellite(TM) is a high-altitude airship that when in placed 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 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 and 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 or more overdue. Bad debt expense for the nine months ended
September 30, 2005 and 2004 were $533,344 and $1,074,516, 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 September 30, 2005 and
December 31, 2004, the Company had $3,277,260 and $462,690, respectively, in
excess of federally insured limits.
The Company had restricted cash of $1,072,000 as of September 30, 2005, as
letters of credits to vendors.
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 that 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 upon
acquisition and as of September 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 September 30, 2005 whereas the fair value of the intangible
assets exceed its carrying amount.
NOTE 2 - ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATION OF CREDIT
RISK AND ECONOMIC DEPENDENCE
As of September 30, 2005, three customers accounted for 98% of the Company's
accounts receivable, including 29% attributable to the Brazil network customer,
58% related to the Mexico network customer, and 11% related to the Philippines
network customer.
11
Four customers accounted for 75% and 89% of the Company's sales for the three
and nine months ended September 30, 2005, respectively. Of these amounts, the
primary customers of Lonestar, Volta, CSI and GlobeTel (attributable to the
Philippines Network) accounted for 37%, 24%, 6% and 8%, respectively, for the
three months ended September 30, 2005, and 39%, 20%, 17% and 13%, respectively,
for the nine months ended September 30, 2005.
Substantially, all of our sales were attributable to foreign operations for the
three and nine months ended September 30, 2005. 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.
Substantially all of the costs of sales (purchases of wholesale minutes) during
the three and nine months ended September 30, 2005, for GlobeTel, Centerline,
Lonestar, and Volta, were from one (each different) vendor for each of the four
companies, and substantially all of such sales proceeds generated from customers
were paid directly to the vendors from the customers.
NOTE 3 - INVESTMENT IN AND ADVANCES FROM UNCONSOLIDATED FOREIGN SUBSIDIARY - CGI
Notwithstanding the Company's 73.15% ownership interest of Consolidated Global
Investments, Ltd. ("CGI") and control of 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 September 30, 2005, consists of 613,333 million shares (9,200,000
pre-split) 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
$352,300 representing the sum of cash advanced by the Company to CGI through
September 30, 2005.
As of September 30, 2005, CGI's shares were not trading on the Australian Stock
Exchange, or any other exchange. 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, and in July 2005 CGI
sold additional 20,000 shares (after consideration of the 1:15 stock split) of
GlobeTel stock, resulting in total net proceeds of $1,607,145 through September
30, 2005. 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 $1,457,174 as of September 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.
NOTE 4 - ASSET ACQUISITION - HOTZONE
On June 2, 2005, the Company entered into an agreement to acquire assets of
HotZone Wireless, LLC ("HotZone"), an advanced developer of WIMAX and extended
range WIFI Systems with operations in the United States and Europe. The
acquisition transaction, which closed during the three months ended September
30, 2005, was paid with $27,000 cash and provides for a total of 2 million
shares of the Company's common stock to be issued in increments of 666,667
shares on each of the first, second, and third anniversary dates of the
agreement, assuming that certain milestones are achieved. Additionally, the
HotZone staff is entering into employment agreements with the Company.
The assets acquired under the HotZone agreement consist primarily of
intellectual property and proprietary rights in intellectual property. As of
September 30, 2005, the Company has placed all of HotZone's tangible assets into
GlobeTel Wireless Corp. (GlobeTel Wireless), its Florida-based, wholly-owned
subsidiary.
12
Accounting for Purchase Price and Intangible Assets
Whereas the milestones for the first year are defined, and the Company believes
that achievement of such milestones for the first year are probable and the
amount payable (with GlobeTel common stock) is measurable, the Company recorded
the amounts during the three months ended September 30, 2005. The purchase price
for the assets acquired was recorded at $2,280,334 based on the $27,000 paid in
cash, plus $2,253,334, which represents the present value of 666,667 shares of
common stock payable on the first anniversary date. The shares were valued at $
3.38 per share, based on the value of the Company's free-trading stock on the
agreement date. The Company allocated the purchase price based on the estimated
fair market value of the asset acquired as follows: (a) HotZone tangible assets
- - $55,910; and (b) HotZone intangible assets - $2,224,424.
Since the milestones to be achieved for the second and third years of the
contract are presently undefined, it is unknown whether or not such milestones,
even if defined, will be achieved. The Company has not recorded the additional
consideration totaling 1,333,333 shares issuable after year one of the agreement
(666,667 issuable for each of years two and three). The Company will record the
additional contingent shares at fair value upon issuance of the shares or at
such time that the Company may determine that the issuance of the shares is
probable and the value ascribable to the shares is measurable. Accordingly, no
amount for such contingent consideration was recorded as a liability or included
in the allocation of the purchase price.
The Company tests the asset for impairment at each reporting period, and upon
the occurrence of any significant event which may affect the carrying value of
the assets. The Company tested the assets for impairment and determined that no
impairment existed and no adjustment to the carrying value was required as of
September 30, 2005, and through the date of this filing.
GlobeTel Wireless's assets, liabilities, results of operations and cash flows
are consolidated in these financial statements.
NOTE 5 - 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.
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 $938,782
for the year ended December 31, 2004 and $469,391 for the nine months ended
September 30, 2005, for a total write-off of $1,408,173.
Contingent Consideration - Sanswire Asset Acquisition
In accordance with the Sanswire and Stratodyne agreements a total of 28 million
shares (1,866,666 after 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 1:15 reverse stock split) additional shares
will be issued to Stratodyne or its assignee(s) and the remaining 150 million
(10,000,000 after 1:15 reverse stock split) shares to Sanswire Technologies,
Inc.
For purposes of the Sanswire purchase agreement as amended, 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.
"Successful Commercial Launch" means (a) a launch ("Launch") within (i) eighteen
(18) months after a successful launch by the Company or any of its affiliates of
a prototype airship (dirigible) that was then under construction, by the Company
or any of its affiliates of an airship (dirigible) that is able to (I) reach and
maintain an altitude of at least 65,000 feet, (II) maintain a position in one
GPS coordinate, (III) receive and transmit commercially acceptable two-way
wireless voice and Internet transmissions (collectively, "Services"), and (b)
there is at least one paying customer for the Services within one year of the
Launch, but not later than 30 months from the date of the launch of the
prototype airship then under construction.
13
As of the date of this report, 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 CSI,
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.
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 $205,000, the
balance due to CSI was $481,363 as of September 30, 2005.
In connection with the CSI agreement, the Company recorded commission expenses
of $724,513 for the three months ended March 31, 2005, $0 for the three months
ended June 30, 2005, and $0 for the three months ended September 30, 2005.
GlobeTel also 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.
In August 2005, GlobeTel purchased additional telecommunications equipment for
Centerline from CSI for $160,000. As payment, 71,704 shares of GlobeTel common
stock (post-split) valued at $120,000 were issued, and the balance was paid with
cash.
Joint Venture Agreement - Englewood Corporation
On May 3, 2004, the Company entered into a joint venture agreement and stock
option plan with Englewood Corporation ("Englewood") and respectively with
Joseph Seroussi, an individual ("the 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.
14
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 nine months ended September 30, 2005, there were no
transactions requiring recording in the financial statements related to this
joint venture.
GlobeTel Wireless Network, Pilot Program
On August 7, 2005, the Company entered into an agreement to provide a wireless
communication network for a pilot program in Shenzhen, China with Guangdong
Tietong South Communication Co. Ltd, a group company of China Tietong Telecom
Corporation, one of only 6 licensed telecom operators in China. Upon successful
completion of the pilot program, GlobeTel Wireless and its local Chinese
partners will commence a roll out of Wireless Communication Networks throughout
China to deliver voice, data and video applications. The agreement was reached
with Nessociet Inc., an organization working towards the development of next
generation wireless telephony services and NGN Telecom Corporation, the partner
to Guangdong Tietong South Communication Co. Ltd., in marketing VoIP services in
China. The Company will also utilize Nessociet Inc. who has become a reseller of
GlobeTel Wireless networks and equipment in Asia.
For the three months ended September 30, 2005, there were no transactions
requiring recording in the financial statements related to these agreements.
Joint Venture Agreement - Leo A. Daly III and J. Randolph Dumas
On July 7, 2005, the Company entered into a joint venture agreement that will
lead to the deployment of the Company's Stratellites(TM), 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 Networks, LLC will own 55% of the joint
venture entity.
For the three months ended September 30, 2005, there were no transactions
requiring recording in the financial statements related to these agreements.
Joint Venture Agreement - Apogeo Enterprises Corporation
On July 14, 2005, the Company's wholly-owned subsidiary, Sanswire Networks, LLC
had entered into a joint venture agreement to deploy Stratellites(TM) 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.
For the three months ended September 30, 2005, there were no transactions
requiring recording in the financial statements related to these agreements.
Licensing Agreement - RapidMoney Corporation
On July 7, 2005, the Company entered into a licensing agreement with RapidMoney
Corporation that allows us to use and modify the RapidMoney system. GlobeTel,
along with its venture partner, Grupo Ingedigit ("GI") of Caracas, Venezuela,
will incorporate the current RapidMoney(R) funds transfer software applications
for merchant Point of Sale ("POS") terminals into the Company's Stored Value
international remittance services. Furthermore, this license allows GlobeTel 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.
For the three months ended September 30, 2005, there were no transactions
requiring recording in the financial statements related to this agreement.
15
Altvater GmbH of Germany, Asset Acquisition
On July 7, 2005, GlobeTel entered into a letter of intent to acquire the assets
and operations of Altvater GmbH of Germany (Altvater). Subsequently, an
agreement was signed, but the acquisition has not yet closed as of the date of
this report. Altvater is a wireless communications systems integrator for
HotZone systems in Europe, with core operations in Germany. Altvater GmbH has
existing sales partner relationships in Europe and North Africa. On September
15, 2005, GlobeTel Wireless Corp., through the acquisition of Altvater, formed a
new division, GlobeTel Wireless Europe GmbH,
For the three months ended September 30, 2005, there were no transactions
requiring recording in the financial statements related to this agreement.
GlobeTel Wireless, Germany Contract
On August 1, 2005, GlobeTel Wireless Corp., a wholly-owned subsidiary of the
Company, was awarded a contract to install wireless networks in three German
cities. The contract will provide high-speed wireless networks for internet
connectivity starting with the town of Kaiserslautern, and continuing with
nearby communities. Construction of the project is to begin in December 2005.
GlobeTel Wireless will install these first wireless networks in Germany as part
of the roll out plan to deploy wireless communication networks to non-DSL
communities, in identified geographic markets.
For the three months ended September 30, 2005, there were no transactions
requiring recording in the financial statements related to this agreement.
Use of Proceeds from Preferred Stock Subscriptions Receivable
During the nine months ended September 30, 2005, the Company received $250,000
and equipment totaling $4,835,200 in payment of Series B Preferred Stock
subscriptions receivable for a total of $5,085,200.
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. 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.
The Company currently leases a 66,000 square foot space hanger in Palmdale,
California. The initial lease, between Sanswire Networks, LLC and the City of
Los Angeles World Airports, was for a term of three months, ended July 22, 2005
with a monthly rent of $19,990. On June 8, 2005 the lease term was amended for
fifteen months, commencing June 8, 2005 through September 7, 2006, with two
one-year options. Concurrently with the signing of the amended lease, the
parties entered into a reimbursement agreement to share the cost of certain
improvements.
In January 2005, GlobeTel signed a lease agreement with the San Bernardino
International Airport Authority for hangar space at the airport in San
Bernardino, California for the purpose of assembling and storing the Stratellite
prototype. The term of the agreement was from January 15, 2005 through March 31,
2005, at a monthly lease rate of $9,767. The Company remained in the space on a
month-to-month basis until moving to its new facility in Palmdale, California on
June 1, 2005.
NOTE 6 - CONVERTIBLE DEBT AND 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.
16
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.
In addition, on August 31, 2005 the Company entered into subscription agreements
with other investors for 5% convertible notes payable totaling $4.5 million,
with 3 year Class A Warrants to purchase up to an additional $6,818,181 in
common stock. Net proceeds of $4,150,730 were received, after deducting costs
and expenses related to the transaction. The notes amortize at 12.5% per quarter
through September 2007, payable each quarter in cash or common shares.
Under the agreements the notes are convertible into common stock of the Company
at $ 1.65 per share (post-split). Prior to any notice of conversion, the Company
had the right to redeem the note(s) at a premium for cash, subject to a 5-day
right to convert by the investor. The Investors also received one Class A
Warrant to purchase one share of common stock for each share that the notes
would be convertible into had they been converted on the closing date (August
31, 2005) (a total of 2,727,273 shares). The per share exercise price of the
Warrants is $2.50.
As of September 30, 2005 and as of the date of this report, no portion of the
notes were converted, nor were any of the warrants exercised.
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). However, the subscription agreement with
the investors allows for the price of the warrant to be adjusted should the
Company offer equity securities at a lower price prior to the Warrants being
exercised. As stated below the Company has entered into such an agreement and
will be obligated to adjust the Warrant exercise price.
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.
The Company 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).
17
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.
In September 2005, the Company issued a total of 1,005,185 (post-split) shares
(unregistered, restricted stock) for consulting and investment banking services,
valued at $1,505,926, based on the closing price of the shares on the dates of
issuance.
Severance Agreements
In September 2005, the Company issued a total of 98,983 shares pursuant to a
severance and settlement agreement with a former employee, valued at $177,400,
based on $1.79 per share, the closing price of the shares on the date of the
agreement and registration of the shares. An additional $237,600 of shares are
issuable pursuant to the agreement of which $118,800 is due January 4, 2006 and
$118,800 is due August 1, 2006. The former employee also received cash of
$55,000 pursuant to the agreement.
Also in September 2005, the Company issued a total of 82,887 shares (restricted
stock - Rule 144) pursuant to a severance agreement with the former President
and Director, valued at $123,750, based on the closing price of the shares on
the dates of issuance. In addition, a total of 81,481 options to purchase common
shares, valued at $55,000 based on the option exercise price (adjusted for 1:15
reverse stock split) per the 2004 Employee Stock Bonus Plan.
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
1:15 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.
A registration statement on Form S-8 was filed in August 2005, registering
98,983 shares of common stock issued in a mutual release and separation
agreement with the former employee discussed above. There were 55,000 shares in
lieu of bonus for 2005 and the remaining amount was for settlement of $360,000
of shares as a settlement and separation payment.
Bonuses to 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 (unregistered, restricted stock), 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.
18
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.
In September 2005, the Company issued an additional 3,166 (post-split) shares of
common stock (restricted - Rule 144) to a current Sanswire employee, valued at
$4,750, based on the closing price of the shares on the dates of issuance .
Also, in September 2005, the Company issued a total of 133,334 (post-split)
shares of common stock (restricted - Rule 144), at a recorded price of $1.50 per
share, based on the closing price of the shares on the dates of issuance, for a
total of $200,000, to a new GlobeTel employee.
NOTE 7 - PREFERRED STOCK
Conversion of Series A Preferred Shares
During the nine months ended September 30, 2005, Series A Preferred Shareholders
converted a total of 136,611,615 (or 9,107,441 after 1:15 reverse stock split)
with a recorded value totaling $697,500. In September 2005, the Company issued
1,881,317 shares payable in exchange for the remaining amount due on conversion
of Preferred A Shares.
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, the preferred stockholder, 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.
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.
During the current year no Series B Preferred shares were converted.
Series C Preferred Stock Conversion Rights
The Series C Preferred Stock subscription agreement provided that the preferred
shares that 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.
19
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.
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).
During the current year no Series C Preferred shares were converted.
Series D Preferred Stock Conversion Rights
On July 28, 2004, the Company agreed to sell 1,000 shares of Series D Preferred
Stock 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).
During the current year no Series D Preferred shares were converted.
20
NOTE 8 - NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share takes into
consideration shares of common stock outstanding (computed under basic loss per
share) and potentially dilutive shares of common stock. In periods where losses
are reported, the weighted average number of common shares outstanding excludes
common stock equivalents, because their inclusion would be anti-dilutive.
NOTE 9 - 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(TM) 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 nine-months ended September 30, 2005 is as follows:
Telecom Sanswire Unallocated Totals
------------ ------------ ------------ ------------
Revenues Earned $ 60,010,691 $ -- $ -- $ 60,010,691
Costs of Revenues Earned 59,456,896 -- -- 59,456,896
------------ ------------ ------------ ------------
Gross Margin 553,795 -- -- 553,795
Expenses 2,090,341 3,448,221 10,438,271 15,976,833
------------ ------------ ------------ ------------
Loss Before Other Income
(Expense) and Income Taxes (1,536,546) (3,448,221) (10,438,271) (15,423,038)
Other Income (Expense) -- -- (99,588) (99,588)
------------ ------------ ------------ ------------
Loss Before Income Taxes (1,536,546) (3,448,221) (10,537,859) (15,522,626)
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $ (1,536,546) $ (3,448,221) $(10,537,859) $(15,522,626)
============ ============ ============ ============
21
NOTE 10 - SUBSEQUENT EVENTS
Services Agreement - Global Crossing, Ltd. (NASDAQ: GLBC)
On October 6, 2005, Global Crossing announced that GlobeTel had selected its
integrated, global IP-based network to offer international cable companies and
Internet Service Providers ("ISPs") a completely customizable VoIP solution for
clients located in Latin America and the Caribbean. As of the date of this
report no transactions have occurred that would require recording or disclosure
in the Company's financial statements.
StrateVoIP Platform Launched
On October 7, 2005, GlobeTel announced the launch of private-label consumer VoIP
platform designed and built specifically for service providers, a customizable
solution known as StrateVoIP. As of the date of this report no transactions have
occurred that would require recording or disclosure in the Company's financial
statements.
Cooperative Technologies Agreement - University of Stuttgart, Germany
On October 12, 2005, GlobeTel announced that our wholly owned subsidiary,
Sanswire Networks LLC, had signed an agreement with TAO-Technologies in
cooperation with the University of Stuttgart in Germany. The agreement states
that TAO-Technologies, in cooperation with the University of Stuttgart, will
design several next-generation airships intended for multiple uses. As of the
date of this report no transactions have occurred that would require recording
or disclosure in the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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").
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.
22
Update on Activities During the Three Months Ended September 30, 2005
Joint Venture Agreement - Leo A. Daly III and J. Randolph Dumas
On July 7, 2005, we entered into a joint venture that will lead to the
deployment of our Stratellites(TM), 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.
Joint Venture Agreement - Apogeo Enterprises Corporation
On July 14, 2005, we announced that our wholly-owned subsidiary, Sanswire
Networks, LLC had 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.
Cooperative Research and Development Agreement
On July 13, 2005, we announced that our wholly-owned subsidiary Sanswire
Networks, LLC had 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 our 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 our 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 - RapidMoney Corporation
On July 7, 2005, we announced we had entered into a licensing agreement with
RapidMoney Corporation that allows us to use and modify the RapidMoney system.
We, along with our 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 us 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. Located in San Antonio, Texas, RapidMoney Corporation
developed a system for personal money transfers on easy-to-use POS terminals.
Altvater GmbH of Germany, Asset Acquisition
On July 7, 2005, we announced that we had entered into a letter of intent to
acquire the assets and operations of Altvater GmbH of Germany (Altvater).
Subsequently, an agreement was signed, but the acquisition has not yet closed as
of the date of this report. Altvater is a wireless communications systems
integrator for HotZone systems in Europe, with core operations in Germany.
Altvater GmbH has existing sales partner relationships in Europe and North
Africa. The assets of Altvater will be put into Globetel Wireless Europe GmbH, a
wholly-owned subsidiary of GlobeTel Wireless Corp., a wholly-owned subsidiary of
the Company.
GlobeTel Wireless, Germany Contract
The Company, through GlobeTel Wireless, is utilizing the HotZone assets and
technology in developing WIMAX wireless systems for deployment in areas the
Company identifies and markets to. Future considerations include the use of the
Company's Stratellites(TM), which will provide radio technology for the wireless
communications that will cover significant geographic areas up to 120,000 square
miles, and, in addition, 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.
23
On August 1, 2005, we announced that our new division (a subsidiary), GlobeTel
Wireless, had been awarded a contract to install wireless networks in three
German cities. The contract will provide high-speed wireless networks for
internet connectivity starting with the town of Kaiserslautern, and continuing
with nearby communities. Kaiserslautern is a city of 100,000 people, located 100
miles South West of Frankfurt. Construction of the project is to begin in
December 2005. GlobeTel Wireless will install these first Wireless Networks in
Germany as part of the roll out plan to deploy wireless communication networks
to non-DSL communities, in identified geographic markets.
GlobeTel Wireless Network, Pilot Program
On August 7, 2005, we announced an agreement to provide a GlobeTel Wireless
communication network for a pilot program in Shenzhen, China with Guangdong
Tietong South Communication Co. Ltd, a group company of China Tietong Telecom
Corporation, one of only 6 licensed telecom operators in China. Upon successful
completion of the pilot program, GlobeTel Wireless and its local Chinese
partners will commence a roll out of wireless communication networks throughout
China to deliver voice, data and video applications. The agreement was reached
with Nessociet Inc., an organization working towards the development of next
generation wireless telephony services and NGN Telecom Corporation, the partner
to Guangdong Tietong South Communication Co. Ltd., in marketing VoIP services in
China. We also announced that Nessociet Inc. has become a reseller of GlobeTel
Wireless networks and equipment in Asia.
Cooperative Research and Development Agreement - Center for Solar Energy and
Hydrogen Research Baden-Wuerttemberg
On September 6, 2005, we announced that our subsidiary, Sanswire Networks LLC
(Sanswire), had signed a Letter of Intent (LOI) with the Center for Solar Energy
and Hydrogen Research Baden-Wuerttemberg (ZSW). The LOI states that ZSW will
provide research and development engineering support under a Cooperative
Research and Development Agreement for the development of a state-of-the-art
solar-electric propulsion system for our Stratellite airship.
Joint Venture Agreement - Kashiwabara Token Corporation
On September 8, 2005, we announced that our subsidiary, Sanswire Networks LLC,
has signed a Letter of Intent (LOI) with Kashiwabara Token Corporation of
Iwakuni City, Japan, to enter a joint venture in the establishment of a
terrestrial ground-based wireless broadband and communications system, a prelude
to the deployment of the Sanswire Stratellite Airship broadband network in
Japan. Kashiwabara Token Corporation holds a controlling interest of a major
cell phone system in the Hiroshima and Yamaguchi prefectures as well as the ICAN
Cable television system in Japan.
Services Agreement - Global Crossing Ltd. (NASDAQ: GLBC)
On October 6, 2005, Global Crossing announced that we selected its integrated,
global IP-based network to offer international cable companies and Internet
Service Providers (ISPs) a completely customizable Voice over IP (VoIP) solution
for clients located in Latin America and the Caribbean. Starting in October
2005, we will use Global Crossing IP Transit(TM), Global Crossing VoIP Local
Service(TM) and Global Crossing VoIP Outbound(TM) to provide international
service providers with end-to-end VoIP from anywhere in the United States to
Argentina, Brazil, Bolivia, Colombia, Mexico, Peru and the entire Caribbean. We
selected Global Crossing to launch our turnkey VoIP solution for international
service providers because of its network's extensive reach, as well as its
reputation for industry-leading technology, reliability and security. Global
Crossing VoIP Local Service will provide GlobeTel's customers local numbers in
the United States that end-users can dial at no charge. With Global Crossing IP
Transit, calls to these numbers will be routed to Global Crossing's VoIP network
through an IP-based connection. Global Crossing VoIP Outbound will then
transport the packet-based voice traffic to Latin America and the Caribbean and
complete the call. Global Crossing has built one of the world's most extensive
integrated voice networks. By providing a dedicated connection and transporting
calls across a secure, private backbone, the company ensures its voice traffic
receives maximum protection. VoIP packets are given highest priority in Global
Crossing's IP backbone, which translates into reliable, carrier-quality service
with minimized latency, packet loss and jitter, as well as call quality that is
even and predictable.
StrateVoIP Platform Launched
On October 7, 2005, we announced the launch of the most flexible, private-label
consumer VoIP platform designed and built specifically for service providers.
The completely customizable solution known as StrateVoIP provides everything
required to turn an existing service provider into a leader in VoIP technology
without the usual obstacles involved in building out a carrier-class VoIP
platform. StrateVoIP is a private-label solution designed for ISPs, cable
companies, telcos, and all other providers desiring to offer VoIP services to
their local markets. The StrateVoIP platform is operated by our proprietary VoIP
software package, which allows clients to design and architect completely
customized calling packages to fit the needs of their specific local markets.
StrateVoIP's customizable platform provides real time, web-based functionality
to set up custom calling plans by country or region with customized rate
management for profitability control. The consumer experience is powered by
Linksys VoIP hardware and is completely plug and play, while providing advanced
calling features such as real-time accounting, web and email-based voicemail,
and global "follow-me" services. We introduced this technology at the ISPCON
conference Santa Clara, CA, October 18 - 20, 2005.
24
Cooperative Technologies Agreement - University of Stuttgart, Germany
On October 12, 2005, we announced that our wholly owned subsidiary, Sanswire
Networks LLC, had signed an agreement with TAO-Technologies (TAO) in cooperation
with the University of Stuttgart in Germany. The University of Stuttgart has
been well known for the research and development of airships for decades, and
has developed an excellent track record in the design, development and flight
testing of numerous air vehicles. The agreement states that TAO-Technologies, in
cooperation with the University of Stuttgart, will design several
next-generation airships intended for multiple uses. These unique and
proprietary designs are specific to certain customer demands and are intended to
complement the suite of near-space vehicles currently being developed and built
by our wholly owned subsidiary, Sanswire Networks, LLC.
Segment Highlights Sanswire Networks' Stratellite Airship
On October 20, 2005, we announced that on October 28, 2005 construction of the
Sanswire One airship was to be featured on the Discovery's Science Channel. The
segment had previously been aired on the Discovery Channel in Canada.
Financial Information
Three months ended September 30, 2005, ("2005" or "the current period") compared
to the three months ended September 30, 2004 ("2004" or "the prior period"),
unless otherwise noted.
Financial Condition as of September 30, 2005 and December 31, 2004
Assets. At September 30, 2005, we had total assets of $18,154,504 compared to
total assets of $6,195,977 as of December 31, 2004.
The current assets at September 30, 2005, were $5,842,336, compared to
$2,561,197 at December 31, 2004. As of September 30, 2005, we had $3,419,606 of
cash and cash equivalents compared to $601,559 as of December 31, 2004. The
increase in cash and cash equivalents is primarily related to private placement
funding during the current period. We also had restricted cash of $1,072,000 at
September 30, 2005, compared to none as of December 31, 2004, relating to money
on deposit and held as collateral for our MasterCard program ($1 million) and
with a Sanswire vendor ($72,000).
Our net accounts receivable were $927,217 as of September 30, 2005, compared to
$1,740,883 as of December 31, 2004. Approximately 98% of the September 30, 2005,
receivables were attributable to three customers, including 58% or $538,623 (net
of allowance) related to the Mexico network, 29% or $269,889 (net of allowance)
related to the Brazil network and 11% or $103,872 related to the Philippines
network. We have increased our allowance for doubtful accounts by $533,344 for
the year.
Other current assets included $317,737 in prepaid expenses, primarily prepaid
minutes with carriers and prepaid insurance, compared to $58,900 in 2004;
$60,976 inventory of IP Phones, compared to $63,976 in the prior year; and
deposits on equipment purchases and other current assets of $44,800 (after
recording a loss on equipment deposit of $80,993 during the three months ended
September 30, 2005) compared to $88,994 in 2004.
Fixed assets (net of accumulated depreciation) were $6,837,031 as of September
30, 2005, compared to $445,756 as of December 31, 2004, reflecting the
acquisition of substantial assets in connection with our expanding
telecommunications equipment, include "Switches" of approximately $5 million, as
well as increases in office improvements, furniture and equipment.
25
Other assets were $5,475,137 as of September 30, 2005, compared to $3,189,024 as
of December 31, 2004, reflecting the acquisition of the HotZone assets of
approximately $2.2 million. These amounts also include, as of both periods, the
Sanswire intangible assets valued at $2,778,000 and investment in CGI, our
unconsolidated foreign subsidiary, totaling $352,300
Liabilities. At September 30 2005, we had total liabilities of $10,487,318
compared to total liabilities of $919,400 as of December 31, 2004.
The current liabilities at September 30, 2005 were $8,237,318 compared to
$914,682 at December 31, 2004, an increase of $7,322,636. The increase is
principally due to $1,457,174 advanced by CGI, our unconsolidated foreign
subsidiary, current portion of long-term debt, including $2,250,000 current
portion of convertible notes payables, contractual obligations netting $481,363
due to CSI, due to former employee of $237,600 payable in our stock, due to
HotZone Wireless, Inc. for the assets acquisition of $2,253,334, payable in our
stock, and accounts payable and accrued expenses of $865,064 and $422,764,
respectively, relating to our increased level of business activities.
Long-term liabilities at September 30, 2005 include the portion of convertible
notes payable due after one year of $2,250,000. There were no significant
long-term liabilities as of December 31, 2004.
Results of Operations for the Three Months Ended September 30, 2005 and 2004
Revenues. During the current period, our gross sales were $22,299,516
representing an increase of 197% over the prior period when our gross sales were
$7,509,206. Our revenues increased primarily due to revenues from our
subsidiary, Centerline and its subsidiaries, which recorded consolidated
revenues of $20,482,932 (or 92% 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 $1,784,574 (or 8% 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 $22,390,416 for the current year, compared to
$7,709,650 for the prior period. We expect cost of sales to increase in future
periods to the extent that our sales volume increases.
Gross Loss. Our gross loss was $90,900 or less than 1% for the current period,
compared to gross loss of $200,444 or 2.7% of total revenues in the prior
period, a decrease of $109,544 or 55%. The continued gross loss, reduced as
compared to the prior period, is primarily due to lower margins on resale of
wholesale minutes related to the increased cost of the minutes to terminate,
especially the Philippines network, where our margin was less than two percent,
and initial activities of Centerline, where our gross margin was minimal or zero
as in the prior period. We expect to derive higher margins from our Centerline
operations in the near term 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 $5,787,054 compared to prior period operating
expenses of $2,414,260 an increase of $3,372,794 or 140%. The increase is
primarily due to the following:
Consulting and professional fees increased to $725,864 from $651,594 in the
prior period.
Employee payroll and related taxes for the current period were $1,599,511
compared to $296,117, an increase of $1,303,394 or 440%. 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. In addition,
expenses of approximately $470,000 were incurred in connection with a settlement
and severance agreement with a former employee.
26
Investment banking and financing fees increased to $1,579,270 (including
non-cash compensation of $1,230,000), from $0 in the prior period. This increase
was due to costs and expenses related to $4.5 million in convertible notes
payable received during the current period and amounts contractually payable as
agreed with our investment banker.
Investor and public relations increased to $224,305 (including non-cash
compensation of $100,000), from $27,605 in the prior period. This increase was
due to costs and expenses related to our annual meeting , marketing and general
corporate expenses.
We incurred $158,875 of research and development costs for our Sanswire project
- - development of the Stratellite(TM) - during the current period, compared to
$60,309 in the prior year.
Other operating expenses increased to $226,638 from $39,125 and rents increased
to $171,683 from $38,282. These increases were due to our expanding facilities,
personnel and general expenses in maintaining a growing organization, including
our new Sanswire facilities in Palmdale, CA, our Centerline facilities in Los
Angeles, CA and our corporate facilities in Pembroke Pines, FL.
Travel and related increased to $259,808 from $50,816. This increase was due to
our expanding project and market development both domestically and
internationally.
Loss from Operations. We had an operating loss of $5,877,954 for the current
period as compared to an operating loss of $2,614,704 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 $5,965,244 in the current period compared to a
net loss of $2,589,044 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 Nine Months Ended September 30, 2005 and 2004
Revenues. During the current period, our gross sales were $60,010,691,
representing an increase of 314% over the prior period when our gross sales were
$14,509,624. Our revenues increased primarily due to revenues from our
subsidiary, Centerline and its subsidiaries, which recorded consolidated
revenues of $50,941,997 (or 85% 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 $7,674,615 (or 13% of gross revenues).
Additional revenues generated included $700,000 from a network built for an
international client (netting $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 $59,456,896 for the current year, compared to
$14,524,807 for the prior period, an increase of 309%. We expect cost of sales
to increase in future periods to the extent that our sales volume increases.
Gross Margin (Loss). Our gross margin was $553,795 or about 1% for the current
period, compared to a gross loss of ($15,183) or less than (1%) of total
revenues in the prior period, an increase of $568,978. The added margin is
primarily due to the increase in wholesale minutes that was passed, primarily
with our Philippines network.
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 $15,976,833 compared to prior period operating
expenses of $4,754,339, an increase of $11,222,494 or 236%. The increase is
primarily due to the following:
Consulting and professional fees increased to $5,072,183 (including non-cash
compensation of $3,709,826), from $1,129,202 in the prior period. Investment
banking and financing fees increased to $2,028,820 in the current period,
related to obtaining funding of approximately $9.3 million, compared to $169,066
in the prior period, as well as increased professional fees in maintaining and
expanding a public company, including amounts contractually payable as agreed
with our investment banker.
27
In addition, employee payroll and related taxes for the current period were
$3,076,476 (including non-cash compensation of $964,750) compared to $482,082,
an increase of $2,594,394 or 538%. Insurance and employee benefits for the
current period were $403,646 compared to $80,148, an increase $323,498. 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. In
addition, expenses of approximately $470,000 were incurred in connection with a
settlement and severance agreement with a former employee.
Investor and public relations increased to $417,902 (including non-cash
compensation of $100,000), from $101,509 in the prior period. This increase was
due to costs and expenses related our annual meeting and marketing and general
corporate expenses.
We incurred $977,335 of research and development costs for our Sanswire project
- - development of the Stratellite(TM) - during the current period, compared to
$76,586 in the prior year.
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.
Other operating expenses increased to $577,332 from $116,872 and rents increased
to $314,934 from $70,140. These increase was due to our expanding facilities,
personnel and general expenses in maintaining a growing organization, including
our new Sanswire facilities in Palmdale, CA, our Centerline facilities in Los
Angeles, CA and our corporate facilities in Pembroke Pines, FL.
Loss from Operations. We had an operating loss of $15,423,038 for the current
period as compared to an operating loss of $4,769,522 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 $15,522,626 in the current period compared to a
net loss of $4,749,917 in the prior period. The net loss is primarily
attributable to the increase in the operating expenses as discussed above.
Liquidity and Capital Resources
Cash Flows. Our cash used in operating activities was $8,373,047 for the current
period, compared to $3,485,052 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.
Our cash used in investing activities includes acquisitions of property and
equipment totaling $1,548,944, relating primarily to our expanding
telecommunication program, compared to $73,018 in the prior year.
Net cash provided by financing activities was $12,740,038 as compared to
$3,626,360 from the prior period, principally from proceeds from the sale of
preferred stock of $500,000 for the current period, compared to $3,582,060 in
the prior period; proceeds totaling $5,730,217 (after related costs) for
convertible notes payable; $5,117,311 from sales of common stock, relating to
the exercise of warrants by convertible note holders and private placements; and
proceeds of $1,607,174 from the loan payable to CGI.
We raised approximately $18 million during the nine months ended September 30,
2005 which was used 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,.
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.
28
As reflected in the accompanying financial statements, during the nine month
period ended September 30, 2005, we had a net loss of $15,522,626 compared to a
net loss of $4,749,917 during the prior period. Consequently, there is an
accumulated deficit of $55,183,662 at September 30, 2005, compared to
$39,661,036 at December 31, 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
September 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 September
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.
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 considers 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.
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As noted above and below, 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
We have made significant changes in the Company's internal controls that have
affected the 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. We have purchased a financial reporting
software tool to help analyze financial data and to expedite the consolidation
and reporting process. We have purchased a new integrated accounting system
which will be implemented during the first quarter of 2006. The Company hired a
consultant to perform an internal control review for the purpose of evaluating
the Company's internal controls. As a result, additional controls and procedures
were implemented. The Company has also restructured departmental
responsibilities and instituted a budgeting process.
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 pre-split 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 pre-split shares of ADGI common stock as the
decision on that would be reserved to time of trial.
An Answer and Counterclaim had been interposed on both of these actions. The
Answer denies many of the allegations in the complaint and is comprised of
eleven affirmative defenses and five counterclaims alleging damages in the sum
of $1,000,000. The counterclaims in various forms involve breach of contract and
breach of fiduciary duty by the plaintiffs.
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. The
matter is set for trial in December 2005.
Mexico Associate and Customer
We are taking legal actions against our associate and customer in Mexico for
non-payment of the amount they owe us. 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.
30
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, along with the substantial portion of the related equipment, and we
anticipate receipt of Mexican tax refunds, later in 2005.
This situation with our customer has caused us to record an allowance for bad
debt expense of $469,391 and $938,782 through September 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 us
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.
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 and Alexsam have subsequently settled our dispute. In exchange for granting a
non-exclusive license to GlobeTel for the Patents, GlobeTel withdrew its motion
for attorneys' fees in the Texas Lawsuit and dismissed the Florida Lawsuit. The
License Agreement was made and entered into in September 2005. The license taken
by us extends further to our customers, bank partners, third party financial
processors and cardholders, and all those in privity with any of them, but only
to the extent those entities' activities relate to us and its license.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 31, 2005 we entered into s subscription agreements with certain
investors for 5% convertible notes payable totaling $4.5 million, with 3 year
Class A Warrants to purchase up to an additional $6,818,181 in common stock. Net
proceeds of $4,150,730 were received, after deducting costs and expenses related
to the transaction. The notes amortize at 12.5% per quarter through September
2007, payable each quarter in cash or common shares.
Under the agreements the notes are convertible into common stock of the Company
at $ 1.65 per share (post-split). Prior to any notice of conversion, the Company
had the right to redeem the note(s) at a premium for cash, subject to a 5-day
right to convert by the investor. The Investors also received one Class A
Warrant to purchase one share of common stock for each share that the notes
would be convertible into had they been converted on the closing date (August
31, 2005) (a total of 2,727,273 shares). The per share exercise price of the
Warrants is $2.50. The proceeds were used primarily for working capital needs.
As of September 30, 2005 and as of the date of this report, no portion of the
notes were converted, nor were any of the warrants exercised.
Item 3. Defaults upon Senior Securities
None
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Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting
On August 11, 2005, by written consent of the majority vote of its shares at the
Company's annual meeting, the shareholders re-elected the Company's directors
and approved all proposals. Shareholders re-elected as directors include,
Timothy Huff, Przemyslaw Kostro, Mitch Siegel, Kyle McMahan, Laina Raveendran
Greene, and Leigh Coleman. Additionally, proposals to ratify Dohan & Co. CPA's
PA as our auditors, increase the number of authorized common shares from 100
million to 150 million (subsequent to the reverse split authorized in the
preceding quarter), and ratify the 2004 employee stock option plan were all
approved.
Item 5. Other Information
Board Appointments and Resignations
On August 30, 2005, Leigh Coleman, a director of the Company, resigned effective
August 18, 2005. There were no disputes with the Company. The Board of Directors
appointed Jonathan Leinwand to the Board of Directors effective August 18, 2005.
Mr. Leinwand is and continues to be our general Counsel.
On September 16, 2005, the Company announced it has named Sir Christopher Meyer,
KCMG, as Chairman of its Board of Directors. The appointment of Sir Christopher,
61, increases the number of independent Directors to three among a total of
seven Board members.
On October 7, 2005 Przemyslaw Kostro resigned as a director of the Company. Mr.
Kostro had no disputes with the Company. The vacancy created by Mr. Kostro's
resignation had not been filled by the date of this report.
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
32
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: November 11, 2005
/s/ Thomas Y. Jimenez
---------------------
Thomas Y. Jimenez, Chief Financial Officer
Date: November 11, 2005
33