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 March 31, 2006
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 May 10, 2006, we had issued and outstanding 103,898,223 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
===========================================================================================================================
March 31, December 31,
2006 2005
(Unaudited) (Audited)
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,135,104 $ 1,228,180
Restricted cash 1,292,000 1,122,000
Accounts receivable, less allowance for doubtful accounts of $492,329 and $409,100 1,287,880 371,618
Loans to employees 3,258 46,068
Prepaid expenses 471,839 184,434
Prepaid expenses - related party, ISG Jet, LLC 170,660 185,960
Inventory 266,230 67,525
Deposits on equipment purchase 108,993 124,993
Deferred tax asset, less valuation allowance of $10,359,842 and $9,828,700 -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,735,964 3,330,778
- ---------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $781,319 and $596,958 7,044,123 7,028,422
- ---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets 9,907,550 9,907,550
Deposits 52,322 52,322
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 9,959,872 9,959,872
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 22,739,959 20,319,072
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
COMMITMENTS AND CONTINGENCIES (NOTE 5)
LIABILITIES
CURRENT LIABILITIES
Accounts payable 794,200 907,208
Due to related payable - Carrier Services, Inc. 259,875 901,606
Due to former employee payable in GTE stock 86,790 237,600
Due to related party payable in GTE stock - Hotzone Wireless, Inc. 2,451,834 2,451,834
Accrued expenses and other liabilities 183,199 643,018
Deferred revenue 301,108 --
Related party payables 57,500 57,500
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,134,506 5,198,766
- ---------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Due to related party payable in GTE stock - Hotzone Wireless, Inc. 4,533,166 4,708,167
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 4,533,166 4,708,167
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,667,672 9,906,933
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Series A Preferred stock, $.001 par value, 10,000,000 shares authorized;
0 shares issued and outstanding: -- --
Series B Preferred stock, $.001 par value, 35,000 shares authorized;
0 shares issued and outstanding: -- --
Series C Preferred stock, $.001 par value, 5,000 shares authorized;
0 shares issued and outstanding: -- --
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;
102,876,802 and 98,192,101 shares issued and outstanding 1,029 982
Additional paid-in capital 88,890,051 81,570,082
Stock subscriptions receivable:
Series D Preferred Stock (500,000) (500,000)
Common Stock (194,004) (44,494)
Accumulated deficit (75,124,789) (71,614,431)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 14,072,287 10,412,139
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,739,959 $ 20,319,072
===========================================================================================================================
See accompanying notes.
3
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS (Unaudited)
===========================================================================================================
For the three months Ended
March 31,
2006 2005
- -----------------------------------------------------------------------------------------------------------
REVENUES EARNED $ 22,294,725 $ 18,010,643
COST OF REVENUES EARNED 22,213,503 17,283,963
- -----------------------------------------------------------------------------------------------------------
GROSS MARGIN 81,222 726,680
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Payroll and related taxes 857,744 570,591
Consulting and professional fees 389,756 1,283,458
Officers Compensation 481,742 268,534
Bad debts 83,229 94,092
Investment banking and financing fees -- 439,715
Investor and public relations 94,151 25,730
Commissions expense - related party Carrier Services, Inc. 694 724,513
Research and development 524,085 443,924
Other operating expenses 355,333 148,558
Telephone and communications 62,574 21,947
Travel and related expenses 356,286 126,180
Rents 130,023 69,958
Insurance and employee benefits 113,692 63,416
Depreciation and amortization 184,848 18,402
- -----------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 3,634,157 4,299,018
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE OTHER INCOME (EXPENSE) AND INCOME TAXES (3,552,935) (3,572,338)
- -----------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 42,577 6,195
Interest expense -- (33,910)
- -----------------------------------------------------------------------------------------------------------
NET OTHER INCOME (EXPENSE) 42,577 (27,715)
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (3,510,358) (3,600,053)
INCOME TAXES
Provision for income taxes -- --
Tax benefit from utilization of net operating loss carryforward -- --
- -----------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES -- --
- -----------------------------------------------------------------------------------------------------------
NET LOSS $ (3,510,358) $ (3,600,053)
===========================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 101,353,367 66,121,945
DILUTED 101,353,367 66,121,945
===========================================================================================================
NET LOSS PER SHARE
BASIC $(0.03) $(0.05)
DILUTED $(0.03) $(0.05)
===========================================================================================================
See accompanying notes.
4
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
===================================================================================================================================
For the Three Months Ended
March 31,
2006 2005
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (3,510,358) (3,600,053)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 229,848 35,902
Bad debt expense 83,229 94,092
Common stock options exchanged for services 118,336 --
Common stock exchanged for services -- 1,166,400
(Increase) decrease in assets: -- --
Accounts receivable (999,491) (929,141)
Restricted cash (170,000) --
Loans to employees 42,810 5,541
Prepaid expenses (287,405) 17,605
Prepaid expenses - related party, ISG Jets, LLC 15,300 --
Inventory (198,705) 3,000
Deposits 16,000 (1,351)
Increase (decrease) in liabilities:
Accounts payable (113,921) 65,504
Signing bonuses payable to Sanswire employees with Globetel stock -- 300,000
Due to related party - Carrier Services, Inc. (106,231) 481,363
Due to related party payable in GTE stock - Hotzone Wireless, Inc. (175,000) --
Accrued expenses and other liabilities (459,818) (134,906)
Deferred revenues 301,108 (29,312)
-------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (5,214,298) (2,525,356)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (245,550) (5,151,177)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (245,550) (5,151,177)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock - Series B -- 5,085,200
Sale of common stock -- 2,631,120
Sale of common stock - exercises of options 24,713 --
Proceeds from unconsolidated foreign subsidiary - CGI -- 1,223,786
Proceeds from exercises of stock warrants 6,341,148 --
Proceeds from convertible notes payable -- 1,800,000
Payments on loan payable to unconsolidated foreign subsidiary - CGI -- (60,000)
Payments on capital lease financing -- (691)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,365,861 10,679,415
- -----------------------------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash 911 --
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS 906,924 3,002,882
CASH AND EQUIVALENTS - BEGINNING 1,228,180 601,559
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS - ENDING $ 2,135,104 $ 3,604,441
===================================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ -- $ 6,537
Income taxes $ -- $ --
In addition to amounts reflected above, common stock was issued for:
Options issued for services $ 118,336 $ --
Shares issued for services $ -- $ 1,166,400
Shares issued for convertible notes payable $ -- $ 1,800,000
Shares issued as payment due to former employee in GTE stock $ 150,810
Conversion of Series A preferred stock to common stock $ -- $ 585,000
Payment of Series B preferred stock subscriptions receivable equipment $ -- $ 4,835,200
Non-cash Financing Activities:
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 March 31, 2006
- --------------------------------------------------------------------------------
See accompanying notes.
5
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2006
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 three months ended March 31, 2006, are not necessarily
indicative of the results to be expected for the year ending December 31, 2006.
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-K
for the year ended December 31, 2005. The accompanying financial statements
should be read in conjunction with the financial statements and notes. However,
to assist the users of these financial statements, accounting policies for
certain significant accounts and transactions are repeated below,
notwithstanding the absence of any significant changes in any policies since the
last reported period, other than as noted in "Stock-Based Compensation" below.
Basis of Presentation
The financial statements include the accounts of GlobeTel Communications Corp.
and its wholly-owned subsidiaries. All material inter-company balances and
transactions were eliminated in the consolidation.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform to the current year presentation. There were
no material changes in classifications made to previously issued financial
statements.
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. ("GlobeTel") is engaged in the business of
providing telecommunications and financial services. GlobeTel operates business
units in stored value cards, as a certified MasterCard processor, the sale of
Internet telephony using Voice over Internet Protocol ("VoIP") technology and
equipment, and wireless communications both domestically and internationally,
including Mexico and certain countries in South America, Europe and Asia. In
addition, our subsidiary, Sanswire Networks, LLC, is developing a National
Wireless Broadband Network utilizing high-altitude airships called Stratellites
that will be used to provide wireless voice, video, and data services. Although
through March 31, 2006, only the telecommunications activities produced
revenues, all of our operations are considered to be of relatively equal
importance, based on the anticipation of future revenue producing activities and
substantial investment in assets related to all of our operations.
Organization and Capitalization
In May 2005, GlobeTel approved a reverse split of shares of common stock on a
one for fifteen (1:15) basis and changed the number of shares authorized to
100,000,000. In the Company's annual shareholders meeting on August 11, 2005,
the shareholders voted to increase the shares authorized from 100,000,000 to
150,000,000.
6
All common stock amounts in this report have been retroactively restated to
account for the reverse stock split, unless otherwise noted.
The American Stock Exchange (AMEX) granted approval for the Company to list its
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 connections with our
Mexico network, Mexican tax refunds receivable. The Company estimates doubtful
accounts on an item-to-item basis and includes over-aged accounts as part of
allowance for doubtful accounts, which are generally accounts that are
ninety-days or more overdue. When accounts are deemed uncollectible, the account
receivable is charged off and the allowance account is reduced accordingly. Bad
debt expense for the three months ended March 31, 2006 and 2005 was $83,229 and
$94,092, respectively.
Inventory
Inventory is recorded at lower-of-cost-or-market, first-in first-out (FIFO)
basis. Inventory at March 31, 2006 consisted primarily of component parts
related to the Company's wireless operations and communications equipment, and
at December 31, 2005 consisted primarily of communications equipment (IP Phones)
and component parts related to the Company's wireless operations.
During the three months ended March 31, 2006, the Company wrote off $16,000 of
IP Phones inventory considered obsolete and charged this amount to expense.
Concentrations 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 several financial institutions. As of March 31, 2006 and
December 31, 2005, the Company had $1,727,750 and $898,701 respectively, in
excess of federally insured limits.
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, Europe 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.
In January 2006, investors exercised all of the outstanding 2,727,273 Class A
Warrants at $2.50 per share for gross proceeds of $6,341,148, net of broker fees
($477,032 which was charged against Additional Paid-in Capital). The Company
also agreed to issue the investors a total of 1,935,606 new warrants with an
exercise price of $4.00 per share, and the warrants expire on August 31, 2008.
The Company anticipates increased cash flows from 2006 sales activities;
however, additional cash will still be needed to support operations. Management
believes it can continue to raise capital from various funding sources, which
when added to budgeted sales and current working capital, will be sufficient to
sustain operations at its current level through March 31, 2007. However, if
budgeted sales levels are not achieved, or if significant unanticipated
expenditures occur, or if the Company is unable to obtain the necessary funding,
the Company may have to modify its business plan, reduce or discontinue some of
its operations or seek a buyer for all or part of its assets to continue as a
going concern through March 31, 2007.
Stock-Based Compensation
Through December 31, 2005, the Company accounted for its stock-based
compensation arrangements with employees in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. As such, compensation expense under
fixed term option plans was recorded at the date of grant only to the extent
that the market value of the underlying stock at the date of grant exceeded the
exercise price. In accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), since the Company had continued to apply the
principles of APB 25 to employee stock compensation, pro forma loss and pro
forma loss per share information had been presented as if the options had been
valued at their fair values. The Company recognized compensation expense for
stock options, common stock and other equity instruments issued to non-employees
for services received based upon the fair value of the services or equity
instruments issued, whichever is more readily determined. Stock compensation
expense was recognized as the stock option is earned, which was generally over
the vesting period of the underlying option.
7
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation." This statement amends SFAS 123. SFAS 148 provided alternative
methods of transition for companies that voluntarily change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, this statement amended the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." ("FIN 44") The Company
adopted FIN 44, effective July 1, 2000, with respect to certain provisions
applicable to new awards, option re-pricings, and changes in grantee status. FIN
44 addresses practice issues related to the application of APB 25. The Company
accounted for stock-based compensation issued to non-employees and consultants
in accordance with the provisions of SFAS 123 and SFAS 148 and EITF No. 96-18,
"Accounting for Equity Instruments that are issued to Other Than Employees for
Acquiring or in Conjunction with Selling, Goods or Services." The measurement
date used is the earlier of either the performance commitment date or the date
at which the equity instrument holder's performance is complete.
In December 2005, the FASB issued SFAS No. 123 (Revised 2005), Share-Based
Payments, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows.
Effective for the years beginning January 1, 2006, the Company recognizes all
share-based payments to employees, including grants of employee stock options,
in the statement of operations based on their fair values. Stock-based
compensation expense for stock options is recognized as the stock option is
earned, which is generally over the vesting period of the underlying option.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0%
Expected stock price volatility 50%
Risk-free interest rate 5.0%
Expected life of options 1.5 years
In accordance with prior accounting standards as discussed above, the Company
had continued to apply the principles of APB 25, through December 31, 2005, to
employee stock compensation, pro forma loss and pro forma loss per share
information had been presented in annual financial statements as if the options
had been valued at their fair values. The above assumptions are substantially
the same as those used for pro-forma reporting purposes in 2005. No restatement
of prior periods, cumulative effect of an accounting change or pro-forma
presentation are required under FASB 123(R).
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 March 31, 2006 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
March 31, 2006 whereas the fair value of the intangible assets exceed its
carrying amount.
NOTE 2. ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATIONS OF CREDIT
RISK AND ECONOMIC DEPENDENCE
As of March 31, 2006, the Company had approximately 40 customers of which seven
customers accounted for approximately 62% of accounts receivable balance,
including one customer accounting for 36% (or $456,704).
Sales attributable to foreign operations for the three months ended March 31,
2006 were $22,311,891 or 99.9% of total sales and $17,751,449 or 99% of total
sales for the three months ended March 31, 2005. Revenue is attributable to
various foreign countries, since calls either originate or terminate in these
countries. All transactions, other than those of GlobeTel Wireless Europe GmbH,
a German corporation, were accounted for in U.S. currency, and no material gain
or loss was recorded on fluctuations in foreign currency.
8
NOTE 3 - INVESTMENT IN AND DISPOSITION OF FORMER UNCONSOLIDATED FOREIGN
SUBSIDIARY - CGI
Prior to December 2005, the Company held a 73.15% interest in Consolidated
Global Investments, Inc. (CGI), an Australian corporation and an unconsolidated
foreign subsidiary.
In December 2005, the parties agreed that: (1) GlobeTel would return all shares
and warrants it held in CGI to CGI, resulting in complete elimination of any
ownership interest in CGI; (2) GlobeTel would not be required to return a net of
$1,449,509 advanced from CGI; (3) CGI would retain 333,334 shares of GlobeTel
common stock; and (4) CGI would return to GlobeTel 280,000 shares of GlobeTel
common stock. As of the date of this report, a total of 256,666 shares were
received from CGI. The Company is expected to receive the remaining 23,334
shares from CGI in the near term during 2006. The shares returned are to be
utilized to satisfy the obligation with CSI (see Note 4 below).
During 2005, the Company recorded a loss of $352,300 upon disposition of the
former unconsolidated foreign subsidiary, representing the cash invested in CGI
through December 31, 2004. The $1,449,509 retained by the Company was
reclassified to additional paid-in capital, because it represented monies
derived from the sale of the Company stock.
NOTE 4 - DUE TO RELATED PARTY - CSI
During 2004 and 2005, the Company entered into contractual agreements with
Carrier Services, Inc. (CSI) pursuant to which CSI would be compensated with the
issuance of (or combination of the issuance of the net proceeds from the sale
of) a total of 333,333 shares of GlobeTel's common stock upon achieving certain
revenue targets.
Also, in 2005, the Company entered into two asset purchase agreements with CSI
to acquire telecommunication equipment totaling $837,836. The parties agreed
that the purchase price for this equipment would be paid with (1) 233,333 shares
of GlobeTel's common stock; and (2) $286,136 in cash. In addition, 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.
Pursuant to these agreements, the Company owed CSI a net amount of $901,606 as
of December 31, 2005, consisting of (1) 336,667 shares of GlobeTel's common
stock; and (2) $106,231 in cash.
In January 2006, the Company paid CSI the $106,231 in cash and 226,666 shares of
GlobeTel stock were transferred to CSI (from the GlobeTel shares returned by
CGI; see Note 3 above), and 110,001 shares, valued at $259,875, are currently
owed. The shares owed to CSI as of March 31, 2006 and December 31, 2005 were
recorded at approximately $2.36 per share, based on the weighted-average fair
market value of the shares on the respective dates the Company became obligated
to issue the shares.
In connection with these and other prior contractual arrangements with CSI, for
the three months ended March 31, 2006 and 2005, the Company recorded commission
expense of $694 and $724,513, respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Due to related party payable - Hotzone Wireless, Inc.
On June 2, 2005, the Company entered into an agreement to acquire assets of
HotZone Wireless, Inc.("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 had placed all of HotZone's tangible assets into
GlobeTel Wireless Corp. (GlobeTel Wireless), its Florida-based, wholly-owned
subsidiary.
The balance due to Hotzone as of March 31, 2006 is $6,985,000, of which
$2,451,834 is the current portion and $4,533,166 is the long-term portion
Litigation
See Part II - Other Information, reference Item 1 under Legal proceedings.
9
GlobeTel Wireless, Russian Joint Venture Agreement
As of December 30, 2005, GlobeTel Wireless Corp. ("GTEW") had entered into a
binding agreement to install wireless communications networks in 30 cities
throughout the Russian Federation, providing broadband, VOIP and DECT
technologies. GTEW had entered into an agreement with LLC Internafta
("Internafta") of Moscow, Russia, whereby Internafta would pay to GTEW a series
of four construction payments totaling $600 million for the installation of an
array of proprietary networks to be installed in Russia's 30 largest cities,
starting with Moscow and St. Petersburg. GTEW would both manage the completed
network and would retain an ongoing 50% interest in the operations of the
network, allowing the Company to enjoy the benefits of the recurring revenue
stream. GlobeTel had planned to roll out the network in 3 stages, comprising 10
cities each, over the next 27 months.
The December 2005 contract called for four equal payments of $150 million each,
of which the first payment, representing an initial deposit, was to be received
by GlobeTel in January 2006. On January 23, 2006, Internafta presented to
GlobeTel a document represented to be a Standby Letter of Credit drawn on Banco
do Brasil S.A. (Rio de Janeiro) in the amount of $300 million. This Standby
Letter of Credit was provided to facilitate the first phase of the network
construction. The banking instrument had a maturity date of two years and needed
to be confirmed and accepted by a correspondent bank before GlobeTel could
receive any funds from the instrument. The terms and conditions of what
constituted an acceptable and functional banking instrument as it related to the
December 2005 contract became a matter of interpretation between the parties.
After extensive negotiations, Internafta agreed to take sole responsibility for
facilitating the financing of their banking instrument in order to be able to
present readily available funds to GlobeTel. The parties continue to work in
good faith and remain committed to building a state-of-the-art wireless network
in Russia.
On March 2, 2006, the Company announced that Internafta had requested an
additional delay in the closing of the funding until the week of March 6, 2006.
The Company had provided Internafta and its banks with a significantly expanded
business plan outlining, in detail, the Company's program for equipment
manufacturing, delivery, installation, testing, monitoring, staffing, progress
payment requirements, and other pertinent information. Internafta advised the
Company that its funding has been approved by its bank syndicate, subject only
to the bank's final review and analysis of the business plan.
GlobeTel had also indicated that if such a funding commitment not be forthcoming
by the end of the week of March 6th or unless the banking syndicate provides
written assurances of the imminent delivery of such commitment to GlobeTel, the
Company would have no choice but to exercise its right to default the contract
for non-payment.
On March 17, 2006, the Company announced that based upon differences between the
Company and Internafta on the financing process, the parties have agreed to
revise their agreement to more accurately reflect the timing of payments
GlobeTel expected to receive for the build out of the 30 city wireless network
in Russia and allow Internafta additional time to begin making payments.
Internafta had informed GlobeTel that its bank recommends that smaller, more
frequent, progress payments be established so that the necessary staged payments
can be delivered to GlobeTel as and when the network is delivered and installed.
These smaller, more frequent, staged payments did not reduce the total capital
value of the agreement with GlobeTel Wireless or change any other terms of the
agreement. GlobeTel would still receive $600 million for deployment of the
network. The exact amount of the new proposed initial deposit, and the size and
timing of the new proposed progress payments, would be discussed and agreed with
GlobeTel once the bank had completed its due diligence and when the bank group
formally accepts the terms of Internafta's proposed banking instrument. See
details in subsequent event section.
Leases and Rents
As of March 31, 2006, the Company had leased offices and facilities in various
locations in California, Florida and Germany. Rent expense for three months
ended March 31, 2006 and 2005 was $130,023 and $69,958, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
Convertible Notes Payable - Stock Warrants
Under the convertible notes payable agreements from August 31, 2005, 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 2,727,272 shares).
The per share exercise price of the warrants was $2.50. The investors exercised
all of the outstanding warrants, and In January 2006, the Company received net
proceeds of $6,341,148 ($6,818,180, less broker fees of $477,032, which was
charged against Additional Paid-in Capital).
10
In addition, the Company issued the investors a total of 1,935,606 new warrants
with an exercise price of $4.00 per share. The investors were given "piggy-back"
registration rights for the warrants. If the warrants have not been registered
after one year, then the investors have a demand registration right. The
warrants expire on August 31, 2008. As of the date of this report, none of these
warrants were exercised.
Directors' Compensation for Services
During the three months ended March 31, 2006, the Company accrued Director's
compensation of $47,500 in cash and 10,326 shares valued at $23,750 ($2.30 per
share) and 10,000 shares of stock options valued at $8,901 ($0.8901 per share)
for committee Chairman/members. The fair value of each option granted is
estimated on the date of the grant using the Black-Scholes option-pricing model,
as explained in Note 1 above, and the above options all had terms of three years
and were fully vested at the grant date.
On March 20, 2006, upon appointment as Chairman of the GlobeTel Board of
Directors, Mr. J. Randolph Dumas' annual cash compensation was increased from
$250,000 to $400,000, and stock compensation (payable in stock options,
exercisable at $1.21 per share, per prior agreement) was reduced from $750,000
to $600,000 (total aggregate dollar amount of options purchasable). Mr. Dumas
was awarded 149,793 shares of stock options valued at $118,336 ($0.79 per share,
based on intrinsic value, with a fair market value of $2.00 per share on the
grant date, less exercise price of $1.21 per share). The recorded value of the
options awarded was computed as of the date of the grant (November 11, 2006, per
prior agreement) using the intrinsic value method per APB 25, as explained in
Note 1 above (whereas the options were granted prior to January 1, 2006), and
the above options have terms of three years and become vested as the related
services are rendered.
Stock Options Exercised
During the three months ended March 31, 2006, 212,538 options shares were
exercised and issued (net of shares used to pay for "cashless options") with
payments of cash and stock subscriptions receivable of $174,492. The shares
included 23,596 issued to a former director and 31,985 issued to a current
director for options granted as director fees in 2005. The remainder of 156,957
shares were issued to current and former employees for options granted pursuant
to the 2004 Employee Stock Options Bonus Plan.
In addition, a total of 1,706,419 options shares were exercised and issued (net
of shares used to pay for "cashless options") to the former President and
Director (463,114 shares) and an affiliate of the former President and Director
(1,243,305 shares). The shares were granted pursuant to a settlement agreement
the parties entered into in 2005.
No expense for any of the above option shares issued were recorded, whereas the
options were expensed when granted/vested.
Registration Statement
On January 4, 2006, GlobeTel filed a registration statement with the Securities
and Exchange Commission on Form S-8 to register 185,726 shares offered to the
employees in employee benefit plans. The offering price per share is $3.89 and
the aggregate maximum offering amount $722,474.
Preferred Stock - Series D
On July 28, 2004, the Company agreed to sell 1,000 shares of Series D Preferred
Stock of GlobeTel Communications Corp. ("GTE") to Mitchell A. Siegel, former
Chief Operating Officer and current Vice President and Director of the Company.
The Company intended to use $1 million of this investment for working capital
and purchase of equipment necessary to expand the Company's stored value card
programs. The Certificate of Designation for the Series D Preferred Stock was
filed with the State of Delaware on July 30, 2004.
Mr. Siegel agreed to advance $1 million to GTEL 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, and in June 2005, remitted the second
$250,000.
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 GTE's authorized
shares of common stock for a period of three years from the first closing date.
11
For a period of two years after the first closing date, the Series D Preferred
Stock shall not be convertible into shares of GTE common stock. Beginning on the
second anniversary of the first closing date and for a period of one year
thereafter, Mr. Siegel may convert (in whole or part) its Series D Preferred
Stock into GTE common stock. The 1000 shares of Series D Preferred Stock will
represent 2% of the GTE 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 GTE common stock. On the third anniversary of the first
closing date, all shares of Series D Preferred Stock owned by Mr. Siegel will
automatically be converted into GTE 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 GTE's common
stock.
The Company expects to receive the remaining $500,000 in stock subscriptions
receivable from Mr. Siegel within one year.
NOTE 7 - EARNINGS (LOSS) PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number (after the 1:15 reverse stock split)
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 8 - SEGMENT INFORMATION
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment sales prices are
market based. The Company evaluates performance based on operating earnings of
the respective business units, segregated into telecommunications services
(Telecom) (international wholesale carrier traffic, networks, prepaid calling
services, internet telephony, stored value services, the Sanswire Stratellite
project (Sanswire), and wireless communications services (Wireless), 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
current and prior period is as follows:
- ------------------------------------------------------------------------------------------------------------------------------
2006 Telecom Sanswire Wireless Unallocated Totals
- ------------------------------------------------------------------------------------------------------------------------------
Revenues Earned 22,276,464 0 2,974 15,287 22,294,725
Cost of Revenue Earned 22,189,217 0 4,206 20,080 22,213,503
----------- ----------- ----------- ----------- -----------
Gross Margin(Loss) 87,247 0 (1,232) (4,793) 81,222
Expenses 353,714 949,222 470,721 1,860,500 3,634,157
----------- ----------- ----------- ----------- -----------
Loss Before Other Income (Expense) and Income Taxes (266,467) (949,222) (471,953) (1,865,293) (3,552,935)
Other Income (Expenses) 5 0 11,115 31,457 42,577
----------- ----------- ----------- ----------- -----------
Loss Before Income Taxes (266,462) (949,222) (460,838) (1,833,836) (3,510,358)
Income Taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net Loss (266,462) (949,222) (460,838) (1,833,836) (3,510,358)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
2005 Telecom Sanswire Wireless Unallocated Totals
- ------------------------------------------------------------------------------------------------------------------------------
Revenues Earned 18,010,643 0 0 0 18,010,643
Cost of Revenue Earned 17,283,963 0 0 0 17,283,963
----------- ----------- ----------- ----------- -----------
Gross Margin(Loss) 726,680 0 0 0 726,680
Expenses 841,783 1,018,669 0 2,438,566 4,299,018
----------- ----------- ----------- ----------- -----------
Loss Before Other Income (Expense) and Income Taxes (115,103) (1,018,669) 0 (2,438,566) (3,572,338)
Other Income (Expenses) 0 0 0 (27,715) (27,715)
----------- ----------- ----------- ----------- -----------
Loss Before Income Taxes (115,103) (1,018,669) 0 (2,466,281) (3,600,053)
Income Taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net Loss (115,103) (1,018,669) 0 (2,466,281) (3,600,053)
- ------------------------------------------------------------------------------------------------------------------------------
NOTE 9 - SUBSEQUENT EVENTS
Securities Class Action Filed Against Globetel Communications Corp
On April 28, 2006, the law firm of Sarraf Gentile LLP commenced a securities
fraud class action lawsuit on behalf of those investors who acquired the
securities of GlobeTel Communications Corp. during the period December 30, 2005
to April 11, 2006. The lawsuit is pending in the United States District Court
for the Southern District of Florida and names as defendants GlobeTel and
certain of its top ranking executives. The Company believes that the suit is
without merit and will vigorously defend against it.
12
GlobeTel Wireless, Russian Joint Venture Agreement
On May 1, 2006, the Company announced that on Tuesday, April 25, it instructed
its lawyers in Moscow, Cleary, Gottlieb, Steen & Hamilton, to prepare and
subsequently deliver to LLC Internafta a formal Default Notice relating to the
Agreement signed between GlobeTel and Internafta on December 29, 2005.See note 5
for details.
Sales of Common Stock
On April 27, 2006 the Company entered into an agreement with Caterham Financial
Management, LTD (`Caterham") and received $1,050,000 for 500,000 shares of GTE
common stock at $2.10 per share, in accordance with a Securities Purchase
agreement executed with Caterham. The agreement stipulates that, before June 25,
2006, Caterham will purchase from the Company, an additional 1,500,000 shares of
GTE stock at 84% of the market price, but not less than $2.00 per share.
However, should the market price fall under $2.25 per share, then Caterham would
not be obligated to make the purchase.
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.
General
GlobeTelX(R) Product Line
On February 15, 2006, we announced the launch of its new GlobeTelX(R) product
line of VoIP Gateways. GlobeTelX is a series of advanced VoIP CPE (Customer
Premise Equipment) units based on Asterisk IAX2 (Inter-Asterisk Exchange Version
2), jointly developed with Taiwan-based Accel Inc. and IP-WARE S.L. based in
Spain.
Sanswire Networks LLC Commences Float Testing of Sanswire II
On March 1, 2006, we announced that our Sanswire Networks LLC subsidiary had
successfully floated the Sanswire II Technology Demonstrator Airship in
Palmdale, California. This initial testing phase marked the first test of many
currently planned for the program. This first phase will test the integrated
subsystems within the Stratellite. The Sanswire float test followed our
streamlined test procedure in order to validate the envelope integrity with the
Sanswire proprietary lifting system and carbon composite structure. The testing
process was governed by test procedures through a strict Quality Management
System, which ensures both the safety and success of this demonstration.
13
Money Remittance Service Program with Travelex
On April 17, 2006, we announced that we launched its money remittance service
program offered in conjunction with Travelex Currency Services, Inc. GlobeTel's
technology has been deployed to enable remittance functions through Fidelity
Express, a national leader in money order generation and walk-in bill payment
solutions with a growing merchant base of more than 5,000 locations in 22
states. Fidelity Express accepts payments through authorized retailers,
primarily supermarkets and convenience stores.
Results of Operations
Three months ended March 31, 2006, ("2006" or "the current period") compared to
the three months ended March 31, 2005, ("2005" or "the prior period").
Revenues. During the current period, our gross revenues were $22,294,725
representing an increase of 24% over the prior period when our gross revenues
were $18,010,643. Our revenues increased primarily due to revenues from our
subsidiary, Centerline and its subsidiaries, which recorded consolidated
revenues of $22,275,244, or 99.9% of total revenues, consisting primarily of
wholesale traffic revenues (telecommunications minutes). The remainder of our
revenues were derived from sales of IP Phones.
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 $22,213,503 for the current year, compared to
$17,283,963 for the prior period. Our goal is to replace non-margin generating
traffic in the short-term with margin generated traffic. We are currently
working to establish additional direct routes, while continuing to increase
sales and accordingly, its customer base.
Gross Margin. Our gross margin was $81,222 or 0.4% of total revenues for the
current period, compared to $726,680 or 4% of total revenues in the prior
period, a decrease of $645,458 or (89%). The decrease is primarily due to the
fact that there was lower margin on resale of wholesale minutes related to the
increased cost of the minutes to terminate. We expect to derive higher margins
in the future as our wholesale traffic business experiences incremental growth.
Operating Expenses. Our operating expenses for the current period were
$3,634,157 compared to prior period operating expenses of $4,299,018, a decrease
of $664,861 or (16%). The decrease is primarily due to the following:
Employee payroll and related taxes for the current period were $857,744 compared
to $570,591, an increase of $287,153 or 50%. 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. As of March 31, 2006, our employee headcount increased to
75 from 44 at March 31, 2005.
Consulting and professional fees decreased to $389,756 from $1,283,458 due
primarily to a reduction in non-cash compensation to $0 from $716,400. There was
also a $165,775 decrease in expenses related to project and market development
expenses as we strive towards launching new products for 2006.
Investment banking and financing fees decreased to $0 in the current period as
compared to $439,715 for 2005, as this amount related to obtaining funding of
approximately $4.8 million during the three months ended March 31, 2005.
We incurred $694 of sales commissions to Carrier Services, Inc. ("CSI") for our
Centerline operations during the current period, compared to $724,513 in the
prior year. This variance is due to commission payments for revenue milestones
that were achieved during fiscal year 2005. See Note 4 to financial statements
regarding amounts due to CSI.
We incurred $524,085 of research and development costs for our Sanswire project
- - development of the Stratellite during the current period, compared to $443,924
in the prior year, an increase of $80,161. This is mainly due to costs related
to the successful floating of Sanswire II Technology Demonstrator Airship along
with the initial testing phases.
Income (Loss) from Operations. We had an operating loss of ($3,552,935) for the
current period as compared to an operating loss of ($3,572,338) for the prior
period. Our operating loss remained relatively stable as compared to prior
years. 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 as it relates to the expected increase in revenues, related to
our subsidiaries.
14
Other Income (Expense). We had net other income totaling $42,577 during the
current period compared to other expense of ($27,715) in the prior period. The
variance is due to elimination of debt in the current year.
Net Income (Loss). We had a net loss of ($3,510,358) in the current period
compared to a net loss of ($3,600,053) in the prior period. The net loss is
primarily attributable to the decrease in gross margin and increase in the
operating expenses as discussed above.
Liquidity and Capital Resources
Assets. At March 31, 2006, we had total assets of $22,739,959 compared to total
assets of $20,319,072 as of December 31, 2005.
The current assets at March 31, 2006, were $5,735,964, compared to $3,330,778 at
December 31, 2005. As of March 31, 2006, we had $2,135,104 of cash and cash
equivalents compared to $1,228,180 as of December 31, 2005. The increase in cash
and cash equivalents is primarily related to the funding related to the
conversion of stock warrants during the current period.
The Company had restricted cash of $1,292,000 as of March 31, 2006 representing
security for letters of credit to suppliers for MasterCard in the amount of
$1,000,000 in support of the Store Value Card program, a rental deposit for Los
Angeles World Airport related to the Palmdale Hanger occupied by Sanswire
Networks, LLC in the amount of $72,000 and for various wholesale carriers in the
amount of $220,000. $1,122,000 of Letters of credit to vendors existed as of
December 31, 2005. The Company anticipates replacing this security with its
restricted stock within the next operating cycle.
Our net accounts receivable were $1,287,880 as of March 31, 2006, compared to
$371,618 as of December 31, 2005. As of March 31, 2006, the Company had
approximately 40 customers of which seven customers accounted for approximately
62% of accounts receivable balance, including one customer accounting for 36%
(or $456,704). As of March 31, 2006, we have increased our allowance for
doubtful accounts by $83,229.
Other current assets included primarily, as of March 31, 2006, $170,660 in
prepayment to a related party, ISG Jet, LLC compared to $185,960 as of December
31, 2005; $471,839 in prepaid expenses related to prepaid minutes with carriers,
compared to $184,434 at December 31, 2005; $266,230 of inventory related to
components for our wireless operations and IP Phones compared to $67,525 as of
December 31, 2005 and deposits on equipment purchases of $108,993 compared to
$124,993 as of December 31, 2005.
We had other assets totaling $9,959,872 as of March 31, 2006 and December 31,
2005. Both balances are primarily related to the intangible assets associated
with the Sanswire Networks and Hotzone Wireless acquisitions. The Hotzone
Wireless acquisition was made during fiscal year 2005, while the Sanswire
Networks acquisition was made during fiscal year 2004.
Liabilities. At March 31, 2006, we had total liabilities of $8,667,672 compared
to total liabilities of $9,906,933 as of December 31, 2005.
The current liabilities at March 31, 2006 were $4,134,506 compared to $5,198,766
at December 31, 2005, a decrease of $1,064,260. The variance is attributed
primarily to reduction in the due to related payable to CSI (see Note 4 above)
to $259,875 from $901,606, a $150,810 reduction (paid in stock) in the amounts
due to former employee to $86,790 from $237,600, an increase of $301,108
representing deposits due to Telecom customers, classified as deferred revenues,
and a reduction in other accrued liabilities to $183,199 from $643,018, a
reduction of $459,819.
Cash Flows. Our cash used in operating activities was ($5,214,298) for the
current period, compared to ($2,525,356) 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 was ($245,550) as compared to ($5,151,177)
in the prior period, which mainly due to less property and equipment
acquisitions as our telecommunication program is currently operational as
compared to acquisition and expansion of new telecommunications equipment in the
prior period.
Net cash provided by financing activities was $6,365,861, principally from
proceeds from the conversion of stock warrants, netting $6,341,148 (net of
broker fees of $477,032, which was charged against Additional Paid-in Capital)
for the current period, compared to $10,679,415 in the prior period, when we
received proceed of approximately $11 million from proceeds for sales of
preferred stock, sales of common stock, convertible notes payables and from our
former unconsolidated foreign subsidiary.
15
As detailed in the financial statements, we have stock subscriptions receivable
for preferred shares that will raise a total of approximately $500,000 in cash
in 2006, primarily in the form of financing provided by Series D preferred
shareholders. In addition, we anticipate increased cash flows from 2006 sales
activities; however, additional cash will still be needed to support operations.
Management believes it can continue to raise capital from various funding
sources, which when added to budgeted sales and current working capital, will be
sufficient to sustain operations at its current level through March 31, 2007.
However, if budgeted sales levels are not achieved, or if significant
unanticipated expenditures occur, or if the Company is unable to obtain the
necessary funding, the Company may have to modify its business plan, reduce or
discontinue some of its operations or seek a buyer for all or part of its assets
to continue as a going concern through March 31, 2007.
As reflected in the accompanying financial statements, during the period ended
March 31, 2006, we had a net loss of ($3,510,358) compared to a net loss of
($3,600,053) during the prior period. Consequently, there is an accumulated
deficit of ($75,124,789) at March 31, 2006, compared to ($71,614,431) at
December 31, 2005.
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
March 31, 2006. 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 March 31,
2006, 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, 2005, the Company's independent auditors, Dohan
and Company, CPA's, P.A. ("Dohan") advised management and the Board of Directors
that in connection with its audit of the Company's consolidated financial
statements for the year ended December 31, 2005, it had noted no 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.
16
Although the independent auditors did not report any material weaknesses in
internal controls, as noted above, the Company has made and is continuing to
make changes in its controls and procedures, including its internal control over
financial reporting, aimed at enhancing their effectiveness and ensuring that
the Company's systems evolve with, and meet the needs of, the Company's
business. As further noted above, the Company is also continually striving to
improve its management and operational efficiency and the Company expects that
its efforts in that regard will from time to time directly or indirectly affect
the Company's controls and procedures, including its internal control over
financial reporting.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation. The Company has established a financial reporting
controls committee, which meets quarterly to address corporate financial issues
and has added one more employee to its accounting staff. Furthermore, we have
restructured departmental responsibilities and we are currently in the process
of implementing a new accounting system.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Mexico Associate and Customer Litigation
We have a legal action against our associate and customer in Mexico for
non-payment of the amount they owe the Company. This customer has substantial
assets, including telecommunications equipment, existing working networks and
Mexican tax refunds which they have proposed to turn over to us. We filed a
motion in the Mexican courts which was necessary to formally request that we
become the assigned payee of the tax refund receivable and formally secure the
equipment and to take over the operations of the existing networks.
In February 2005, the customer agreed that proceeds from the network operations
were to be paid totally to us, including the customer's portion of the profit
sharing, until the amount owed has been fully paid. Upon full payment, we will
begin the sharing profits again in accordance with the contract.
We received a judgment on February 14, 2005, in the amount of $330,000. It is
not certain of the amounts that, ultimately, will be realized from the Mexico
associate.
This situation above with our customer caused us to record an allowance for bad
debt expense for the fiscal year ending 2004. In addition, this customer also
caused us to record another allowance for bad debt expense during 2005 in
relation to the loss on a Mexican Tax Refund in the amount of $382,160.
Former Consultants Litigation
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 had 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, which has since been paid. 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.
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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.
The parties entered into an agreement to proceed before a Judicial Hearing
Officer for a non-jury trial which is scheduled for May 17, 2006. The outcome
cannot be projected with any certainty. However, the company does not believe
that it will be materially adversely affected by the outcome of the proceeding.
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 the Company is 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 investors holding convertible notes payable total $4.5
million 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. Under these agreements, all of
these shares were exercised in January 2006. The proceeds were used primarily
for working capital needs.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters brought to a vote of security holders during the quarter
ended March 31, 2005.
Item 5. Other Information
Officers and Directors Appointments / Resignations
On January 13, 2006, the Board of Directors appointed Dorian Klein and Michael
P. Castellano to serve as directors on GlobeTel's Board of Directors. Mr.
Castellano also serves as Chairman of the Audit Committee and is a member of the
Compensation and Nominating Committees. Mr. Klein serves on GlobeTel's Audit
Committee and also serves as Chairman of the Compensation Committee and is a
member of the Nominating Committees.
On February 17, 2006, we announced that Sir Christopher Meyer, its Non-Executive
Chairman, resigned his position as Chairman of Globetel as he advised the Board
that he felt unable to commit the time to the Chairmanship of GlobeTel that the
Company's shareholders had the right to expect and requested a change in his
status to that of an Independent Director . Effective March 19, 2006, he
resigned his position as an Independent Director, however, on March 23, 2006, we
announced that Sir Christopher Meyer had accepted GlobeTel's offer to chair its
newly formed International Advisory Board.
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On March 23, 2006, we announced that J. Randolph Dumas, Vice Chairman, has been
elected Chairman of the Board of Directors, succeeding Sir Christopher Meyer,
who remains with the Company as Chairman of the GlobeTel International Advisory
Board, but who has resigned his seat on the Board of Directors.
On April 10, we announced that Thomas Jimenez has retired as Chief Financial
Officer of GlobeTel Communications Corp. (Mr. Jimenez had no disputes with the
Company) and Lawrence Lynch has been named Chief Financial Officer.
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
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(b) Form 8-K.
None
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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
Name: Timothy Huff
Title: Chief Executive Officer and Director
Date: May 12, 2006
/s/ Lawrence E. Lynch
Name: Lawrence E. Lynch
Title: Chief Financial Officer
Date: May 12, 2006
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