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
o
Indicated
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filter and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated
filer o
Non-Accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes o No x
As
of
August 9, 2006 we had issued and outstanding 108,062,660 shares of common stock.
Transitional
Small Business Disclosure Format (Check one): Yes o No x
1
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
Page
Item
1. Financial Statements.
3
Item
1A. Risk Factors.
17
Item
2. Management's Discussion and Analysis of Financial Condition
and Results
of Operations.
18
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
23
Item
4. Controls and Procedures.
23
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
24
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
25
Item
3. Defaults Upon Senior Securities.
25
Item
4. Submission of Matters to a Vote of Security Holders.
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 and six months ended June 30, 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 described below in Note 8, “Stock-Based Compensation”.
Basis
of Presentation
The
financial statements include the accounts of GlobeTel Communications Corp.
(“Globetel”) 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 was
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. Through June 30, 2006,
GlobeTel Wireless, GlobeTel VOIP and Centerline Communications generated
revenues, however, all of our operations are considered to be of relatively
equal importance, based on the anticipation of additional 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, and in the Company’s annual shareholders meeting on June 21, 2006,
the shareholders voted to increase the shares authorized to
250,000,000.
8
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.
On
July19, 2006the Company received a letter from the AMEX stating that they intended
to de-list the Company's shares because the Company's press releases were
"overly promotional", that the Company had not provided all requested
documentation to AMEX pursuant to a request for information, and that the
Company or its management had engaged in operations which, in the opinion of
AMEX, are contrary to the public interest.
On
July25, 2006the Company announced that it had notified the AMEX of its decision
to
appeal the AMEX Staff Determination to de-list with the AMEX’s Listing
Qualifications Panel. According to the AMEX Company Guide, a hearing will be
scheduled, to the extent practicable, within 45 days of the Company’s appeal.
The Company anticipates that its common stock will continue to trade on AMEX
pending a decision by the Panel. (See Note 11)
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
and
other accounts receivable are reported at face value, less any provisions for
uncollectible accounts considered necessary. Accounts receivable primarily
includes trade receivables from customers and, in connection with our Mexico
network, Mexican tax refunds receivable. The Company estimates doubtful accounts
on an item-to-item basis and includes over-aged accounts as part of allowance
for doubtful accounts, which are generally 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 June 30, 2006 and 2005 was $83,140 and $289,469
respectively.
Inventory
Inventory
is recorded at lower-of-cost-or-market, first-in first-out (FIFO) basis.
Inventory at June 30, 2006 consisted primarily of component parts related to
the
Company’s wireless operations, 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 and six months ended June 30, 2006, the Company wrote-off $11,940
and
$27,940 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 June 30, 2006 and December31,2005the Company had $1,764,618 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 net proceeds of $6,341,148. 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.
9
As
described in Note 7, in April 2006, net proceeds of $1,050,000 were received
for
the purchase of 500,000 shares of common stock at $2.10 per share, pursuant
to a
Stock Purchase Agreement with Caterham Financial Management, LTD (”Caterham”).
In
June
2006, total net proceeds of $2,672,500 were received for advanced purchase
of a
total of 1,660,656 shares of common stock at various prices and for warrants
to
purchase a total of 1,660,656 shares of common stock at various prices, pursuant
to a new pending Stock Purchase Agreement with Asia Pacific Capital Corporation.
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 December 31, 2006. 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 December 31, 2006.
NOTE
2 - ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
AND ECONOMIC DEPENDENCE
As
of
June 30, 2006, the Company had approximately 65 customers, of which 6 customers
accounted for approximately 52% of accounts receivable balance, including one
customer accounting for $275,700 or 18%.
Sales
attributable to foreign operations for the three months ended June 30, 2006
were
$21,612,923 or approximately 99% of total sales and $43,862,098 or approximately
99% of total sales for the six months ended June 30, 2006. 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.
NOTE
3 - INTANGIBLE ASSETS
Accounting
for 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, and business relationships, were evaluated
by
management initially upon acquisition and, as of June 30, 2006, determined
to
have an indefinite useful life and are not subject to amortization.
The
Company evaluates the remaining useful life of its intangible assets not being
amortized each reporting period to determine whether events and circumstances
continue to support an indefinite life. Since, as of the date of this report,
there are no known legal, regulatory, contractual, competitive, economic, or
other factors identified by the Company’s management that limit the useful lives
of the assets, the asset lives continue to be considered indefinite. If and
when
an intangible asset is determined to no longer have an indefinite useful life,
the asset shall then be amortized prospectively over its estimated remaining
useful life and accounted for in the same manner as other intangibles that
are
subject to amortization.
The
Company tested the intangible assets for impairment, as of June 30, 2006, and
determined that no adjustments for impairment were required, whereas the
projected net cash flows to be generated by the intangible assets are
anticipated to exceed the carrying values of those assets. In evaluating the
projected net cash flows, management considered existing and pending business
associations and market opportunities for each of the intangible assets
discussed below.
The
Company’s intangible assets, as discussed below, consisted of the following as
of June 30, 2006:
Hotzone
$
7,129,550
Sanswire
2,778,000
Lexington
125,000
Total
$
10,032,550
HotZone
On
June2, 2005, the Company entered into an agreement to acquire certain 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 September30, 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 has entered into employment agreements with the Company.
In
June
2006, the Company issued the first increment of 666,667 shares of the Company’s
common stock. The balance due to HotZone as of June 30, 2006 is $4,598,333,
of
which $2,211,666 is the current portion and $2,386,667 is the long-term portion.
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.
10
The
HotZone WIMAX system will provide radio technology for the wireless
communications that will cover significant geographical areas. HotZone’s
associations and opportunities include those with both domestic and foreign
telecommunications companies, including contracts to install high-speed wireless
networks in locales in Germany, Mexico, and China. HotZone’s product, technology
development and marketing activities, regarding this wireless technology, are
continuing and no other conditions occurred that may indicate an impairment.
Sanswire
In
April
2004, the Company entered into an agreement (amended in August 2004) to acquire
certain assets of Sanswire Technologies, Inc. and its subsidiary, Sanswire,
Inc., a company that was developing a National Wireless Broadband Network
utilizing high-altitude airships called Stratellites that will be used to
provide wireless voice, video, and data services. The acquisition was paid
with
1,866,667 shares of the Company’s common stock valued at $2,800,000.
The
purchase was allocated based on the estimated fair market value of the assets
acquired as follows: (a) equipment - $32,000; and (b) intangible assets -
$2,768,000, plus an additional $10,000 for certain costs. The assets acquired
under the Sanswire agreement consist primarily of intellectual property and
proprietary rights in intellectual property. As of September 30, 2004, the
Company placed all of the assets into Sanswire Networks, LLC, its Florida-based,
wholly-owned subsidiary ("Sanswire").
Sanswire’s
associations and opportunities include those with both the United States and
foreign governments, and domestic and foreign telecommunications companies.
The
Company is receiving U.S. Government support from NASA, the U.S. Air Force
and
other branches of the U.S. military, including the utilization of government
facilities and engineering expertise, and possible direct funding of future
operational costs. Furthermore, management believes the costs to acquire and
implement the Sanswire concept of near-space vehicles and related intangibles
is
significantly less than would be required to deploy existing technology (e.g.,
satellites, cell towers, etc.). Sanswire’s research, development, testing of,
and cooperation with governmental and commercial entities regarding the
Stratellite technology is continuing, and no other conditions occurred that
may
indicate an impairment.
Lexington
On
May26, 2006, the Company’s wholly-owned subsidiary, Centerline Communications, LLC
entered into an agreement to acquire specified assets and contracts of Lexington
Global Net, LLC (“Lexington”), a telecommunications systems operator located in
Atlanta, Georgia, with operations in the United States and Latin America,
primarily in the country of Colombia. The acquisition transaction, which closed
during the three months ended June 30, 2006, was paid with $25,000 cash and
$100,000 of the Company's common stock to be paid based on an agreed upon value
of $1.85 per share for a total of approximately 54,054 shares, to be issued
in
increments during a period from 60 to 180 days after the execution of the
agreement. However, should the market price of the shares delivered decrease
to
less than $1.85 per share, one year from the date of execution of the agreement,
the Company shall make up the difference between the market price and $1.85
by
the issuance of additional shares or by payment of said difference in cash
or a
combination of cash and stock at the purchaser’s discretion.
The
assets acquired under the Lexington
agreement consist of property, rights, interests and other tangible and
intangible assets, including rights to relationships (contractual and
non-contractual) with Lexington’s customers and vendors, and certain government
authorizations. The tangible assets acquired are considered of negligible value,
and, accordingly, the Company allocated the entire purchase price of $125,000
to
the intangible assets acquired.
Management
anticipates that the associations and opportunities related to the Lexington
assets will enable the generation of significant, on-going, profitable sales
of
telecommunications traffic through numerous customers and vendors.
NOTE
4 -
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.
11
As
of the
date of this report, a total of 256,666 shares were received from CGI. The
remaining 23,334 shares due from CGI were to be returned and utilized to satisfy
the Company’s obligation with Carrier Services, Inc. (“CSI”). However, in lieu
of receiving the 23,334 shares from CGI, CGI instead paid CSI $23,000 during
the
three months ended June 30, 2006 to satisfy this obligation (see Note 5 below).
Accordingly, no additional amounts or return shares of shares are due from
CGI
as of June 30, 2006.
NOTE
5 - DUE TO RELATED PARTY - CSI
During
2004 and 2005, the Company entered into contractual agreements with 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 4 above), and as of March 31, 2006, 110,001 shares, valued at
$259,875, were owed.
As
discussed in Note 4 above, during the three months ended June 30, 2006, CSI
received cash from CGI, in lieu of 23,334 shares owed. Accordingly, as of June30, 2006, 86,667 shares, valued at $204,807, were owed to CSI, and are expected
to be issued by the Company in the near term.
The
shares owed to CSI as of June 30, 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
six months ended June 30, 2006 and 2005, the Company recorded commission expense
of $694 and $724,513, respectively, to CSI.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Litigation
See
Part
II - Other Information, reference Item 1. under Legal Proceedings.
Leases
and Rents
As
of
June 30, 2006, the Company had leased offices and facilities in various
locations in California, Florida and Germany. In June 2006, the Company took
occupancy of additional office space at its corporate offices in Pembroke Pines,
Florida, with an additional rent obligation of approximately $7,500 per month.
Rent expense for the three months ended June 30, 2006 and 2005 was $199,103
and
$73,292, respectively.
Network
Installation Agreement
On
June7, 2006, the Company entered into an Initial Network Installation Agreement
with
VPN de Mexico, S.A. de C.V. (“VPN”) exclusively for the purposes of setting
forth the terms whereby GlobeTel Wireless will install an initial wireless
broadband network in Mexico utilizing its HotZone Wireless technology. GlobeTel
will install an Initial Test Network in an area not to exceed 10 sq. km. VPN
has
paid a $225,000 deposit to GlobeTel as 50% of the initial cost of the network.
Once the initial test area has been installed and deployed, VPN will evaluate
the network and, upon acceptance, will pay the balance due of $225,000, which
is
anticipated to occur during the three months ended September 30, 2006. In the
event VPN determines that the network does not operate in accordance with its
expectations, then the $225,000 deposit will be returned to VPN by the
Company.
Upon
the
acceptance of the initial test area, VPN and the Company intend to proceed
with
the agreement’s joint venture arrangement, which provides that VPN will pay
$5,000,000 to the joint venture for the next stage of implementation, which
will
call for an installed area of no more than 100 sq. km. The same payment terms
will apply whereby VPN will pay a 50% into the joint venture with the balance
due at completion and acceptance of this stage.
12
Since
the
joint venture arrangements are contingent upon VPN’s acceptance of the initial
network and other factors, there can be no assurance that the anticipated
revenues will be realized.
NOTE
7 - STOCKHOLDERS' EQUITY
Sales
of Common Stock and Stock Warrants
On
April27, 2006the 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 stipulated that, before June25,2006, 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. Since the market price did in fact fall
under $2.25 per share before June 25, 2006, Caterham did not purchase the
additional shares as stipulated in the agreement.
Asia
Pacific Capital Corporation, advanced funds in anticipation of entering into
a
new Securities Purchase agreement with the Company. As of June 30, 2006, and
as
of the date of this report, the Company has not finalized the agreement with
the
investors. However, whereas the related proceeds were received prior to June30,2006, and the Company and the investors have agreed on the anticipated terms
of
the agreement, as set forth below, the Company has recorded the transactions
in
the period ended June 30, 2006.
The
new
Securities Purchase agreement will provide for the investors to purchase up
to
4,500,000 shares of the Company’s common stock. Pursuant to the first closing
provision of the contemplated agreement, the Company received $1,077,500 for
1,102,302 shares of the Company’s common stock at $0.9775 per share, based on
85% of the then market price of $1.15 per share, as stipulated. At the same
time, the Company received $57,500 for the purchase of Stock Warrants for an
additional 1,102,302 shares of the Company’s common stock.
Pursuant
to the second closing provision of the contemplated agreement, the Company
received $524,853 for 558,354 shares of the Company’s common stock at $0.94 per
share, based on 85% of the then market price of $1.11 per share, as stipulated.
At the same time, the Company received $27,647 for the purchase of Stock
Warrants for an additional 558,354 shares of the Company’s common
stock.
The
Stock
Warrants are expected to be exercisable based on incremental purchase prices
ranging from 125% to 200% of the market price of the underlying shares on the
respective original dates of issuance and will expire within a three year
period. As of the date of this report, none of the Stock Warrants were
exercised.
Broker
fees of $65,000 were paid in connection with the above June 2006 transactions
and charged against Additional Paid-In Capital. Based on the above referenced
transactions, the Company received a net of $2,672,500 during the three months
and six months ended June 30, 2006.
Preferred
Stock - Series D
On
July28, 2004, the Company agreed to sell 1,000 shares of Series D Preferred Stock
of
GlobeTel Communications Corp. ("Series D Preferred Stock") to Mitchell A.
Siegel, former Chief Operating Officer and current Vice President of the
Company. The Company intended to use the $1 million investment for working
capital and purchase of equipment necessary to expand the Company's stored
value
card programs. The Certificate of Designations for the Series D Preferred Stock
was filed with the State of Delaware on July 30, 2004.
Mr.
Siegel agreed to pay the $1 million for the 1,000 shares of Series D Preferred
Stock to the Company in four (4) equal quarterly installments beginning August
2004. The agreement was subsequently modified for the installment period to
be
semi-annual and to begin in October 2004, and further modified to defer 50%
of
the payment for the shares until March 31, 2007. Mr. Siegel has remitted the
initial $500,000 due to-date under the modified agreement.
Provided
that the preferred shares have not been converted, the holders of the Series
D
Preferred Stock will vote on an as-converted-to-common basis on any matter
submitted for a vote of stockholders during the period of three years from
the
first closing date.
13
Beginning
on the second anniversary of the first closing date and for a period of one
year
thereafter, the Series D Preferred Stock is convertible, in minimum increments
of 100 shares, into that number of shares of Company common stock that equals
2%
of all common shares issued and outstanding on the conversion date. On the
third
anniversary of the first closing date, all shares of Series D Preferred Stock
not previously converted will automatically be converted into Company common
stock. 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 the Company's common stock.
As
of the
date of this report, none of the Series D Preferred shares have been converted
into shares of the Company's common stock.
NOTE
8 - STOCK-BASED COMPENSATION
Accounting
Policies
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based Payments, SFAS 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors, including employee stock options, based
on estimated fair values. SFAS 123(R) supersedes the Company’s previous
accounting under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and related interpretations, applied for
periods through December 31, 2005. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS
123(R). The Company has applied the provision of SAB 107 in its adoption of
SFAS
123(R).
The
Company adopted SFAS 123(R) using the modified prospective application
transition method, which requires the application of the accounting standard
as
of January 1, 2006, the first date of the Company’s fiscal year. The Company’s
consolidated financial statements as of and for the three and six months ended
June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective method, the Company’s consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R).
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of the grant using an option-pricing model. The value of
the
portion of the award that is ultimately expected to vest is recognized as
expenses over the requisite service periods in the Company’s consolidated
statements of income (loss). Prior to the adoption of SFAS 123(R), the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25, as allowed under SFAS No. 123,
Accounting for Stock-Based Compensation, (SFAS 123). Under the intrinsic value
method, 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. Accordingly, for those stock
options granted for which the exercise price equaled the fair market value
of
the underlying stock at the date of grant, no expense was recorded.
Stock-based
compensation expense recognized during the period is based on the value of
the
portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense for the three and six months
ended June 30, 2006 included $32,055 and $64,109, respectively, for compensation
expense for share-based payment awards granted prior to, but not vested as
of
December 31, 2005. Such stock-based compensation is based on the grant
date fair value estimated in accordance with the pro forma provisions of SFAS
123. Compensation expense for share-based payment awards granted
subsequent to December 31, 2005 are based on the grant date fair value estimated
in accordance with the provisions of SFAS 123(R).
In
conjunction with the adoption of SFAS 123(R), the Company adopted the
straight-line single option method of attributing the value of stock-based
compensation expense. As stock-based compensation expense is recognized during
the period is based on awards ultimately expected to vest, it is subject to
reduction for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. As of and for the three
and
six months ended June 30, 2006, there were no material amounts subject to
forfeiture. The Company has not accelerated vesting terms of its
out-of-the-money stock options, or made any other significant changes, prior
to
adopting FASB 123(R), Share-Based Payments.
The
Company recognizes compensation expense paid with common stock and other equity
instruments issued for assets and services received based upon the fair value
of
the assets/services or the equity instruments issued, whichever is more readily
determined.
As
of the
date of this report the Company has not adopted a method to account for the
tax
effects of stock-based compensation pursuant to SFAS 123(R) and related
interpretations. However, whereas the Company has substantial net operating
losses to offset future taxable income and its current deferred tax asset is
completely reduced by the valuation allowance, no material tax effects are
anticipated.
14
Option-Pricing
Model
Upon
adoption of SFAS 123(R), the Company adopted the Black-Scholes option-pricing
model, which was previously used for the Company’s pro forma information
required under SFAS 123, as presented in annual financial statements. The
Company’s determination of the fair value of share-based payments is effected by
the Company’s stock price as well as assumptions regarding the number of highly
complex and subjective variables. For the periods presented in this report,
the
variables used in computing the fair-value of share-based payments under
Black-Scholes option-pricing model, which are substantially the same as those
used for pro-forma reporting purposes used in the prior year’s financial
statements, were based on 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
The
dividend yield assumption is based on the Company’s history and expectation of
dividend payouts. The Company has never paid a dividend and does not anticipate
paying any dividends in the foreseeable future. The Company used the same
estimated stock price volatility for the current period as used in the
historical pro forma information included in its prior annual financial
statements, in accordance with SFAS 123. The risk-free interest rate assumption
is based on upon observed interest rates appropriate for the term of the
Company’s stock options. The expected life of options represents the estimated
weighted-average period the stock options are expected to remain outstanding,
based on the Company’s prior experience with the exercise of its stock
options.
Accuracy
of Fair Value Estimates
Option-pricing
models were developed for use in estimating the value of traded options that
have no vesting or hedging restrictions and are fully transferable. The Company
has never had any traded options, nor does it anticipate having any traded
options in the foreseeable future. Because the Company’s stock options have
certain characteristics that are significantly different from traded options,
and because changes in the subjective assumptions can materially affect the
estimated value, in management’s opinion, the existing valuation models may not
provide an accurate measure of the fair value of the Company’s stock options.
Although the fair value of stock options is determined in accordance with SFAS
123(R) and SAB 107 using an option-pricing model, the value may not be
indicative of the fair value observed in a willing buyer/willing seller market
transaction.
Stock-Based
Compensation Expense
Stock-based
compensation expense for the three months ended June 30, 2006 included $124,284,
consisting of $26,350 for directors’ fees, which is included in other operating
expenses, and $97,934 for the Chairman of the Board, which is included in
officers’ compensation. Stock-based compensation expense for the six months
ended June 30, 2006 included $275,271, consisting of $59,001 for directors’
fees, which is included in other operating expenses, and $216,270 for the
Chairman of the Board, which is included in officers’ compensation. In addition,
stock-based compensation expense for awards granted prior to, but not vested
as
of, December 31, 2005 of $32,055 and $64,109, respectively, was recorded for
the
three and six months ended June 30, 2006. Officers’ compensation, employee
compensation and directors’ fees for the three months ended June 30, 2006 were
$19,203, $11,521 and $1,331, while these amounts for the six month period were
$38,405, $23,042 and $2,662, respectively.
Directors’
Compensation for Services
During
the three months ended June 30, 2006, the Company accrued Director’s
compensation of $43,333 in cash and 17,906 in shares valued at $21,667 ($1.21
per share) and 10,000 shares of stock options valued at $4,683 ($0.4683 per
share) for committee Chairman/members. For the six months ended June 30, 2006,
the Company recorded director’s compensation of a total of $90,833 in cash and a
total of 28,232 shares valued at $45,417 and a total 20,000 shares of stock
options valued at $13,584 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 above, and the above options
all had terms of three years and were fully vested at the grant date.
During
the three and six months ended June 30, 2006, the Chairman of the GlobeTel
Board
of Directors was awarded 123,967 and 273,760 shares of stock options,
respectively, valued at $97,934 and $216,270, respectively, ($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, 2005, 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 are
recognized as the related services are rendered.
15
Stock
Options Exercised
During
the three months ended June 30, 2006, 34,873 options shares were exercised
and
issued (net of shares used to pay for “cashless options”) for payments of cash
and stock subscriptions receivable of $14,459. The shares were issued to current
and former employees for options granted, primarily pursuant to the 2004
Employee Stock Options Bonus Plan. No expense for any of the above option shares
issued was recorded, whereas the options were expensed when granted and vested
in prior years.
NOTE
9 - EARNINGS (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
10 - 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 operations of the
respective business units, segregated into telecommunications services
(“Telecom”), (includes international wholesale carrier traffic, networks and
prepaid calling services), the Sanswire Stratellite project (“Sanswire”),
wireless communications services (“Wireless”) and Voice over Internet Protocol
("VOIP") (includes Internet telephony and store value services). The "Corporate"
column includes expenses incurred by and net other income realized by the parent
corporation, GlobeTel, including corporate operating expenses, not specifically
allocated to an operating segment. Segment information for the current and
prior
period is as follows:
On
July19, 2006the Company received a letter from the AMEX stating that it intended
to
de-list the Company's shares because the Company's press releases were "overly
promotional", that the Company had not provided all requested documentation
to
AMEX pursuant to a request for information, and that the Company or its
management had engaged in operations, which, in the opinion of the AMEX, are
contrary to the public interest.
16
On
July25, 2006the Company announced that it had notified the AMEX of its decision
to
appeal the AMEX Staff Determination to de-list with the AMEX’s Listing
Qualifications Panel. According to the AMEX Company Guide, a hearing will be
scheduled, to the extent practicable, within 45 days of the Company’s appeal.
The Company anticipates that its common stock will continue to trade on AMEX
pending a decision by the Panel.
There
can
be no assurance that the Company will be successful in its efforts to remain
on
the AMEX, in which case the Company expects that its common stock would trade
on
the over-the-counter bulletin board.
Item
1A. Risk Factors
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 "our") 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.
In
connection with the "safe harbor" provisions of the Act, we are filing the
following summary to identify important factors, risks and uncertainties that
could cause our actual results to differ materially from those projected in
forward-looking statements made by us, or on our behalf. These cautionary
statements are to be used as a reference in connection with any forward-looking
statements. The factors, risks and uncertainties identified in these cautionary
statements are in addition to those contained in any other cautionary
statements, written or oral, which may be made or otherwise addressed in
connection with a forward-looking statement or contained in any of our
subsequent filings with the Securities and Exchange Commission. Because of
these
factors, risks and uncertainties, we caution against placing undue reliance
on
forward-looking statements.
This
quarterly report also contains certain estimates and plans related to the
telecommunications industry in which we operate. The estimates and plans assume
that certain events, trends and activities will occur, of which there can be
no
assurance. In particular, we do not know what level of growth will exist, if
any, in the telecommunications industry, and particularly in those domestic
and
international markets in which we operate. Our growth will be dependent upon
our
ability to compete with larger telecommunications companies, and such factors
as
our ability to collect on our receivables and to generate profitable revenues
from operations and/or from the sale of debt or equity securities, of which
there can be no assurance. If our assumptions are wrong about any events, trends
and activities, then our estimates for the future growth of GlobeTel and our
consolidated business operations may also be wrong. There can be no assurance
that any of our estimates as to our business growth will be achieved.
The
following risk factors may affect our operating results and the environment
within which we conduct our business. If our projections and estimates regarding
these factors differ materially from what actually occurs, our actual results
could vary significantly from any results expressed or implied by
forward-looking statements. These risk factors include, but are not limited
to:
·
Changes
in general economic, demographic, geopolitical or public safety conditions
which affect consumer behavior and spending, including the ongoing
ramifications of the September 11, 2001 terrorist attacks and the
governmental response to those attacks, including the armed conflict
in
Iraq or other potential countries;
17
·
Increasing
competition in the VOIP segment of the telecommunications industry;
·
Adverse
Internet conditions which impact customer traffic on our Company's
networks in general and which cause the temporary underutilization
of
available bandwidth;
·
Various
factors which increase the cost to develop and/or affect the number
and
timing of the openings of new networks, including factors under the
influence and control of government agencies and others;
·
Fluctuations
in the availability and/or cost of local minutes or other resources
necessary to successfully operate our Company's networks;
·
Our
Company's ability to raise prices sufficiently to offset cost increases,
including increased costs for local minutes;
·
The
feasibility and commercial viability of our Stratellite project;
related
contemplated funding from third parties to finance the project, and
necessary cooperation with various military and non-military agencies
of
the United States government, and similar agencies of foreign government
and telecommunication companies;
·
Depth
of management and technical expertise and source of intellectual
and
technological resources;
·
Adverse
publicity about us and our business;
·
Our
current dependence on affiliates in our overseas markets;
·
The
rate of growth of general and administrative expenses associated
with
building a strengthened corporate infrastructure to support our Company's
growing operations;
·
Political
and economic risks of doing business outside the United States, relations
between our Company and its employees; legal claims and litigation
against
the Company;
·
The
availability, amount, type, and cost of capital for the Company and
the
deployment of such capital, including the amounts of planned capital
expenditures;
·
Changes
in, or any failure to comply with, governmental regulations; the
amount
of, and any changes to, tax rates and the success of various initiatives
to minimize taxes; and other risks and uncertainties referenced in
this
Quarterly Report on Form 10-Q.
·
The Company has lacked profitable operations for
the past
3 years.
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
General
Money
Remittance Service Program with Travelex
On
April17, 2006, we announced that we launched our money remittance service program
offered in conjunction with Travelex Currency Services, Inc. Our 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.
On
May 9,2006, the Company announced that it had terminated its agreement with LLC
Internafta (“Internafta”), due to Internafta’s failure to pay the initial funds
due under the parties’ agreement.
VozBrazil
On
May 15,2006, we announced the launch of VozBrasil(TM), a service which will allow
Brazilians to call their friends, relatives and business associates in the
U.S.
through a local number, at local rates, without the need for broadband internet
access or any special equipment.
VOIP
Voice Platform in Brazil - iLigue.com.br
On
May31, 2006, we announced that our newly-launched, customized, VOIP-based
communications network for Brazil offers Brazilian telecom customers an
unparalleled level of flexibility and cost-efficiency, whether calling next
door
or around the world.
Following
the introduction of VozBrasil.com, a VOIP network designed specifically for
Brazilians living in the United States, iLigue(TM) was rolled out in conjunction
with our Brazilian partners -- first in the northeastern region of Brazil,
then
continuously throughout the remainder of the country. This flexible
communications network allows Brazilian residents to obtain a telephone number
in Brazil, the U.S. or in any other country without the need for either
broadband Internet access or special equipment.
18
The
service allows Brazilians to obtain a U.S. phone number that, when called,
will
forward those calls to their local phone number in Brazil -- all at low VOIP
rates. This is the first of many services that will allow people across the
globe to attach U.S. phone numbers -- and thereby forward local U.S. calls
-- to
their local phone numbers in their own countries.
Wireless
Pilot Testing Worldwide
On
June16, 2006, we announced that our GlobeTel Wireless Division is working to develop
and install advanced communications resources in diverse regions of the world,
led by the testing of its HotZone 4010 terrestrial-based wireless technology.
The HotZone pilots are the required building blocks from which complete networks
will be constructed.
In
addition to the recently disclosed U.S. government pilot/test currently underway
in California where the U.S. Forest Service is evaluating HotZone 4010's
effectiveness in alerting and preventing forest fires, GlobeTel Wireless has
pilots either in progress, concluded or in the advanced planning stages in
China, Ghana, Republic of the Congo, Japan, Germany, and a second pilot in
Mexico for Grupo IUSA, one of Mexico's largest industrial conglomerates.
Delay
of Sanswire II Flight Test - Testing
Window Extended to Later Date
On
July17, 2006, we announced that our wholly-owned subsidiary, Sanswire Networks
LLC,
had announced a short delay in launching the test flights of Sanswire II due
to
a manufacturing defect which has been discovered on several of the carbon-fiber
parts of the airship. Sanswire has recently received these remaining components
(known as "Taco Shells") from the manufacturer and, after a rigorous quality
assurance inspection by Sanswire's QI Officer, discovered that they do not
meet
the minimum performance standards established by our aerospace engineers. In
addition to the defects found in the carbon-fiber fin spars and fin assembly,
the cross-brace structural support for the fins has also been delayed from
our
German supplier. As a result of these unexpected component failures, these
parts
are being re-manufactured by the supplier and those replacements are arriving
in
Palmdale, CA around the last week of July and mid-August. These component delays
will now, assuming no further delays, push the new launch window to between
the
20th and the 30th of August.
US
Air Force Approves Statement of Capability for Sanswire Flight
Testing
On
July20, 2006, we announced that our wholly-owned subsidiary, Sanswire Networks
LLC,
has been granted a Statement of Capability (“SOC”) by the Air Force Flight Test
Center (“AFFTC”) of the United States Air Force, permitting Sanswire to flight
test its Sanswire II high altitude airship technology demonstrator. Sanswire
began to seek approval for the SOC in February of this year. NASA's Dryden
Flight Research Center, also located at Edwards Air Force Base, will provide
meteorological services to the Air Force Flight Test Center in support of
Sanswire's flight test effort. The flight tests will occur at Edwards Air Force
Base in California's high desert. It is planned that flight tests may extend
through the fourth quarter of 2006. The Sanswire airship is scheduled to fly
several test sorties at Edwards Air Force Base Range after the successful
completion of tethered flights.
Results
of Operations
Three
months ended June 30, 2006, ("2006" or "the current period") compared to the
three months ended June 30, 2005 ("2005" or "the prior
period").
Revenues
earned. During the current period, our gross revenues were $21,628,623
representing an increase of 10% as compared to the prior period, when our gross
revenues were $19,700,531. Our revenues increased primarily due to revenues
from
our subsidiary, Centerline and its subsidiaries, which recorded consolidated
revenues of $21,570,703 , or 99% of total revenues, consisting primarily of
wholesale traffic revenues (telecommunications minutes). The remaining $57,920
of revenues was derived from sales of from our IP Phone products and services,
Wireless products and services and from our Store Value Card program.
Cost
of
revenues earned. Our cost of revenues earned 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. These costs were $21,223,711 for the current year, compared to
$19,782,516 for the prior period. Our goal is to replace non-margin generated
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. The remainder of the cost of revenues
earned was derived from cost of selling our IP Phone products and services,
Wireless products and services and our Store Value Card program.
19
Gross
Margin. Our gross margin was $404,912 or 1.9% of total revenues for the current
period, compared to ($81,985) or -0.4% of total revenues in the prior period,
an
increase of $486,897 or 594%. $373,536 of the increase was due primarily to
higher margin on resale of wholesale minutes as compared to the related cost
of
the minutes to terminate. We expect to derive more margins in the future as
our
wholesale traffic business experiences incremental growth. The remaining $31,376
of gross margin was attributed to our Wireless division, IP Phone products
and
services and our Store value Card program.
Operating
Expenses. Our operating expenses for the current period were $4,381,044 compared
to prior period operating expenses of $5,890,762, a decrease of $1,509,718
or
-26%. The decrease is primarily due to the following:
Employee
payroll and related taxes for the current period were $1,023,183 compared to
$903,365, an increase of $119,818 or 13%. Our payroll costs and related taxes
remain relatively stable as compared to the last period as we utilized most
of
our current labor force efforts towards the launching of our new products and
services, including our Stored Value Program, IP Phone and Wireless division
throughout international markets.
Consulting
and professional fees decreased to $420,791 from $3,062,862 due primarily to
a
reduction in non-cash compensation to $27,681 from $2,367,500 which was related
to professional fees incurred in maintaining and expanding a public company,
including our move to the AMEX during the prior year. There was also a $302,252
decrease in expenses related to project and market development expenses as
we
began launching new products during 2006.
Officers’
Compensation increased to $634,700 from $204,922, an increase of $429,778 or
210%. This is due to compensation for various executive positions that did
not
exist during the prior period. The variances pertain primarily to positions
for
Legal Counsel, Senior VP of Corporate Finance and, to the new Chairman of the
Board.
Bad
debt
expense decreased to $83,140 in the current period as compared to $289,469
in
the prior period, a decrease of $206,329. The decrease is due to the company’s
efforts to maintain customer trade accounts current.
Research
and development costs increased to $528,371 for the current period as compared
to $374,535 in the prior period, an increase of $153,836 or 41%. This is due
primarily to the development of our Sanswire project - development of the
Stratellite. This increase is due primarily to the costs related to the floating
of Sanswire II Technology Demonstrator Airship along with the initial testing
phases. The remaining variance relates to research and development costs
incurred by our Wireless division.
Travel
and related expenses increased to $440,584 from $155,086, an increase of
$285,498 or 184%. This is due primarily to additional travel costs incurred
for
various projects commencing during the current period, such as Internafta,
VPN
Mexico and our Store Value Program in India. These projects did not exist during
the prior period.
Rent
expense increased to $199,103 for the current period as compared to $73,292
for
the prior period, an increase of $125,811 or 172%. This variance is due to
additional facilities being utilized by the company based on expansion of our
business products and services. (See Note 6 on Commitments and
Contingencies).
Insurance
and employee benefits decreased to $152,596 from $291,689, a decrease of
$139,093 or -48%. The decrease is due to implementation of a new employee health
insurance plan for 2006. The new health insurance plan provides quality benefits
and is less expensive for the Company.
Depreciation
and amortization increased to $169,994 from $31,838, an increase of $138,156
or
434%. The is principally due to depreciation on new Telecom equipment purchased
for our subsidiary Centerline Communications, fixed assets attributed to our
new
subsidiary Globetel Wireless Europe, Gmbh which did not exist during the prior
period and computer software and hardware attributed to our new accounting
system.
Income
(Loss) from Operations. We had an operating loss of ($3,976,132) for the current
period as compared to an operating loss of ($5,972,747) for the prior period.
Our operating loss decreased as compared to prior years. We expect that we
will
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.
Other
Income (Expense). We had net other income totaling $6,798 during the current
period compared to other income of $15,418 in the prior period. The variance
is
due to reduction in interest income earned based on lower balances of
interest bearing cash accounts.
Net
Income (Loss). We had a net loss of ($3,969,334) in the current period compared
to a net loss of ($5,957,329) in the prior period. The net loss is primarily
attributable to operating costs (as discussed above) in excess of gross margins.
20
Six
months ended June 30, 2006, ("2006" or "the current period") compared to the
six
months ended June 30, 2005 ("2005" or "the prior period").
Revenues
earned. During the current period, our gross revenues were $43,923,348
representing an increase of 17% over the prior period when our gross revenues
were $37,711,175. Our revenues increased primarily due to revenues from our
subsidiary, Centerline and its subsidiaries, which recorded consolidated
revenues of $43,847,167, or 99% of total revenues, consisting primarily of
wholesale traffic revenues (telecommunications minutes). The remaining $76,181
of revenues was derived from sales of IP Phones, Wireless products and services
and our Store Value Card program.
Cost
of
revenues earned. Our cost of sales consists primarily of the increased 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 $43,437,214 for the current year, compared
to
$37,066,480 for the prior period, an increase of 6,370,734 or 17%. This is
due
principally to our increase in the volume of minutes purchased.
Gross
Margin. Our gross margin was $486,134 or 1.1% of total revenues for the current
period, compared to $644,695 or 1.7% of total revenues in the prior period,
a
decrease of $158,561 or -25%. 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. In addition, we discontinued terminating
minutes to one of our Philippine customers which generated high margins for
us
in the prior year. We expect to derive higher margins in the future as our
wholesale traffic business experiences incremental growth. 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.
Operating
Expenses. Our operating expenses for the current period were $8,015,204 compared
to prior period operating expenses of $10,189,781 a decrease of $2,174,577
or
-21%. The decrease is primarily due to the following:
Employee
payroll and related taxes for the current period were $1,880,927 compared to
$1,473,956, an increase of $406,971 or 28%. This increase was due to final
expansion of our operations, facilities and workforce, related to additional
services required to launch our new product and services to global markets.
These products and services included the Stored Value Program, our Sanswire
Project and our Wireless division. As of June 30, 2006, our employee headcount
increased to 75 from 45 at June 30, 2005.
Consulting
and professional fees decreased to $810,548 from $4,346,320, a decrease of
$3,535,772, due primarily to a reduction in non-cash compensation to $61,663
from $2,232,700 which was related to professional fees incurred in maintaining
and expanding a public company, including our move to the AMEX during the prior
year. There was also a $1,364,735 decrease in expenses related to project and
market development expenses as we began launching new products during 2006.
Officers
Compensation increased to $1,116,442 from $466,034, an increase of $650,408
or
140%. This is due to compensation for various executive positions that did
not
exist during the prior period. This is due to compensation for various executive
positions that did not exist during the prior period. The variances pertain
primarily to positions for Legal Counsel, Senior VP of Corporate Finance and,
to
the new Chairman of the Board.
Investment
banking and financing fees decreased to $0 in the current period as compared
to
$449,550 for 2005, as this amount related to obtaining funding of approximately
$4.8 million during the six months ended June 30, 2005.
We
incurred $694 of sales commissions to 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 5 to financial statements regarding amounts due to CSI.
We
incurred $1,052,457 of research and development costs as of the current period
as compared to $818,460 for the prior period, an increase of $233,997 or 29%.
These costs relate primarily to our Sanswire project - development of the
Stratellite. $1,044,447 of these costs relate to the successful floating of
Sanswire II Technology Demonstrator Airship along with the initial testing
phases. The remainder of the costs related to the development of Wireless
products and services.
Travel
and related expenses increased to $796,870 from $281,266, an increase of
$515,604 or 183%. This is due primarily to additional travel costs incurred
for
various projects commencing during the current period, such as Internafta,
VPN
Mexico and India. These projects did not exist during the prior
period.
21
Insurance
and employee benefits decreased to $266,288 from $355,105, a decrease of $88,817
or -25%. The overall variance is due to implementation of a new employee health
insurance plan for 2006 which generated a decrease in health insurance as
compared to the prior period. The new health insurance plan provides quality
benefits and is less expensive for the company. The variance was also attributed
to an increase in new insurance policies established for Property, Directors
& Officers Liability and Workers Compensation.
Depreciation
and amortization increased to $354,843 from $50,240, an increase of $304,603
or
606%. The is principally due to depreciation on new Telecom equipment purchased
for our subsidiary Centerline Communications, fixed assets attributed to our
new
subsidiary Globetel Wireless Europe, Gmbh which did not exist during the prior
period and computer software and hardware attributed to our new accounting
system.
Income
(Loss) from Operations. We had an operating loss of ($7,529,070) for the current
period as compared to an operating loss of ($9,545,086) for the prior period.
Our operating loss decreased as compared to prior years. We expect that we
will
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.
Other
Income (Expense). We had net other income totaling $49,375 during the current
period compared to other expense of ($12,297) 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 ($7,479,695) in the current period compared
to a net loss of ($9,557,383) in the prior period. The net loss is primarily
attributable to the decrease in gross margin and operating expenses in excess
of
gross margin (as discussed above).
Liquidity
and Capital Resources
Assets.
At June 30, 2006, we had total assets of $22,464,765 compared to total assets
of
$20,319,072 as of December 31, 2005.
The
current assets at June 30, 2006, were $5,102,518, compared to $3,330,778 at
December 31, 2005. As of June 30, 2005, we had $1,869,411 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 from the conversion
of
stock warrants during the current period.
The
Company had restricted cash of $142,000 as of June 30, 2006 representing
security 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 $70,000. $1,122,000 in 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 $1,575,207 as of June 30, 2006, compared to $371,618
as
of December 31, 2005. As of June 30, 2006, the Company had approximately 65
customers of which 6 customers accounted for approximately 52% of accounts
receivable balance, including one customer accounting for $275,700 or 18%.
As of
June 30, 2006, we have increased our allowance for doubtful accounts by
$166,309.
Other
current assets included primarily, as of June 30, 2006, $99,480 in prepayment
to
a related party, ISG Jet, LLC compared to $185,960 as of December 31, 2005;
$606,334 in prepaid expenses related to prepaid minutes with carriers, compared
to $184,434 at December 31, 2005; $367,745 of inventory related to components
for our wireless operations compared to $67,525 as of December 31, 2005 and
deposits on equipment purchases of $88,993 compared to $124,993 as of December31, 2005.
We
had
other assets totaling $10,078,722 as of June 30, 2006 compared to $9,959,872
as
of December 31, 2005. The increase is due principally to $125,000 acquisition
of
property, rights, interests and other tangible and intangible assets acquired
from Lexington Global Net, LLC which was done on May 26, 2006 (see Note 3).
The
remaining balances are primarily related to the intangible assets associated
with the acquisition of 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 June 30, 2006, we had total liabilities of $6,959,791 compared to total
liabilities of $9,906,933 as of December 31, 2005.
22
The
current liabilities at June, 30, 2006 were $4,573,124 compared to $5,198,766
at
December 31, 2005, a decrease of $625,642. The variance is attributed primarily
to reduction in the due to related payable to CSI (see Note 4) to $204,807
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 $277,024 representing a
$225,000 deposit from a customer VPN Mexico for a Wireless services in Mexico
(see Note 6) and deposits from Telecom customers, classified as deferred
revenues. An additional variance included is a liability to Lexington Global
Net, LLC for $100,000 (see Note 3) which was incurred during the three months
ended June 30, 2006.
Cash
Flows. Our cash used in operating activities was ($7,767,794) for the current
period, compared to ($4,618,692) 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 ($734,946) as compared to ($5,961,095) in
the
prior period, which was 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. In addition, the Company used cash to acquire the intangible asset
related to Lexington Global Net, LLC (see Note 3).
Net
cash
provided by financing activities was $9,131,455 compared to 13,514,763 due
principally from proceeds from the sale of common stock of $2,652,353 in the
current period as compared to $5,102,152 in the prior period plus 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
$0 in the prior period, when we received proceeds of approximately $7,135,200
from proceeds for sales of preferred stock, convertible notes payables and
proceeds from our former unconsolidated foreign subsidiary.
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
prior
to the end of the three months ending March 31, 2007, 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 December 31, 2006. 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 December 31, 2006.
As
reflected in the accompanying financial statements, during the period ended
June30, 2006, we had a net loss of ($7,479,695) compared to a net loss of
($9,557,383) during the prior period. Consequently, there is an accumulated
deficit of ($79,094,126) at June 30, 2006, compared to ($71,614,431) at December31, 2005.
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
June30, 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 June30,2006, 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.
23
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 about 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 public accountants,
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 the Company’s internal control and 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 public accountant’s 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.
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
implemented a new accounting system. Furthermore, we have restructured
departmental responsibilities.
On
April28, 2006, the law firm of Sarraf Gentile LLP commenced a securities 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.
Subsequently, two additional investors commenced securities fraud class
action against GlobeTel Communications alleging the same cause of action, namely
that the Company’s transaction to install wireless networks in Russia was a
“sham.” All lawsuits are 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 suits are without merit
and will vigorously defend against it. The Company has hired outside counsel
to
defend it in this action.
Derivative
Action
On
July10, 2006 a derivative action was filed against the officers and directors of
GlobeTel alleging that they have not acted in the best interest of the Company
or the shareholders and alleged that the transaction to install wireless
networks in Russia was a “sham.” The lawsuit is pending in the Federal District
Court for the Southern District of Florida (Civil Case No. 06-60923). The
Company believes that the suits are without merit and will vigorously defend
against it. The Company has hired outside counsel to defend it in this action.
It is the Company’s understanding that this action will not be advanced until
the Court in the Class Action Litigation has ruled on the Company’s anticipated
Motion to Dismiss in that action.
24
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. The loan has been repaid. 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.
This
case
went before a Judicial Hearing Officer on July 6 and 7, 2006. No resolution
occurred during the July hearing and the Judicial Hearing Officer scheduled
a
continuance of the hearing for September 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.
Caribou
Arbitration Proceeding
Caribou
Investments had purchased $250,000 of Series C Preference Shares under a
contract for the purchase of $1 million in Series C Preference Shares. After
making the first investment, Caribou failed to make its subsequent investments
under the Subscription Agreement. Pursuant to the Agreement the Company was
allowed to force the conversion of the shares, which it subsequently did.
Caribou filed an arbitration claim with the American Arbitration Association
pursuant to the terms of the Agreement claiming that the date of conversion
should have been earlier, and that by converting on a later date, Caribou got
fewer shares then it was entitled. Additionally, Cairbou claims that shares
were
to be free trading. Caribou is seeking more than $700,000 in damages. The
Company disputes the allegations of the claim and is vigorously defending it.
The final hearing before the arbitrators is set for mid-November
2006.
As
described in Part I, Item 1., Financial Information, Note 7, in April 2006,
$1,050,000 was received for the purchase of 500,000 shares of common stock
at
$2.10 per share, and in June 2006, a total of $2,672,500, net of expenses,
was
received for the purchase of a total of 1,660,656 shares of common stock at
various prices and for warrants to purchase a total of 1,660,656 shares of
common stock at various prices. As of the date of this report, none of the
stock
warrants have been exercised by the purchaser, nor have the shares been
physically issued to the purchaser of the June placement, pending the signing
of
a definitive agreement. The proceeds were used primarily for working capital
needs.
On
June22, 2006 by written consent of the majority vote of its shares at the Company's
annual meeting, the recommended slate of directors was ratified by shareholders,
including J. Randolph Dumas, Chairman, Timothy Huff, Jonathan Leinwand, Dorian
Klein, Michael Castellano, and Ambassador Ferdinando Salleo. Each director
received approximately 88% of all votes cast.
The
proposal to ratify Dohan & Co. as the Company's auditors for the fiscal year
2006 passed with 82,654,596 votes, or 89% of all votes cast. The proposal to
increase authorized shares to 250 million from 150 million passed with
75,883,483 votes, or 82% of all votes cast.
There
were no other matters brought to a vote of security holders during the quarter
ended June 30, 2006.
Officers
and Directors Appointments / Resignations
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 E. Lynch has been named Chief Financial Officer.
On
May16, 2006 we announced that His Excellency Ferdinando Salleo, who served as
Italian ambassador to the United States from 1995 until 2003, has joined our
Board of Directors.
31.1 Exhibit is filed as an exhibit
hereto -
Certification of the Chief Executive Officer, pursuant to Section 302
of
the Sarbanes-Oxley Act of 2002
31.2 Exhibit is filed as an exhibit
hereto -
Certification of the Chief Financial Officer, pursuant to Section 302
of
the Sarbanes-Oxley Act of 2002
32.1 Exhibit is filed as an exhibit
hereto -
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 Exhibit is filed as an exhibit
hereto -
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
26
SIGNATURES
In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, 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:
August 14th, 2006
/s/
Lawrence E. Lynch
Name:
Lawrence E. Lynch
Title:
Chief Financial Officer
Date
August 14th,
2006
27
Dates Referenced Herein and Documents Incorporated by Reference
