UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(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, 2004
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.
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(Exact name of small business issuer as specified in its charter)
Delaware 88-0292161
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(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
9050 Pines Blvd. Suite 110 Pembroke Pines Fl 33024
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(Address of principal executive offices)
954-241-0590
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ___ No __X___
As of May 9, 2004, we had issued 741,771,766 shares of common stock, of which
725,271,766 shares were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements. 2
Item 2. Management's Discussion and Analysis or Plan of Operation. 12
Item 3. Controls and Procedures. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities. 17
Item 3. Default Upon Senior Securities. 17
Item 4. Submission of Matters to a Vote of Security Holders. 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K. 17
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited) 3
Consolidated Statements of Income (Loss) (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
2
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (Unaudited)
March 31, 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 333,917
Accounts receivable, less allowance for doubtful
accounts of $777,535 2,933,731
Deposits on equipment 352,300
Prepaid expenses 245,300
Inventory 12,600
Deferred tax asset, less valuation allowance of $2,138,847 -
------------
TOTAL CURRENT ASSETS 3,877,848
PROPERTY AND EQUIPMENT, less
accumulated depreciation of $477,540 387,313
------------
OTHER ASSETS
Deposits 27,059
------------
TOTAL OTHER ASSETS 27,059
------------
TOTAL ASSETS $ 4,292,220
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 592,678
Notes payable, secured 248,701
Current portion of capital lease obligations 52,114
Loan payable to related party - Charterhouse 361,960
Accrued expenses and other liabilities 57,423
Deferred revenues 31,528
Deferred revenue - related party 21,276
Related party payables 57,500
------------
TOTAL CURRENT LIABILITIES 1,423,180
------------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, $.001 par value,
10,000,000 shares authorized;
150,000 issued and outstanding 2,224,200
Common stock, $.00001 par value, 1,500,000,000 shares
authorized; 741,771,766 shares issued and
725,271,766 outstanding 7,417
Additional paid-in capital 28,430,156
Accumulated deficit (27,792,733)
------------
TOTAL STOCKHOLDERS' EQUITY 2,869,040
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,292,220
============
See accompanying notes.
3
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
For the Three Months Ended
March 31,
2004 2003
------------ ------------
(Restated)
REVENUES EARNED $ 3,210,333 $ 3,013,067
COST OF REVENUES EARNED 3,164,741 2,109,232
------------ ------------
GROSS MARGIN 45,592 903,835
------------ ------------
EXPENSES
Payroll and related taxes 76,288 96,040
Professional fees 171,734 119,137
Officers' salaries 516,667 141,251
Bad debts 398,748 -
Consulting fees 22,671 30,060
Other operating expenses 48,691 42,748
Telephone and communications 15,876 18,067
Travel and related expenses 43,893 33,302
Rents 13,991 10,892
Insurance and employee benefits 21,184 14,128
Depreciation and amortization 11,716 10,412
------------ ------------
TOTAL EXPENSES 1,341,459 516,037
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(LOSS) INCOME BEFORE OTHER INCOME
(EXPENSE) AND INCOME TAXES (1,295,867) 387,798
------------ ------------
OTHER INCOME (EXPENSE)
Gain on forgiveness of debt 3,515 -
Gain on discontinued operations - 58,755
Interest income 736 109
Interest expense (6,951) (35,589)
------------ ------------
NET OTHER INCOME (EXPENSE) (2,700) (23,275)
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (1,298,567) 411,073
INCOME TAXES
Provision for income taxes - (164,429)
Tax benefits from utilization of
net operating loss carryforwards - 164,429
------------ ------------
- -
TOTAL INCOME TAXES ------------ ------------
NET INCOME (LOSS) $ (1,298,567) $ 411,073
============ ============
Weighted average number of common shares
outstanding - Basic 683,244,745 605,320,283
============ ============
Weighted average number of common shares
outstanding - Diluted 683,244,745 638,741,405
============ ============
Net income (loss) per share - Basic $ 0.00 $ 0.00
============ ============
Net income (loss) per share - Diluted $ 0.00 $ 0.00
============ ============
See accompanying notes.
4
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended
March 31,
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net (loss) income $ (1,298,567) $ 411,073
Adjustments to reconcile net (loss) income
to net cash used by operating activities:
Depreciation and amortization 52,854 48,762
Bad debt expense 398,748 -
Common stock issued for officer salary 425,000 -
(Increase) decrease in assets:
Accounts receivable (239,052) (877,560)
Prepaid expense (174,300) -
Inventory (12,600) -
Deposits (10,924) (3,000)
Deposit on equipment (50,000) -
Increase (decrease) in liabilities:
Accounts payable (278,562) 146,742
Accounts payable - paid with
non-readily marketable securities - 49
Accrued payroll and related taxes - 95,000
Accrued expenses and other liabilities - 14,808
Deferred revenues - 16,162
Deferred revenues - related party - (73,740)
------------ ------------
Net Cash Used By Operating Activities (1,187,403) (221,704)
------------ ------------
Cash Flows From Investing Activities:
Acquisition of property and equipment (3,792) (50,000)
------------ ------------
Net Cash Provided by Investing Activities (3,792) (50,000)
------------ ------------
Cash Flows From Financing Activities:
Sale of preferred stock 1,132,060 -
Payments on capital lease obligations (1,195) (1,196)
Proceeds from notes payable and long-term debt 375,000 353,678
Proceeds from related party payables - 144,194
Payments on notes payable and long-term debt (200,000) -
Payments on related party payables (5,747) (88,707)
------------ ------------
Net Cash Provided by Financing Activities 1,300,118 407,969
------------ ------------
Net increase in cash and cash equivalents 108,923 136,265
Cash and cash equivalents - Beginning 224,994 201,631
------------ ------------
Cash and cash equivalents - Ending $ 333,917 $ 337,896
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 6,951 $ 35,589
============ ============
Income taxes - -
============ ============
See accompanying notes.
5
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2004
NOTE 1 - BASIS OF PRESENTATION
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 for the interim periods
presented. All adjustments are of a normal recurring nature, except as otherwise
noted below. The results of operations for the three months ended March 31,
2004, are not necessarily indicative of the results to be expected for the year
ending December 31, 2004.
Certain financial information and footnote disclosures which are normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, but which are not
required for interim reporting purposes, have been condensed or omitted. The
accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements in its annual report on Form 10-KSB
for the year ended December 31, 2003. The accompanying financial statements
should be read in conjunction with the financial statements and notes.
NOTE 2 - ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATIONS OF CREDIT
RISK AND ECONOMIC DEPENDENCE
Three (3) customers accounted for 93% of the Company's sales for the three
months ended March 31, 2004, including 23% attributable to the Brazil network,
52% to the Mexico network, and 18% to the Philippine network. The Brazil and
Mexico customers account for 98% of the company's accounts receivable, including
48% attributable to the Brazil network and 50% to the Mexico network.
NOTE 3 - NON-READILY-MARKETABLE EQUITY SECURITIES, AVAILABLE FOR SALE
Network Sales - Charterhouse Investment Holdings, Ltd.
In May 2002, the Company entered into a Network Purchase Agreement with IP World
Ltd., (IPW) an Australian corporation to build as many as five (5) networks to
be located in different countries throughout the world. As payment for each
network the Company agreed to accept 64 million shares of IPW stock, at an
agreed-upon value of $ .10 (US) per share, in full payment of the promissory
note for the Brazil and Philippines networks. The IPW shares were not listed for
sale on the Australian Stock Exchange (ASX) or any other domestic or
international securities exchange. At the time, the Company was informed that
such listing was imminent, and the Company would be able to sell all or a
portion of the IPW shares.
6
The above agreements and transactions were facilitated by and through
Charterhouse Consultancy Service, Ltd, a Nevis corporation, and it's successor
corporation, Charterhouse Investment Holdings Ltd., a Malaysian corporation
(collectively known as "Charterhouse"), and Global VoIP, a Delaware Corporation,
of which Timothy Huff, the Company's current CEO was a 99% owner and officer.
Although Mr. Huff, by and through GVoIP, originally functioned as consultant to
Charterhouse, neither Mr. Huff nor GVoIP were directly compensated for
participating in the agreements and transactions described above and below.
Instead, Mr. Huff became an officer and a Director of the Company and assigned
any and all interest GVoIP had to the Company without compensation. GVoIP was
dissolved immediately thereafter.
In connection with agreements between Charterhouse and the Company, Charterhouse
paid for the two networks sold to date by the transfer of shares in IPW to the
Company. In that connection, Charterhouse maintained 70 million IPW shares in
escrow for the Company, and, accordingly, the Company was deemed beneficial
owner of the shares.
As of June 30, 2003, the Company had included in its current assets, $1,600,000
in non-readily marketable, available-for-sale equity securities, which represent
16 million shares of IPW unrestricted stock, valued at $.10 per share, held in
the company's name and $4,301,500 in non-readily marketable, available for sale
equity securities, due from a related party, Charterhouse, which represent 70
million shares of IPW restricted stock valued at $.06145 per share, held by
Charterhouse on the Company's behalf.
As of September 30, 2003, IPW was in liquidation and was no longer listed in the
Australian Exchange. The Company is still transacting with IPW to move out of
liquidation and be relisted in the Australian Exchange. However, the outcome of
the transaction can not be determined, therefore, the company has written off
$4,301,500 in stock receivable as well as the $1,600,000 in stock it had in its
name.
NOTE 4 - DEPOSIT ON EQUIPMENT
In September 2003, the Company entered into an agreement with Advantage
Telecommunications Ltd. (ATC), an Australian telecommunications corporation
where, for a strategic investment of $1.2 million, the Company would own up to
50% of the stock of ATC, and would have control of the board of directors of
ATC. ATC had operations in England and Hong Kong and had points of presence in
over 15 countries. The agreement was subsequently modified to where the
investment of $1.2 million would be for the purchase of ATC's telecommunication
equipment and network operations in Hong Kong and England.
As of March 31, 2004, the Company had remitted $352,300 to ATC and ATC's
assignee as partial payment towards the completion of the transaction. The
Company issued 16,500,000 shares of the Company's restricted common stock to
complete the transaction. The shares are being held by the Company pending the
transfer by ATC of the title to the Company. The issuance of the shares, based
on an average of $.0544 per share, or $897,700 completes the Company's purchase
of ATC's assets totaling $1.2 million.
7
NOTE 5 - LETTERS OF CREDIT AND NOTES PAYABLE
The Company has available up to $500,000 for letters of credit with
CommerceBank, N.A., which is guaranteed by Florida Export Finance Corporation
(FEFC). As of December 31, 2002, a $200,000 letter of credit was issued to the
Mexican telecom provider that provides local connectivity. In March 2003, the
Company issued another $100,000 to the same Mexican telecom provider. The
remaining $200,000 was used by the Company as collateral for its $200,000 loan
with CommerceBank, N.A., the funds of which were used to purchase the telecom
equipment used in the Brazil operations.
NOTE 6 - LOAN PAYABLE TO RELATED PARTY - CHARTERHOUSE
In January 2003, the Company received a $50,000 loan from Charterhouse. This
loan payable as well as the previous $311,960 payable are unsecured,
non-interest bearing and have no formal repayment terms.
NOTE 7 - CONSULTING AND INVESTMENT BANKING AGREEMENTS
In October 2003, the Company entered into an agreement with Fordham Financial to
raise $2,500,000 resulting in issuance of circular offering dated October 17,
2003. Fordham Financial agreed to receive 10% commission for the raising of the
funds. Fordham Financial had subscriptions of $1,092,140 as of December 31,
2003, and had raised the full $2,500,000 as of January 31, 2004.
NOTE 8 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the period ended March 31, 2004, the Company increased its allowance for
doubtful accounts by $398,748, predominantly for the receivables from the Mexico
and Brazil networks, representing a percentage of amounts receivable older than
90 days which have not been received as of the date of this report.
NOTE 9 - EARNINGS (LOSS) PER SHARE
Per share information is computed based on the weighted average number of common
shares outstanding (basic and diluted) during the period.
8
NOTE 10 - STOCK OPTIONS
During the year ended December 31, 2003, the Company issued the following
options to acquire common stock:
Date Issued Shares Consideration Valuation Relationship
September 26, 2003 2,206,667 Satisfaction of debt 33,100 Former President
September 26, 2003 17,600,000 Accrued salary 264,200 Former President
September 26, 2003 8,944,467 Accrued salary 134,167 Chief Executive Officer
September 26, 2003 7,444,467 Accrued salary 111,667 Chief Operating Officer
September 26, 2003 7,444,467 Accrued salary 111,667 Chief Financial Officer
September 26, 2003 4,111,133 Accrued salary 61,667 Controller
December 18, 2003 6,666,667 Officer salary 100,000 Former President
December 18, 2003 5,333,333 Officer salary 80,000 Chief Operating Officer
December 18, 2003 3,333,333 Salary 50,000 Controller
December 18, 2003 1,000,000 Officer salary 15,000 President
December 18, 2003 1,666,667 Accounting services 25,000 Accountants
December 18, 2003 2,666,667 Network services 40,000 Vendor
According to option agreements in connection with the above shares, the option
prices were the lower of $ .015 per share or one-half of the closing market
price on the last reported sale or closing price on the date of the agreement.
The above options were issued at $.015 per share and were issued in "cashless
exercises". Accordingly, the option shares actually issued were reduced by the
number of shares required to pay for the options as $ .015 per share. All of the
stock options were subsequently exercised in January 2004.
NOTE 11 - PREFERRED STOCK
In October 2003, the Company entered into an agreement with Fordham Financial
Management Inc. to raise funds to finance the ATC transaction. In accordance
with the agreement, the investors will receive preferred shares convertible into
common stock upon investment. An Offering Circular was made available to
investors on October 17, 2003. As part of the offering, the Company agreed to
pay its investment banking consultant, Fordham Financial Management, Inc. a 10%
commission.
The offering was for maximum of 150,000 shares ("Shares") of Series A
Convertible Redeemable Preferred Stock, par value $.001 per share ("Series A
Preferred"). The shares have a liquidation preference of $16.67 per share and
each share is convertible into a number of shares of common stock determined by
dividing the number of shares of common stock outstanding as of the date of
conversion by three, and dividing the result of that calculation by 250,000. The
Company may redeem the Shares at $.001 per share at any time after the second
anniversary of the date of issuance. Such redemption would be effectively
require the investor to convert his shares at that time or lose the entire
amount of his investment.
The full amount of $2,500,000 has been subscribed as of January 31, 2004, and
the funds, less commission of $250,000 and legal and incidental costs of
$25,800, were received as of February 6, 2004.
9
NOTE 12 - SUBSEQUENT EVENTS
In March 2004, the Company entered into a binding letter of intent to purchase
substantially all of the assets of Sanswire Technologies, Inc. and its
subsidiary, Sanswire, Inc. (collectively, "Sanswire"), a company that 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. The definitive purchase agreement was signed on April 15,
2004.
Sanswire's assets consist primarily of its intellectual property and its
proprietary rights in its intellectual property. The Strattelite that they are
developing is similar to a satellite, but it is stationed in the stratosphere
rather than in orbit. Sanswire is a development stage company and as of May 3,
2004, the Stratellites are in the initial development stage. GlobeTel has placed
all of Sanswire's asset into Sanswire Networks, LLC, its Florida-based,
wholly-owned subsidiary ("Sanswire-FL").
As consideration for the sale of the assets, the Company has agreed to issue 28
million shares ("Shares") of its common stock ("Common Stock") to Sanswire at
the closing and the shares will be held in escrow pending delivery of the
audited financial statements, defined in and in accordance with Section 1.2(d)
of the purchase agreement. An additional 200 million shares will be issued
pursuant to the terms and conditions of the "successful commercial launch" of a
commercial communications platform aboard an airship by the December 31, 2005
closing date.
For purposes of the purchase agreement, a "successful commercial launch" will be
deemed to have occurred if all the conditions in the Agreement have been
satisfied and all other conditions deemed material by GlobeTel are satisfied, as
determined by GlobeTel in its sole discretion. A "successful commercial launch"
will occur if (i) an airship (dirigible) is flown for a period of 90 consecutive
days at an approximate altitude of 70,000 feet, without technical difficulty,
(ii) a customer is able to receive both voice and Internet services at the same
time when it uses the "Stratellite service", at a customer-premises equipment
(CPE) cost of approximately $100, and (iii) at least 250,000 paying customers
must be able to use the Stratellite service based on agreed upon engineering
specifications. For purposes hereof, it is also assumed that the cost of each
airship used in the Stratellite service will not exceed $3 million, the cost of
each tracking earth station will not exceed $7 million and that each earth
station (if more than one) will have the ability to cover several deployed
airships at one time. If the cost of any airship or earth station exceeds $3
million or $7 million, respectively, at the time that the "commercial launch" is
being implemented, the project will not be deemed to be commercially viable and
a "successful commercial launch" will not have occurred.
10
The Company also entered into employment agreements with four former Sanswire
executives. Michael Molen, Jairo Rivera, Brian Keith and Jane Molen will serve
as the Chief Executive Officer, Chief Financial Officer; Chief Operating Officer
and Comptroller of Sanswire-FL, respectively. All of these employment agreements
are for three-year terms. Mr. Molen will also receive an earn-out which will be
based on value of Sanswire-FL compared to the Company (exclusive of
Sanswire-FL). If the value of Sanswire-FL is more than 24% of the value of the
Company, Mr. Molen will be entitled to receive stock equal to 10% of GlobeTel
common stock outstanding on the date of valuation. Mr. Molen has the right to
select the valuation date and a mutually agreeable third party will evaluate the
value of Sanswire-FL compared to GlobeTel.
On April 27, 2004, the Company agreed to sell 1,000 shares of Series B Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Caterham Financial
Management, Ltd., a Malaysian company ("Caterham"), for a total of $15 million
investment. The Company intends to use $5 million of this investment for working
capital and $10 million to purchase two Stored Value Card Data switches.
With respect to the $5 million in working capital, Caterham has agreed to
advance $1 million to GTEL on May 7, July 1, September 1, November 1 and
December 31. The Agreement provides that Caterham has a 10 day grace period, in
which to make any scheduled payments. With respect to the Master Card Data
switches, Caterham has agreed to advance an aggregate of $5 million to GTEL to
purchase a Stored Value Card Data Switch, which will be located in Miami,
Florida and subsequently a second switch will be installed in the Company's Hong
Kong operations.
Except for voting rights and conversion rights, each share of Series B Preferred
Stock shall have rights that are identical to shares of the Company's common
stock. The Series B Preferred Stock issued to Caterham and its nominees will
have voting rights equal to 50% plus one share of the Company's authorized
shares of common stock for a period of three years beginning on the first
closing date an ending three years thereafter, provided that Caterham and/or its
nominee have not converted more than 15% of its/their Series B Preferred Stock
into the Company's common stock during this time period.
Beginning on the first anniversary after the first closing date and expiring two
years thereafter, Caterham and its nominees may convert (in whole or in part)
its Series B Preferred Stock into GlobeTel common stock. The 1,000 shares of
Series B Preferred Stock, as a class, issued to Caterham and its nominees shall
be convertible into that number of shares of the Company's common stock equal to
35% of GlobeTel then issued and outstanding shares (the "Aggregate Conversion
Shares") as determined on the date in which Caterham, or one of its nominees,
first converts its Series B Preferred Stock into the Company's common stock (the
"First Conversion Date"). Each holder of the Series B Preferred Stock will
receive shares of GlobeTel aggregate conversion shares based on his pro-rata
ownership of the Series B Preferred Stock. Three years after the first closing
date, all of the shares of GlobeTel's Series B Preferred Stock which have not
converted into GTEL common stock will be automatically converted into shares of
GlobeTel's common stock.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
This Form 10-QSB and other statements issued or made from time to time by
GlobeTel contain statements which may constitute "Forward-Looking Statements"
within the meaning of the Securities Act of 1933, as amended and the Securities
Exchange Act of 1934 by the Private Securities Litigation Reform Act of 1995, 15
U.S.C.A. Sections 77Z-2 and 78U-5 (SUPP. 1996). Those statements include
statements regarding our intent, belief or current expectations, 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 materially from those contemplated by such
forward-looking statements.
Forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations, intentions and assumptions and other statements
that are not historical facts. Words like "expect", "anticipate", "intend",
"plan", "believe", "seek", "estimate" and similar expressions identify
forward-looking statements.
Overview
GlobeTel Communications Corp. (Globetel), a Delaware corporation established in
July 2002, is engaged in the business of providing telecommunication services,
primarily involving Internet telephony using Voice over Internet Protocol
("VoIP") equipment. The Company is authorized to issue up to 1,500,000,000
shares of Common Stock, par value $0.00001 per share, and 10,000,000 shares of
Preferred Stock, par value $0.001. The preferred stock is a so-called "blank
check" preferred, meaning that its terms such as dividends, liquidation and
other preferences, are to be fixed by the Company's Board of Directors at the
time of issuance.
Results of Operations - Comparison of Three Months Ended March 31, 2004 and 2003
Revenues. During the three-month period ended March 31, 2004, our sales were
$3,210,333 compared to sales of $3,013,067 during the same period last year, or
an increase of 6.5%. Our revenues continue to be predominantly from
telecommunications minutes going through our Mexico and Brazil networks.
However, during this period, we started running telecommunications traffic to
the Philippines and United Kingdom.
Cost of Sales. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, costs of telecommunication
equipment and technical service. We had cost of sales of $3,164,741 for the
three months ended March 31, 2004, compared to cost of sales of $2,109,232
during the three months ended March 31, 2003. We expect cost of sales to
increase in future periods only to the extent that our sales volume increases.
12
Gross Margin. The gross margin decreased to $45,592 for the three months ended
March 31, 2004 compared to the same period last year when the gross margin was
$903,835, or a decrease of 95%. The decrease in gross margin is attributable to
the increased cost of the minutes to terminate, especially the Mexico network,
where our margin is less than two percent. We expect to derive higher margins
once we formally take over the operations of our customer's Mexico network as
described in Part II, Item 1 "Legal Proceedings."
Operating Expenses. Our operating expenses consist primarily of payroll and
related taxes, expenses for executive and administrative personnel, facilities
expenses, professional and consulting service expenses, travel and other general
corporate expenses. Our operating expenses for the three months ended March 31,
2004, was $1,341,459, an increase of $825,422 from the same period in 2003. Our
operating expenses are higher in this period as we wrote off some bad debts from
our Mexico and Brazil operations. Our expenses in the future may increase in
absolute dollars as we continue to expand our network termination locations
worldwide and incur additional costs related to the growth of our business and
being a public company.
Income (Loss) from Operations. We had a net ordinary loss of ($1,295,867) for
the three months ended March 31, 2004, compared to net ordinary income of
$387,798 for the three months ended March 31, 2003. The loss was a result of
reduced margin and higher operating costs. We expect that we will continue to
have higher operating costs as we increase our staffing and start expanding our
operations in Europe and Asia.
Other Income (Expense). Interest income (expense) consists of interest expense
on our borrowings and interest income earned on our cash and cash equivalents
and, for the prior period, receivables from related parties. We recorded
interest income of $736 during the three months ended March 31, 2004, compared
to $109 during the same period in the prior year. Interest expenses during the
three months ended March 31, 2004, were $6,951 compared to $35,589 during the
same period in the prior year.
Net Income (Loss). Our net loss for the three months ended March 31, 2004, was
($1,298,567) compared to a net income of $411,073, during the three months ended
March 31, 2003.
13
Liquidity and Capital Resources. As of March 31, 2004, we had $333,917 of cash
and cash equivalents compared to $337,896 as of March 31, 2003.
Our accounts receivable were $2,933,731 as of March 31, 2004, compared to
$2,625,278 during the same time period in 2003. An estimated 98% or $2,875,056
of the March 2004 receivables were attributable to two (2) customers, including
an 48% or $1,408,191 related to the Brazil network and 50% or $1,466,865 related
to the Mexico network. We have increased our allowance for doubtful accounts by
$398,748 for the period for these two customers.
We had current assets totaling $3,877,848 as of March 31, 2004, compared to
$4,563,275 as of March 31, 2003. The decrease was attributable to the write-off
of receivables in the prior year as discussed in note 2 to the financial
statements. Total assets decreased to $4,292,220 as of March 31, 2004, from
$9,362,947 in the same period in 2003. Likewise, the decrease is attributable to
write-off of long-term receivables as discussed in note 2 to the financial
statements.
Our total current liabilities decreased to $1,423,180 as of March 31, 2004, from
$4,738,005 as of March 31, 2003. The decrease is principally due to payments of
notes payable, accrued officers' salaries and related party payables. Total
liabilities decreased to $1,423,180 as of March 31, 2004, from $4,793,005 as of
March 31, 2003.
Our cash used in operating activities was $1,187,403 for the three months ended
March 31, 2004, compared to $221,704 during the same period in the prior year.
Our investing activities during the three months ended March 31, 2003 totaled
$3,792 compared to $50,000 in the prior year. Cash provided by financing
activities was $1,300,118, principally from the sale of preferred stock, for the
three months ended March 31, 2004, as compared to $407,969 for the same period
in the prior year.
We do not have existing capital resources or credit lines available that are
sufficient to fund our operations and capital requirements as presently planned
over the next twelve months. We are actively pursuing additional funds through
the issuance of debt and/or equity instruments. Item 3. Controls and Procedures
14
Item 3. 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, 2004. 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,
2004, 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, 2003, the Company's independent auditors, Dohan
and Company, CPA's, P.A. ("Dohan") advised management and the Board of Directors
by a letter dated March 30, 2004 that, in connection with its audit of the
Company's consolidated financial statements for the year ended December 31,
2003, it noted certain matters involving internal control and its operation that
it considered to be a material weakness under standards established by the
American Institute of Certified Public Accountants. Reportable conditions are
matters coming to an independent auditors' attention that, in their judgment,
relate to significant deficiencies in the design or operation of internal
control and could adversely affect the organization's ability to record,
process, summarize, and report financial data consistent with the assertions of
management in the financial statements. Further, a material weakness is a
reportable condition in which the design or operation of one or more internal
control components does not reduce to a relatively low level the risk that
errors or fraud in amounts that would be material in relation to the financial
statements being audited may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions. Dohan
advised management and the Board of Directors that it considered the following
to constitute material weaknesses in internal control and operations: (i) the
Company's failure to adequately staff its finance group to effectively control
the increased level of transaction activity, address the complex accounting
matters and manage the increased financial reporting complexities and (ii) the
Company's current monthly close process does not mitigate the risk that material
errors could occur in the books, records and financial statements, and does not
ensure that those errors would be detected in a timely manner by the Company's
employees in the normal course of performing their assigned functions. Dohan
noted that these matters were considered by it during its audit and did not
modify the opinion expressed in its independent auditor's report dated March 30,
2004.
15
The Company is still in the process of assessing the findings of its independent
auditors. As noted above, however, the Company has made and is continuing to
make changes in its controls and procedures, including its internal control over
financial reporting, aimed at enhancing their effectiveness and ensuring that
the Company's systems evolve with, and meet the needs of, the Company's
business. As further noted above, the Company is also continually striving to
improve its management and operational efficiency and the Company expects that
its efforts in that regard will from time to time directly or indirectly affect
the Company's controls and procedures, including its internal control over
financial reporting. For example, the Company is attempting to add two more
employees to its accounting staff.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are a defendant in a lawsuit file 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). This lawsuit relates to
consulting services that were provided by Mr. Milo and Mr. Quattrocchi and a
$50,000 loan advanced by these individuals, dated May 14, 1997, of which $35,000
has been repaid.
We entered into an agreement with Mr. Milo and Mr. Quattrocchi as consultants on
June 25, 1998. The agreement was amended on August 15, 1998. On November 30,
1998, both Mr. Milo and Mr. Quattrocchi resigned from their positions as
consultants to our company without fulfilling all of their obligations under
their consulting agreement. We issued 3 million shares each to Mr. Milo and Mr.
Quattrocchi as consideration under the consulting agreement. We have taken the
position that Mr. Milo and Mr. Quattrocchi received compensation in excess of
the value of the services that they provided and the amounts that they advanced
as loans.
Mr. Milo and Mr. Quattrocchi disagreed with our position and have commenced an
action against us that is pending in the Supreme Court of the State of New York.
Mr. Milo and Mr. Quattrocchi claim that they are entitled to an additional
24,526,000 shares of our common stock as damages under the consulting agreement
and to the repayment of the loan balance. We believe that we have meritorious
defenses to the Milo and Quattrocchi action, and we have counterclaims against
Mr. Milo and Mr. Quattrocchi. However, we cannot project an outcome with any
certainty. We have not entered into any settlement negotiations with Mr. Milo
and Mr. Quattrocchi and we do not believe that we would be materially adversely
affected by the outcome of this proceeding.
16
There is presently an outstanding claim against us related to an equipment lease
which approximates $53,311 and is reflected as part of capital lease
obligations, current portion. As of May 14, 2004, the lessor has not commenced
any legal action against us and we believe that we may be able to enter into
settlement agreement. We do not believe that we will be materially adversely
affected by these liabilities.
We are in the process of taking legal actions against our associate and customer
in Mexico for non-payment of the amount they owe us. This customer has
substantial assets, including telecommunications equipment, existing working
networks and Mexico tax refunds which they have proposed to turn over to us. The
motion filed in the Mexican courts was necessary to formally request that
Globetel become the assigned payee of the tax refund receivable and formally
secure the equipment and to take over the operations of the existing networks.
Item 2. Changes in Securities
Not Applicable
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, 2004.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(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
Timothy Huff, Chief Executive Officer
Date: May 17, 2004
/s/ Thomas Y. Jimenez
Thomas Y. Jimenez, Chief Financial Officer
Date: May 17, 2004
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