GTCI filing:
April 16, 2002
GLOBAL TELEPHONE COMMUNICATION INC /NV/ (GTCI.OB)
Annual Report (SEC form 10KSB)
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
During the year ended December 31, 2001, the Registrant generated revenues of $50,424 and operating expenses of $2,365,267, resulting in a net loss of $2,314,843 from operations.
General and administrative expenses decreased to $1,742,532 in 2001 from $5,043,696 in 2000 and depreciation and amortization expenses increased to $622,735 in 2001 from $408,347 in 2000. The following is a breakdown of the significant general and administrative expenses incurred in 2000:
In 2001, legal and accounting expenses totaled approximately $73,550, payroll costs totaled approximately $35,160, office and administrative expenses totaled approximately $347,300, finance charges totaled approximately $858,000, consulting costs totaled approximately $1,035,200, travel and entertainment costs totaled approximately $36,950, rent totaled approximately $51,000.
Depreciation and amortization expense increased from $408,347 in 2000 to $622,735 in 2001. This increase was due to the fact that the Registrant's goodwill has been amortized for a full year in 2001.
During the year ended December 31, 2000 the Registrant raised $1,300,000 from the sale of equity securities and $2,077,324 from notes payable to fund current operations. During the year ended December 31, 2001 the Registrant raised $241,800 from the sale of equity securities and $0 from notes payable to fund current operations.
On December 12, 2000, Messrs. Brandenburg, Andresen and Zapton were removed from the Board of Directors of the Registrant, pursuant to a Consent Stockholders' Resolution that was signed by stockholders controlling more than two-thirds of the Company's outstanding shares. The current Board of Directors is comprised of Messrs. Wong and Kennedy.
Subsequently, on February 7, 2001, Messrs. Brandenburg and Andresen resigned as officers of the Registrant pursuant to a mutual settlement agreement that was approved by the Board of Directors of the Registrant. The settlement offer entitles Mr. Brandenburg to retain the 1,000,000 stock options granted on September 28, 1999 at an exercise price of $1.56 per share with an expiration date of September 28, 2002. Mr. Andresen is also entitled to retain 500,000 stock options at an exercise price of $1.375 with an expiration date of January 10, 2003. The settlement offer also entitles them to $180,000 less any governmental
withholdings. The Registrant was expected to pay a total of $50,000 to Messrs. Brandenburg and Andresen within 90 days from February 7, 2001 with the balance being payable on or before July 7, 2001. At December 31, 2001, the Registrant had not made any settlement payments to Messrs. Brandenburg and Andresen.
The current Board of Directors is comprised of Terry Wong and Thomas Kennedy. Terry Wong is currently the President and CEO of the Registrant.
There have been no seasonal aspects that caused any material changes in the Registrant's financial statements.
The Registrant's viability is contingent upon its ability to raise additional funds to support development efforts. There is no assurance the Registrant will obtain additional financing on terms it deems acceptable.
The implementation and expansion of the Registrant's business is expected to require a commitment of substantial funds. The Registrant is currently seeking working capital to fund current operations. During 2000, the Registrant completed a bridge financing.
On June 5, 2000, the Registrant issued a convertible note (the "Note") for proceeds of $250,000, bearing interest at the rate of prime (as announced by the Wall Street Journal ("WSJ")) plus 0.5% per year (9%) at December 31, 2000), compounded annually. The principal and all accrued interest is due on May 30, 2003; however, the holder may demand repayment at any time after May 30, 2002.
The holder may at any time convert all or any portion of the outstanding balance of the Note (but not less than $50,000 unless the remaining balance of the Note is less than such amount), including accrued but unpaid interest thereon, into shares of the Registrant's common stock. The conversion price shall be the lower of (i) $1.30 per share, adjusted for stock splits and reverse stock splits, and (ii) 80% of the five day trailing average of the Registrant's common stock on the date notice of conversion is delivered to the Registrant. The Registrant has recorded a financing cost attributable to the beneficial conversion feature in the amount of $62,500. This amount has been charged to interest expense.
The parties have agreed that the total amount due under the note at December 27, 2001, including interest, is $285,000 and this amount is reflected in the financial statements. In connection with the Sinobull transaction described below, the parties have reached a settlement agreement pursuant to which the
Registrant will pay $150,000 in full and final payment and settlement of the note. The payment is comprised of $20,000 cash, 2,000,000 shares of common stock valued at $100,000, and a promissory note in the amount of $30,000 due one year after the closing of the Sinobull transaction. In connection with the issuance of the above note, the Registrant issued warrants to purchase a number of shares of common stock.
The number of warrant shares purchased shall be calculated as of the date an exercise notice is delivered to the Registrant of (i) 500,000 (or the portion of such 500,000 exercised by holder evidenced by a duly executed exercise notice for such portion) divided by $1.30, adjusted for any stock splits or reverse stock splits of the Registrant (ii) the quotient determined by dividing 500,000 or such lesser portion of the warrant the being exercised, by 80% of the market price. For purposes of this warrant, "market price" shall equal the five (5) trailing average of the Registrant's common stock at the close of market for each day, ending on the date the Registrant receives a duly completed and executed exercise notice.
The warrant expires on June 5, 2005. The fair value of the warrant, using the Black-Sholes option pricing model is $619,075. This amount has been recorded as a deferred financing cost and is being charged to interest expense over the life of the note.
During August 2000, the Registrant issued 9 convertible promissory notes for aggregate proceeds of $285,000. All of the notes are due in August 2003. The Registrant has also issued common stock purchase warrants in connection with the issuance of the notes. The terms of the notes and warrants are substantially the same as those described above, except that the highest exercise or conversion price is $0.71 per share, as opposed to $1.30 per share, and the warrants expire in August 2003. The Registrant has recorded a financing cost attributable to the beneficial conversion feature in the amount of $78,492 charged to interest expense. The Registrant has recorded deferred financing costs of $194,056, representing the fair value of the warrants, as determined by the Black Sholes option-pricing model. This deferred financing cost is being charged to interest expense over the life of the notes.
During 2001, notes in the principal amount of $235,000, plus accrued interest of $14,149, were converted into 4,048,770 shares of common stock.
The Registrant has received aggregate advances pursuant to a convertible debenture totaling $1,149,838. The debenture bears interest at the rate of 9% per year and is due on December 31, 2003. Terms provide that the holder is entitled to convert $177,778 of principal and accrued interest upon issuance (June 30,2000) and a similar amount each month thereafter. The note is convertible at
the lower of $2.50 per share or 100% of the lowest daily trading price for the 20 tracking days prior to conversion. In connection with the issuance of the debenture, the Registrant issued warrants to purchase 1,209,000 shares of common stock, exercisable at prices ranging from $2.24 to $3.75 per share. The warrants expire June 30, 2002. The Registrant has recorded a deferred financing cost of $1,277,530, representing the fair value of the warrants as determined by the Black-Sholes option-pricing model. This deferred financing cost is being charged to interest expense over the life of the note.
The parties have agreed that the total amount due under the note at December 27, 2001, including interest, is $1,500,000 and this amount is reflected in the financial statements. In connection with the Sinobull transaction described below, the parties have reached a settlement agreement pursuant to which the Company will pay $1,000,000 in full and final payment and settlement of the note. The payment is comprised of $200,000 cash, 11,000,000 shares of common stock valued at $550,000, and a promissory note in the amount of $250,000 due one year after the closing of the Sinobull transaction.
The Registrant has received advances pursuant to a line of credit with the Bank of Communication. These advances aggregate $718,889 at December 31, 2000 and are due on demand. The line of credit provides for up to $850,000 in advances and provides for an interest rate of 6.435% per year. The bank held $850,000 in a separate account as collateral for the advances under the line. The line of credit was repaid in full in 2001 and was terminated.
The Registrant believes that it will need funding sources to continue the expansion of its operations and it intends to pursue additional funding in the form of additional direct equity. The Registrant does not intend to develop its own value-added products and services at this time. It will, instead, purchase or license those products and services from third parties.
On April 12, 2001, the Registrant signed a Letter of Intent to acquire privately held Apollo Communications International Corporation (Apollo). Apollo is a niche international telecommunications carrier operating out of Seattle, Washington and Shanghai, China.
The acquisition was expected to be completed during the second quarter of 2001. Upon completion of its due
diligence the Registrant determined that it was not in the best interest of its shareholders to complete this transaction.
On December 14, 2001, The Board of Directors of the Registrant as well as persons holding a majority of the outstanding shares determined that it is in the best interest of the Registrant to enter into a Share Exchange Agreement, whereby the Registrant will acquire 100% of the issued and outstanding shares of SinoBull Financial Group, (SinoBull) a Hong Kong corporation, in exchange for shares representing approximately 76.32% of the total issued and outstanding capital stock of the Company (See Share Exchange Agreement). The proposed exchange is a private placement of restricted securities pursuant to Regulation S and Rule 506 of Regulation D. Following the transaction, SinoBull will operate as a wholly owned subsidiary of the Company.
SinoBull Financial Group develops financial technology, financial operating platforms and Internet-based financial services. SinoBull's operating companies include: Shanghai SinoBull Information Company Ltd., SinoBull Network Technology (formerly Shandgi Networks), WindInfo Ltd., Financial Telecom Ltd., Fintel wireless Ltd., Ton Bo software, HCTV Financial TV channel Ltd. and SinoBull Magazine Ltd. SinoBull.com is a financial information and stock trading website. SinoBull Group and its strategic partners provide news, data and analysis of financial information to the business community and media outlets. Services include; real-time pricing, historical pricing, indicative data, analysis of financial information and electronic communications. Clients include China's investment institutions, commercial banks, government offices and agencies, corporations, and news/media organizations.
SinoBull Group is a financial technology developer and Internet service provider. SinoBull's subsidiaries include: Beijing UAC Stock Exchange Online, Shanghai Guo Mao Science & Technology, SinoBull Network Technology (formerly Shangdi Networks), Financial Telecom (FTL), StreamingAsia and LogicSpace. In addition to quality financial news, real-time market data, financial analysis and commentary via the SinoBull portals.
SinoBull currently offers online trading platform services that allow users to trade online for shares listed on stock exchanges in Shenzhen and Shanghai. This trading platform is currently the only such trading platform
available in the PRC. SinoBull also has a financial portal which offers a comprehensive range of Chinese financial content coupled with an online trading platform service in the PRC.
On December 11, 2001, China became a member of the World Trade Organization (WTO). China's entry into the WTO is expected to expand China's financial market and develop new models and new channels for using foreign capital, and provide foreign enterprises with more business opportunities.
Present indications from Beijing point to the liberalization of foreign investment in China's Internet sector. The liberalization of the telecom sector would allow the Registrant to provide capital and investment in other value-added products and services within the information technology/Internet sector such as IP Telephony and Long Distance Calling Cards that are presently prohibited from foreign participation.
In the meantime, there are inherent risks in operating in this sector where the rules and regulations are still uncertain. Opening of the information technology/Internet sector to foreign participation will also mean an increase in competition from multinational telecommunications companies in China. The degree to which it will affect the Registrant's future operations and financial results is uncertain and will depend on the competency of the management team in executing its business plan and carrying out an effective implementation of the core operations of the joint ventures.
As a result of conducting overseas operations, the Registrant is vulnerable to foreign exchange fluctuations. This is especially true in Asia where currency fluctuations and devaluations are not only determined by market forces but are also affected by the monetary and fiscal policies of foreign governments. There are also risks associated with the laws and regulations that apply to the repatriation of capital from overseas operations.
The success of the Registrant and its subsidiaries' operations in China is subject to the political and economic uncertainties of that region. These unknowns are characterized by unexpected changes in rules and regulations; tariffs or other barriers; policy changes regarding foreign asset ownership; changes in tax laws for foreign companies; unexpected changes in monetary or fiscal policies; market reforms; austerity programs enacted by the government; government subsidies that are anti-competitive in nature; currency exchange regulations and lack of transparency in the financial markets. These and other factors could have an adverse impact on the Registrant's business and financial results in the future or require the Registrant to modify its current business practices.
The market for information technology products and services is characterized by rapidly changing technology, frequent introductions of new products and evolving industry standards that result in product obsolescence and short product life cycles. Accordingly, the Registrant's success is dependent upon its ability to anticipate technological changes in the industry and to continually identify, obtain and successfully market new products and services that satisfy evolving technologies, customer preferences and industry requirements within the markets that the Registrant and its subsidiaries operate.
There can be no assurance that competitors will not market products and services in the Chinese markets that have certain competitive advantages over those of the Registrant and its subsidiaries.
There are also uncertainties and risks attributable to the immature and volatile nature of the Chinese information technology market. This market is still in its nascent stage where sufficient data and market studies are not available for any thorough analysis in determining the viability of the Registrant's business plan. The Registrant and its subsidiaries mainly have to rely on the experiences of its local joint venture partners and of its own management team to make strategic decisions with respect to its operations. This lack of clear and reliable market information dramatically increases the risk of the Registrant making incorrect market assumptions.
The Registrant believes that the size of the emerging market in China contributes positively to its prospects for success and that the current availability of capital seems to support present and future needs of the Registrant's operations. Any material change in the regulatory climate in China could be materially damaging to the Registrant's future prospects for success.
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