Form 10QSB for GLOBETEL COMMUNICATIONS CORP
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16-May-2005
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Three months ended March 31, 2005, ("2005" or "the current period") compared to the three months ended March 31, 2004, ("2004" or "the prior period").
Results of Operations
Revenues. During the current period, our gross sales were $18,010,643, representing an increase of 461.1% over the prior period when our gross sales were $3,210,333. Our revenues increased primarily due to revenues from our subsidiary, Centerline and its subsidiaries, which recorded consolidated revenues of $13,399,726 (or 76.1% of total revenues), consisting primarily of wholesale traffic revenues (telecommunications minutes) and related network management fees. The remainder of our revenues continued to be predominantly from telecommunications minutes going through our Philippines and Brazil networks.
Philippines network generated $3,491,970 (or 20.2% of gross revenues) and our Brazil network generated $101,368 (or less than 1% of gross revenues). Other domestic and international wholesale traffic revenues were $14,417,305 (or 79.0% of gross revenues), including revenues $2,988,375 (or 16.6% of gross revenues) from Mexico (unrelated to our Mexico network). Our Mexico network generated no revenues.
Additional revenues generated included $700,000 from a network built for an international client (netting in $35,000 of gross profit, after costs of $665,000). Revenues from our Magic Money program were $39,585 and $2,976 from the sale of IP Phones. There were no sales from these programs in the prior year.
Cost of Sales. Our cost of sales consists primarily of the wholesale cost of buying bandwidth purchased by us for resale, collocations costs, technical services, wages, equipment leases, and the costs of telecommunications equipment. We had cost of sales of $17,283,963 for the current year, compared to $3,164,741 for the prior period. We expect cost of sales to increase in future periods to the extent that our sales volume increases.
Gross Margin (Loss). Our gross margin was $726,680 or 4.0% for the current period, compared to $45,592 or 1.4% of total revenues in the prior period, an increase of $681,088 or 767.9%. The increase 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, especially the Mexico network, where our margin was less than two percent, and initial activities of Centerline, where our gross margin was minimal or zero in the prior period. 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," and commence sales directly to the retail market.
Operating Expenses. Our operating expenses consist primarily of payroll and related taxes, professional and consulting services, expenses for executive and administrative personnel and insurance, bad debts, investment banking and financing fees, investor and public relations, research and development, sales commissions telephone and communications, facilities expenses, travel and related expenses, and other general corporate expenses. Our operating expenses for the current period were $4,299,018 compared to prior period operating expenses of $1,341,459, an increase of $2,957,559 or 220%. The increase is primarily due to the following.
Consulting and professional fees increased to $1,238,458 (including non-cash compensation of $716,400), from $194,405 in the prior period. Investment banking and financing fees increased to $439,715 in the current period, related to obtaining funding of approximately $4.8 million, compared to none in the prior period
In addition, employee payroll and related taxes for the current period were $570,501 compared to $72,288, an increase of $494,303 or 637.9%. This increase was due to expansion of our operations, facilities and workforce, related to additional services required to develop and expand our geographical and product markets and projects, including our Stored Value Program, our Sanswire Project, and international markets, primarily in Asia and Australia, as well as increased professional fees in maintaining and expanding a public company.
We incurred $443,924 of research and development costs for our Sanswire project
- development of the Stratellite during the current period, compared to none in the prior year, whereas the Sanswire assets were acquired in April 2004.
We incurred $724,513 of sales commissions for our Centerline operations during the current period, compared to none in the prior year, whereas the Centerline operations began in after the prior period in 2004.
Income (Loss) from Operations. We had an operating loss of ($3,572,338) for the current period as compared to an operating loss of ($1,295,867) for the prior period, primarily due to increased operating expenses as described above, including the expansion of our various programs. We expect that we will continue to have higher operating costs as we increase our staffing and continue expanding operations, programs, projects and operating costs related to our newly acquired subsidiaries.
Other Income (Expense). We had net other expenses totaling $27,715 during the current period compared to $2,700 in the prior period.
Net Income (Loss). We had a net loss of ($3,600,053) in the current period compared to a net loss of ($1,298,567) in the prior period. The net loss is primarily attributable to the increase in the operating expenses as discussed above.
Liquidity and Capital Resources
Assets. At March 31, 2005, we had total assets of $15,124,388 compared to total assets of $4,292,220 as of March 31, 2004.
The current assets at March 31, 2005, were $6,390,994, compared to $3,877,848 at March 31, 2004. As of March 31, 2005, we had $3,604,441 of cash and cash equivalents compared to $333,917 as of March 31, 2004. The increase in cash and cash equivalents is primarily related to private placement funding during the current period.
Our net accounts receivable were $2,575,932 as of March 31, 2005, compared to $3,039,427 at the same point in 2004. Approximately 94% of the March 31, 2005, receivables were attributable to four customers, including 27% or $695,087 (net of allowance) related to the Mexico network, 19% or $485,800 (net of allowance) related to the Brazil network and 48% or $1,232,310 related to the Philippines network. We have increased our allowance for doubtful accounts by $94,095 for the year.
Other current assets included $49,307 in prepaid expense, primarily prepaid minutes with carriers, compared to $245,300 in 2004; $60,976 inventory of IP Phones, compared to none in the prior year; and deposits on equipment purchases and other current assets of $88,994 compared to none in 2004.
We had other assets totaling $3,181,363 as of March 31, 2005, compared to $27,057 as of March 31, 2004. The increase was attributable primarily to the acquisition of the Sanswire intangible assets valued at $2,778,000 and investment in CGI, our unconsolidated foreign subsidiary, totaling $352,300 as of March 31, 2005. Neither of these two items existed as of March 31, 2004.
Liabilities. At March 31, 2005, we had total liabilities of $2,765,146 compared to total liabilities of $1,423,180 as of March 31, 2004.
The current liabilities at March 31, 2005 were $2,761,176 compared to $1,423,180 at March 31, 2004, an increase of $1,337,996. The increase is principally due to $1,163,786 due to CGI, our unconsolidated foreign subsidiary, contractual obligations netting $481,363 due to CSI, and $300,000 in sign-on bonuses payable to Sanswire employees with GlobeTel stock. There were no significant long-term liabilities as of March 31, 2005 and 2004.
Cash Flows. Our cash used in operating activities was ($2,525,356) for the current period, compared to ($1,137,403) 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, including acquisitions of property and equipment totaling ($5,151,177), relating primarily to our expanding telecommunication program, compared to ($3,792) in the prior year.
Net cash provided by financing activities was $10,679,415, principally from proceeds from the sale of preferred stock of $5,085,200 for the current period, compared to $1,132,060 in the prior period; proceeds totaling $1,800,000 (before related costs) for convertible notes payable; $2,631,120 from sales of common stock, relating to the exercise of warrants by convertible note holders; and proceeds of $1,163,786 (net of repayments) from the loan payable to CGI.
In order for us to pay our operating expenses during 2005, including certain operating expenses of our wholly-owned subsidiaries, Sanswire and Centerline, and the overall expansion of our operations, we raised approximately $10.7 million during the current period. An additional, private placement funding approximately $3.5 million is expected to be received during the second quarter of 2005.
As detailed in the financial statements, we have stock subscriptions receivable for preferred shares that will raise a total of approximately $7 million in cash in 2005, primarily in the form of financing provided by Series B preferred shareholders. Of these funds, $5 million is committed to the purchases of equipment (two data switches) for our stored value program. With this funding, as well as the additional funding received to-date in 2005, we will have the existing capital resources necessary to fund our operations and capital requirements as presently planned over the next twelve months. However, if we do not receive the full amount, then we may not have the existing capital resources or credit lines available that are sufficient to fund our operations and capital requirements and therefore we may have to pursue additional funds through the issuance of debt and/or equity instruments.
Furthermore, the capital markets have responded favorably to our growth and business strategies through to-date in 2005, particularly as a result of our Stratellite project, and increased investment is anticipated in the near term.
As reflected in the accompanying financial statements, during the period ended March 31, 2005, we had a net loss of ($3,600,053) compared to a net loss of ($1,298,567) during the prior period. Consequently, there is an accumulated deficit of ($43,261,089) at March 31, 2005, compared to ($27,792,733) at March 31, 2004.
This Form 10-Q 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.
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