PART I

Forward-Looking Statements and Risk Factors

Certain information included in this Form 10-KSB and other materials filed or to be filed by GlobeTel Communications Corp. ("GlobeTel," the “Company”, "we", "us" or "ours") with the Securities and Exchange Commission (as well as information included in oral or written statements made from time to time by us, may contain forward-looking statements about our current and expected performance trends, business plans, goals and objectives, expectations, intentions, assumptions and statements concerning other matters that are not historical facts. These statements may be contained in our filings with the Securities and Exchange Commission, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. Words or phrases such as "believe", "plan", "will likely result", "expect", "intend", "will continue", "is anticipated", "estimate", "project", "may", "could", "would", "should" and similar expressions are intended to identify forward-looking statements. These statements, and any other statements that are not historical facts, are forward-looking statements.

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 materially from those contemplated by such forward-looking statements.

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. 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.

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 armed conflict in Iraq or other potential countries; 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 networks; our current dependence on affiliates in our overseas markets; relations between our Company and its employees; legal claims and litigation against the Company; including the recently commenced SEC investigation; 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 Annual Report on Form 10-K. This statement, and any other statements that are not historical facts, are forward-looking statements.

This annual 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.

 

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ITEM 7. FINANCIAL STATEMENTS

 

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Dohan and Company	7700 North Kendall Drive, 200
Certified Public Accountants	Miami, Florida 33156-7564
A Professional Association	Telephone: (305) 274-1366
	Facsimile: (305) 274-1368
	E-mail:    info@uscpa.com
	Internet:  www.uscpa.com

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Globetel Communications Corp. and Subsidiaries

Ft. Lauderdale, Florida

 

We have audited the accompanying consolidated balance sheet of Globetel Communications Corp. and Subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of income (loss), cash flows and stockholders’ equity for the year then ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Globetel Communications Corp. and Subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

As described in Note 2 to the financial statements, the 2005 financial statements have been restated for an error in the method of revenue recognition related to reporting gross revenue versus net as per EITF 99-19 and in the application of an accounting principle relating to purchase accounting.

Miami, Florida

/s/ Dohan & Company, CPAs

 

March 13, 2006 except as to Note 2, which is November 30, 2007

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GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		DECEMBER 31, 2006			DECEMBER 31, 2005
					(restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	4,243		$	1,065,952
Accounts receivable, less allowance for doubtful accounts of $0 and $408,128			271,262			77,905
Prepaid expense – related party			—			185,960
Prepaid expense			—			67,060
Loans to employees			—			46,068
Deposits			72,987			1,212,921
Current assets from discontinued operations			106,033			710,840
TOTAL CURRENT ASSETS			454,525			3,366,706
EQUIPMENT, NET			—			717,425
OTHER ASSETS
Assets held for sale, net			—			5,279,567
Other assets from discontinued operations			54,380			1,047,824
TOTAL OTHER ASSETS			54,380			6,327,391
TOTAL ASSETS		$	508,905		$	10,411,522
LIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIT)
LIABILITIES
CURRENT LIABILITIES
Accounts payable		$	2,463,605		$	702,052
Notes and convertible notes payable, net of discount of $882,128			6,262,598			—
Bank Overdraft			14,664			—
Accrued officers' and directors' compensation			—			97,382
Accrued expenses and other liabilities			460,097			459,528
Related party payables			—			57,500
Current liabilities from discontinued operations			895,697			1,192,870
TOTAL CURRENT LIABILITIES			10,096,661			2,509,332
LONG-TERM LIABILITIES
Due to former employee payable in stock			—			237,600
Due to related party payable in stock			4,598,333			7,160,000
TOTAL LONG-TERM LIABILITIES			4,598,333			7,397,600
TOTAL LIABILITIES			14,694,994			9,906,932
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY(DEFICIT)
Series A Preferred stock, $.001 par value, 250,000 shares authorized;
no shares issued and outstanding:			—			—
Series B Preferred stock, $.001 par value, 500,000 shares authorized;
no shares issued and outstanding:			—			—
Series C Preferred stock, $.001 par value, 5,000 shares authorized;
no shares issued and outstanding:			—			—
Series D Preferred stock, $.001 par value, 5,000 shares authorized;
no shares issued and outstanding:			—			1
Additional paid-in capital - Series D Preferred stock			—			999,999
Common stock, $.00001 par value, 250,000,000 shares authorized;
109,470,803 and 98,192,101 shares issued and outstanding			1,095			982
Additional paid-in capital			94,733,346			81,570,082
Stock subscriptions receivable:
Series D Preferred Stock			—			(500,000	)
Common Stock			(130,282	)		(44,494	)
Accumulated deficit			(108,790,248	)		(81,521,980	)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY			(14,186,089	)		504,590
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	508,905		$	10,411,522

 

See accompanying notes

 

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		SERIES D
								ADDITIONAL			STOCK						TOTAL
								PAID-IN			SUBSCRIPTIONS			ACCUMULATED			STOCKHOLDERS'
Description		SHARES			AMOUNT			CAPITAL			RECEIVABLE			DEFICIT			EQUITY
Balance, Dec. 31, 2004			1,000		$	1		$	999,999		$	(750,000	)	$	(42,439,036	)	$	2,498,577
Shares issued for options exercised			—			—			—			—			—			48,412
Shares issued for services			—			—			—			—			—			4,930,751
Shares issued for convertible note payable and accrued interest			—			—			—			—			—			6,368,026
Shares issued for cash			—			—			—			—			—			6,903,932
Shares issued for brokers fees			—			—			—			—			—			—
Shares issued for severance pay			—			—			—			—			—			177,397
Conversion of amount due to unconsolidated subsidiary to equity per buy-back agreement			—			—			—			—			—			1,568,524
Shares issued for conversion of Preferred Series A shares			—			—			—			—			—			—
Preferred Series B stock subscriptions receivable paid for with cash and equipment			—			—			—			—			—			5,085,200
Shares issued for conversion of Preferred Series B shares			—			—			—			—			—			—
Shares issued for conversion of Preferred Series C shares			—			—			—			—			—			—
Preferred Series D stock subsc. receivable paid for with cash			—			—			—			250,000			—			250,000
Options issued for Board member stipends			—			—			—			—			—			85,575
Options issued for executive compensation			—			—			—			—			—			55,000
Options issued for services, per Executives % Stock Option Grant Plan			—			—			—			—			—			10,359,267
Options issued for settlement of obligations			—			—			—			—			—			1,256,873
Net loss			—			—			—			—			(39,082,945	)		(39,082,944	)
BALANCE, DEC. 31, 2005 (restated)			1,000		$	1		$	999,999		$	(500,000	)	$	(81,521,981	)	$	504,589
Shares issued for options exercised			—			—			—			—			—			360,749
Shares issued for services			—			—			—			—			—			321,729
Shares issued for settlement of debt obligations			—			—			—			—			—			3,214,835
Shares issued for cash			—			—			—			—			—			6,341,148
Shares issued for conversion of Preferred Series D shares			(1,000	)		(1	)		(999,999	)		500,000			—			—
Shares issued for Preferred Series C shares			—			—			—			—			—			—
Options issued for Board member stipends			—			—			—			—			—			586,995
Options issued for executive compensation			—			—			—			—			—			472,133
Warrants issued with convertible notes			—			—			—			—			—			655,131
Beneficial conversion feature with convertible notes			—			—			—			—			—			624,869
Net loss			—			—			—			—			(27,268,267	)		(27,268,267	)
BALANCE, DEC. 31, 2006			—		$	—		$	—		$	—		$	(108,790,248	)	$	(14,186,089	)

 

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GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

		2006			2005
					(restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(27,268,267	)	$	(39,082,945	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation			289,914			165,352
Loss on settlement			—			1,256,873
Loss on disposition of unconsolidated foreign subsidiary			—			352,300
Loss on disposition of assets			682,695			—
Loss on impairment of assets			5,279,567			—
Bad debt expense			93,571			1,373,458
Research and development expense			—			7,129,550
Stock based compensation			321,729			4,930,573
Common stock exchanged for severance pay			—			177,397
Fair value of vested options			1,059,128			10,499,842
Interest expense for convertible notes payable			201,181			—
Noncash activity from discontinued operations			1,681,645			—
(Increase) decrease in assets:
Accounts receivable			(193,357	)		184,003
Loans to employees			46,068			(39,183	)
Prepaid expenses			67,060			(117,522	)
Prepaid expenses – related party			185,960			(185,960	)
Inventory			—			(3,549	)
Amortization of debt discount			(397,872	)		—
Deposits			1,139,934			(1,159,610	)
Decrease in assets relating to discontinued operations			1,598,251			—
Increase (decrease) in liabilities:
Accounts payable			1,761,553			235,597
Due to former employee with stock			(237,600	)		237,600
Accrued officers' salaries and bonuses			(97,382	)		(100,951	)
Accrued expenses and other liabilities			569			(452,200	)
Related party payable			(57,500	)		—
Deferred revenue			—			(13,964	)
Decrease in liabilities relating to discontinued operations			(297,173	)		901,606
NET CASH USED BY OPERATING ACTIVITIES			(14,140,328	)		(12,807,332	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment			(255,182	)		(2,021,559	)
Acquisition of Hotzone assets			—			(27,000	)
NET CASH USED BY INVESTING ACTIVITIES			(255,182	)		(2,048,559	)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock - Series B			—			250,000
Sale of preferred stock - Series C			—			250,000
Issuance of common stock – exercises of warrants			6,341,148			6,903,931
Sale of common stock - exercises of options			34,446			48,412
Proceeds from unconsolidated foreign subsidiary			—			1,568,524
Payments on capital lease financing			—			(4,718	)
Proceeds from notes and loans payable			6,943,545			6,368,026
Payments on notes and loans payable			—			(2,846	)
Bank overdraft			14,664			—
Payments on related party payables			—			(60,000	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			13,333,803			15,321,329
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS			(1,061,709	)		465,438
CASH AND EQUIVALENTS – BEGINNING			1,065,952			600,514
CASH AND EQUIVALENTS – ENDING		$	4,243		$	1,065,952

 

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SUPPLEMENTAL DISCLOSURES		2006			2005
					(restated)
Cash paid during the period for:
Interest		$	26,310		$	730
Income taxes			—			—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Options issued for services			—			10,499,842
Options issued for settlement of obligations			—			1,256,873
Shares issued for services			—			4,930,573
Shares issued for Hotzone debt			2,386,667			—
Shares issued for research and development			—			7,073,640
Shares issued for assets			—			55,910
Conversion of Series A preferred stock to common stock			—			697,500
Conversion of Series B preferred stock to common stock			—			8,435,200
Conversion of Series C preferred stock to common stock			—			750,000
Conversion of Series D preferred stock to common stock			1,000,000			—
Cashless issuance for exercise of options			360,749			48,412
Non cash receipt for services			590,568			—
Non cash disbursement for debt			590,568			—
Conversion of notes payable to common stock			—			6,368,026
Series B preferred stock issued for equipment			—			4,835,200
Non-cash equity-warrant valuation and intrinsic value of beneficial
conversion associated with convertible notes			1,280,000			—

 

See accompanying notes

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

NATURE OF OPERATIONS

GlobeTel Communications Corp. ("GlobeTel," “the Company”) is engaged in the business of airships and telecommunications delivery systems. GlobeTel is developing high-altitude airships called Stratellites that will be used to provide wireless voice, video, and data services.

ORGANIZATION AND CAPITALIZATION

GlobeTel was organized in July 2002, under the laws of the State of Delaware. Upon its incorporation, GlobeTel was a wholly-owned subsidiary of American Diversified Group, Inc. (ADGI). ADGI was organized January 16, 1979, under the laws of the State of Nevada. ADGI had two other wholly-owned subsidiaries, Global Transmedia Communications Corporation (Global), a Delaware corporation, and NCI Telecom, Inc. (NCI), a Missouri corporation.

On July 1, 2002, both Global and NCI were merged into ADGI. On July 24, 2002, ADGI stockholders approved a plan of reincorporation for the exchange of all outstanding shares of ADGI for an equal number of shares of GlobeTel. Subsequently, ADGI was merged into GlobeTel, which is now conducting the business formerly conducted by ADGI and its subsidiaries, and all references to ADGI in these financial statements now apply to GlobeTel interchangeably.

In July 2002, pursuant to the reincorporation, the Company authorized the issuance of up to 1,500,000,000 (pre-split) shares of common stock, par value of $0.00001 per share and up to 10,000,000 shares of preferred stock, par value of $0.001 per share.

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 1, 2005, the shareholders voted to increase the shares authorized from 100,000,000 to 150,000,000.

All common stock amounts in this report have been retroactively restated to account for the reverse stock split, unless otherwise noted.

In the Company's annual shareholders meeting on June 21, 2006, the shareholders voted to increase the shares authorized from 150,000,000 to 250,000,000.

BASIS OF PRESENTATION

The financial statements include the accounts of GlobeTel Communications Corp. and its wholly-owned subsidiaries: Sanswire Networks, LLC; GlobeTel Wireless Corp.; GlobeTel Wireless Europe GmbH, a German corporation, and Centerline Communications, LLC, and its wholly-owned subsidiaries, EQ8, LLC, EnRoute Telecom, LLC, G Link Solutions, LLC, Volta Communications, LLC, and Lonestar Communications, LLC; High Valley Property Ltd., a British Virgin Islands corporation; as well as the accounts GTCC de Mexico, S.A. de C.V, which GlobeTel owns 99%.

Inter-company balances and transactions were eliminated in the consolidation.

GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company had a net loss of $27,268,267 and a negative cash flow from operations of $14,140,330 for the year ended December 31, 2006, and had a working capital deficiency of $13,216,834 and a stockholders’ deficit of $14,186,089 at December 31, 2006.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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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, 2007. However, if budgeted sales levels are not achieved and/or if significant unanticipated expenditures occur, or if it 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. As of the date of this report the Company has continued to raise capital to sustain its current operations which have been significantly reduced since January 1, 2007.  The Company will need to periodically seek investment to provide cash for operations until such time that operations provide sufficient cash flow to cover expenditures. (see also next paragraph.)

On May 2, 2008, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the United States District Court for the Southern District of Florida against GlobeTel Communications Corp. (the “Company”) and three former officers of the Company, Timothy J. Huff, Thomas Y. Jimenez and Lawrence E. Lynch. The SEC alleges, among other things, that the Company recorded $119 million in revenue on the basis of fraudulent invoices created by Joseph Monterosso and Luis Vargas, two individuals formerly employed by the Company who were in charge of its wholesale telecommunications business. The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Company intends to vigorously defend itself in this action. The staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of Company’s securities pursuant to Section 12(j) of the Exchange Act. (also see Note 15)

 

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments with an original maturity of three months or less at the date of purchase to be cash equivalents.

BANK OVERDRAFT

The Company records any negative balances in its bank accounts as a bank overdraft. 

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 consists of a reimbursement from the Company’s Directors and Officers insurance for legal and accounting expenses that were paid above the Company’s deductible. The Company estimates doubtful accounts on an item-to-item basis and includes over-aged accounts for any trade receivable 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 years ended December 31, 2006 and 2005 were $93,571, and $1,372,221, respectively.

INVENTORY

Inventory is recorded at lower-of-cost-or-market, first-in first-out (FIFO) basis.

As of December 31, 2006, the Company had no inventory, however, as of December 31, 2005, the Company had $60,976 of IP phones inventory, but considered them obsolete.

PROPERTY AND EQUIPMENT

Property and equipment consists of primarily telecommunications equipment, computer and related equipment and office furniture and fixtures, which are stated at cost less depreciation and amortization. Depreciation is based on the estimated useful lives of the assets, ranging from seven years for office furniture and equipment to five years for telecommunications equipment, using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred. Major improvements are capitalized. Gains and losses on disposition of property and equipment are included in income as realized.

 

REGISTRATION RIGHTS

 

In connection with the sale of debt or equity instruments, we may enter into Registration Rights Agreements. Generally, these Agreements require us to file registration statements with the Securities and Exchange Commission to register common shares that may be issued on conversion of debt or preferred stock, to permit re-sale of common shares previously sold under an exemption from registration or to register common shares that may be issued on exercise of outstanding options or warrants.

 

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The Agreements usually require us to pay penalties for any time delay in filing the required registration statements, or in the registration statements becoming effective, beyond dates specified in the Agreement. These penalties are usually expressed as a fixed percentage, per month, of the original amount we received on issuance of the debt or preferred stock, common shares, options or warrants. We account for these penalties as a contingent liability and not as a derivative instrument. 

REVENUE RECOGNITION

Revenues for voice, data, and other services to end-users are recognized in the month in which the service is provided. Amounts invoiced and collected in advance of services provided are recorded as deferred revenue. Revenues for carrier interconnection and access are recognized in the month in which the service is provided.

Sales of telecommunications networks are recognized when the networks are delivered and accepted by the customer. Sales of computer hardware, equipment, and installation are recognized when products are shipped to customers. Provisions for estimated returns and allowances are provided for in the same period the related sales are recorded. Revenues on service contracts are recognized ratably over applicable contract periods. Amounts billed and collected before services are performed are included in deferred revenues.

INCOME TAXES

Income taxes are computed under the provisions of the Financial Accounting Standards Board (FASB) Statement No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of the difference in events that have been recognized in the Company's financial statements compared to the tax returns.

ADVERTISING AND MARKETING COSTS

Advertising and marketing costs are charged to operations in the period incurred. Advertising and marketing expense for the years ended December 31, 2006 and 2005, were $230,329 and $265,283, respectively, and are included in "General and Administrative" in the consolidated statements of income (loss).

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments, including cash, receivables, securities, accounts payable, and notes payable are carried at amounts which reasonably approximate their fair value due to the short-term nature of these amounts or due to variable rates of interest which are consistent with market rates.

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 had cash balances of $4,243 and $1,065,952 as of December 31, 2006 and 2005, respectively, which included balances as of December 31, 2005 is in excess of federally insured limit. As of December 31, 2006, the Company had no balances 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 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.

 

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, 2007. However, if budgeted sales levels are not achieved and/or if significant unanticipated expenditures occur, or if it 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. As of the date of this report the Company has continued to raise capital to sustain its current operations which have been significantly reduced since January 1, 2007.  The Company will need to periodically seek investment to provide cash for operations until such time that operations provide sufficient cash flow to cover expenditures.

 

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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.

 

RECLASSIFICATIONS

Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 presentation for comparative purposes. There were no material changes in classifications made to previously issued financial statements.

NET LOSS PER COMMON SHARE

Basic net loss per common share has been computed based upon the weighted average number of shares of common stock outstanding during each period. The basic net loss is computed by dividing the net loss by the weighted average number of common shares outstanding during each period. 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. If all outstanding options, warrants and convertible shares were to be converted or exercised as of December 31, 2006, the shares outstanding would be 139,944,588. If all outstanding options, warrants and convertible shares were to be converted or exercised as of the date of this report, the shares outstanding would be 166,806,582.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company follows FASB Statement No. 144 (SFAS 144), "Accounting for the Impairment of Long-Lived Assets." SFAS 144 requires that long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.

 

STOCK-BASED COMPENSATION

 

On January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment , which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values. SFAS No. 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees . In March 2005, the Securities and Exchange Commission issued SAB No. 107, Share-Based Payment , relating to SFAS No. 123(R). The Company has applied applicable provisions of SAB No. 107 in its adoption of SFAS No. 123(R).

 

The Company adopted SFAS No. 123(R) using the prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of its year ended December 31, 2006. In accordance with this transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include the impact of, SFAS No. 123(R). The Company’s consolidated financial statements, as of and for the year ended December 31, 2006 and thereafter, reflect the impact of SFAS No. 123(R). Upon adopting SFAS No. 123(R), for awards with service conditions and graded-vesting, a one-time election was made to recognize stock-based compensation expense on a straight-line basis over the requisite service period for the entire award.

 

The Company used the intrinsic value method of measuring the fair value of share based payments granted prior to January 1, 2006. Because the Company utilized the intrinsic value method for pro forma disclosure purposes under the original provisions of SFAS No. 123, Accounting for Stock-based Compensation , disclosures to demonstrate the effect of pro forma compensation cost on net loss and net loss per share for the year ended December 31, 2005 is not appropriate in accordance with SFAS No. 123(R).

 

The stock-based compensation expense related to employee stock options and restricted stock awards recognized during the year ended December 31, 2005 was $122. Stock-based compensation expense recognized under SFAS No. 123(R) for the year ended December 31, 2006 was $321,729 before income taxes.

 

The Company accounts for stock issued to consultants on a fair value basis in accordance with SFAS No. 123(R) and EITF No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans, consistent with the measurement provisions of SFAS 123 and SFAS 148, the Company's net loss and basic loss per share would have been adjusted as follows:

 

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		For the Year Ended
		December, 31, 2005
Net Loss
As Reported		$	(39,082,945	)
Pro Forma		$	(43,012,437	)
Net Loss per common share – basic and diluted
As Reported		$	(.52	)
Pro Forma		$	(.57	)

 

In December 2005, the FASB issued SFAS No. 123 (revised 2005), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. Effective for the years on or after December 15, 2005, the Company will recognize all share-based payments to employees, including grants of employee stock options, in the statement of operations based on their fair values.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123(R))

 

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation . SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees , and amends SFAS No. 95, Statement of Cash Flows . Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107) which summarizes the views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations. SAB No. 107 provides guidance on several topics, including valuation methods, the classification of compensation expense, capitalization of compensation expenses related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements, and disclosures in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” subsequent to adoption of SFAS No. 123(R).

In April 2005, the SEC issued FR-74, Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (FR-74). FR-74 allows companies to implement SFAS No. 123(R) at the beginning of their next fiscal year, instead of the next reporting period that begins after June 15, 2005. FR-74 does not change the accounting required by SFAS No. 123(R); it only changes the implementation date of the standard.

The Company adopted SFAS No. 123(R) using the prospective method on January 1, 2006. The Company cannot predict the level of its impact since it will depend upon the level of share-based payments granted in the future. However, the Company generally expects compensation expense to increase.

 

SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 39 (SFAS No. 154)

 

In May 2005, the FASB issued SFAS No. 154, which changes the requirements for the accounting and reporting of a change in accounting principle or correction of an error. It requires, unless impracticable, retrospective application of the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company implemented SFAS No. 154 effective January 1, 2006.

 

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48)

 

In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. The provisions of FIN 48 are effective as of January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company believes that FIN 48 will not have a material impact on its consolidated financial statements.

 

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SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108)

 

In September 2006, the SEC released SAB 108. SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income statement was misstated (rollover method) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction would be reflected in the opening balance sheet with appropriate disclosure of the nature and amount of each individual error corrected in the cumulative adjustment, as well as a disclosure of the cause of the error and that the error had been deemed to be immaterial in the past. The Company believes that SAB 108 will not have a material impact on its consolidated financial statements.

SFAS No. 157, Fair Value Measurements (SFAS No. 157)

 

In September 2006, the FASB issued SFAS No. 157. This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in GAAP and expands disclosure related to the use of fair value measures in financial statements. SFAS No. 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The Standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity’s own fair value assumptions as the lowest level. SFAS No. 157 is to be effective for its financial statements issued in 2008. The Company believes that SFAS No. 157 will not have a material impact on its consolidated financial statements.

SFAS No. 141 (R), Business Combinations (SFAS No. 141R) and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements (SFAS No. 160)

 

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements. SFAS No. 141R requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statement. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141R and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company has not yet determined the effect on our financial statements, if any, upon adoption of SFAS No. 141R or SFAS No. 160.

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161)

In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for the Company in fiscal 2010.

Management does not believe that there are any recently-issued, but not yet effective accounting pronouncements, which could have a material effect on the accompanying condensed consolidated financial statements

 

NOTE 2. RESTATEMENT OF RESULTS

 

The Company determined that, in certain cases, it misinterpreted or misapplied Generally Accepted Accounting Principles (“GAAP”) in the 2005 consolidated financial statements and, accordingly, the Company has restated these consolidated financial statements.

 

As discussed more fully below, the restatements involve, among other matters, revenue recognition issues related to reporting gross revenue versus net as per EITF Issue 99-19. In making these restatements, the Company performed an internal analysis of its accounting policies, practices, procedures and disclosures for the affected period.

 

Summary of restatement items

 

The following table set forth the effects of the restatement adjustments discussed below on revenue; cost of sales; net loss; and loss per share as presented in the consolidated statement of operations for the year ended December 31, 2005 and intangible assets. The restatement adjustments are discussed in the paragraphs following the tables.

 

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Net Revenue Adjustment

 

		Year ended December 31, 2005
		Revenue			Cost of Sales			Net Loss			Loss per Share			Intangible Assets
Previously reported		$	81,143,838		$	80,730,141		$	(31,953,395	)	$	(0.426	)	$	9,907,550
Restatement Adjustments, net:
Net Revenue Adjustment		$	(70,999,058	)	$	(70,999,058	)		—			—
2004 Purchase accounting			—			—						—			(2,778,000	)
Purchase accounting			—			—			(7,129,550	)		(0.095	)		(7,129,550	)
Net restatements		$	(70,999,058	)	$	(70,999,058	)		(7,129,550	)		(0.095	)		(9,907,550	)
As restated		$	10,144,780		$	9,731,083		$	(39,082,945	)	$	(0.521	)	$	—

In 2005, the Company engaged in transactions where it recorded wholesale telecommunications revenues as Gross Revenue. After thorough review, the Company concluded that 2005 revenues equaling $70,999,058 could not be supported and thus were reduced from previously reported revenues. The adjustments were offset against previously reported cost of sales by the same amount of $70,999,058.

In the previously issued consolidated financial statements, the gross consideration was recorded for all wholesale telecommunications revenue without additional consideration to its characteristics. As part of the internal analysis of the accounting policies, practices and procedures in place in 2005, the Company did not review the previous accounting model for recording the revenues.

For financial statement purposes, part of this restatement has been reclassified into discontinued operations (see Note 3 below).

Purchase Accounting

As described in Item 7, Financial Statements, Note 9 - Asset Acquisition – Hotzone, the Company found a discrepancy in the application of purchase accounting for the June 2, 2005 transaction and have recorded an adjustment to the consolidated financial statements.

Intangible Assets.  The Company recorded restatement adjustments to the amounts allocated to the technology-in-place intangible assets acquired in the transaction. The effect of the adjustments to intangible assets in 2005 was a reduction of $7,129,550 and subsequently an increase to research and development expense in 2005 of $7,129,550.

NOTE 3. DISCONTINUED OPERATIONS

The Company has decided to close several of its operations and has presented certain activities as discontinued operations as of and for the years ended December 31, 2006.

Telecom

The Company decided to wind down the operations of Centerline Communications LLC. It did not have sufficient working capital to make Centerline profitable. The Company decided that any capital should be directed towards the Company’s other programs and that it should collect Centerline’s outstanding receivables and sell its assets.

GlobeTel Wireless Corp.

During the first quarter of 2007, the president of GlobeTel Wireless, Ulrich Altvater, became a consultant to the company to provide many of the services that were provided under the auspices of GlobeTel Wireless. Globetel believed at the time that this would be a more cost efficient manner of running the business. However, in May of 2007 Globetel terminated the contract with Altvater. In the second quarter of 2007, the Company decided to shut down the subsidiary and concentrate its efforts solely on the development and sale of Lighter than Air Unmanned Aerial Vehicles (LTA UAV’s).

 

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During 2007, the Company disposed of two components of its business which constituted discontinued operations – Centerline Communications, LLC and Globetel Wireless Corp. The loss on the Company’s consolidated statements of operations for the years ended December 31, 2006 and 2005 is summarized as follows:

Telecom		2006			2005
Loss from discontinued operations		$	(3,306,546	)	$	(1,510,388	)
Globetel Wireless
Loss from discontinued operations			(4,260,336	)		(744,649	)
Loss from discontinued operations - net		$	(7,566,882	)	$	(2,255,037	)

The Company incurred the following losses from discontinued operations for the years ended December 31, 2006 and 2005:

2006		Telecom			Globetel Wireless			Total
Revenue		$	7,478,250		$	260,058		$	7,738,308
Cost of sales			(7,297,515	)		(207,884	)		(7,505,399	)
Gross margin (loss)			180,735			52,174			232,909
Payroll and related taxes			(627,403	)		(617,916	)		(1,245,319	)
General and Administrative			(628,102	)		(2,855,053	)		(3,483,155	)
Deprecation and Amortization			(274,451	)		(118,258	)		(392,709	)
Loss on Disposition of Assets			(891,692	)		(692,582	)		(1,584,274	)
Bad debt expense			(1,065,634	)		(28,700	)		(1,094,334	)
Loss from discontinued operations		$	(3,306,547	)	$	(4,260,335	)	$	(7,566,882	)

2005		Telecom			Globetel Wireless			Total
Revenue		$	9,296,973		$	8,644		$	9,305,617
Cost of sales			(8,947,920	)		(8,335	)		(8,956,255	)
Gross margin			349,053			309			349,362
Payroll and related taxes			(342,834	)		(216,297	)		(559,131	)
General and Administrative			(1,352,368	)		(524,211	)		(1,876,579	)
Deprecation and Amortization			(163,002	)		(4,450	)		(167,452	)
Bad debt expense			(1,237	)		—			(1,237	)
Loss from discontinued operations		$	(1,510,388	)	$	(744,649	)	$	(2,255,037	)

The Company had the following assets and liabilities from its discontinued operations on its consolidated balance sheet for the years ended December 31, 2006 and 2005:

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2006		Telecom			Globetel Wireless			Total
Cash		$	9,011		$	10,903		$	19,914
Accounts receivable			16,761			—			16,761
Prepaid expense			1,607			—			1,607
Deposits			65,551			2,200			67,751
Total current assets			92,930			13,103			106,033
Other assets			54,380			—			54,380
Total assets			147,310			13,103			160,413
Accounts payable			202,963			458,584			661,547
Accrued liabilities			44,651			28,280			72,931
Deferred revenue			6,412			—			6,412
Due to related party			154,807			—			154,807
Total current liabilities			408,833			486,864			895,697
Net liabilities of discontinued operations		$	261,523		$	473,761		$	735,284

2005		Telecom			Globetel Wireless			Total
Cash		$	113,709		$	48,520		$	162,229
Accounts receivable			284,658			9,055			293,713
Prepaid expense			76,808			15,565			92,373
Inventory			—			67,525			67,525
Deposits			75,000			20,000			95,000
Total current assets			550,175			160,665			710,840
Other assets			987,878			59,946			1,047,824
Total assets			1,538,053			220,611			1,758,664
Accounts payable			105,712			99,446			205,158
Accrued liabilities			38,604			47,503			86,107
						—
Due to related party			901,605			—			901,605
Total current liabilities			1,045,921			146,949			1,192,870
Net assets of discontinued operations		$	492,132		$	73,662		$	565,794

NOTE 4. ACCOUNTS RECEIVABLE

For the year ended December 31, 2006 accounts receivable consists of a reimbursement of $271,262 from the Company’s Directors and Officers insurance for legal and accounting expenses that were paid above the Company’s deductible. For the year ended December 31, 2005 accounts receivable consisted of two trade receivables associated to wholesale customer of $486,033, of which $408,128 was included in allowance for doubtful accounts. The Company estimates doubtful accounts on an item-to-item basis and includes over-aged accounts for any trade receivable 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 years ended December 31, 2006 and 2005 were $93,571, and $1,372,221, respectively.

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NOTE 5. PREPAID EXPENSES AND EXPENSE-RELATED PARTY

PREPAID EXPENSE

Prepaid expenses as of December 31, 2005 consist of $26,191 for prepaid insurance, $10,195 for prepaid lease payments related to an equipment lease and $30,674 in miscellaneous prepayments.

PREPAID EXPENSE - RELATED PARTY

Prepaid expenses as of December 31, 2005 consist of $185,960 for travel services with ISG Jet, LLC. The agreement provides the Company with the ability to utilize executive air travel services at a reduced rate over a two-year period. The Company made a payment of $185,960, which included $60,960 in cash and 81,168 shares of the Company's common stock, valued at $125,000. During 2006 the Company wrote off the prepaid balance that was being reduced over the term of the agreement, which was to end in September 2007. The prepaid balance was written off as the Company’s financial condition did not allow for the additional expenditures required to utilize the travel services. The Parent company of ISG Jet, LLC is owned by Investor Source Group, LLC, which is owned 100% by Steven King, Executive Vice President of GlobeTel.

LOANS TO EMPLOYEES

Loans to employees of $46,068 as of December 31, 2005 consist of advances made by the Company to non-officer employees for payment of payroll taxes on stock options exercised during 2005. The Company recovered the December 31, 2005 amount from the employees during the first quarter of 2006.

 

NOTE 6. DEPOSITS

Deposits as of December 31, 2006 of $72,987 include a rental deposit for Los Angeles World Airport related to the Palmdale Hanger occupied by Sanswire Networks, LLC in the amount of $72,000. Deposits as of December 31, 2005 were $1,212,921 of which $1,000,000 was payments made for the new MasterCard Switch and the remaining balances were $104,993 for deposits for equipment, $82,924 for rental deposits, $25,004 for other operating deposits. During 2006, Los Angeles World Airports has drawn against the rental deposit and the MasterCard assets were transferred as part of an agreement to sell the Stored Value assets. See Note 8 below for more information.

NOTE 7. EQUIPMENT

EQUIPMENT CONSISTS OF THE FOLLOWING:		2006			2005
Telecommunications equipment		$	—		$	409,949
Assets not yet placed in service			—			80,825
Computer and related equipment			—			391,590
Office furniture and fixtures			—			258,357
TOTAL EQUIPMENT			—			1,140,721
Accumulated depreciation			—			(423,296	)
Equipment, net book value		$	—		$	717,425

Depreciation expense for the years ended December 31, 2006 and 2005, amounted to $289,914 and $68,566, respectively, as reflected in the Consolidated Statement of Operations.

NOTE 8. ASSETS HELD FOR SALE

These assets, primarily the financial process switch have been reclassified to assets held for sale at December 31, 2005 due to the impending sale during 2006, accordingly, no depreciation was recorded for these assets.

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On November 3, 2006, GlobeTel Communications Corp. entered into an agreement regarding the stored value card assets that was also known as the Magic Money program, to Gotham. Under terms of the agreement, Gotham acquired substantially all of the assets, which include the stored value program, financial processing switch and contracts totaling $5,279,567, and assumed the liabilities of associated with the program including certain employees and leased office space totaling $57,500, but due to the lack of consideration received, no sale has been recorded and the assets were instead impaired. The $5,279,567 of assets were comprised of $5,042,727 for the MasterCard switch, $97,975 in telecom equipment, $45,996 in office improvements and $80,825 in other assets.

The agreement calls for the payment, over a 3 to 6 year period, of $3,250,000 with additional clauses that could bring the total to $4,000,000. The length of the payment period depends upon Gotham making certain minimum payments. Revenues earned by GlobeTel will be based on the successful rollout of the platform by Gotham and on user fees following a formula that considers the total number of transactions on a Stored Value card and use of the card at any ATM, Point-of-Sale (POS) or other transaction, under closed and committed contracts GlobeTel had at the time of sale, and the number of transactions utilizing the Financial Processing Switch. As of the date of this report, no payments have been received in relation to this agreement. In the event the Company does receive future payments, it will record the payments as income at the time they are received.

NOTE 9. ASSET ACQUISITION – HOTZONE (restated)

In September 2004, the Company entered into an independent contractor agreement with Hotzone Wireless, LLC (HotZone), a service provider for consulting/engineering services related to the Sanswire Stratellite project. The non-exclusive service provider provided engineering / consulting services, transmission equipment, and installation and testing of equipment. The term of the agreement was for six (6) months and was automatically renewable for additional one (1) year terms after the initial term unless terminated by either party. As initial compensation, Company paid the service provider $10,000 per month. This agreement was terminated during fiscal year 2005.

On June 2, 2005, the Company entered into an agreement to acquire assets of HotZone, an advanced developer of WIMAX and extended range WIFI Systems with operations in the United States and Europe. The acquisition transaction, which closed during the three months ended September 30, 2005, was paid with $27,000 cash and provides for a total of 2 million (post split) 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 was entering into employment agreements with the Company.

The assets acquired under the HotZone agreement consist primarily of intellectual property and proprietary rights in intellectual property. As of September 30, 2005, the Company had placed all of HotZone's tangible assets into GlobeTel Wireless Corp. (GlobeTel Wireless), its Florida-based, wholly-owned subsidiary.

ACCOUNTING FOR PURCHASE PRICE

Whereas the milestones for the first year were defined, and the Company believed that achievement of such milestones for the first year were probable and the amount payable (with GlobeTel common stock) was measurable, the Company recorded the amounts during the three months ended September 30, 2005. The purchase price for the assets acquired was recorded at $2,280,334 based on the $27,000 paid in cash, plus $2,253,334, which represents the value of 666,667 shares of common stock payable on the first anniversary date. The shares were valued at $ 3.38 per share, based on the value of the Company's free-trading stock on the agreement date. The Company allocated the purchase price based on the estimated fair market value of the asset acquired as follows: (a) HotZone tangible assets $55,910; and (b) HotZone research and development expense - $2,224,424.

 

NOTE 15. COMMITMENTS AND CONTINGENCIES

Securities and Exchange Commission

On September 28, 2006, the Company received a formal order of investigation from the SEC. The formal order only named the Company and was not specific to any particular allegations. Through the use of subpoenas, the SEC has requested documentation from certain officers and directors of the Company. In subsequent subpoenas, the SEC has asked for additional documents and information.

On October 5, 2007, GlobeTel received a "Wells Notice" from the SEC in connection with the SEC’s ongoing investigation of the Company. The Wells Notice provides notification that the staff of the SEC intends to recommend to the Commission that it bring a civil action against the Company for possible violations of the securities laws including violations of Sections 5 and 17(a) of the Securities Act of 1933; Sections 10(b), 13(a), and 13(b)(2)(A) & (B) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and seeking as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of Company’s securities pursuant to Section 12(j) of the Exchange Act.

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On May 2, 2008, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the United States District Court for the Southern District of Florida against GlobeTel Communications Corp. (the “Company”) and three former officers of the Company, Timothy J. Huff, Thomas Y. Jimenez and Lawrence E. Lynch. The SEC alleges, among other things, that the Company recorded $119 million in revenue on the basis of fraudulent invoices created by Joseph Monterosso and Luis Vargas, two individuals formerly employed by the Company who were in charge of its wholesale telecommunications business.

The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Company intends to vigorously defend itself in this action.

Joseph Monterosso

In October 2007 the Company filed a lawsuit in the Circuit Court for Broward County, Florida against Joseph J. Monterosso alleging Libel, Slander and Defamantion, Tortious Interference, Violations of FS § 836.05 (THREATS EXTORTION)  and violations of FS §517 (Securities Fraud). Mr. Monterosso has not yet been served with the complaint.

Wachovia v. GlobeTel

In connection with the operations of Globetel Wireless Europe GmbH and the acquisition of Altvater GmbH, the Company guaranteed a letter of credit in the amount of $600,000. Upon Globetel Wireless Europe GmbH ceasing operations, the letter of credit was drawn upon. The letter of credit was not collateralized. In September 2007, Wachovia filed a lawsuit in Broward County in an attempt to recover the amount through arbitration with the American Arbitration Association. On June 2, 2008, the American Arbitration Association awarded Wachovia $745,733.

Richard Stevens v. GlobeTel

The Company and its directors were sued in the case RICHARD STEVENS vs. GLOBETEL COMMUNICATIONS CORP., et al. Case No.: 06-cv 21071. The original allegations of the complaint were that the Company’s proposed transaction to build wireless networks in Russia was a sham. The amended complaint alleged that the transaction was not a sham, but that the Company refused to accept payment of $300 million. Recently, the officers and directors with the exception of Timothy Huff have been dismissed from the case.

In February 2008, the Company and the Plaintiff reached a settlement in principle that has been filed with the Court for approval. Under the terms of the proposed settlement agreement in the class action, the Company’s D&O insurance carrier will make a cash payment to the class of $2,300,000, less up to $100,000 for potential counsel fees and expenses. All claims in the class action will be dismissed with prejudice. The US District Court for the Southern District of Florida has approved the settlements reached in its pending securities class action and a shareholder derivative action

Derivative Action

On July 10, 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. The Company and the Plaintiff have reached an agreement in principle to settle this action and have submitted such settlement with the Court for its approval. Under the terms of the settlement, Company’s D&O insurance carrier will pay $60,000 in attorneys’ fees to plaintiff’s counsel, the Company will implement or maintain certain corporate governance changes, and all claims will be dismissed with prejudice.

Mitchell Siegel v. Globetel

On February 2, 2007, GlobeTel was sued in the Circuit Court for Broward County, Florida entitled Mitchell Siegel v. Globetel Communications Corp. , Case no. 0702456 (“the Siegel Lawsuit”). In this action, Siegel sued GlobeTel for breach of contract in regards to a Key Executive Employment Agreement. On February 15, 2008, both parties entered into a settlement agreement whereas Mr. Siegel would receive $175,000 worth of stock, payable over 12 months, and 50% of the gross proceeds, up to a total amount of $300,000, received from Gotham pursuant to the October 2006 agreement.

 

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Former Consultants

The Company is a defendant in two lawsuits filed by Matthew Milo and Joseph Quattrocchi, two former consultants, filed in the Supreme Court of the State of New York (Richmond County, Case no. 12119/00 and 12118/00). These matters were subsequently consolidated as a result of an Order of the court and now bear the singular index number 12118/00. The original lawsuits were for breach of contract. The complaint demands the delivery of 10,000,000 pre split shares of ADGI stock to Milo and 10,000,000 to Quattrocchi. GlobeTel was entered into the action as ADGI was the predecessor of the Company. The suit also requests an accounting for the sales generated by the consultants and attorneys fees and costs for the action.

The lawsuits relate to consulting services that were provided by Mr. Milo and Mr. Quattrocchi and a $50,000 loan advanced by these individuals, dated May 14, 1997, of which $35,000 has been repaid.

The Company 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 the Company without fulfilling all of their obligations under their consulting agreement. The Company issued 3 million pre split shares each to Mr. Milo and Mr. Quattrocchi as consideration under the consulting agreement. The Company has 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 the Company’s position and commenced 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 pre split shares of common stock as damages under the consulting agreement and to the repayment of the loan balance. The Company believes that it has meritorious defenses to the Milo and Quattrocchi action, and the Company has counterclaims against Mr. Milo and Mr. Quattrocchi.

With regard to the issues related to original index number 12119/00, as a result of a summary judgment motion, the plaintiffs were granted a judgment in the sum of $15,000. The rest of the plaintiff's motion was denied. The court did not order the delivery of 24,526,000 pre split shares of ADGI common stock as the decision on that would be reserved to time of trial.

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.

For the most part, the summary judgment motions that plaintiffs brought clearly stated that their theories of recovery and the documents that they will rely on in prosecuting the action. The case was assigned to a judicial hearing officer and there was one week of trial. The trial has been since adjourned with no further trial dates having been set.

It is still difficult to evaluate the likelihood of an unfavorable outcome at this time in light of the fact that there has been no testimony with regard to the actions. However, the plaintiffs have prevailed with regard to their claim of $15,000 as a result of the lawsuit bearing the original index Number 12119/00.

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 has asked for written statements of facts and law. 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.

Trimax Wireless

On July 3, 2007 GlobeTel filed suit against its former employee Ulrich Altvater and his company Trimax Wireless seeking the return of certain equipment held at the former GlobeTel Wireless offices and for the return of $175,000 lent to Altvater by the Company. The replevin action against Trimax was dismissed on the basis of venue and the Company intends to refile the suit with regard to Trimax in Collier County, Florida.

 

On July 12, 2007, the Company terminated its agreement with Mr. Altvater and his company, Trimax Wireless, Inc.

 

In August 2007, Altvater and Trimax filed suit against GlobeTel alleging, defamation, conversion, breach of contract and seeking injunctive relief. GlobeTel successfully moved to have the two cases consolidated and has filed a Motion to Dismiss this suit. The Company intends to vigorously defend this suit, but no assurance can be given about the outcome of the litigation.

 

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LEASES AND RENTS

 

GlobeTel’s corporate offices are now located at 101 NE 3 ^rd Ave., Suite 1500, Fort Lauderdale, FL 33301. Base rent is $2,000 per month plus the cost of services used by GlobeTel. The lease is for a period of 6 months.

The Company previously leased office facilities at 9050 Pines Blvd., Suite 110, Pembroke Pines, Florida 33024, as of April 1, 2004. This lease will expire in June 2009, and had an initial monthly rent of $5,462.

 

In November 2004, the Company leased additional adjacent space at the Pembroke Pines, Florida location under the same terms and period as the existing lease, bring the total monthly rent to $9,186.

 

In June 2005, the Company negotiated with the landlord to lease an additional 5,000 square feet office on the second floor of the present facility, 9050 Pines Blvd., Pembroke Pines, Florida 33024. The Company began occupancy of this office in April 2006 and the lease expires in June 2009 with a monthly rent of $9,186 (including sales tax). GlobeTel vacated the premises in March 2006, having turned over the space to Gotham Financial as part of the sale of the Stored Value assets to Gotham. However, there was unpaid rent due on both the first and second floor suites. In August 2007, the landlord received a judgment in the amount of $206,730 of which $115,693 is accrued for in 2006 as it relates to 2006 expenses. The balance will be accrued in 2007.

 

GlobeTel formerly leased facilities at 444 Brickell Avenue, Suite 522, Miami, Florida 33131. The Company was under a five-year lease expiring April 2005, with a monthly rent of $3,463. In January of 2005 the Company satisfied its lease obligation related to this office.

 

In January 2005, GlobeTel signed a lease agreement with the San Bernardino International Airport Authority for hangar space at the airport in San Bernardino, California for the purpose of assembling and storing the Stratellite prototype. The term of the agreement is from January 15, 2005 through March 31, 2005, at a monthly lease rate of $9,767. Three months prepaid rent totaling $29,302 was paid in December 2004. The agreement provides that with the consent of the lessor the Company may remain on a month-to-month basis, and do intend to remain in the space for the near term.

Until September 2007, the Company leased a 66,000 square foot space hanger in Palmdale, California. The initial lease, between Sanswire Networks, LLC and the City of Los Angeles World Airports, was for a term of three months, ended July 22, 2005 with a monthly rent of $19,990. On June 8, 2005 the lease term was amended for fifteen months, commencing June 8, 2005 through September 7, 2006, with two one-year options. Concurrently with the signing of the amended lease, the parties entered into a reimbursement agreement to share the cost of certain improvements.

As of October 2007, Sanswire no longer occupies a hangar at Palmdale Regional Airport, the monthly cost of this space was $20,847. This facility was adjacent to the United States Air Force’s Plant 42 and Edwards Air Force Base. Sanswire constructed and tested Stratellite and Sky Sat prototypes at the facility. The hangar also included administrative office space. Sanswire is indebted to Los Angeles World Airports, the lessor of the hangar, in the amount of $161,761.

Sanswire Technologies, Inc., the company from which the Sanswire, LLC assets were purchased, had an office space lease in Dekalb County, GA. The lease term was from April 1, 2004 through March 31, 2005, with monthly rent of $2,628. Although not directly obligated on this lease, the Company paid the monthly rent from May 2004 through March 2005, whereas employees of the Company’s subsidiary, Sanswire, LLC, utilized the premises. The employees have since vacated the premises and the Company no longer occupies the space and is no longer obligated for any lease payments.

Future minimum rental payments required under the above operating leases subsequent to the year ended December 31, 2006 are as follows:

2007		$	357,355
2008			54,000
2009 and thereafter			—
		$	411,355

 

Name		Age		Position with Company
Timothy Huff (a)		40		Chief Executive Officer and Director
J. Randolph Dumas (b)				Chairman (Until resignation on October 7, 2006)
Sir Christopher Meyer (c)				Director
Przemyslaw Kostro		42		Chairman
Mitchell Siegel (d)		58		Director
Thomas Y. Jimenez (e)		46		Chief Financial Officer
Kyle McMahan (g)		47		Director
Amb. Amb. Ferdinando Salleo (h)				Director
Dorian Klein (i)				Director
Michael Castellano (j)				Director
Patrick Heyn (k)				Director
Peter Khoury (l)				Director, CEO
Jonathan Leinwand		37		Director, CEO

 

(a)	Resigned as Director and CEO October 7, 2006.
(b)	Resigned October 7, 2006
(c)	Resigned March 19, 2006
(d)	Retired as a Director June 21, 2006.
(e)	Retired as Chief Financial Officer on April 17, 2006.
(f)	Declined to stand for re-election and term ended August 11, 2005.
(g)	Declined to stand for re-election as director and term ended on June 21, 2006.
(h)	Resigned October 7, 2006
(i)	Resigned October 7, 2006
(j)	Resigned March 14, 2007
(k)	Resigned March 14, 2007
(l)	Resigned September 7, 2007

 

Jonathan Leinwand

Jonathan Leinwand, Chief Executive Officer and Director, joined GlobeTel as General Counsel in June 2005 and became a director in August 2005. He was appointed CEO in September 2007. Prior to joining GlobeTel, he was in private practice since 1996 concentrating in the areas of corporate and securities law, representing a number of public companies. As part of his practice, Mr. Leinwand also served as a deal-maker for several US and foreign corporations arranging strategic alliances and funding both in the US and abroad. Mr. Leinwand graduated from the University of Miami with honors degrees in Political Science and Communications and graduated cum laude from the University of Miami School Of Law.

Przemyslaw L. Kostro

 

Przemyslaw L. Kostro, Chairman, was first elected to the Board of Directors in November 2001. From November 2001 to April 2002, Mr. Kostro also served as the CEO of GlobeTel before relinquishing the position to Timothy Huff. Over the past five years, Mr. Kostro has been an attorney engaged in international law, and has been providing professional and consulting services to several large and mid-sized entities in Europe.  Mr. Kostro resigned as a Director in October 2005 and was reappointed as Director and Chairman of the Board in October 2006.

 

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Timothy M. Huff

Timothy M. Huff, Director, Chief Executive Officer, joined GlobeTel in October 1999, and served as CEO and as a member of the Board of Directors from April 2002 to October 2006. Prior to joining GlobeTel, Mr. Huff spent over five years owning and operating several successful private telecom companies. Mr. Huff has over eighteen years experience in international telecom business that included working with Sprint and MCI International, where he was involved in the construction of MCI's first international gateways. Mr. Huff resigned as Director and CEO on October 7, 2006.

Mitchell A. Siegel

Mitchell A. Siegel, Director, Chief Operating Officer, served in this capacity and as a member of the Board of Directors from May 2002 to June 2006. Since 1996, he was a consultant to Global Transmedia Communications Corporation and was instrumental in defining our role as a licensed telecommunications company. Mr. Siegel graduated from American University, holding a Bachelors Degree in Business Administration and has completed Masters Degree courses in finance at City College of New York - Bernard Baruch School of Finance. Mr. Siegel retired as a Director on June 21, 2006.

For the year 2002, the agreements provided for annual compensation of $150,000 for its Chief Executive Officer (CEO), $125,000 each for its Chief Financial Officer (CFO) and Chief Operating Officer (COO) and $75,000 each for its Chief Administrative Officer (CAO) and VP of Network Operations. Further, there remained an employment contract with its former President, as described below, which called for a salary of $100,000 per annum through 2003.

In 2004, the base compensation increased to $200,000 for its CEO, $175,000 each for its CFO and COO, $120,000 for the Controller (formerly the CAO) and $110,000 for its VP of Network Operations. Also, GlobeTel hired a new President at an annual compensation of $125,000 in June 2005, a Senior Vice President (Sr. VP) at an annual compensation of $100,000 in August 2005, and a Chief Technology Officer (CTO) at an annual compensation of $125,000 in November 2005.

Accrued but unpaid base compensation of $82,500 for the CEO, $57,500 for the CFO and $58,333 for the COO (a total of $198,333) were owed as of December 31, 2004. These amounts were paid in January 2005.

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In 2005, the base compensation remained at $200,000 for its CEO. The CFO, COO, CTO and General Counsel all had base compensation of $175,000. The Company also entered into employment contracts with the Executive Vice Chairman (EVC) and Senior Vice President (SVP) of Finance. The EVC agreement called for annual salaries of $250,000 plus signing bonuses equal to 2.5% of the outstanding shares of the Company as of December 31, 2005. The EVC is also entitled to stock salary in stock options totaling $750,000 per year for three years at $1.21 per share. The SVP Finance agreement calls for annual salaries of $195,000 plus bonuses amounting to 2% of the outstanding shares of the Company's stock at the end of the year, payable in the form of stock options.

OUTSTANDING EQUITY AWARDS

 

		Option Awards														Stock Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable			Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)			Option Exercise Price ($)			Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested (#)			Market Value of Shares or Units of Stock That Have Not Vested ($)			Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)			Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
Timothy Huff			1,782,964									0.675		December 31, 2006
			1,647,442									0.675		December 31, 2007
			116,527									0.675		April 1, 2007
Thomas Jimenez			633,842									0.675		December 31, 2006
			877,810									0.675		December 31, 2007
Jerrold Hinton			1,577,367									0.675		December 31, 2006
			569,416									0.675		December 31, 2007
Mitchell Siegel			851,853									0.675		December 31, 2006
			1,093,113									0.675		December 31, 2007
Jonathan Leinwand			921,052									0.190		May 22, 2010
			1,400,000									0.105		October 18, 2010
			2,916,667									0.090		January 10, 2011
Leigh Coleman			133,333									0.675		December 31, 2006
			574,438									0.675		December 31, 2007

 

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COMPENSATION OF DIRECTORS

 

DIRECTOR COMPENSATION

Name		Fees Earned or Paid in Cash ($)			Stock Awards ($)			Option Awards ($)			Non-Equity Incentive Plan Compensation ($)			Non-Qualified Deferred Compensation Earnings ($)			All Other Compensation ($)			Total ($)
(a)		(b)			(c)			(d)						(f)			(g)			(j)
Sir Christopher Meyer, Chairman (2005)			—			—			25,000												25,000
J. Randolph Dumas, Vice Chairman (2006)			100,000			—			541,136												641,136
J. Randolph Dumas, Vice Chairman (2005)			62,500			4,397,097			6,250												4,465,847
Przemyslaw L. Kostro, Former Chairman (2005)			—			—			18,750												18,750
Laina Green (2005)			—			85,575			19,000												104,575
Michael Molen (2005)			—			—			18,520												18,520
Michael Costellano (2006)			13,125			7,917			10,297												31,339
Ferdinando Salleo (2006)			—			—			27,087												27,087
Dorian Klein (2006)			31,666			7,917			5,148												44,731
Patrick Heyn (2006)			—			—			—												—
Kyle McMahan (2006)			26,250			7,917			3,327												37,494
Kyle McMahan (2005)			—			—			25,000												25,000

 

Compensation paid to Directors who are also officers of the Company is reflected in Item 10. Executive Compensation.