ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of

Sanswire Corp. and Subsidiaries:

We have audited the accompanying consolidated balance sheet of Sanswire Corp. and subsidiaries (the “Company”), as of December 31, 2009 and the related consolidated statements of operations, cash flows and stockholders’ deficit for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these 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 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 financial statements, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sanswire Corp. and subsidiaries as of December 31, 2009 and the consolidated results of their of operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company has experiences significant losses and negative cash flows, resulting in decreased capital and increased accumulated deficits. These conditions raise substantial doubt about its ability to continue as a going concern. In addition, 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 has advised that it intends to vigorously defend itself in this action. The SEC lawsuit states that 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. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  Management’s plans regarding those matters are described in Note 10.

/s/ Rosen Seymour Shapss Martin & Company LLP

CERTIFIED PUBLIC ACCOUNTANTS

New York, New York

March 31, 2010

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To the Board of Directors and Stockholders of:

Sanswire Corp. (formerly known as GlobeTel Communications Corp.) and Subsidiaries

We have audited the accompanying consolidated balance sheet of Sanswire Corp. (formerly known as GlobeTel Communications Corp.) and Subsidiaries (the “Company”), as of December 31, 2008 (as restated) and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended. 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 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. An audit 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 provide a reasonable basis for our opinion.

We were not engaged to examine management’s assertion about the effectiveness of Sanswire Corp. (formerly known as GlobeTel Communications Corp.) and Subsidiaries’ internal control over financial reporting as of December 31, 2008 included in the Company’s Item 9A “Controls and Procedures” in the Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sanswire Corp. (formerly known as GlobeTel Communications Corp.) and Subsidiaries as of December 31, 2008 (as restated) and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced net losses and negative cash flows from operations and expects such losses to continue. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As described in Note 4 “Restatement of Financial Statements” to the financial statements, the Company has restated its 2008 financial statements.

As discussed in Note 1, 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 has advised that it intends to vigorously defend itself in this action. The SEC lawsuit states that 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. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Weinberg & Company, P.A.

Boca Raton, Florida

March 30, 2009, except for Note 4 and 7, as to which the date is September 8, 2009

 

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 SANSWIRE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		DECEMBER 31, 2009				DECEMBER 31, 2008
						(as Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	12			$	4,809
Inventories			1,545,490				—
Current assets from discontinued operations			6,406				6,406
TOTAL CURRENT ASSETS			1,551,908				11,215
Deposits			11,150				—
Intangible assets, net of accumulated amortization of $1,049,425			2,179,574
Investment in joint venture			—				3,229,000
TOTAL NONCURRENT ASSETS			2,190,724				3,229,000
TOTAL ASSETS		$	3,742,632			$	3,240,215
LIABILITIES AND STOCKHOLDERS’ DEFICIT
LIABILITIES
CURRENT LIABILITIES
Accounts payable (including $396,625 and $0 due to joint venture partner at December 31, 2009 and 2008)		$	4,220,167			$	3,802,777
Notes and convertible notes payable, net of discount of $0 and $134,423			7,391,718				9,264,732
Accrued expenses and other liabilities (including $2,185,000 due to joint venture partner at December 31, 2009 and 2008)			3,311,025				3,489,210
Derivative liabilities			1,406,665				748,244
Current liabilities from discontinued operations			1,387,406				1,387,406
TOTAL LIABILITIES			17,716,981				18,692,369
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT
Common stock, $.00001 par value, 500,000,000 shares authorized;
263,040,586 and 184,704,015 shares issued and outstanding			2,631				1,848
Additional paid-in capital			120,114,115				109,848,580
Series E Preferred stock, $.001 par value, 100,000 shares authorized;
100,000 shares issued and outstanding:			100				—
Additional paid-in capital - Series E Preferred stock			625,894				—
Accumulated deficit			(134,717,089	)			(125,302,582	)
TOTAL STOCKHOLDERS’ DEFICIT			(13,974,349	)			(15,452,154	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	3,742,632			$	3,240,215

See accompanying notes to consolidated financial statements

 

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SANSWIRE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,  

		2009				2008
						(as Restated)
REVENUES		$	—			$	—
EXPENSES
Payroll and related taxes			554,065				887,283
Consulting fees			1,771,372				1,415,235
Officers’ and directors’ stock based compensation			3,744,070				435,000
Amortization			1,049,425				—
General and administrative			451,775				476,827
TOTAL EXPENSES			7,570,707				3,214,345
LOSS FROM OPERATIONS			(7,570,707	)			(3,214,345	)
OTHER INCOME (EXPENSE)
Loss on extinguishment of debt			—				(1,096,650	)
Extinguishment of derivative liabilities			629,563				465,173
Change in fair value of derivative liabilities			(1,287,984	)			375,166
Interest expense, net			(1,185,379	)			(1,127,420	)
NET OTHER EXPENSE			(1,843,800	)			(1,383,731	)
LOSS FROM CONTINUING OPERATIONS			(9,414,507	)			(4,598,076	)
LOSS FROM DISCONTINUED OPERATIONS			—				(197	)
NET LOSS		$	(9,414,507	)		$	(4,598,273	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC and DILUTED			216,936,864				151,534,774
LOSS PER SHARE FROM CONTINUING OPERATIONS
BASIC and DILUTED		$	( 0.04	)		$	( 0.03	)
LOSS PER SHARE FROM DISCONTINUED OPERATIONS
BASIC and DILUTED			—			$	( 0.00	)
NET LOSS PER SHARE
BASIC and DILUTED		$	( 0.04	)		$	( 0.03	)

 

See accompanying notes to consolidated financial statements

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SANSWIRE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (as Restated)

		COMMON STOCK
										ADDITIONAL
										PAID-IN
Description		SHARES				AMOUNT				CAPITAL
BALANCE, DECEMBER 31, 2007 (as Restated)			129,756,897			$	1,299			$	105,889,705
Shares issued for conversion of notes			27,265,195				272				1,788,566
Shares issued for services			12,269,444				123				712,378
Shares issued for settlement of debt			2,700,701				27				99,647
Shares issued for accrued expenses			6,831,778				68				367,852
Shares issued for interest			3,200,000				32				189,368
Shares issued for joint venture			2,680,000				27				267,973
Options issued for executive compensation			—				—				244,831
Fair value of warrants issued with convertible notes			—				—				288,260
Net loss
BALANCE, DECEMBER 31, 2008 (Restated)			184,704,015			$	1,848			$	109,848,580
Shares issued for cash			18,123,014				181				1,882,173
Shares issued for conversion of notes			25,683,212				257				2,702,942
Shares issued for settlement of debt			2,720,346				27				131,753
Shares issued for services			31,484,999				314				2,933,686
Shares issued for options exercised			75,000				1				(1	)
Shares issued for interest			250,000				3				9,497
Fair value of vested options issued for officers’ and directors’ compensation			—				—				2,134,120
Warrants issued with convertible notes			—				—				28,060
Modification of warrants			—				—				443,305
Preferred Series E shares issued for accrued expenses			—				—				—
Preferred Series E shares issued for accounts payable			—				—				—
Net loss			—				—				—
BALANCE, DECEMBER 31, 2009			263,040,586			$	2,631			$	120,114,115

 

(continued)

See accompanying notes to consolidated financial statements

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SANSWIRE CORP.  AND SUBSIDIARIES (continued)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (as Restated)

 

		SERIES E PREFERRED STOCK
						ADDITIONAL												TOTAL
						PAID-IN								ACCUMULATED				STOCKHOLDERS’
Description		SHARES				AMOUNT				CAPITAL				DEFICIT				DEFICIT
BALANCE, DECEMBER 31, 2007 (as Restated)															(120,704,309	)			(14,813,305	)
Shares issued for conversion of notes															—				1,788,838
Shares issued for services															—				712,501
Shares issued for settlement of debt															—				99,674
Shares issued for accrued expenses															—				367,920
Shares issued for interest															—				189,400
Shares issued for joint venture															—				268,000
Options issued for executive compensation															—				244,831
Fair value of warrants issued with convertible notes															—				288,260
Net loss															(4,598,273	)			(4,598,273	)
BALANCE, DECEMBER 31, 2008 (Restated)			—			$	—			$	—			$	(125,302,582	)		$	(15,452,154	)
Shares issued for cash			—				—				—				—				1,882,354
Shares issued for conversion of notes			—				—				—				—				2,703,199
Shares issued for settlement of debt			—				—				—				—				131,780
Shares issued for services			—				—				—				—				2,934,000
Shares issued for options exercised			—				—				—				—				—
Shares issued for interest			—				—				—				—				9,500
Fair value of vested options issued for officers’ and directors’ compensation			—				—				—				—				2,134,120
Warrants issued with convertible notes			—				—				—				—				28,060
Modification of warrants			—				—				—				—				443,305
Preferred Series E shares issued for accrued expenses			70,385				70				440,537				—				440,607
Preferred Series E shares issued for accounts payable			29,615				30				185,357				—				185,387
Net loss			—				—				—				(9,414,507	)			(9,414,507	)
BALANCE, DECEMBER 31, 2009			100,000			$	100			$	625,894			$	(134,717,089	)		$	(13,974,349	)

 

See accompanying notes to consolidated financial statements

 

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SANSWIRE CORP.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

 

		2009				2008
						(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(9,414,507	)		$	(4,598,273	)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization of debt discount			176,465				314,549
Amortization of intangible asset			1,049,425				—
Loss on extinguishment of debt			—				1,096,650
Fair value of stock based compensation			3,102,725				712,501
Fair value of vested options			2,134,120				244,831
Change in fair value of derivative liabilities			(629,563	)			(375,166	)
Extinguishment of derivative liabilities			1,287,984				(465,173	)
Fair value of modification of warrants			443,305				—
Accrued interest expense on convertible notes payable			482,966				569,590
Common stock exchanged for interest and financing costs			—				227,081
Change in operating assets and liabilities:
Inventories			(1,545,490	)			—
Assets from discontinued operations			—				12,272
Accounts payable			615,808				746,729
Accrued expenses and other liabilities			306,172				604,776
Liabilities from discontinued operations			—				25
NET CASH USED IN OPERATING ACTIVITIES			(1,990,590	)			(909,608	)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on joint venture			—				(385,000	)
Deposits			(11,150	)			—
Investing activities from discontinued operations			—				—
NET CASH USED IN INVESTING ACTIVITIES			(11,150	)			(385,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock – exercises of warrants			—				—
Payments on notes payable			(25,411	)			(25,139	)
Proceeds from notes and loans payable			140,000				1,292,278
Proceeds from sale of common stock			1,882,354				—
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,996,943				1,267,139
NET CHANGE IN CASH AND EQUIVALENTS			(4,797	)			(27,469	)
CASH AND EQUIVALENTS – BEGINNING OF PERIOD			4,809				32,278
CASH AND EQUIVALENTS – END OF PERIOD		$	12			$	4,809
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest		$	2,903			$	16,200
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Shares issued for joint venture			—				268,000
Common stock for accrued expenses			43,750				367,920
Common stock for accounts payable			13,031				99,674
Deposit applied to accrued expenses			—				659,000
Accrued expense for joint venture			—				2,844,000
Conversion of notes payable to common stock			2,618,973				1,788,838
Non-cash equity-warrant valuation and intrinsic value of beneficial conversion associated with convertible notes			28,060				288,260
Preferred stock for accrued expenses			440,607				—
Preferred stock for accounts payable			185,387				—

 

See accompanying notes to consolidated financial statements

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SANSWIRE CORP.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2009 AND 2008

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

NATURE OF OPERATIONS

The opportunities associated with Sanswire are related to the Lighter Than Air (LTA) Unmanned Aerial Vehicle (UAV) market. Sanswire seeks to build and run a UAV business that includes low-, mid- and high-altitude, lighter-than-air vehicles. Sanswire intends to provide customers surveillance sensor suites and advanced seamless wireless broadband capabilities utilizing its High Altitude Airship technology. 

Sanswire’s main products are airships, which provide a platform to transmit wireless capabilities from air to ground.  The High Altitude class of prospective airships are generally referred to as HAAs (High Altitude Airships) but have also been called HAPs and HALEs (High Altitude Platforms, High Altitude Long Endurance). They have been designed to be able to keep a station in one location in the Stratosphere, at approximately 65,000 ft for durations of 30 days or more.  The company is focused on the development and construction of the STS-111 Lighter than air (LTA) Mid Altitude Long Endurance (MALE) Unmanned Aerial Vehicle (UAV) platform for providing survelliance and reconnaissance capabilities.

ORGANIZATION AND CAPITALIZATION

The Company was organized in July 2002, under the laws of the State of Delaware. Upon its incorporation, Sanswire 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. Subsequently, ADGI was merged into the Company, 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 Sanswire interchangeably.

In May 2005, the Company 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. Common stock amounts in this report have accounted for the reverse stock split retroactively, 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.

On November 2, 2009, holders of a majority of voting shares of the Company, Sanswire Corp., acted by written consent in lieu of a special meeting of shareholders to an adopt amendment to the articles of incorporation to increase the number of shares of common stock which the Company is authorized to issue from 250,000,000 shares to 500,000,000 shares.

On May 3, 2009, the Board of Directors approved the creation of a Series E Preferred Stock. The Company is authorized to issue 10,000,000 shares of preferred stock. As of December 31, 2009, 100,000 shares of preferred stock was issued and outstanding. The rights, preferences, and provisions of the remaining authorized shares would be determined, at the discretion of the Board of Directors, at the time of issuance.

BASIS OF PRESENTATION

The consolidated financial statements of the Company include the accounts of its subsidiaries. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements presented reflect entries necessary for the fair presentation of the Consolidated Statements of Operations for the years ended December 31, 2009 and 2008, Consolidated Balance Sheets as of December 31, 2009 and 2008 and Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008. All entries required for the fair presentation of the financial statements are of a normal recurring nature. Intercompany transactions and balances are eliminated upon consolidation.

 

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The Company applied the provision of Financial Accounting Standards Board (“FASB”) ASC 810 “Consolidation of Variable Interest Entities (revised December 2003)” (“ASC 810”) to its investment in Sanswire-TAO. Under ASC 810, a variable interest entity (VIE) is subject to consolidation if the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. As of December 31, 2009, the Company determined that that consolidation of Sanswire-TAO was appropriate. Inter-company accounts and transactions have been eliminated in 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 $9,414,507 and a negative cash flow from operations of $1,990,590 for the year ended December 31, 2009, and had a working capital deficiency of $16,165,073 and a stockholders’ deficit of $13,974,349 at December 31, 2009.  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 to develop and implement a successful business plan. The Company has a business plan which, if successful, will allow the Company to sell unmanned aerial systems for a profit, which in turn will reduce the dependency of raising additional funds from outside sources.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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 current working capital, will be sufficient to sustain operations at its current level through December 31, 2010. However, if the Company’s plans are not achieved and/or if significant unanticipated events 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 reduced since January 1, 2008.  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. (See Note 10)

CASH AND CASH EQUIVALENTS

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

VALUATION HIERARCHY

FASB ASC 820, “Fair Value Measurements”, establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.  Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

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The following table lists the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2009:

						Fair Value Measurements at December 31, 2009
		Total Carrying Value at December 31, 2009				(Level 1)				(Level 2)				(Level 3)
Cash and cash equivalents		$	12			$	12			$	—			$	—
Derivative liabilities			1,406,665				—				—				1,406,665

The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors, and are classified within Level 3 of the valuation hierarchy. There were no changes in the valuation techniques during the year ended December 31, 2009.

REGISTRATION RIGHTS

 

In connection with the sale of debt or equity instruments, the Company may enter into Registration Rights Agreements. Generally, these Agreements require the Company 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.

 

These 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 the Company received on issuance of the debt or preferred stock, common shares, options or warrants. The Company accounts for these penalties when it is probable that a penalty will be incurred. At December 31, 2009, the Company has no registration rights agreement requiring penalties to be recorded.

 

REVENUE RECOGNITION

The Company recognized no revenue in the years 2009 and 2008 since it is developing its unmanned aerial systems.

INVENTORIES

Inventories consist of work in progress related to the Company’s consolidated joint venture Sanswire-TAO.

INCOME TAXES

Income taxes are computed under the provisions of the Financial Accounting Standards Board (FASB) ASC 740, “Accounting for Income Taxes.” ASC 740 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. There was no advertising and marketing expense for the years ended December 31, 2009 and 2008.

 

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FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments, including cash, deposits, 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.

FOREIGN CURRENCY TRANSACTIONS

The currency of the primary economic environment in which the operations of the Company are conducted is the United States Dollar (“dollar”). Accordingly, the Company and its subsidiaries use the dollar as their functional currency. All exchange gains and losses denominated in non-dollar currencies are presented on a net basis in operating expense in the consolidated statement of operations when they arise. Foreign currency gains for the years ended December 31, 2009 and 2008 were immaterial.

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.

BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic and diluted 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 and diluted 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, 2009, the shares outstanding would be 341,630,205.  As of March 30, 2010, the Company had 267,040,586 shares of our common stock outstanding. The Company is obligated under various existing agreements, options and warrants to issue additional shares of our common stock.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company follows FASB ASC 360, “Accounting for the Impairment of Long-Lived Assets.” ASC 360 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

We account for stock-based compensation under the provisions of ASC 718-10 and ASC 505-50 “Stock Compensation and Equity Based Payments to Non-Employees.” ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations.

We are using the Black-Scholes option-pricing model as its method of valuation for share-based awards.  Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.

 

Stock-based compensation expense recognized under ASC 718 for the years ended December 31, 2009 and 2008 were $3,744,070 and $435,000, respectively.

 

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The Company’s determination of fair value of share-based payment awards to employees and directors on the date of grant uses the Black-Scholes model, which is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.  

The Company accounts for stock option and warrant grants issued to non-employees for goods and services using the guidance of ASC 718 and ASC 505 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” whereby the fair value of such option and warrant grants is determined using the Black-Scholes option pricing model at the earlier of the date at which the non-employee’s performance is completed or a performance commitment is reached.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2009, the Financial Accounting Standards Board (“FASB”) issued a staff position that amends and clarifies the new business combination standard, to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The Company does not expect the adoption of this staff position to have a material impact on its financial condition and results of operations.

In April 2009, the FASB issued a staff position requiring disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This staff position also requires those disclosures in summarized financial information at interim reporting periods. The Company adopted this staff position in its second quarter ended June 30, 2009. The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2009, the FASB issued a staff position which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The Company adopted this staff position in its second quarter ended June 30, 2009. The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2009, the FASB issued a staff position which provides additional guidance for estimating fair value in accordance with the new business combination standard when the volume and level of activity for the asset or liability have significantly decreased. This staff position also includes guidance on identifying circumstances that indicate a transaction is not orderly. The Company does not expect the adoption of this staff position to have a material impact on its financial condition and results of operations.

In May 2009, the FASB issued new guidance on subsequent events which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. The Company adopted the guidance in the quarter ended June 30, 2009 and the statement did not have a material impact on our consolidated results of operation and financial position.  

In June 2009, the FASB issued the standard that established the FASB Accounting Standards Codification (the “Codification”).  The Codification will become the source of authoritative United States generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.  The Company adopted the standard in the quarter ended September 30, 2009.  Other than the manner in which accounting guidance is referenced in its financial reporting, the adoption of the Codification had no impact on the Company’s financial position, results of operations or cash flows.

 

In August 2009, the FASB issued guidance which provides clarification for the fair value measurement of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available. This guidance is effective for interim periods beginning after August 28, 2009. The Company adopted this guidance in the quarter ended September 30, 2009.  The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company does not expect the adoption of this staff position to have a material impact on its financial condition and results of operations.

NOTE 2. DISCONTINUED OPERATIONS

The Company decided to close several of its operations and has presented certain activities as discontinued operations as of and for the years ended December 31, 2009 and 2008.

The loss on the Company’s consolidated statements of operations for the years ended December 31, 2009 and 2008 is summarized as follows:

Telecom		2009				2008
Loss from discontinued operations		$	—			$	(197	)
GlobeTel Wireless
Loss from discontinued operations			—				—
Total loss from discontinued operations		$	—			$	(197	)

The Company incurred the following losses from discontinued operations for the year ended December 31, 2008:

2008		Telecom				GlobeTel Wireless				Total
General and administrative		$	(197	)		$	—			$	(197	)
Gain/loss from discontinued operations		$	(197	)		$	—			$	(197	)

The Company had the following assets and liabilities from its discontinued operations on its consolidated balance sheet as of December 31, 2009 and 2008:

2009		Telecom				GlobeTel Wireless				Total
Cash		$	6,406			$	—			$	6,406
Total assets		$	6,406			$	—			$	6,406
Accounts payable		$	140,116			$	1,216,208			$	1,356,324
Accrued liabilities			9,605				21,477				31,082
Total current liabilities			149,721				1,237,685				1,387,406
Net liabilities of discontinued operations		$	143,315			$	1,237,685			$	1,381,000

2008		Telecom				GlobeTel Wireless				Total
Cash		$	6,406			$	—			$	6,406
Total assets		$	6,406			$	—			$	6,406
Accounts payable		$	140,116			$	1,216,208			$	1,356,324
Accrued liabilities			9,605				21,477				31,082
Total current liabilities			149,721				1,237,685				1,387,406
Net liabilities of discontinued operations		$	143,315			$	1,237,685			$	1,381,000

 

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NOTE 3. JOINT VENTURE AND INTANGIBLE ASSETS

On June 3, 2008 Sanswire and TAO Technologies Gmbh (“TAO”) with support from Professor Bernard Kroplin (“Kroplin”) restructured the November 2007 agreement and entered into a new agreement to form a 50/50 US based joint venture to place, among other things, the license rights to the TAO intellectual property in US, Canada, and Mexico into the US-based joint venture company to be called Sanswire-TAO that was to be owned equally by TAO and Sanswire Corp. Additionally, Sanswire-TAO would register the patents and the intellectual property of TAO in the United States for the exclusive use of Sanswire-TAO. The intellectual property includes, but is not limited to an existing patent as well as any updates to that patent. This integration of Sanswire and Stuttgart, Germany-based TAO took place to create various strategic advantages for both companies. Each group entered the relationship with synergistic, yet very distinct core competencies. Sanswire’s business development, its inroads into the U.S. Government review process as well as inroads into overseas markets and other marketing resources complement TAO’s vast airship product research and development ability. In addition the joint venture has an exclusive agreement with TAO that may require additional payments in the future.

On June 3, 2008, the Company reclassified the transaction as the purchase of assets and recognized a $3,229,000 Intangible Asset related to the intellectual property, including existing patent. The $391,000 paid during 2007 was applied as payment towards the investment.  During 2008, the Company paid an additional $653,000 for the investment, made up of $385,000 in cash and the issuance of 2,680,000 shares of the Company’s common stock valued at $268,000.  After application of the 2007 deposit of $391,000 and the 2008 payments of $653,000, the balance of $2,185,000 due for the investment is included in accrued expenses as of December 31, 2009 (see Note 6).

The Company determined that the intangible assets have a definite life equal to the remaining life of the patent, which was through March 3, 2012, and accordingly, is subject to amortization using that life or 40 months, which is $80,725 per month. During the normal process of testing for an intangible impairment, the Company updated its ASC 360 analysis as of the end of December 2009 and determined there were no cash flows associated with the Company’s intangible assets.  The Company has determined that the appropriate method of determining if any impairment was necessary was the stated value for the intangible assets.

NOTE 4.  RESTATEMENT OF FINANCIAL STATEMENTS

 

On September 4, 2009, the Company concluded, with the concurrence of the Company’s Board of Directors, that an accounting error had been made in the Company’s historical December 31, 2008 financial statements in relation to the recording of derivative liabilities related to the conversion feature and associated warrants issued with convertible notes during 2008.  As a result, the Company’s consolidated financial statements for the year ended December 31, 2008 have been amended and restated.

On September 4, 2009, the Company concluded, with the concurrence of the Company’s Board of Directors, that an accounting error had been made in the Company’s historical December 31, 2008 consolidated financial statements in relation to the provisions of FASB ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities” and the recording of certain warrants and the beneficial conversion feature of the Company’s convertible notes payable. In accordance with ASC 815, the fair value of certain of the Company’s options and warrants and the embedded conversion feature of the Company’s convertible notes payable, have been re-characterized as derivative liabilities effective January 1, 2007. ASC 815 requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations. As a result, the Company’s consolidated financial statements as of December 31, 2008 have been restated.

 

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The effects of the restatement on the Company’s consolidated financial statements for the year ended December 31, 2008 is shown below (note: see table of adjustment descriptions at end of this section):

		December 31, 2008
Account		(As Initially Reported)				(Adjustment)				(As Restated)
Current Assets
Cash		$	4,809			$	—			$	4,809
Current assets from discontinued operations			6,406				—				6,406
Total current assets			11,215				—				11,215
Investment in joint venture			3,229,000				—				3,229,000
Total Assets		$	3,240,215			$	—			$	3,240,215
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable		$	3,802,777			$	—			$	3,802,777
Notes and notes payable, net of discount of $134,423			9,264,732				—				9,264,732
Accrued expenses and other liabilities			3,489,210				—				3,489,210
Derivative liabilities			—				748,244	1			748,244
Current liabilities from discontinued operations			1,387,406				—				1,387,406
Total current liabilities			17,944,125				748,244				18,692,369
Stockholders’ Deficit
Common stock			1,848				—				1,848
Additional paid-in capital			111,128,580				(1,280,000	)  1			109,848,580
Accumulated deficit			(125,834,338	)			531,756	1			(125,302,582	)
Total Stockholders’ Deficit			(14,703,910	)			(748,244	)			(15,452,154	)
Total Liabilities and Stockholders’ Deficit		$	3,240,215			$	—			$	3,240,215

 

		Year ended December 31, 2008
Account		(As Initially Reported)				(Adjustment)				(As Restated)
Revenue		$	—			$	—			$	—
Cost of revenues			—				—				—
Gross margin			—				—				—
Payroll and related taxes			(887,283	)			—				(887,283	)
Consulting fees			(1,415,235	)			—				(1,415,235	)
Noncash officers’ and directors’ compensation			(435,000	)			—				(435,000	)
General and administrative expenses			(476,827	)			—				(476,827	)
Loss from operations			(3,214,345	)			—				(3,214,345	)
Loss on extinguishment of debt			(1,096,650	)			—				(1,096,650	)
Interest expense			(1,127,420	)			—				(1,127,420	)
Extinguishment of derivative liabilities			—				465,173	3			465,173
Change in fair value of warrants and conversion feature			—				375,166	2			375,166
Net other expense			(2,224,070	)			840,339				(1,383,731	)
Loss from continuing operations			(5,438,415	)			840,339				(4,598,076	)
Loss from discontinued operations			(197	)			—				(197	)
Net loss		$	(5,438,612	)		$	840,339			$	(4,598,273	)
Net loss per share from continuing operations, basic and diluted		$	(0.04	)			0.01	4			(0.03	)
Net loss per share from discontinuing operations, basic and diluted		$	(0.00	)			—			$	(0.00	)
Weighted average shares outstanding, basic and diluted			151,534,774								151,534,774

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		Year ended December 31, 2008
		(As Initially Reported)				(Adjustment)				(As Restated)
Cash flow from operating activities:
Net loss		$	(5,438,612	)		$	840,339			$	(4,598,273	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount			314,549				—				314,549
Loss on extinguishment of debt			1,096,650				—				1,096,650
Stock based compensation			712,501				—				712,501
Fair value of vested options			244,831				—				244,831
Change in fair value of derivative liabilities			—				(375,166	) 2			(375,166	)
Extinguishment of derivative liabilities			—				(465,173	) 3			(465,173	)
Interest expense on convertible notes payable			569,590				—				569,590
Common stock exchanged for interest			189,400				—				189,400
Common stock exchanged for financing costs			37,681				—				37,681
Decrease in assets:
Decrease in assets relating to discontinued operations			12,272				—				12,272
Increase in liabilities:
Accounts payable			746,729				—				746,729
Accrued expenses and other liabilities			604,776				—				604,776
Increase in liabilities relating to discontinued operations			25				—				25
Net cash used in operating activities			(909,608	) )			—				(909,608	)
Cash flows from investing activities:
Payment on joint venture			(385,000	)			—				(385,000	)
Net cash used in investing activities			(385,000	)			—				(385,000	)
Cash flows from financing activities:
Payments on notes payable			(25,139	)			—				(25,139	)
Proceeds from notes and loans payable			1,292,278				—				1,292,278
Net cash provided by financing activities			1,267,139				—				1,267,139
Net decrease in cash and cash equivalents			(27,469	)			—				(27,469	)
Cash and cash equivalents, beginning of period			32,278				—				32,278
Cash and cash equivalents, end of period		$	4,809			$	—			$	4,809

Description of adjustments:

 

(1)	To record $748,244 increase to derivative liability, $531,756 decrease to accumulated deficit for prior period recognition of derivative liability, and $1,280,000 decrease to additional paid in capital for cumulative effect of correction of accounting for warrants and conversion feature of convertible notes as derivative liabilities.
(2)	To record $375,166 decrease in derivative liability for the year ended December 31, 2008.
(3)	To record $465,173 decrease from the extinguishment of derivative liabilities for the year ended December 31, 2008.
(4)	Effect on Earnings per share of restatements

 

NOTE 5. INVENTORIES

Inventories as of December 31, 2009 and 2008 consisted of the following:

		December 31,				December 31,
		2009				2008
Work in process		$	1,545,490			$	—
INVENTORIES		$	1,545,490			$	—

 

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NOTE 6. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consisted of the following:

		December 31, 2009				December 31, 2008
Payroll liabilities		$	1,007,079			$	1,185,264
Professional fees			118,946				118,946
Due to Joint Venture Partner			2,185,000				2,185,000
ACCRUED EXPENSES AND OTHER LIABILITIES		$	3,311,025			$	3,489,210

 

NOTE 7. NOTES AND CONVERTIBLE NOTES PAYABLE

		December 31, 2009				December 31, 2008
(A) Notes payable		$	5,997,030			$	5,997,030
(B) Convertible notes payable, net of unamortized discount of $0 and $454,531			—				80,000
(C) Convertible promissory notes, net of unamortized discount of $0 and $134,423			—				2,016,913
Total			5,997,030				8,093,943
Accrued interest			1,394,688				1,170,789
NOTES AND CONVERTIBLE NOTES PAYABLE		$	7,391,718			$	9,264,732

(A) NOTES PAYABLE

Notes payable are made up of two separate notes.

From February 2007 to October 2007, the Company received a total of $641,812 from the first note. During January 2008, the Company received a total of $7,673. As of December 31, 2009 and 2008, a balance of $4,997,130 remains through an unsecured promissory note with no formal terms of repayment.  The Company has accrued interest at a rate of 7% per annum, which totals $1,162,544 from inception to December 31, 2009.

During 2008 and 2009, the Company received no additional funding related to the second note. In January 2008, the note holder converted $150,000 of the loans to 1,428,571 shares of common stock. As of December 31, 2009 and 2008, a balance of $999,900 remains through an unsecured promissory note with no formal terms of repayment.  The Company has accrued interest at a rate of 7% per annum, which totals $232,144 from inception to December 31, 2009.

Interest expense on these notes totaled $405,753 for each of the years ended December 31, 2009 and 2008, respectively.

 (B) CONVERTIBLE NOTES PAYABLE

Effective January 16, 2008, the Company entered into a forbearance agreement with certain note holders that were issued in 2006. This agreement changed their conversion price to the lesser of $.20 or 70% of the volume weighted average price for the 10 days prior to conversion.

In January 2008, the Company issued certificates of adjustment for certain convertible notes issued in September 2006 to reduce the conversion prices from $0.196 to $.105 per share.  The modification was deemed an extinguishment of debt, with a loss of $293,817 recorded in January 2008.

During 2008, $1,200,000 of principal and interest was converted into approximately 23.4 million shares of Company common stock.

During 2009, $80,000 of principal and interest was converted into 1,047,619 million shares of Company common stock.

 

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(C) CONVERTIBLE PROMISSORY NOTES

On February 17, 2009, the Company entered into subscription agreements with accredited investors. The Company sold $110,000 of the Company’s 7% Convertible Debentures, 3-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture shares of the Company’s common stock at an exercise price of $0.315. The Debentures are convertible into shares of the Company’s common stock at $.105 per share.

The Company determined that the total fair value of the warrants was $21,365 based upon the relative value of the Black Scholes valuation of the warrants and the underlying debt amount.  For the Black Scholes calculation, the Company assumed no dividend yield, a risk free interest rate ranging from 1.31% to 1.40%, expected volatility of 169.01% and an expected term of the warrants of 3 years.  The initial calculated fair value of warrants of $21,365 was reflected by the Company as a valuation discount and an offset to the carrying value of the Notes, and is being amortized by the straight line method over the term of the Notes. As of December 31, 2009, the Company amortized $21,365 of the valuation discount, which is reflected as interest expense in the Company’s consolidated statements of operations.  During the year ended December 31, 2009, all principal and interest has been converted as part of an overall conversion request that includes all outstanding notes from this note holder.  On September 30, 2009, the balance of $1,633,869 of principal and $199,648 of interest were converted into 17,462,080 shares of Company common stock.

On April 29, 2009, the Company agreed to extend the expiration of certain warrants associated with the notes.  A charge of $399,707 was recorded for the change in the fair value of the warrants at the time of modification.

On February 17, 2009, the Company entered into subscription agreement with an accredited investor. The Company sold $30,000 of the Company’s 7% Convertible Debentures, 3-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase a number of shares equal to 50% of the number of shares issuable upon conversion of the debenture shares of the Company’s common stock at an exercise price of $0.315. The Debentures are convertible into shares of the Company’s common stock at $.105 per share pursuant to the following terms.

The Company determined that the total fair value of the warrants was $4,865 based upon the relative value of the Black Scholes valuation of the warrants and the underlying debt amount.  For the Black Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 1.22%, expected volatility of 169.01% and an expected term of the warrants of 3 years.  The initial calculated fair value of warrants of $4,865 was reflected by the Company as a valuation discount and offset to the carrying value of the Notes, and is being amortized by the straight line method over the term of the Notes. As of December 31, 2009, the Company amortized $4,865 of the valuation discount, which is reflected as interest expense in the Company’s consolidated statements of operations.  During the year ended December 31, 2009, all principal and interest has been converted as part of an overall conversion request that includes all outstanding notes from this note holder.  On September 30, 2009, the balance of $130,000 of principal and $10,558 of interest were converted into 1,338,651 shares of Company common stock.

On April 29, 2009, the Company agreed to extend the expiration of certain warrants associated with the notes.  A charge of $41,121 was recorded for the change in the fair value of the warrants at the time of modification.

During 2009, the Company made payments totaling $42,630 to reduce a previously entered into note. On September 30, 2009, the balance of $119,836 of principal and $9,084 of interest were converted into 1,227,810 shares of Company common stock.

In October 2008, the Company entered into a new financing agreement for a convertible promissory note payable totaling $25,000.  On February 11, 2009, $25,438 of principal and interest was converted into 238,096 shares of the Company’s common stock.

 

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During May 2009, the Company converted a previously entered into note totaling $290,000 of principal and $5,921 of interest into 2,447,790 shares of Company common stock.

In September 2008, the Company entered into a new financing agreement for a convertible promissory note payable totaling $50,000. On February 12, 2009, the Company issued 250,000 shares, valued at $9,500, as a penalty to extend the maturity to an unspecified date. On March 30, 2009, the investor foreclosed on its lien and security interest based on the previously entered into pledge agreement.  The note was secured by 1,000,000 shares of common stock of the Company held by the Company’s CEO.  As a result, the holder acknowledged that by virtue of its ownership of the shares, the note was deemed satisfied in full.

On April 17, 2009, the Company entered into an amendment to the Subscription Agreement, dated September 17, 2008 pursuant to which the Company agreed (i) to extend the expiration date of both the Series A Warrant and Series B Warrant issued from October 15, 2010 to December 31, 2010 and (ii) extend the final date that the holder may make up to two additional purchases of the Company’s securities, from October 15, 2008 and December 15, 2008, respectively, until December 31, 2010 and December 31, 2010, respectively.  A charge of $2,477 was recorded for the change in the fair value of the warrants at the time of modification.

In 2008, the Company entered into $1,234,606 in financing agreements which are convertible into common stock of the Company at $.105 per share, due two years from inception, accrue interest at a rate of 7% per annum and were issued Class A and Class B warrants. The Class A and B warrants are exercisable for a purchase price of $.21 and $.315, respectively. The warrants have a 2 year term.

The Company originally accounted for the fair value of the conversion feature and the fair value of the warrants based upon the relative value of the Black Scholes Merton valuation of the warrants and the underlying debt amount.   Subsequently, the Company’s identified them as embedded derivatives due to price resets relating to the 2008 convertible notes. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the related convertible notes up to the proceeds amount and to fair value as of each subsequent balance sheet date.  At the inception of the 2008 convertible notes, the Company determined the fair value of the embedded derivative to be $487,883.  In addition, the Company determined the fair value of derivative related to warrants issued with the 2008 notes to be $205,172.  The Company recorded a discount of $190,124 for the 2008 notes, which is being amortized by the effective interest method over the term of the Notes.

For the years ended December 31, 2009 and December 31, 2008, the Company amortized $157,548 and $114,238, respectively of the valuation discount.

The fair value of the embedded derivative was determined using a probability weighted Black Scholes Merton option pricing model based on the following assumptions:  dividend yield: -0-%, volatility 28 - 167%, risk free rate: .11 – 1.00%, expected term: .01 – 2.74 years.

NOTE 8.  DERIVATIVE LIABILITIES

In 2007, the Company adopted FASB ASC 815 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and FASB ASC 815 “Accounting for Derivative Instruments and Hedging Activities,” as amended by FASB ASC 815 “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB ASC 815,” collectively referred to as FASB ASC 815. FASB ASC 815 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income.

 

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The derivative liabilities were valued using the Black-Scholes option pricing model and the following assumptions:

		December 31, 2009				December 31,  2008
Conversion feature:
Risk-free interest rate			—				0.27 – 0.76	%
Expected volatility			—				118 – 134	%
Expected life (in years)			—				0.33 – 1.76
Expected dividend yield			—				—
Warrants:
Risk-free interest rate			0.14 – 1.45	%			0.11 – 1.00	%
Expected volatility			10 – 168	%			28 – 167	%
Expected life (in years)			0.08 – 2.92				0.01 – 2.74
Expected dividend yield			—				—

Fair value:
Conversion feature		$	—			$	495,805
Warrants		$	1,406,665			$	252,439

The risk-free interest rate was based on rates established by the Federal Reserve.  In 2009, the Company’s expected volatility was based upon the historical volatility for its common stock.  The expected life of the Debentures’ conversion option was based on the maturity of the Debentures and the expected life of the warrants was determined by the expiration date of the warrants.  The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.

NOTE 9. AGREEMENTS

AGREEMENTS

Several agreements, letters of intent, and memorandums of understanding regarding the Sanswire project were entered into during 2009 and 2008 and through the date of this report, none of which require the recording of any assets, liabilities, revenues or expenses.

NOTE 10. 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, the Company 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.

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.

 

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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 Commission subsequently consolidated this action with another pending action involving former officers of the Company. The Commission has also moved to amend its complaint against the Company to include additional allegations of wrongdoing beginning in 2002, but which does not add any new defendants. The Company has been vigorously defending itself in this action. The trial of this matter has been set for October 2010.

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 Defamation, Tortuous 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 pending additional information arising from the SEC lawsuit.  This action has been dismissed for lack of prosecution but may be refiled by the Company in the future.

Hudson Bay Fund LP et al.

Hudson Bay Fund LP and Hudson Bay Overseas Fund Ltd. filed an action against the Company relating to the warrants attached to a Subscription Agreement between those entities and the Company. The Hudson Bay entities are seeking to reprice the warrants, increase the number of shares they can purchase pursuant to the warrants, certain equitable remedies, and unspecified damages. The Company has retained outside counsel and has filed an answer and affirmative defenses in the case. The Company intends to vigorously defend the action, but the outcome of the action cannot be predicted.

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 $762,902. This liability was previously recorded in the Company’s accounts payable as incurred.

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 on February 4, 2008.

Derivative Action

On July 10, 2006, a derivative action was filed against the officers and directors of the Company 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.

 

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Mitchell Siegel v. GlobeTel

On February 2, 2007, the Company 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 the Company 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 an October 2006 agreement. During 2009, the Company paid the remaining $43,750 in the Company’s common stock.

Tsunami Communications v. GlobeTel

On March 3, 2006, Civil Action File No. 06A-02368-5 was filed in Superior Court for Gwinnett County Georgia.  A purported shareholder of a company from whom GlobeTel purchased assets is seeking to receive shares of our common stock that they believe that they are entitled to as their pro-rata share of shares paid for the asset. We have asserted affirmative defenses and the trial of this matter was held in November 2009. We are waiting for a ruling from the Court.

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. The Company 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.

 

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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. The Company has not been informed of any further developments since the hearing.

Trimax Wireless

On April 6, 2009, the Company entered into a settlement agreement with Ulrich Altvater, a former employee, and his company, Trimax Wireless.  As per the terms of the settlement, Mr. Altvater will return 1,640,000 shares of the Company’s common stock and certain equipment that was held by Trimax Wireless. The Company has received the shares and certain equipment pursuant to the settlement and the matter has been dismissed.

American Express

American Express Travel Related Services Company, Inc. has filed a lawsuit against the Company and Sanswire Networks LLC (CASE NO: CACE 08-013239, Broward County Florida), seeking to recover a total of $394,919 for unpaid charges on the Companies’ corporate purchasing account. On October 3, 2008, American Express received a final judgment for $404,113.  This liability was previously recorded in the Company’s accounts payable as incurred.

Leases and Rents

 

Sanswire’s corporate offices are now located at 17501 Biscayne Blvd, Aventura, FL 33160. Base rent is $2,900 per month. The lease is for a period of 36 months and terminates on June 30, 2012.   We believe our facilities are adequate for our current and near-term needs.  Sanswire’s corporate offices were previously located at 101 NE 3 rd Ave., Suite 1500, Fort Lauderdale, FL 33301 which were vacated on December 31, 2009 as the lease expired.

 

Rent expense for 2009 and 2008 were $23,498 and $42,431, respectively.

Estimated future minimum rental payments and lease payments on noncancelable operating leases as of December 31, 2009 were as follows:

 

Year Ended December 31,
2010		$	34,668
2011			34,668
2012			17,334

 

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NOTE 11. INCOME TAXES

Deferred income taxes and benefits for 2009 and 2008 are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes. The tax effects (computed at 15%) of these temporary differences and carry-forwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:

		2008				Current Period Changes				2009
Deferred tax assets:
Net operating loss carryforwards		$	15,665,187			$	1,412,176			$	17,077,363
			15,665,187				1,412,176				17,077,363
Valuation allowance			(15,665,187	)			(1,412,176	)			(17,077,363	)
Net deferred tax asset		$	—			$	—			$	—

A reconciliation of income benefit provided at the federal statutory rate of 15% to income tax benefit is as follows:

		2009				2008
Income tax benefit computed at federal statutory rate		$	(1,412,176	)		$	(815,792	)
Deferred income taxes			1,412,176				815,792
		$	—			$	—

 

The Company has accumulated net operating losses, which can be used to offset future earnings. Accordingly, no provision for income taxes is recorded in the financial statements. A deferred tax asset for the future benefits of net operating losses and other differences is offset by a 100% valuation allowance due to the uncertainty of the Company’s ability to utilize the losses. These net operating losses begin to expire in the year 2021.

At the end of 2009, the Company had net operating loss carry-forwards (including those of its successor due to accounting for the reincorporation as an “F” reorganization under the Internal Revenue Code) of approximately $81,429,083, which expire at various dates through 2021.

NOTE 12. COMMON STOCK TRANSACTIONS

During the year ended December 31, 2009, the Company issued the following shares of common stock:

 

SHARES		CONSIDERATION		VALUATION
2,970,346		Settlement of Debts	$	141,281
17,934,999		Consulting Services		1,421,250
75,000		Exercised Options		—
35,387,971		Converted Notes Payable and Accrued Interest		3,722,198
12,500,000		Services - Performance Bonus		1,405,000
8,418,255		Stock for Cash		863,355
1,050,000		Stock for Directors Fees		107,750

 

During the year ended December 31, 2008, the Company issued the following shares of common stock:

 

 

SHARES		CONSIDERATION		VALUATION
2,700,701		Settlement of Debt	$	99,674
1,222,222		Services - Performance Bonus		110,000
6,047,222		Consulting Services		374,502
30,465,195		Converted Notes Payable and Accrued Interest		1,978,838
6,831,778		Stock for Debt		367,920
1,500,000		Services - Performance Bonus		52,500
2,680,000		Stock for Joint Venture		268,000
2,000,000		Services - Performance Bonus		78,000
1,500,000		Services - Performance Bonus		97,500

 

The valuation amounts of the above common stock transactions are based on the amounts that common stock and related additional paid-capital were increased (decreased) upon recording of each transaction. For exercises of stock options, no values are indicated, whereas the options were valued and the additional paid-in capital account was increased upon the original issuance (grant) of the options and no additional charges were recorded upon exercise of the options. For conversions of preferred stock, the valuation indicated is the recorded amount of the preferred stock upon original issuance of the preferred shares, which amount was reclassified to common stock and related additional paid-in capital upon conversion. Where preferred stock was originally issued for broker’s fees (instead of cash) and, accordingly, no monetary compensation was received or recorded by the Company for the preferred shares issued, the listed common stock valuation is also zero.

 

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For other issuances of shares during the periods described above, the Company-issued restricted shares (Rule 144) of its common stock to consultants and officers for services to the Company. Through December 31, 2004, issuance of restricted shares (Rule 144) were valued, due to limitations in current marketability, by the Company based upon half of the average bid and asked price of the Company’s shares on the date of issuance, unless the services provided were valued at another amount as agreed upon between the parties.

 

In August 2008, the Company issued an additional 800,000 contingent shares to a vendor that will be returned to the Company when the amounts due the vendor are paid.  The Company has accounted for them as forfeitable shares as they believe they will be returned under the agreement in 2009.  They are not considered outstanding for Earnings per share purposes and the liability remains recorded.

NOTE 13. STOCK OPTIONS AND WARRANTS

During the year ended December 31, 2009, the Company issued the following fully vested options to acquire Common stock:

Date Issued		Shares			Consideration		Valuation			Relationship
4/10/2009			5,305,556		Employees’ Bonus		$	221,239		Non Executive Employees
5/6/2009			8,311,116		Employees’ Bonus		$	852,959		Non Executive Employees
5/6/2009			5,555,556		Officer Stock Option Grant		$	570,160		Former Chief Executive Officer
6/1/2009			500,000		Officer Stock Option Grant		$	63,422		Chief Financial Officer
12/31/2009			4,500,000		Employees’ Bonus		$	284,227		Non Executive Employees
12/31/2009			250,000		Director Stock Option Grant		$	15,791		Board Member
12/31/2009			2,000,000		Officer Stock Option Grant		$	126,323		Chief Financial Officer

During the year ended December 31, 2008, the Company issued the following fully vested options to acquire Common stock:

Date Issued		Shares			Consideration		Valuation			Relationship
1/18/2008			3,444,444		Employees’ Bonus		$	228,029		Non Executive Employees
2/6/2008			250,000		Employees’ Bonus		$	16,803		Non Executive Employees

See below for more information regarding vesting term and exercise prices.

All options are fully vested and thus there is no future compensation.

The above scheduled stock options were recorded at fair market value under ASC 718 (see Note 1 above). The fair value of the options at the time of issuance was determined using the Black-Scholes option-pricing model with the following assumptions:

Risk free interest rate			1.36 – 1.52	%
Expected life		3 years
Expected volatility			171 - 192	%
Expected dividend yield			0	%

 

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STOCK OPTIONS

Employee options vest according to the terms of the specific grant and expire from 3 to 5 years from date of grant. As of December 31, 2009, all options issued and outstanding have fully vested and thus there was no deferred compensation, Stock option activity for the years ended December 31, 2009 and 2008 was as follows:

		Number of Options (in shares)				Weighted Average Exercise Price
Outstanding at December 31, 2007			28,705,170			$	.600
Options Granted			3,694,444				.091
Options Forfeited			(10,916,862	)			1.619
Options Cancelled			(5,500,000	)			.317
Outstanding at December 31, 2008			15,982,752			$	.350
Options Granted			26,422,222				.062
Options Exercised			(250,000	)			.105
Options Forfeited			(4,112,475	)			.994
Outstanding at December 31, 2008			38,042,499			$	.298

 The following table summarizes information about stock options outstanding as of December 31, 2009:

 

			Options Outstanding					Options Exercisable
Range of Exercise Prices			Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares			Weighted Average Exercise Price
$0.045 to $0.37			38,042,499		$	0.298		1.63		38,042,499		$	0.298
			38,042,499							38,042,499

WARRANTS

During 2008, the Company entered into financing agreements for convertible promissory notes payable whereby these investors were issued Class A and Class B warrants. The Class A and B warrants are exercisable for a purchase price of $.21 and $.315, respectively. The warrants have a 2 year term.

During 2009, the Company entered into financing agreements for convertible promissory notes payable  as well as stock subscription agreements whereby these investors were issued Class A and Class B warrants. The Class A and B warrants are exercisable for a purchase price of $.21 and $.315, respectively. The warrants have a 2 year term.

The following table summarizes certain information about the Company’s stock warrants.

		Warrants Class A				Warrants Class B				Weighted Average Exercise Price
Outstanding at December 31, 2007			8,108,129				5,715,380			$	0.330
Warrants Granted			5,879,075				3,919,383				0.252
Warrants Exercised			—				—				—
Outstanding at December 31, 2008			13,987,204				9,634,763			$	0.253
Warrants Granted			8,251,982				8,220,236				0.262
Warrants Expired			(3,305,382	)			(2,203,588	)			0.252
Outstanding at December 31, 2009			18,933,804				15,651,411			$	0.258

The fair value of the warrants issued during 2009 was determined using the Black-Scholes option-pricing model with the following assumptions:

Risk free interest rate			.14 – 1.45	%
Expected life		.08 – 2.92 years
Expected volatility			10 – 168	%
Expected dividend yield			0	%

The aggregate intrinsic value of 38,042,499 options and 18,933,804 Class A and 15,651,411 Class B warrants outstanding and exercisable as of December 31, 2009 was $5,301,823. The aggregate intrinsic value for the options is calculated as the difference between the price of the underlying awards and quoted price of the Company’s common shares for the options that were in-the-money as of December 31, 2009. At December 31, 2009, all warrant shares were vested. Therefore there is no unamortized cost to be recognized in future periods.

 

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NOTE 14. PREFERRED STOCK

On May 3, 2009, the Board of Directors approved the creation of a Series E Preferred Stock.  The terms of the Series E Preferred Stock were subsequently amended on May 14, 2009. The Series E Preferred Stock, as amended, does not pay dividends but each holder of Series E Preferred Stock shall be entitled to 21.5 votes for each share of common stock that the Series E Preferred Stock shall be convertible into.  The Series E Preferred Stock, as amended, has a conversion price of $0.105 and a stated value of $6.26.  Each share of Series E Preferred Stock is convertible, at the option of the holder, into such number of shares of common stock of the Company as determined by dividing the Stated Value by the Conversion Price.  The Series E Preferred Stock has no liquidation preference.  The Company also cancelled all the authorized shares associated with the Series A, B, C, and D of Preferred Stock.

As of December 31, 2009, the Company has 100,000 shares of Series E Preferred Stock outstanding.

NOTE 15. SUBSEQUENT EVENTS

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth information regarding compensation paid to our principal executive officer, principal financial officer, and our highest paid executive officer, all of whose total annual salary and bonus for the years ended December 31, 2009, and 2008.

Name & Principal Position		Year			Salary ($)		Bonus ($)			Stock Awards ($)		Option Awards ($)			Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($)			All Other Compensation ($)		Total ($)
David Christian, CEO, Director			2009		5,000			—		27,500			—		—			—		—		32,500
Thomas Seifert, CFO			2009		34,615			—		55,000			189,749		—			—		—		279,364
Jonathan Leinwand, CEO, Director			2009		68,262			—		1,010,000			696,483		—			—		319,119		2,093,864
Jonathan Leinwand, CEO, Director			2008		34,599			—		55,000			—		—			—		48,205		137,804

 

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