10-Q 1 velatel_10q-093013.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

£ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended September 30, 2013

 

OR

 

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the transition period from _______ to _______

 

Commission file number 333-134883

 

VELATEL GLOBAL COMMUNICATIONS, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada 98-0489800
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

5950 La Place Court, Suite 160, Carlsbad, California 92008

(Address of principal executive offices) (Zip code)

 

760.230.8986

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes x     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer o Accelerated filer o
  Non-accelerated filer o Smaller reporting company x

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of November 19, 2013, the filing date of this Report, Registrant had outstanding 1,113,412,415 shares of its Series A common stock, 130,000,000 shares of its Series B common stock, and 285 shares of its Series B preferred stock. Each class or series of Registrant’s common and preferred stock has a par value of $0.001.

 

 

 

 
 

VELATEL GLOBAL COMMUNICATIONS, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013 AND 2012

 

    PAGE
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
 
 

Unaudited Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

3
 
 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three months and nine months ended September 30, 2013 and September 30, 2012

4
 
 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and September 30, 2012

5
 
  Notes to Unaudited Consolidated Financial Statements  
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
     
Item 4. Controls and Procedures 44
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 44
     
Item 1A. Risk Factors 44
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
     
Item 3. Defaults Upon Senior Securities 49
     
Item 4. Removed and Reserved 49
     
Item 5. Other Information 49
     
Item 6. Exhibits 49

   

 

2
 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

VELATEL GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30,   December 31, 
   2013   2012 
   (Unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $1,077,560   $207,903 
Accounts receivable, net of provision for doubtful accounts of $17,721 and $6,500   227,534    197,349 
Receivables, other   18,927    28,439 
Inventory        
Prepaid expenses and other current assets   114,135    98,575 
Assets held for sale/discontinued operations       4,968,902 
Total current assets   1,438,156    5,501,168 
           
Property, plant and equipment, net of accumulated depreciation of $916,150 and $692,393 as of September 30, 2013 and December 31, 2012, respectively   268,991    406,387 
           
Other assets:          
Intangible assets, net of accumulated amortization of $241,201 and $209,716 as of September 30, 2013 and December 31, 2012, respectively   819,952    819,150 
Deposits   38,899    639,654 
Total other assets   858,851    1,458,804 
           
Total assets  $2,565,998   $7,366,359 
           
LIABILITIES AND DEFICIENCY     
Current liabilities:          
Accounts payable and accrued expenses  $15,215,541   $12,579,399 
Due to officers and related parties   64,076    825,845 
Unearned revenue   17,477     
Notes payable, related party   870,138    1,129,122 
Notes payable, current portion   11,879,386    9,075,373 
Convertible debentures, net   573,868    298,923 
Notes payable, other   821,735    821,735 
Derivative liability   18,186,760    6,393,863 
Liabilities of discontinued operations   612,529    9,346,975 
Total current liabilities   48,241,510    40,471,235 
           
Notes payable, net of current portion   3,395,414    3,450,122 
Mandatory redeemable Series B common stock; $0.001 par value, 1,000,000,000 shares authorized, 80,000,000 and 20,000,000 issued and outstanding as of September 30, 2013 and December 31, 2012, respectively,   49,281    11,870 
           
Total liabilities   51,686,205    43,933,227 
           
Stockholders' deficiency:          
Preferred stock, Series B;$0.001 par value, 2,500 shares authorized, 285 and 120 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively        
Common stock:          
Series A common stock; $0.001 par value, 1,000,000,000 shares authorized, 657,160,092 and 105,153,206 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively   657,160    105,153 
Additional paid in capital   274,176,852    263,199,856 
Common stock in escrow   (178,664)   (178,664)
Accumulated other comprehensive loss   (43,551)   (69,398)
Accumulated deficit   (322,620,767)   (298,347,524)
Total Velatel Global Communications, Inc.'s stockholders' deficiency   (48,008,970)   (35,290,577)
           
Non controlling interest   (1,111,237)   (1,276,291)
           
Total deficiency   (49,120,207)   (36,566,868)
           
Total liabilities and deficiency  $2,565,998   $7,366,359 

 

The accompanying notes are an integral part of these unaudited financial statements.

3
 

VELATEL GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2013   2012   2013   2012 
                 
REVENUE  $462,880   $214,486   $1,031,134   $438,840 
Cost of revenue   61,245    36,543    128,472    77,076 
Gross profit   401,635    177,943    902,662    361,764 
                     
OPERATING EXPENSES:                    
Selling, general and administrative expenses   2,842,284    2,685,590    6,173,062    8,651,572 
Impairment of investments       1,010,000    6,387,100    1,010,000 
Depreciation and amortization   75,534    197,646    210,375    172,675 
Total operating expenses   2,917,818    3,893,236    12,770,537    9,834,247 
                     
Net loss from operations   (2,516,183)   (3,715,293)   (11,867,875)   (9,472,483)
                     
OTHER INCOME (EXPENSES):                    
Other income (expenses)   (112,107)   (63,363)   451,045    (63,342)
Gain (loss) on settlement of debt   (1,514,810)   (133,720)   (6,763,365)   1,723,817 
Gain (loss) on foreign currency transactions   (2,028)   (64,806)   (6,028)   (24,921)
Gain (loss) on change in fair value of debt derivative   (24,200)   53,098    (1,151,633)   14,714 
Interest expense   (676,604)   (243,099)   (1,517,408)   (1,151,705)
Total other income (expense)   (2,329,749)   (451,890)   (8,987,389)   498,563 
                     
Loss from continuing operations   (4,845,932)   (4,167,183)   (20,855,264)   (8,973,920)
                     
Discontinued operations:                    
Income (loss) from operations of discontinued operation   (308,125)   168,773    (70,911)   (502,744)
Gain on disposition of discontinued operation   5,817,986         5,817,986      
Net income (loss)   663,929    (3,998,410)   (15,108,189)   (9,476,664)
                     
(Income) loss attributed to non controlling interest   (306,562)   (30,477)   (165,054)   7,063 
                     
NET INCOME (LOSS) ATTRIBUTABLE TO VELATEL GLOBAL COMMUNICATIONS, INC.  $357,367   $(4,028,887)  $(15,273,243)  $(9,469,601)
                     
Net loss per common share (basic and fully diluted) - continuing operations  $(0.01)  $(0.47)  $(0.08)  $(1.06)
Net income (loss) per common share (basic and fully diluted) - discontinued operations  $(0.00)  $0.02   $(0.00)  $(0.06)
Weighted average number of shares outstanding, basic and fully diluted  431,588,995    8,842,770   266,336,625    8,425,091 
                     
Comprehensive Loss:                    
Net income (loss)  $663,929   $(3,998,410)  $(15,108,189)  $(9,476,664)
Foreign currency translation gain   (115,661)       25,847     
Comprehensive Loss:   548,268    (3,998,410)   (15,082,342)   (9,476,664)
Comprehensive gain (loss) attributable to the non controlling interest   (306,562)   (30,477)   (165,054)   7,063 
Comprehensive loss attributable to Velatel Global Communications, Inc.  $241,706   $(4,028,887)  $(15,247,396)  $(9,469,601)

 

The accompanying notes are an integral part of these unaudited financial statements.

 

4
 

 

VELATEL GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended September 30, 
   2013   2012 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(15,108,189)  $(9,476,664)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   416,851    575,503 
Impairment of investments   6,387,100    1,010,000 
Amortization of debt discounts   504,009     
(Gain) loss on settlement of debt   6,763,365    (1,723,817)
(Gain) loss on change in fair value of debt derivative   1,151,633    (14,714)
Allowance for (recovery of) bad debts   11,221     
Gain on sale of subsidiary   (5,817,986)    
(Increase) decrease in:          
Accounts receivable   205,246    (1,249,627)
Inventory       (471,024)
Prepaid expenses and other current assets   40,864    1,020,297 
Increase (decrease) in:          
Accounts payable and accrued liabilities   4,636,427    15,003,526 
Unearned revenue   17,477     
Net cash used in operating activities   (791,982)   4,673,480 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property, plant and equipment   (74,126)   (7,122,626)
Purchase of intangible assets   (22,117)    
Deposit for acquisition        
Proceeds from the sale of subsidiary   1,259,716     
Cash paid for China Motion   (1,550,000)   (669,061)
Cash received with acquisitions        663,226 
Net cash used in investing activities   (386,527)   (7,128,461)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds (payments) on advances from officers   3,626    (225,301)
Proceeds from issuance of convertible notes   659,500     
Proceeds from issuance of notes payable   600,000    2,061,635 
Proceeds from issuance of Series B preferred stock   900,000     
Proceeds from issuance of notes payable, related party   46,060    739,749 
Payments on notes payable   (101,192)    
Payments on notes payable, related party   (61,020)   (24,527)
Net cash provided by financing activities   2,046,974    2,551,556 
           
Effect of currency rate change on cash   1,192     
           
Net increase (decrease) in cash and cash equivalents   869,657    96,575 
           
Cash and cash equivalents, beginning of the period   207,903    183,457 
Cash and cash equivalents, end of the period  $1,077,560   $280,032 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during the period for interest  $7,998   $10,280 
Cash paid during the period for taxes  $845   $1,306 
           
NON CASH INVESTING AND FINANCING ACTIVITIES          
Common stock issued in settlement of debt  $6,988,660   $12,676,088 
Common stock issued for acquisitions  $   $424,000 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

5
 

VELATEL GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

 

NOTE 1     SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting policies applied in the presentation of the accompanying unaudited Consolidated Financial Statements follows:

 

General

 

The accompanying unaudited Consolidated Financial Statements of VelaTel Global Communications, Inc. (formerly China Tel Group, Inc.) (“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Capital Structure

 

The Company’s capital stock consists of three series of its stock for which there are shares issued and outstanding: (i) Series A common stock (“Series A Common Stock,” “Series A Shares” or “Shares”); (ii) Series B common stock (“Series B Common Stock” or “Series B Shares”); and (iii) Series B Convertible and Redeemable Preferred Stock (“Series B Preferred Shares”). Series A Common Stock, together with Series B Common Stock, are collectively referred to in these Notes as “Common Stock”. The par value of each share of every series of the Company’s capital stock is $0.001.

 

Series A Shares are quoted on the OTC Link™ quotation platform of OTC Markets Group, Inc. under the symbol “OTCQB:VELA.” The holder of each Series A Share has the right to cast one vote at any duly called meeting of shareholders or pursuant to a written consent of shareholders in lieu of a meeting.

 

Series B Shares do not participate in any declared dividends, have no rights upon liquidation of the Company and have no conversion rights into shares of Series A Shares. The Company is required to redeem each Series B Share that is issued and outstanding on May 23, 2023, at its par value. The holder of each Series B Share has the right to cast ten votes at any duly called meeting of shareholders or pursuant to a written consent of shareholders in lieu of a meeting. The consent of 80% of the issued and outstanding Series B Shares is required in order to sell, assign or transfer any of the Series B Shares, or to grant proxies or voting rights with respect to any shares of Series B Common Stock, except for any proxies granted to George Alvarez.

 

Series B Preferred Shares rank, with respect to dividend rights and rights upon liquidation, winding-up or dissolution: (i) senior to Series A Shares with respect to dividends and rights upon liquidation; and (ii) junior to all existing and future indebtedness of the Company. The holder of each Series B Preferred Share has no right to vote at any duly called meeting of shareholders or pursuant to a written consent of shareholders in lieu of a meeting, provided that, without the affirmative approval of the holders of a majority of the Series B Preferred Shares (voting as a class), the Company may not: (i) authorize or issue any class of stock that is not junior to the Series B Preferred Shares in right of dividends and/or liquidation; (ii) change the rights given to Series B Preferred Shares; (iii) liquidate, dissolve or wind-up the business of the Company; or (iv) effect any merger, consolidation or similar transaction the effect of which the capital stock of the Company would not constitute a majority of the voting power of the capital stock of the surviving entity.

 

Upon any liquidation, after payment or provision for payment of the Company’s debts and other liabilities, the holders of Series B Preferred Shares will be entitled to be paid out of the Company’s assets available for distribution at $10,000 per Series B Preferred Share, plus any accrued but unpaid dividends. Dividends accrue on each Series B Share from the date of issuance at 2.50% compounded annually. Each Series B Preferred Share may be redeemed by the Company or converted by either the Company or the holder of such Series B Preferred Share at the sum of the following: (i) $10,000; plus (ii) the Embedded Derivative Liability (as defined in the Certificate of Designations); less (iii) any dividends that have been paid (“Redemption Price”). Upon a conversion, the Company is required to issue a number of Series A Shares equal to: (iv) the Redemption Price; multiplied by (v) the number of Series B Shares subject to conversion; divided by (vi) $0.20 per Series A Share.

 

6
 

Amended and Restated Articles of Incorporation

 

On July 23, 2013, the Company’s Board of Directors (“Board”), by Unanimous Written Consent, adopted a resolution to file with the Nevada Secretary of State a Certificate of Amended and Restated Articles of Incorporation (“A&R Articles”) containing the following substantive changes to the Articles of Incorporation previously on file with the Nevada Secretary of State: (i) increasing the number of authorized shares of Series A Common Stock from 1,000,000,000 to 10,000,000,000; (ii) increasing the number of authorized shares of Series B Common Stock from 100,000,000 to 1,000,000,000; (iii) withdrawing the designation of up to 20,000,000 authorized shares of Series A Preferred Stock and instead treating such shares as undesignated Preferred Stock; (iv) prescribing that future amendments to the Company’s Articles of Incorporation may, to the maximum extent allowable by Nevada law, be approved by resolution of the Board and without necessity of approval by the Company’s shareholders (provided that future amendments which increase the number of authorized shares of any class or series of the Company’s capital stock for which there are shares outstanding will continue to require shareholder approval); and (v) electing not to be governed by certain provision of the Nevada Revised Statutes governing “acquisition of a controlling interest” and/or “combinations with interested shareholders (collectively, “Action”). In addition, the Board recommended that the shareholders of the Company’s Common Stock approve the Board’s proposal by adopting a majority written consent in lieu of voting at a general or special meeting of shareholders. The Board fixed a record date of July 23, 2013 (“Record Date”) for purposes of determining the shareholders entitled to vote on the proposal to adopt the A& R Articles as detailed above.

 

On July 23, 2013 and pursuant to section 78.320 of the NRS, the Company received, by written consent in lieu of a regular or special meeting, votes in favor of the Action by shareholders holding 14,213,138 Series A Shares (with a power of one vote per share) and 40,000,000 Series B Shares (with a power of ten votes per share), equaling 54.6% of the total voting power of all of the Common Stock issued and outstanding as of the Record Date. Pursuant to Section 14(c) of the Exchange Act, the Company filed a Preliminary Information Statement with the SEC on July 26, 2013, and a Definitive Information Statement on August 20, 2013. The Definitive Information Statement was also mailed to the Company’s shareholders beginning August 20, 2013. The Action became effective on September 19, 2013 when the A&R Articles were accepted for filing by the Nevada Secretary of State.

 

Subsidiaries and Consolidation

 

The unaudited Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and its majority owned subsidiaries. The wholly owned subsidiaries whose results are reported are Trussnet USA, Inc., a Nevada corporation (“Trussnet Nevada”), Gulfstream Capital Partners, Ltd., a Republic of Seychelles corporation (“Gulfstream Seychelles”), Gulfstream Capital Partners, Ltd., a Cayman Island corporation (“Gulfstream Cayman”) and Beijing Yunji Technology Co., Ltd., a Peoples Republic of China (“PRC” or “China”) corporation (“Beijing Yunji”). The Company’s majority owned subsidiaries are a 75% equity interest of Herlong Investments, Ltd., a Cyprus corporation, and Herlong’s two wholly owned subsidiaries, (collectively, “Herlong”), Novi-Net, d.o.o., a Croatian corporation (“Novi-Net”) and Montenegro Connect, d.o.o., a Montenegro corporation (“Montenegro Connect”).  All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Company also holds a 100% equity interest in China Motion Telecom (HK) Limited, a Hong Kong corporation (“China Motion”). The accounts of China Motion are not consolidated in the unaudited Consolidated Financial Statements because the Company determined that during the period ending September 30, 2013 it did not have effective control of the operations of China Motion, as further explained in Note 18 – Acquisition.

 

The Company also held majority interests in two subsidiaries disposed of prior to the filing of this Report, a 95% equity interest in VelaTel Peru, S.A., formerly known as Perusat, S.A., a Peru corporation (“VelaTel Peru”) (disposition transaction described in Note 19 – Dispositions/Discontinued Operations), and a 75% equity interest in Zapna, ApS, a Danish corporation (“Zapna”) (disposition transaction descried in Note 20 – Subsequent Events). The Company has not been able to obtain accurate financial information for VelaTel Peru or Zapna for the three months ended September 30, 2013, which has required the Company to make estimates regarding the third quarter activity.  In the accompanying unaudited Consolidated Statement of Operations, the operating results for VelaTel Peru are presented as income (loss) from operations from discontinued operations and as gain (loss) on disposition of discontinued operation. The operating results for Zapna are presented as income (loss) from operations from discontinued operations. 

Segment Reporting

 

ASC Topic 280, “Segment Report,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance.  ASC Topic 280 has no effect on the Company’s consolidated financial statements as the Company consists of one reportable business segment.  All revenue is from telecommunications operations.

 

7
 

Use of Estimates

 

The Company’s unaudited Consolidated Financial Statements have been prepared in accordance with GAAP.  The preparation of these unaudited Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, contingencies and litigation.  Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  The most significant accounting estimates inherent in the preparation of the Company’s unaudited Consolidated Financial Statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.  Actual results could differ from the Company’s estimates.

 

Revenue Recognition

 

For revenue from product sales and services, the Company recognizes revenue in accordance with ASC subtopic 605, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the selling price is fixed and determinable; and (iv) collectability is reasonably assured.  Determination of criteria (iii) and (iv) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.  Provisions for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.  ASC 605-10 incorporates ASC subtopic 605-25, Multiple-Element Arrangements.  ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.

 

Revenue arises from sale of local and long distance service access and/or wireless broadband service access where some payments are received before and some payments are received after the service has been rendered.  The Company sells its products separately and in various bundles that contain multiple deliverables.  These revenues include long distance and prepaid telephone cards, prepaid wireless access plans, along with other products and services.  In accordance with ASC 605-25, sales arrangements with multiple deliverables are divided into separate units of accounting, if the deliverables in the arrangement meet the following criteria: (i) the product has value to the customer on a standalone basis; (ii) there is objective and reliable evidence of the fair value of undelivered items; and (iii) delivery or performances of any undelivered item is probable and substantially in the Company’s control.  The fair value of each separate element is generally determined by prices charged when sold separately.  If there is any discount from the combined fair value of the individual elements, the discount is allocated to the portion of the revenues attributable to the individual elements.  In accordance with ASC 605-25, if fair value of all undelivered elements in an arrangement exists, but fair value does not exist for a delivered element, then revenue is recognized using the residual method.  Under the residual method, the fair value of undelivered elements is deferred and the remaining portion of the arrangement fee (after allocation of 100 percent of any discount to the delivered item) is recognized as revenue. 

 

Cash and Cash Equivalents

 

For purposes of the unaudited Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.

 

Fair Values

 

ASC subtopic 825-10, Financial Instruments requires disclosure of the fair value of certain financial instruments.  The carrying value of cash and cash equivalents, as well as short-term borrowings, approximate fair value because of the short-term maturity of these instruments.  All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the unaudited Consolidated Financial Statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk.  Where practicable, the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise, only available information pertinent to fair value has been disclosed.

 

8
 

Accounting For Bad Debt and Allowances

 

Bad debts and allowances are provided based on historical experience and management's evaluation of outstanding accounts receivable. Management evaluates past due or delinquency of accounts receivable based on the open invoices aged on due date basis.

 

Inventories

 

The inventory consists of finished goods ready for resale purposes. The Company purchases the merchandise on delivered duty paid basis.  Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out method.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. Depreciation is computed over the estimated useful lives of the respective assets.

 

The estimated useful lives of property, plant and equipment are as follows:

 

Machinery and equipment 10 years
Vehicles 4 years
Furniture and fixtures 10 years
Leasehold improvements
Constructed assets (towers) 10 years
Computers 5 years

* Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease.

 

The Company evaluates the carrying value of items of property, plant and equipment to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of an item of property, plant and equipment is considered impaired when the projected undiscounted future cash flows related to the asset are less than its carrying value. The Company measures impairment based on the amount by which the carrying value of the respective asset exceeds its fair value.  Fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved.

 

Long-Lived Assets

 

The Company has adopted ASC subtopic 360-10, Property, Plant and Equipment. ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets would be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

Intangible Assets and Goodwill

 

The Company accounts for acquisitions in accordance with the provisions of ASC 805-10.  The Company assigns to all identifiable assets acquired (including intangible assets) and to all identifiable liabilities assumed a portion of the cost of the acquired company equal to the estimated fair value of such assets and liabilities at the date of acquisition.  The Company records the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed, if any, as goodwill.

 

The Company amortized its identifiable intangible assets over the period which the asset is expected to contribute to future cash flows.  The estimated useful life of developed software is ten years.  The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or indicate that impairment exists.

 

9
 

The Company accounts for and reports acquired goodwill and other intangible assets under ASC subtopic 350-10, Intangibles, Goodwill and Other.  In accordance with ASC 350-10, the Company tests its intangible assets for impairment on an annual basis and when there is reason to suspect that their values have been diminished or impaired.  Any write-downs will be included in results from operations.

 

Functional Currency

 

The accounts of Novi-Net are maintained in Croatian Kuna, the accounts of Herlong and Montenegro Connect are maintained in the Euro and the accounts of China Motion are maintained in Hong Kong Dollars. The accounts of these foreign subsidiaries or investments were translated into US dollars in accordance with ASC Topic 830 “Foreign Currency Matters.” According to ASC Topic 830: (i) all assets and liabilities were translated at the exchange rate on the balance sheet dates; (ii) stockholders’ equity is translated at historical rates; and (iii) statement of operation items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income.

 

Foreign Currency Transactions and Comprehensive Income

 

GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Translation gains are classified as an item of accumulated other comprehensive income in the stockholders’ equity section of the unaudited Consolidated Balance Sheet.

 

Advertising Costs

 

Advertising costs, which are included in selling, administrative and general, are expensed as incurred.  Advertising costs for the nine months ended September 30, 2013 and 2012 were not significant.

 

Net Loss Per Share

 

The Company has adopted ASC subtopic 260-10, Earnings Per Share. This requires the computation, presentation and disclosure requirements of earnings per Share information. Basic earnings per Share have been calculated based upon the weighted average number of Shares outstanding. Stock options and warrants have been excluded as common stock equivalents in the diluted earnings per Share, because they are anti-dilutive.

 

Concentrations of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions.  At times, such investments may be in excess of the FDIC insurance limit.

 

Stock Based Compensation

 

The Company adopted ASC subtopic 718-10, Compensation. ASC 718-10 requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to an employee stock purchase plan, based on the estimated fair values.

 

Research and Development

 

The Company accounts for research and development costs in accordance with the ASC subtopic 730-10, Research and Development. Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company sponsored research and development costs related to both present and future products and services are expensed in the period incurred.

 

10
 

Reclassifications

 

Certain reclassifications have been made to prior periods’ data to conform to the presentation set forth in this Report. These reclassifications had no effect on reported income or losses.

 

Recent Accounting Pronouncements

 

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 Comprehensive Income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations, or its financial condition.

 

NOTE 2     GOING CONCERN MATTERS

 

The accompanying unaudited Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited Consolidated Financial Statements, the Company incurred a net loss of $15,273,243 for the nine months ended September 30, 2013. In addition, the Company had negative working capital of $46,803,354 and a total deficiency of $49,120,207 as of September 30, 2013.

 

The Company requires substantial additional capital to finance its planned business operations and expects to incur operating losses in future periods due to the expense of deploying the networks and related businesses that are the core of the Company’s businesses. The Company has not realized material revenue since its commenced doing business in the telecommunications sector, and it is not without doubt that it will be successful in generating revenues in the future.

 

If the Company is not able to raise substantial additional capital in a timely manner, the Company may lose its rights to participate in one or more of its projects and may be forced to cease operations.

 

To attain profitable operations, management continues to focus its efforts on the deployment and operation of wireless broadband networks and related businesses. The Company typically contributes its technical expertise in deploying and operating wireless broadband networks, as well as the capital required to deploy the networks, in exchange for its equity interest in each project. The Company will continue to be dependent on outside capital to fund its operations for the foreseeable future. Any financing obtained may further dilute or otherwise impair the ownership interest of the current stockholders. If the Company fails to generate positive cash flows or fails to obtain additional capital when required, the Company could modify, delay or abandon some or all of its business plans.

 

The accompanying unaudited Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

NOTE 3     INVESTMENTS

 

Sino Crossings Joint Venture

 

On November 11, 2010, the Company entered into two related subscription and shareholder agreements, collectively the “Sino Crossings Agreements.” Under the Sino Crossings Agreements, the parties will each contribute certain defined resources in order to upgrade existing installed but unimproved by infrastructure equipment fiber optic cable located in China with engineering services and equipment that will make it suitable for transmission of data and to charge market rate transport fees to telecommunications operators who use the lit fiber comprising the “Sino Crossings Network.” On December 2, 2010, the Company issued to Azur 90,000 shares of its Series A Common Stock valued at $1,431,000.

 

11
 

The Company expects to utilize the fiber for the same purposes for its China based projects, but at a discount compared to amounts charged to third party telecommunication providers.  On December 2, 2011, the Company and Azur amended their agreement to require Azur to undertake additional duties. On that same date, the Company issued to Azur 150,000 additional shares of its Series A Common Stock valued at $1,230,000. The Company will record its equity interest in the profit and loss of the operating company to be formed pursuant to the Sino Crossings Agreements once the entity is formed and operations commence.

 

On July 13, 2012, Azur served a Notice of Arbitration on the Company.  The arbitration was filed with the Hong Kong International Arbitration Centre and was brought pursuant to Article 3 of the United Nations Commission on International Trade Law Arbitration Rules for breach of the Sino Crossings Agreements. The Notice of Arbitration alleges that Azur suffered damages and losses due to breaches by the Company in implementing the terms of the Sino Crossings Agreements.  In the Notice of Arbitration, Azur demanded acknowledgment of termination and a declaration of rescission of the Sino Crossings Agreements.  Further, it demanded indemnification by the Company for Azur’s claimed damages, including $2,000,000 Azur paid to Shanghai Ying Yue Network Technology Ltd. (“YYNT”) pursuant to the first Sino Crossings Agreement. On August 11, 2012, the Company responded to the allegations of Azur, asserted counterclaims against Azur and named additional parties the Company requested be joined into the arbitration proceeding.  An arbitrator has been appointed, but there have been no rulings on the Company’s request to join additional parties or on any substantive matters. During the year ended December 31, 2012, the Company wrote off its entire investment in the Sino Crossings joint venture of $2,661,000 which is included in “impairment of investments” in the accompanying statement of operations.

 

VN Tech Fuel Cell Business

 

On April 22, 2012, Gulfstream Seychelles and the Company entered into an Amended and Restated VN Tech Subscription and Shareholder Agreement with Shenzhen VN Technologies Co., Ltd (“VN Tech”) and Luo (“VN Tech Amended Shareholder Agreement”). Under the VN Tech Amended Shareholder Agreement, the parties deemed it no longer necessary to form a wholly owned foreign enterprise (“WOFE”) in connection with this transaction. Instead, VN Tech will become the wholly owned subsidiary of VN Tech HK, which in turn will become a wholly owned subsidiary of VN Tech Cayman. Under the VN Tech Amended Shareholder Agreement, the Company’s equity interest in the entities comprising the joint venture is increased from 51% to 75%, and Luo is subscribing to the remaining 25% in the entities directly instead of through VN Tech. In addition, under the VN Tech Amended Shareholder Agreement, the consideration the Company is paying Luo instead of VN Tech is increased from 50,000 to 100,000 shares of the Company’s Series A Common Stock. The terms of the VN Tech Amended Shareholder Agreement are otherwise similar, but not identical to, the VN Tech Shareholder Agreement, which the VN Tech Amended Shareholder Agreement supersedes entirely.

 

The VN Tech Amended Shareholder Agreement became effective on April 22, 2012, when it was signed by all parties. All transfers of stock and other formalities described in the VN Tech Amended Shareholder Agreement are considered contractual obligations subsequent, not conditions precedent, to the rights and obligations of the parties contemplated in the VN Tech Amended Shareholder Agreement. On April 22, 2012, the Company issued 100,000 shares of the Company’s Series A Common Stock valued at $224,000 to Luo pursuant to the VN Tech Amended Shareholder Agreement. As of December 31, 2012, the Company made the determination that the full amount of this investment was impaired.

 

Herlong and its Operating Subsidiaries Novi-Net and Montenegro Connect

 

On December 6, 2011, the Company entered into a Business Cooperation Agreement with 7L Capital Partners Emerging Europe, L.P. (“7L”) and others to acquire a 75% equity interest in Herlong and its wholly owned operating subsidiaries Novi-Net and Montenegro Connect. In exchange for its 75% equity interest in Herlong, the Company agreed to contribute all capital and operating expenditures necessary to deploy and operate the “Novi-Net Network” and the “Montenegro Network” until each of Novi-Net and Montenegro Connect attain a positive cash flow.

 

12
 

On April 2, 2012, the Company closed its acquisition of 75% of Herlong by paying a €500,000 ($668,402 based on the exchange rate on the closing date), plus credit for a €528,086 ($649,546 based on the exchange rate on the closing date) deposit on an initial equipment order placed with ZTE Corporation (“ZTE”) described below. Herlong issued the Company 48,843 shares of its common stock, which represents 75% of Herlong’s total number of its shares of common stock that are issued and outstanding. The BCA calls for minimum installments towards the Company’s total investment of €500,000 each within 90, 180 and 270 days following the closing date, plus €271,904 within 360 days of the closing date (a total of approximately $2,272,000 based on the exchange rate as of September 30, 2013). The Company’s obligation to make these additional investment installments is secured by a pledge of it 48,843 shares of Herlong’s common stock pursuant to a stock pledge and an escrow agreement. The Company has made additional payments toward its Herlong acquisition in the form of: (i) $850,454 as additional down payment to ZTE related to the equipment contracts described below; and (ii) $105,128 paid to Joinmax Engineering & Consulting Services (HK), Ltd. (“Joinmax”) for shipping logistics services. Of that, $500,000 of the down payments to ZTE and $105,128 of the consulting services to Joinmax were in the form of liabilities relieved through assignment of those creditors’ receivables with the Company through assignment to Ironridge Global.

 

On July 3, 2012, 7L delivered a notice of default to the Company contending the Company had failed to timely pay the €500,000 investment installment called for under the BCA to be made within 90 days of closing. The Company contended that the additional payments made to ZTE and Joinmax on Herlong’s behalf satisfied this requirement. The Company prepared and delivered to 7L but did not file a notice of arbitration pursuant to the BCA. On October 8, 2012, the Company and 7L entered into a compromise agreement whereby the €500,000 installment due within 90 days of closing, as well as the €271,904 installment due within 360 days of closing would be deemed paid provided the Company paid in cash directly to Herlong by October 19, 2012 the €500,000 installment due within 180 days of closing. The deadline for this payment was later extended to November 26, 2012. The compromise agreement provides that if the €500,000 is not timely made, both parties reserve all rights under their respective notices of default and arbitration. To date, the Company has not fully paid the €500,000 installment called for under the compromise agreement, or the additional €500,000 installment called for under the BCA to be made within 270 days of closing. Since the extended deadline under the compromise agreement, the Company has paid $144,710 directly to Herlong in various installments and on various dates through the period ended September 30, 2013. Neither the Company nor 7L have proceeded further in exercising the rights each reserved under their respective notices of default and arbitration.

 

NOTE 4     INTANGIBLE ASSETS

 

Intangible assets are comprised of software and other licenses and are amortized over the estimated life of ten years. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or indicate that impairment exists.

 

NOTE 5     ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities are comprised of the following:

 

   September 30,   December 31, 
   2013   2012 
Accounts payable and accrued compensation  $13,796,261   $11,436,882 
Accrued interest on indebtedness   1,419,280    923,538 
Attorney fees and court costs   218,979    218,979 
   $15,215,541   $12,579,399 

 

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NOTE 6     CONVERTIBLE NOTES

 

Convertible notes as of September 30, 2013 and December 31, 2012 are comprised of the following:

 

 

   September 30,   December 31, 
   2013   2012 
10% Convertible Note Purchase Agreements (“Convertible Notes”) were due and payable December 31, 2008; accrued and unpaid interest was due at maturity; convertible note holder had the option to convert note principal together with accrued and unpaid interest to the Shares at a rate of $95.00 per Share. The Company is currently in default.  $80,000   $80,000 
10% Amended and Restated Convertible Note Purchase Agreements (“Amended Convertible Notes”) were due and payable December 31, 2009, with interest payable at maturity.  The Amended Convertible Notes were convertible into Shares at the lesser of: (i) $0.95 per Share; or (ii) 80% of the volume weighted average of the closing bid price for the Shares on the Over The Counter Bulletin Board quotation system (“OTCBB”) for the ten day period prior to the convertible note holder’s election to convert.  The Company is currently in default.   218,923    218,923 
8% convertible note dated January 28, 2013.  The note matures on January 23, 2014 and is convertible into shares of the Company's Series A common stock at a conversion price equal to 65% of the market value at the date of conversion.   8,000     
12% convertible note dated June 26, 2013.  The note matures on June 26, 2014 and is convertible into shares of the Company's Series A common stock at a conversion price equal to 70% of the market value at the date of conversion.   123,200     
12% convertible note dated June 26, 2013.  The note matures on December 26, 2013 and is convertible into shares of the Company's Series A common stock at a conversion price equal to 60% of the market value at the date of conversion.   25,000     
12% convertible note dated July 5, 2013.  The note matures on January 6, 2014 and is convertible into shares of the Company's Series A common stock at a conversion price equal to 60% of the market value at the date of conversion.   75,000     
12% convertible note dated September 6, 2013.  The note matures on March 6, 2014 and is convertible into shares of the Company's Series A common stock at a conversion price equal to 60% of the market value at the date of conversion.   50,000     
12% convertible note dated September 6, 2013.  The note matures on March 6, 2014 and is convertible into shares of the Company's Series A common stock at a conversion price equal to 60% of the market value at the date of conversion.   150,000     
10% convertible note dated July 5, 2013. The note matures on April 1, 2014 and is convertible into shares of the Company's Series A common stock at a conversion price equal to 80% of the market value at the date of conversion.   81,000     
Total   811,123    298,923 
Less debt discounts   (237,255)    
    573,868    298,923 
Less current maturities   (573,868)   (298,923)
Long term portion  $   $ 

 

The convertible notes issued in 2013 converted into shares of the Company’s Series A Shares at a discount to the market price which gives rise to a beneficial conversion feature. The Company calculated the beneficial conversion feature to be $741,264 which has been recorded as a debt discount. The Company amortized $504,009 of this debt discount during the three months ended September 30, 2013.

 

14
 

NOTE 7     NOTES PAYABLE

 

On August 16, 2013, the Company entered into a loan agreement (“AQT Loan Agreement”) with AQT, LLC (“AQT”) for repayment of $600,000 that AQT advanced to the Company on June 27, 2013 and paid directly to China Holdings as the principal only installment called for under the promissory note with the sellers of China Motion (transaction described in Note 18 – Acquisition). Under the AQT Loan Agreement, the Company agreed: (i) to repay $600,000, together with interest accruing at 5% per annum, on or before January 27, 2014; and (ii) to cause the Company’s subsidiary VelaTel Peru to transfer to Inversiones Balesia, S.A. (“IB”), an affiliate of AQT, 30 cellular towers designed, constructed and owed by VelaTel Peru (transaction described in Note 19 – Dispositions). The Company is entitled to repay $600,000 plus accrued interest in any combination of: (iii) cash; and/or (iv) transfer to AQT of shares of the capital stock of China Motion. One hundred percent of the stock of China Motion is valued for purposes of repayment at $6,437,100.

 

Notes payable at September 30, 2013 and December 31, 2012 were comprised of the following:

 

   September 30,   December  31, 
   2013   2012 
Note payable, dated December 12, 2012; due June 12, 2013 unsecured and accrues interest at 8% per annum  $   $103,500 
Note payable, due January 1, 2015, secured by equipment; interest at LIBOR (at rate of 0.3804% at September 30, 2013) plus 2.5% per annum with three semi-annual principal payments beginning January 1, 2014   5,501,870    5,501,870 
Note payable, dated February 24, 2012 is unsecured, due on February 24, 2013 and accrues interest at 10% per annum, and is in default   669,211    684,210 
Note payable, dated April 12, 2012 is unsecured, due on April 12, 2013 and accrues interest at 10% per annum, and is in default   15,789    38,653 
Note payable, dated July 26, 2006 is due on October 1, 2016 and accrues interest at 8% per annum   50,921    63,782 
Note payable, dated February 1, 2012 is due on March 1, 2015 and accrues interest at 8.7% per annum   71,138    106,662 
Note payable, dated September 2, 2010 is secured by an automobile, due on August 15, 2015 and accrues interest at 10.45% per annum   5,335    7,229 
Note payable, dated December 30, 2010 is secured by an automobile, due on February 1, 2014 and accrues interest at 8.8% per annum   6,981    20,031 
Line of Credit Loan Agreement and Promissory Note (“First Note”), due December 31, 2011, and Second Note, all unsecured, interest at 10% per annum. During 2012, the First Note was split into 15 separate notes. As of December 31, 2012, two notes had been paid in full, two were partially paid, and the unpaid balance is in default.   4,116,055    5,999,558 
Note payable issued in connection with acquisition of China Motion. The note calls for a final payment of $4,237,500 due on August 31, 2013, which is in default.   4,237,500     
Note payable, dated June 24, 2013 and is due on January 27, 2014 and accrues interest at 5% per annum.   600,000     
Total   15,274,800    12,525,495 
Less current maturities   (11,879,386)   (9,075,373)
Long term portion  $3,395,414   $3,450,122 

 

NOTE 8     NOTES PAYABLE, OTHER

 

During the year ended December 31, 2009, three judgments were entered against the Company relating to certain Convertible Notes currently in default.  The judgments are accruing interest at rates between 3.6% and 10% per annum. The principal balance of the three judgments totaled $821,735 and $821,735 as of September 30, 2013 and December 31, 2012, respectively. The judgments are deemed current (as opposed to long-term) but are in default.

 

NOTE 9     DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company's derivative financial instruments consisted of embedded derivatives related to the Amended Convertible Notes, the convertible notes issued in 2013 and the Series B Preferred Stock. The embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments required that the Company record the derivatives at their fair values as of the inception date and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each reporting date.  If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income. The derivatives were classified as short-term liabilities.  The derivative liability at September 30, 2013 and December 31, 2012 was $18,186,760 and $6,393,863, respectively.

 

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NOTE 10    NON-CONTROLLING INTEREST

 

The following table summarizes the changes in Non-Controlling Interest from December 31, 2012 to September 30, 2013:

 

   Vela Tel             
   Peru   Herlong   Zapna   Total 
Balance as of December 31, 2012  $(504,258)  $(755,327)  $(16,706)  $(1,276,291)
Period income (loss) applicable to non-controlling interest for the nine months ended September 30, 2013   504,258    (202,359)   (136,845)   165,054 
Balance as of September 30, 2013  $   $(957,686)  $(153,551)  $(1,111,237)
Non-Controlling interest percentage   5%    25%    25%      

 

NOTE 11    MANDATORY REDEEMABLE SERIES B COMMON STOCK

 

As of September 30, 2013, Company has issued and outstanding 80,000,000 shares of its Series B Common Stock, with a par value of $0.001 per share.  The general attributes of the Company’s Series B Common Stock are:

 

Voting Rights. Each share of Series B Share is entitled to ten votes in all matters for any action that each Series A Share is entitled to vote.

 

Non Participatory. Series B Shares do not participate in any declared dividends for any class or series of stock, have no rights upon voluntary or involuntary liquidation or winding up of the Company and have no conversion rights into any other class or series of stock.

 

Transferability. The consent of 80% of Series B Shares outstanding is required in order to sell, assign or transfer any Series B Shares to any third party or to grant proxies or voting rights with respect to Series B Shares, except proxies granted to George Alvarez.

 

Mandatory Redemption. Series B Shares will be redeemed in 2023, at their par value $0.001 per share, and are therefore classified outside of equity for reporting purposes.  The present value balance of liability for redemption of Series B Shares at September 30, 2013 was $49,281, which is the deemed fair value of Series B Shares issued and outstanding.

 

NOTE 12    DEFICIENCY

 

Equity Funding Agreements

 

Ironridge Technology Preferred Stock Purchase Agreement

 

On December 14, 2012, the Company entered into a Stock Purchase Agreement (“Ironridge Technology SPA”) with Ironridge Technology Co., a division of Ironridge Global, IV, Ltd (“Ironridge Global” and collectively, “Ironridge Technology”), for the sale of 1,200 shares of the Company’s Series B Preferred Stock (“Series B Preferred Shares”), at a price of $10,000 per share, for a total purchase price of $12,000,000. The first closing occurred on December 17, 2012 by direct wire transfer of $600,000 to the designated escrow holder under the China Motion SPA (defined below), as the down payment deposit for this acquisition. Each successive closing is to occur on the first day of each calendar month, subject to fulfillment of designated equity conditions as defined in the Certificate of Designations. Ironridge Technology was received a one-time non-refundable commitment fee of 60 shares of Series B Preferred Stock in consideration for providing the $12 million irrevocable funding commitment.

 

In addition on December 14, 2012, the Company filed a Certificate of Designations with the Nevada Secretary of State in order to fix the dividend, conversion, redemption, voting rights and other attributes of the Series B Preferred Shares called for under the Ironridge Technology SPA. The Company may redeem or the Company or any shareholder of any share of Series B Preferred Shares may convert one or more Series B Preferred Shares into Series A Shares at $10,000 per Series B Preferred Share being redeemed or converted, divided by the fixed conversion price of $0.20 per Series A Share together with the sum of accrued dividends, plus an embedded derivative liability, divided by 81% of the closing bid price for such Series A Shares during an equity conditions measuring period. The attributes of the Series B Preferred Shares are set forth in the Certificate of Designations (discussed in Note 1, Significant Accounting Policies).

 

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Ironridge Technology Registration Rights Agreement

 

On December 14, 2012, the Company and Ironridge Technology also entered into a Registration Rights Agreement (“RRA”). Under the RRA, the Company is required to file an S-1 Registration Statement with the SEC to cover the resale of any Series A Shares issued upon conversion of Series B Preferred Shares (collectively, “Registrable Securities”). The Company is required to use its best efforts to cause an S-1 Registration Statement to become effective under the Securities Act and to file such amendments as are necessary for the S-1 Registration Statement is to remain continuously effective for registration of such additional Registrable Securities as are subsequently issued under the Ironridge Technology SPA.

 

On December 17, 2012, the Company issued Ironridge 120 Series B Preferred Shares in exchange for $600,000 that the Company paid as a deposit for its China Motion acquisition. The Series B Preferred Shares can be converted into Series A Shares. The conversion feature was determined by the Company to be a derivative instrument and will be adjusted to fair value at each balance sheet date. The initial derivative liability was determined to be $2,133,333 which was recorded as a liability. The carrying value of the Series B Preferred Shares was reduced by $600,000, and the remaining $1,533,333 was recorded to accumulated deficit.

 

On January 30, 2012, the Company filed an S-1 Registration Statement with the United States Securities and Exchange Commission (“SEC”) contemplated by the RRA. The S-1 Registration Statement seeks to register 32,000,000 Series A Shares issuable upon conversion of shares of its Series B Preferred Shares. The number of Series A Shares to be registered was determined based on one-third of the Company’s public float as of January 27, 2013. On February 25, 2013, the SEC submitted its first comment letter in response to the filing. The SEC requested the Company to provide updated Financial Statements for the S-1 Registration Statement and indicated that it believed the Ironridge Technology SPA is an “equity line agreement” and, therefore, constitutes an “indirect primary offering” which the SEC does not permit. The Company has not taken any further steps to attempt to resolve the concerns raised by the SEC.

 

Ironridge Technology Waiver Agreement

 

On February 26, 2013, the Company and Ironridge Technology entered into a Waiver Agreement, pursuant to which Ironridge Technology waived completion of certain conditions described in the Ironridge Technology SPA to allow the Company to call for a closing to occur. Pursuant to and on the date of the Waiver Agreement, Ironridge Technology agreed to purchase 75 Series B Preferred Shares and to pay the Company $750,000. The Company also agreed to issue Ironridge Technology 75 Series B Preferred Shares as a non-refundable fee for entering into the Waiver Agreement. The Waiver Agreement also provides for certain restrictions on the Company’s right to negotiate or enter into financing arrangements with potential investors other than Ironridge Technology or its affiliates while any Series B Preferred Shares are outstanding and for six months after their conversion to Series A Shares. The Waiver Agreement requires the Company to immediately reserve 492,000,000 Series A Shares for potential issuance to Ironridge Technology and to, as soon as possible, amend its articles of incorporation to increase the number of authorized Series A Shares to a number sufficient to also cover subsequent closings and future conversions of Series B Preferred Shares into Series A Shares as contemplated in the Ironridge Technology SPA.

 

On February 27, 2013, Ironridge Technology paid the Company $750,000 and the Company issued Ironridge Technology 150 Series B Preferred Shares. The conversion feature was determined by the Company to be a derivative instrument and will be adjusted to fair value at each balance sheet date. The initial derivative liability was determined to be $9,000,000 which was recorded as a liability. The carrying value of the Series B Preferred Shares was reduced by $750,000 and the remaining $8,250,000 was recorded to accumulated deficit.

 

17
 

NOTE 13    WARRANTS

 

The following table summarizes the changes in warrants outstanding and the related prices for the Series A Shares issued to non-employees of the Company.  These warrants were in connection with the sale of the Company’s Series A Shares.

 

    Warrants Outstanding       Warrants Exercisable 
Exercise Price   Number Outstanding   Weighted Average Remaining Contractual Life (Years)   Weighted Average Exercise Price   Number Exercisable   Weighted Average Exercise Price 
$21.00    265,453    1.75   $21.00    265,453   $21.00 
$21.00    344,887    2.25   $21.00    344,887   $21.00 
$21.00    37,732    2.50   $21.00    37,732   $21.00 
$21.00    102,279    2.75   $21.00    102,279   $21.00 
$20.00    301,168    1.00   $20.00    301,168   $20.00 
$18.00    86,444    1.25   $18.00    86,444   $18.00 
$0.01-.012    314,005,369    2.00   $ 0.01-.012    314,005,369   $0.01-.012 
      315,143,332              315,143,332      

 

Transactions involving warrants are summarized as follows:

 

       Weighted 
       Average 
   Number of   Price 
   Shares   Per Share 
Outstanding at December 31, 2012   60,051,772   $0.45 
Issued   255,091,560    0.01 
Exercised        
Canceled or expired        
Outstanding at September 30, 2013   315,143,332   $0.09 

 

The assumptions used in calculating the fair value of warrants granted using the Black-Scholes option- pricing model for warrants granted in 2013 are as follows:

 

Risk-free interest rate   0.40% 
Expected life of the warrants   3 years 
Expected volatility   248% 
Expected dividend yield   0% 

 

The weighted-average fair value of the Warrants and Adjusted Warrants to be issued during the period ended September 30, 2013 was $0.02.

 

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NOTE 14    RELATED PARTY TRANSACTIONS

 

The Company has the following material related party transactions:

 

   September 30,   December 31, 
   2013   2012 
Note payable dated April 15, 2009, non-interest bearing, due on demand, unsecured  $   $473 
Note payable dated February 24, 2012, 10% per annum interest, payable upon demand   81,343    81,343 
Note payable dated May 20, 2009, 8% per annum interest, due December 1, 2009, unsecured, currently in default   200,000    200,000 
Note payable dated April 1, 2009, 8% per annum interest, due originally October 1, 2009, unsecured, currently in default   100,000    100,000 
Note payable dated July 1, 2009, 8% per annum interest, due March 17, 2010, currently in default   100,000    100,000 
Note payable dated December 10, 2012, 10% per annum interest   200,000    200,000 
Line of Credit Promissory Note, due March 13, 2013, unsecured, interest at 10% per annum, currently in default   188,795    447,306 
Total  $870,138   $1,129,122 

 

Advances from Officers and Related Parties

 

Officers of the Company or its subsidiaries have advanced certain operating expenses, including business travel, which is non-interest bearing and expected to be repaid within 12 months:

 

   September 30,   December 31, 
   2013   2012 
Advances to VelaTel $19,765   $785,715 
Advances to Gulfstream Seychelles   44,311    40,130 
   $64,076   $825,845 

 

Agreements with Related Parties

 

For the period from December 31, 2012 through the date this Report is filed with the SEC, there have been no transactions, nor are there any currently proposed transactions, to which the Company was or is a participant in which the amount involved exceeds $25,660 (1% of the average of the Company’s total assets as of September 30, 2013 and December 31, 2012) and in which any director or executive officer, or any security holder who is known by the Company to own of record or beneficially more than 5% of any class of the Company’s common stock, or any member of the immediate family of any of the foregoing persons, has an interest.

 

For the period from the May 21, 2008 (the date the Company changed its business purpose and commenced concentrating on the telecommunications industry) through May 17, 2013 (the date the Company filed it SEC Form 10-K for the period ended December 31, 2012), all agreements with related parties have been summarized and reported to the public in the Company’s Form 10-K for the period ended December 31, 2012.

 

NOTE 15    COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company is subject to the following legal proceedings that arise in the ordinary course of its business.  

 

The Fischer Litigation

 

On May 22, 2009, a complaint was filed by Michael Fischer (“Fischer”) against the Company in the Central District of California of the United States District Court, identified as Case No. CV09-3682 VBF. The complaint alleged a claim for breach of contract relating to the Company’s default of a Convertible Note in favor of Fischer. The complaint requested damages in the amount of $1,000,000 plus interest, court costs and attorneys’ fees. The Company settled this case for $960,000. Through the date of this Report, the Company has paid $560,000 of the settlement amount. The Company intends to complete the settlement when sufficient funds are available to do so.

 

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The Gomez Litigation

 

On July 17, 2009, a complaint was filed by Edgar Pereda Gomez (“Gomez”) against the Company in the County of San Diego Superior Court of the State of California, identified as Case No. 37-2009-00094247-CU-BC-CTL. The complaint alleged a claim for breach of contract relating to the Company’s default of a Convertible Note in favor of Gomez. The complaint requested damages in the amount of $525,000 plus interest, court costs and attorneys’ fees. The Company settled this case for approximately $684,000. Through the date of this Report, the Company has paid approximately $455,950 of the settlement amount. The Company intends to complete the settlement when sufficient funds are available to do so.

 

The Olaechea Litigation

 

On December 13, 2010, a complaint was filed by Estudio Olaechea SOC. Civil DE R.L. (“Olaechea”) against the Company in the County of San Diego Superior Court of the State of California, identified as Case No. 37-2010-00105897.  The complaint alleged a breach of contract arising from the Company’s default under a promissory note in favor of Olaechea in the amount of approximately $149, 500. The complaint requested damages in the amount of approximately $149,500 plus interest, court costs and attorneys’ fees.  The Company settled this case for approximately $188,500. The Company has paid $47,500 of the settlement. The Company intends to complete the settlement when sufficient funds are available to do so.

 

The Chinacomm Litigation

 

On November 18, 2011, the Company and TCP (collectively, “Plaintiffs”), filed a complaint against Chinacomm Limited, Thrive Century International Limited, Newtop Holdings Limited, Smart Channel Development Limited, Mong Sin, Qiu Ping, Yuan Yi, Chinacomm and CECT Chinacomm Shanghai Co. Ltd. (collectively, “Defendants”) in The High Court of the Hong Kong Special Administrative Region, Court of First Instance, Action No. 1978 of 2011 (“Chinacomm Litigation”). The complaint was later amended to add Feng Xiao Ming as a defendant.

 

The Chinacomm Litigation arises out of the breach of numerous agreements between Plaintiffs and some Defendants, including, but not limited to, the Framework Agreement and the Subscription and Shareholders Agreements, related to the joint venture between the parties to those agreements for the deployment of the Chinacomm Network. In addition, the Chinacomm Litigation arises out of the deceitful representations by certain Defendants in connection with the issuance of licenses by certain regulatory agencies in China for the operation of the Chinacomm Network. Finally, the Chinacomm Litigation involves the unauthorized removal of Colin Tay as an authorized signatory to a joint bank account Chinacomm Cayman has with Standard Chartered Bank (HK) Limited (“Standard Chartered”), one of three Standard Chartered bank accounts in the name of Chinacomm Cayman and into which Plaintiffs deposited $4,749,599. The Chinacomm Litigation seeks injunctive relief to prevent Defendants from utilizing or dissipating the deposited funds pending the trial of the action and compensatory damages in excess of $1 million plus interest and court costs. Injunction orders have been issued and remain in place prohibiting Defendants from utilizing or dissipating the deposited funds. The parties are currently engaged in discovery related to their respective positions in the case.

 

The Sino Crossings Arbitration

 

On July 13, 2012, Azur served a notice of arbitration against the Company. On July 31, 2012, Azur filed a Notice of Arbitration with the Hong Kong International Arbitration Centre (“HKIAC”). The Notice of Arbitration alleged that Azur suffered damages and losses due to breaches by the Company in implementing the terms of the Sino Crossings Agreements.  In the claim, Azur demanded acknowledgment of termination and a declaration of rescission of the Sino Crossings Agreements.  Further, it demanded indemnification by the Company for Azur’s claimed damages, including $2,000,000 Azur paid to YYNT pursuant to the first Sino Crossings Agreement.  On August 11, 2012, the Company responded to the allegations of Azur. It asserted counterclaims against Azur and named additional parties, including YYNT. The Company requested HKIAC to permit the Company to join YYNT and others into the arbitration proceeding.  An arbitrator has been appointed, but there have been no rulings on the Company’s request to join additional parties or on any substantive matters.

 

The Ace Litigation

 

On January 15, 2013, a complaint was filed by Ace American Insurance Company (“Ace”) against the Company in in the County of San Diego Superior Court of the State of California, identified as Case No. 37-2013-00029913. The complaint alleged breach of contract for the Company’s failure to pay $37,603 as premium due on a commercial general liability insurance policy in force from March 30, 2012 through May 30, 2012, plus interest. The Company is waiting for Ace to provide a copy of the insurance policy it issued to the Company and the amount allegedly due thereunder.

 

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The Westmoore Receiver Litigation

 

On March 22, 2013, David Gill (“Receiver Gill”), in his capacity as Court-Appointed Receiver for Westmoore Management, LLC, Westmoore Investment, LP, Westmoore Capital Management, Inc., Westmoore Securities, Inc., Westmoore Capital, LLC, Westmoore Lending Opportunity Fund and Westmoore Holdings, Inc. (collectively, the “Westmoore Entities”), et al. filed a First Amended Complaint against Active Resources, Inc., Ceralta Medical Institute, Inc., Sam J. Arrietta, Michael Wall, Hodgson Russ, LLP, Mobile Truss, Inc., Trussnet Delaware, Trussnet Nevada, the Company, Capital Truss, Inc., George Alvarez, Changestar Corporation, Primetech Consulting, Inc., Servimax Financial, Inc., Servimax Financial, LLC, Waters Winery, LLC, The Tippet Fund, LP, TSB Company, Inc., Craig Brod, Factory MX Parts, LLC, Maplewood Solutions, LLC, Jason D. Huntley, Fix N Flex, LLC, Christine Hasir, Lighthorse Ventures, LLC, Paul Bickford, Linas Kleiza, Nita Criswell, Scott Leventhal, Sugarman Family Partners L.P., and Quartz Rock, LLC. The First Amended Complaint was filed in the Central District of California of the United States District Court, identified as Case No. SACV-12-02236 AG. It arises out of an alleged “Ponzi scheme” by the Westmoore Entities pursuant to which the Westmoore Entities transferred funds to one or more of the defendants while the Westmoore Entities were insolvent. The First Amended Complaint seeks damages in an undisclosed amount, injunctive relief and foreclosure of a real estate lien related to Active Resources, Inc. The Company has voluntarily produced documents to Receiver Gill in an effort to show that the alleged claims against the Company, Mr. Alvarez and others are without merit and has formally requested Receiver Gill voluntarily dismiss the claims against them.

 

The China Holdings Arbitration

 

On July 20, 2013, the Company and Gulfstream Seychelles (collectively, “Claimants”) commenced an arbitration proceeding (“China Holdings Arbitration”) by filing a Notice of Arbitration with Hong Kong International Arbitration Centre against the sellers (collectively “Respondents”) from whom the Company acquired its equity interest in China Motion. The terms of the stock purchase agreement (“SPA”) and related transaction documents (“China Motion SPA Documents”) between Claimants and Respondents for the Company’s acquisition of 100% of the capital stock of China Motion are further described in Note 18 – Acquisition). Claimants alleged Respondents breached the China Motion SPA Documents by interfering in the day-to-day management of  China Motion in various ways that exceeded the limited oversight granted to Respondents while a portion of the purchase price remains unpaid, pursuant to the terms of the China Motion SPA Documents. Such interference by Respondents includes: (i) delaying and interfering with China Motion’s processing of the Company’s invoices for technical services rendered to China Motion; and (ii) refusing to change signature authority on the bank accounts maintained by China Motion in a manner that would allow the Company’s representatives to approve or issue payments from those accounts without also obtaining the authority or counter-signature of a representative of the Seller. Claimants sought the following relief in the arbitration: (iv) declaring Respondents had breached the China Motion SPA Documents; (v) enjoining Respondents from future interference in the management of China Motion; and (vi) for recovery of Claimants past and future damages caused by Respondents’ breach of the China Motion SPA Documents. The Notice of Arbitration did not quantify Claimants’ damages, but Claimants alleged such damages may include the following categories of damage: (a) additional audit and legal fees associated with restating the Company’s past financial statements, (b) diminution in value of Claimants’ equity or capital raising ability as a result of restating the Company’s past financial statements or inability to include the current financial results of China Motion in the Company’s future consolidated financial statements; (c) diminution in value of China Motion’s equity; (d) harm to China Motion’s business reputation, corporate opportunities or potential concession opportunities; (e) other incidental and consequential damages; and (f) attorney fees and other costs and disbursements Claimants incurred in prosecuting the Arbitration.

The China Holdings Arbitration was resolved and dismissed as a result of transactions with Respondents and others that occurred after the period ending September 30, 2013, which events are described in Note 18 – Acquisition.

 

Material Contracts

 

NGSN Exclusive Business and Services Agreements

 

On October 21, 2011, the Company entered into the NGSN Business Agreement with Next Generation Special Network Communications Technology Co. Ltd., a PRC corporation (“NGSN”), in China. Under the NGSN Business Agreement, the Company is required to form a PRC operating company to be jointly owned with NGSN subject to the Company’s control. The operating company is required to enter into an exclusive services contract with NGSN to deliver the information services and deploy and operate a 4G wireless broadband network that will utilize TD-LTE technology. The Company will finance the first phase of the joint venture’s deployment, and the joint venture will own the infrastructure equipment. The operating company will initially provide its services to consumers, wireless carriers, enterprises, automobile manufacturers and original equipment manufacturers in two regions of China.

 

21
 

On February 1, 2012, the Company and NGSN entered into the NGSN Exclusive Services Agreement contemplated by the NGSN Business Agreement. The Company has completed the formation of the holding company entities contemplated by the NGSN Business Agreement, specifically NGSN Communications Network Co., Ltd. a Cayman Islands corporation (“NGSN Cayman”), and NGSN Communications Network (HK) Co., Ltd., a Hong Kong corporation (“NGSN HK”).  Pending formation of a WOFE that will be an operating subsidiary of NSGN HK, the Company may begin providing services to NGSN through Beijing Yunji.

 

Aerostrong Business Agreement

 

On November 11, 2011, the Company entered into a Business Agreement (“Aerostrong Business Agreement”) with Aerostrong Company Limited (“Aerostrong”).  The Company will partially meet its contractual obligations with Aerostrong through Beijing Yunji, which is a technical service company engaged mainly in the business of telecommunication service related technology development, consulting, design, deployment management and operation management. Aerostrong is a subsidiary of China Aerospace Science and Technology Group (“China Aerospace”).  Aerostrong holds a PRC-issued license for value added telecommunication services by which Aerostrong is authorized to provide these services throughout China and internet services in 18 major cities in China. Aerostrong has been commissioned by Beijing Zhengzhou Software Technology Co., Ltd., a subsidiary of the China Aerospace, to deploy an internal wireless broadband network (“Commercial Network”) and application platform for China Aerospace.  The Commercial Network will cover the companies, research institutions and other entities owned by or affiliated with China Aerospace.  The preliminary estimated total investment in the Commercial Network is approximately $32.15 million, and the estimated investment for Phase 1 of the Commercial Network is approximately $8.4 million.

 

Aerostrong and Beijing Yunji will enter into agreements for the implementation of projects and for Beijing Yunji to act as the exclusive contractor for Aerostrong to provide deployment management, operation management and other services for the projects. Beijing Yunji and/or the Company will pay for all capital expenditures, operating expenditures and other negative cash flow in connection with the projects and will arrange financing for the projects.  The revenue generated by the telecommunication business will be used in priority to reimburse Beijing Yunji and/or the Company for any amounts paid for by either of them and to repay any financing arranged by Beijing Yunji and/or the Company.  Aerostrong and Beijing Yunji will share the profit generated from the telecommunication business in a manner to be agreed to in the services agreement.

 

Aerostrong Strategic Agreement

 

On April 19, 2011, Beijing Yunji entered into a strategic business agreement with Aerostrong (“Aerostrong Strategic Agreement”), which is the exclusive services agreement contemplated under the Aerostrong Business Agreement. The term of the Aerostrong Strategic Agreement is from April 19, 2012 until all projects agreed upon between the parties are completed and Beijing Yunji receives the last payment from Aerostrong. The parties will cooperate on application of jointly approved wireless broadband projects for which the rights and obligations of each party will be set forth in a separate project agreement. The agreed upon initial cooperation projects are: (i) the Digital Lijiang management platform project in Guangxi Autonomous Region; (ii) the Shen Hua wireless broadband special network project for railway; and (iii) the overload wireless broadband surveillance projects in Shanxi Province. Aerostrong is responsible for the development and follow-up of governmental markets and industrial markets. The Company is responsible to provide each component usually associated with the design, deployment and operation of a wireless broadband telecommunications network in China.

 

Equipment Contracts for Montenegro Connect and Novi-Net Wireless Broadband Networks

 

On May 10, 2012, the Company entered into three related contracts and three purchase orders with ZTE for the supply of infrastructure equipment and software for the Company’s wireless broadband network projects in Croatia and Montenegro. The aggregate price of the goods covered by the three contracts and the purchase order associated with each contract is $7,001,870. The components of each purchase order are described as follows:

 

Equipment Contract and Purchase Order for Montenegro Connect. Approximate total contract price - $820,300 for 25 base transceiver stations, including their back up power supply and installation materials, 32 microwave radios and antennae, and data center core equipment including back up power supply, gateway equipment, servers, routers, switches and racks.

 

Equipment Contract and Purchase Order for Novi-Net. Approximate total contract price - $1,280,250 for 50 base transceiver stations, including their back up power supply and installation materials, nine microwave radios and antennae and data center core equipment, including back up power supply, gateway equipment, servers, routers, switches and racks.

 

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Software Contract and Purchase Order for Herlong. Approximate Total Contract Price - $4,901,300 for all software associated with the equipment described above, including access gateways, lawful interception gateways, elements management, network management systems, operations maintenance, universal subscriber databases, switching and router software, and mobile broadband wireless base transceiver stations software systems.

 

Terms Common to or Combined for all Contracts Each of Montenegro Connect, Novi-Net and Herlong are contracting parties to one contract and its associated purchase order for purposes of delivery of goods and allocation of value on the balance sheets of the Company’s subsidiaries. Herlong will license the software it has contracted to purchase to Montenegro Connect and Novi-Net. The Company is a contracting party to all contracts and purchase orders for purposes of guaranteed payment of the purchase price. The Company had previously paid $1 million as a deposit to ZTE that was applied against the aggregate down payment for all contracts, and has since paid an additional $500,000 down payment. Each installment of down payment has been allocated pro rata in relation to the total contract price for each contract.

 

The contract terms common to all three contracts and all three purchase orders are as follows: (i) all equipment and software includes a one-year warranty; (ii) the delivery terms are “FCA Hong Kong,” under which term the Company is responsible for payment of shipping and other costs of transport to final destination, customs, duty and value added tax; and (iii) the purchase price, net of the down payment described above, is financed by ZTE for 2.5 years with a one-year grace period commencing on the bill of lading date for each purchase order. The principal amount financed is payable in three equal semi-annual installments, with the first installment due 180 days after expiration of the grace period. Interest accrues on the unpaid balance at an interest rate equal to the 6-month LIBOR rate plus a margin of 2.5%. Each installment will include principal repayment plus the interest accrued. ZTE has a mortgage on 100% of the goods covered under each contract. The Company believes all of the terms of each contract are standard in commercial contracts of a similar nature.

 

NOTE 16    FAIR VALUE MEASUREMENT

 

The Company adopted the provisions of ASC 825-10 on January 1, 2008.  ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.  ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities;

 

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the unaudited Consolidated Financial Statements.

 

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value, because of their short-term maturity.

 

23
 

Items recorded or measured at fair value on a recurring basis in the accompanying unaudited Consolidated Financial Statements consisted of the following items as of September 30, 2013:

 

   Quoted Prices             
   in Active   Significant         
   Markets for   Other   Significant     
   Identical   Observable   Unobservable     
   Instruments   Inputs   Inputs     
   Level 1   Level 2   Level 3   Total 
Derivative Liability  $   $   $18,186,760   $18,186,760 
                     
    Rollforward                 
    of Balance                
Balance, December 31, 2012  $6,393,863                
Derivative liability for Series B preferred stock   9,900,000                
Derivative liability for convertible notes   741,264                
Change in value of derivative liability during 2013   1,151,633                
Balance, September 30, 2013  $18,186,760                

 

The Company's derivative liability was valued using pricing models, and the Company generally uses similar models to value similar instruments.  Where possible, the Company verifies the values produced by its pricing models to market prices.  Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs.  These financial liabilities do not trade in liquid markets, and, as such, model inputs cannot generally be verified and do involve significant management judgment.  Such instruments are typically classified within Level 3 of the fair value hierarchy.  The change in fair value of the derivative liability is included as a component of other income in the unaudited Consolidated Statement of Operations.

 

NOTE 17    NET LOSS PER SHARE

 

The Company accounts for net loss per share in accordance with ASC subtopic 260-10, Earnings Per Share (“EPS”). This requires presentation of basic and diluted EPS on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS.

 

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of Series A Shares outstanding during each period.  It excludes the dilutive effects of potentially issuable common shares such as those related to the Company’s convertible notes.  Diluted net loss per share is calculated by including potentially dilutive share issuances in the denominator.  However, diluted net loss per share for the periods ended September 30, 2013 and 2012 do not reflect the effects of shares potentially issuable upon conversion of convertible notes and outstanding warrants.  These potentially issuable shares would have an anti-dilutive effect on the Company’s net loss per share.

 

NOTE 18    ACQUISITION

 

China Motion Telecom (HK) Limited

 

On November 27, 2012, the Company, through its wholly owned subsidiary Gulfstream Seychelles, entered into a Stock Purchase Agreement (“China Motion SPA”) with (i) China Motion Telecom International Limited; (ii) its wholly owned subsidiary China Motion Holdings Limited; and (iii) China Holdings’ 95% subsidiary ChinaMotion InfoServices Limited (collectively “Seller”) to acquire 100% of the capital stock of China Motion. In addition, the Company provided Seller a corporate guaranty of the obligations of Gulfstream Seychelles under the China Motion SPA. The China Motion SPA was amended on two occasions prior to closing. The Company closed its acquisition of China Motion on March 1, 2013. Funds paid or payable under the China Motion SPA (as amended) are in Hong Kong dollars. Currency conversions to US dollars are expressed in parentheses at a conversion rate of HK$7.75=US$1.00, with the US equivalent rounded to the nearest US$100, and are therefore approximate and may change as of the date any amount was paid or becomes or became payable. The material terms of the China Motion SPA (as amended) are as follows:

 

24
 

(i) The total purchase price for 100% of the capital stock of China Motion (“China Motion Stock”) is HK$49,500,000 (US$6,387,100). The Company paid HK$12,009,363 (US$1,549,600) in cash at or prior to closing and HK$37,490,637 (US$4,837,500) as the principal balance of a promissory note (“Note”) issued by the Company at closing. The purchase price is subject to the following adjustments, as determined by audit of China Motion’s balance sheet as of February 28, 2013 that is to be completed within four months of closing: (a) a credit to Seller equal to the balance of all cash, accounts receivable, other receivables, inventory and prepayments to others; and (b) a credit to the Company equal to the balance of all accounts payable, accruals and other payables and advanced income received. The aggregate cash balance in China Motion’s accounts as of closing was in the agreed amount of HK$7,800,000 (US$1,006,500).

 

(ii) The Note is in the total amount of HK$38,990,637.45 (US$5,031,000), of which the principal balance of HK$37,490,637 (US$4,837,500) is applicable to the purchase price and the remaining HK$1,500,000 (US$193,500) represents interest that will accrue on the Note through its maturity and is not part of the purchase price. The Note calls for a payment of HK$4,650,000 (US$600,000) principal only on or before May 31, 2013 (which the Company paid on or about June 27, 2013) and the remaining HK$32,840,637.45 (US$4,237,500) balance of principal and accrued interest due on or before August 31, 2013.

 

(iii) As security for repayment of the Note, the Company pledged the China Motion Stock to Seller pursuant to the terms of a Stock Pledge Agreement. Seller is acting as an interim escrow agent under the Stock Pledge Agreement, subject to appointment of a substitute escrow agent the parties are to locate and retain and who is willing to accept substantially all of the material terms of the Stock Pledge Agreement.

 

(iv) For so long as the Note remains unpaid, Seller is entitled to appoint one of three or more members of China Motion’s board of directors, and the following fundamental decisions require the unanimous consent of all directors and the written consent of Seller: (a) borrow any sum or enter into any contract for capital expenditures that is in excess of HK$1,500,000 (US$193,500) or is outside the course of China Motion’s general business model as a telecommunications service provider; (b) vary any rights attaching to any of China Motion’s shares; (c) consolidate or merge with or acquire any other business or dispose of any existing capital assets of China Motion; (d) issue any China Motion shares or create or issue any debentures or other securities convertible into shares or debentures; (e) pass any resolutions in general meeting or by way of written resolution relating to wind-up or dissolution of China Motion; and (f) distribute any profits of China Motion.

 

(v) The Company commits to begin upgrading China Motion’s telecommunications network. China Motion will bear the expenses of engineering services rendered in connection with such upgrade, upon reasonable commercial terms estimated to total approximately no more than HK$1,300,000 (US$167,700) per month.

 

(vi) The Company agrees to pay to Seller at closing HK$387,500 (US$50,000) towards reimbursement of total costs and disbursements to the professional fees incurred by Seller in connection with the first amendment and the second amendment, which payment is in addition to and is not part of the purchase price.

 

(vii) For a period of one year following the Closing, Seller will assist the Company with managing relationships between the Company and key suppliers and customers by assigning an executive representative of Seller who has significant past experience managing those relationships on behalf of the Company.

 

(viii) Each party to the China Motion SPA makes certain representations and warranties regarding their respective corporate status and authority, and Seller regarding the financial status of China Motion and its past operations, all upon terms the Company believes are standard in transactions of this nature. The maximum aggregate damages the Company may recover for one or more breach of Seller’s representations and warranties is 70% of the purchase price set forth in the China Motion SPA. Any such claim must be brought no later than 24 months after Closing. In addition, the Company agrees to hold Seller harmless from any claims or damages arising solely out of or in connection with the Company taking over China Motion during the time period between closing and the final termination of the Stock Pledge Agreement, including any diminution of the value of the net current assets of China Motion to a level below their net value as of closing.

 

(ix) The China Motion SPA is governed under Hong Kong law, and any disputes are to be resolved through arbitration conducted in Hong Kong.

 

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Although the Company owns 100% of the shares of China Motion, as of the period ending September 30, 2013, the Company does not believe it can control China Motion, because the management of China Motion continued to follow instructions of the Seller that blocked significant decisions made by the Company in the ordinary course of business. Most significantly, the Company was unable to change signature authority on the bank accounts maintained by China Motion in a manner that would allow the Company’s representatives to approve or issue payments from those accounts without also obtaining the authority or counter-signature of a representative of the Seller. The dispute between the Company and the Seller that gave rise to the Company’s lack of control of China Motion is further described in Note 15 – Commitments and Contingencies. The Company’s inability to control management of China Motion was discovered in June 2013. In accordance with ASC 810, the Company believes this lack of control over management is significant enough to overcome the presumption of consolidation by the Company even though it is the majority shareholder. Instead, the Company is accounting for its acquisition of China Motion on the cost method. During the quarter ended June 30, 2013, the Company determined that its investment in China Motion must be completely impaired and wrote off the entire purchase price of $6,387,100. The Company’s impairment analysis remained unchanged as of September 30, 2013. As a result of transactions with Seller and others occurring after September 30, 2013 and further described in Note 20– Subsequent Events, the Company expects its impairment and consolidation analysis will change to allow the Company to account for its acquisition of China Motion as a wholly owned subsidiary in its future consolidated financial statements.

 

NOTE 19    DISPOSITIONS/DISCONTINUED OPERATIONS

 

Sale of Tower Assets of VelaTel Peru

 

On August 16, 2013, VelaTel Peru entered into an asset purchase agreement (“VelaTel Peru APA”) with IB for sale to IB of the 30 cellular towers, along with a mutual warranty agreement (“IB Mutual Warranties”) regarding the future permitting of the cellular towers. Under the VelaTel Peru APA, the purchase price for the towers is assumption by IB of all liabilities associated with the towers, which includes (i) $112,904 in past unpaid rent to site landlords, (ii) future rents totaling $7,975 per month aggregate for all 30 cellular towers, (iii) $7,918 in unpaid electricity charges advanced by site landlords, and (iv) $61,736 owed to the steel fabricator who contracted to erect the towers. Under the IB Mutual Warranties, VelaTel Peru agrees that IB may make application in the name of VelaTel Per for any such permit for which VTP's status as a holder of telecommunications licenses or concessions is required or advantageous, and to assign any permits so obtained in whole or in part in favor of other licensed telephone operators who may wish to lease space on the towers. In return, VelaTel Peru is allowed to maintain its existing equipment on each tower until 90 days after the later of the date a permit is issued for that tower or the date IB determines the applicable municipality will not grant a permit. Closing of the VelaTel Peru APA and IB Mutual Warranties occurred on September 4, 2013.

 

In recognition of the fact the Company received benefit pursuant to the AQT Loan Agreement (transaction described in Note 7 – Notes Payable) that did not flow to VelaTel Peru in exchange for the obligation of VelaTel Peru to transfer title to the 30 cellular towers to IB as an affiliate of AQT, VelaTel Peru received a credit in the amount of $600,000 against the balance of the intercompany debt that VelaTel Peru and GMR owe to the Company. FGPM consented to the VelaTel Peru APA, the IB Mutual Warranties, and the reduction of intercompany debt in connection with the VelaTel Peru SPA described immediately below.

 

Sale of Stock of VelaTel Peru

 

On August 16, 2013, the Company, through Gulfstream Seychelles, entered into a stock purchase agreement (“VelaTel Peru SPA”) with First Global Projects Management, Ltd. (“FGPM”) for the sale of 100% of the capital stock of VelaTel Peru. Under the VelaTel Peru SPA, in exchange for payment to the Company at closing of $1,300,000, the Company will: (i) transfer to FGPM all of the Company’s 95% interest in the capital stock of VelaTel Peru; (ii) transfer all of the Company’s 99.9% interest in the capital stock of VelaTel Peru’s sister company Go Movil Resources, S.A.C. (“GMR”); and (iii) assign to FGPM the balance of all intercompany debt that VelaTel Peru and GMR will owe to the Company as of closing of the VelaTel Peru SPA. Under the VelaTel Peru SPA, FGPM also acquires the 5% equity interest of the minority shareholders of VelaTel Peru in exchange for $68,422. The Company and the other sellers are not making representations or warranties as extensive as would be typical in such a transaction, nor are they agreeing to indemnify FGPM regarding the past operations or financial condition of VelaTel Peru that have already been identified as contingencies during FGPM’s due diligence. The purchase price reflects a discount for the limitations of such representations, warranties and indemnities. The purchase price also reflects a reduction for the separate transfer of assets and liabilities associated with cellular towers designed, constructed and owned by VelaTel Peru transferred to IB and described immediately above. Closing of the VelaTel Peru SPA occurred on September 4, 2013.

 

The sale of Vela Tel Peru resulted in a gain on the disposition of a subsidiary in the amount of $5,817,986. The gain was determined as follows: net proceeds of $1,259,716 and the disposition of Vela Tel Peru net liabilities of $9,608,693 less the intercompany debt of $5,050,423.

 

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Sale of Stock of Zapna

 

This transaction occurred after the period ending September 30, 2013 and is described in Note 20 – Subsequent Events.

 

Treatment of VelaTel Peru and Zapna on Financial Statements

 

During the period ending September 30, 2013, VelaTel Peru and Zapna were considered discontinued operations. The Company has not been able to obtain accurate financial information for VelaTel Peru or Zapna for the three months ended September 30, 2013, which has required the Company to make estimates regarding the third quarter activity.

 

The operating results for VelaTel Peru and Zapna have been presented in the accompanying unaudited Consolidated Statement of Operations for the nine-month periods ended September 30, 2013 and 2012 as discontinued operations and are summarized below:

 

   Nine-Months Ended September 30, 
   2013   2012 
         
Revenues  $465,275   $1,668,373 
Cost of revenue   397,979    1,497,810 
Gross profit   67,296    170,563 
Operating expenses   892,307    496,663 
Loss from operations   (825,011)   (326,100)
Non-operating income   754,100    (176,644)
Net income (loss)  $(70,911)  $(502,744)

 

The assets and liabilities of the discontinued operations at September 30, 2013 and December 31, 2012 are summarized below:

 

   September 30,   December 31, 
   2013   2012 
         
Current assets  $   $372,534 
Long-term assets       4,596,368 
   $   $4,968,902 
           
Current liabilities  $612,529   $9,346,975 

 

NOTE 20    SUBSEQUENT EVENTS

 

The Company has evaluated events subsequent to September 30, 2013, to assess the need for potential recognition or disclosure in this Report. Such events were evaluated through the date the Company’s unaudited Consolidated Financial Statements were finalized.  Based upon this evaluation, it was determined that no subsequent events occurred that require recognition in the unaudited Consolidated Financial Statements and that the following items represent subsequent events that merit disclosure in this Report.

 

Refinance of Unpaid Balance of Purchase Price for China Motion Acquisition

 

On October 28, 2013, the Company entered into a series of related agreements pertaining to its acquisition of China Motion that is described in Note 18 – Acquisition. For all agreements, funds paid or payable are in Hong Kong dollars. Currency conversions to US dollars are expressed in parentheses at a conversion rate of HK$7.75=US$1.00, with the US equivalent rounded to the nearest US$100, and are therefore approximate and may change as of the date any amount was paid or becomes or became payable.

 

Deed of Settlement with Sellers

 

The same parties to the China Motion SPA (including the Company as Guarantor of Gulfstream Seychelles) entered into a Deed of Settlement, the material terms of which are:

 

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(i) Immediate payment to Sellers of (a) the unpaid balance of the Note in the amount of HK$34,340,637 (US$4,431,100), and (b) HK$850,000 (US$109,700) towards Seller’s attorney fees incurred in connection with the arbitration proceeding and negotiation and preparation of the Deed of Settlement.

 

(ii) Seller’s withdrawal of all default notices and release of all collateral security covered by the Stock Pledge Agreement.

 

(iii)  Dismissal within seven days of the arbitration proceeding commenced by the Company and Gulfstream Seychelles against Sellers (described in Note 15 – Commitments and Contingencies).

 

(iv) Waiver and release by the Company and Gulfstream Seychelles of any claims against Sellers arising under the representations and warranties contained in the China Motion SPA or otherwise related to the Transaction Documents.

 

(v) Seller authorizes its representative on China Motion’s board of directors to join in execution of board resolutions to change banking mandates to restore the Company’s operational control over China Motion.

 

China Motion Loan Agreement with new Lender

 

Xin Hua (as Lender), Gulfstream Seychelles (as Borrower) and the Company (as Guarantor) entered into a Loan Agreement, the material terms of which are:

 

(i) Borrower will borrow from Lender, who will immediately pay to Sellers the loan amount of HK$26,540,637 (US$3,424,600), without interest.

 

(ii) Repayment of the loan amount shall be in two installments, HK$7,800,000 (US$1,006,500) on or before December 15, 2013, and HK$18,740,637 (US$2,814,100) on or before February 28, 2014.

 

(iii) Repayment of the loan amount is secured by a Share Charge (described immediately below) against Borrower’s 100% equity ownership in China Motion.

 

(iv) During the time any of the loan amount is outstanding, Borrower and the Company agree to preserve the value of Lender’s collateral in the equity of China Motion, including (a) maintaining the net asset value of China Motion in the positive, (b) maintaining a minimum of two months’ working capital in China Motion, and (c) being primarily responsible for contracts associated with the upgrade of China Motion’s core network, including prohibition against China Motion paying any down payment, debt service, finance charges or principal repayment associated with such upgrade. Lender’s written consent is required for (d) China Motion to lend money or extend credit except to its customers in the ordinary course of its business, (e) China Motion to borrow money, receive credit or guaranty any indebtedness except to its vendors in the ordinary course of its business, (f) China Motion to hire new employees at a monthly salary in excess of HK$15,000 (US$1,900), or (g) Borrower or the Company to withdraw any funds from China Motion.

 

(v)  Lender consents in the Loan Agreement to China Motion making a loan to Borrower and the Company (“Agreed Loan”) in the amount of up to HK$1,936,216 (US$249,800) for the sole purposes of: (a) settling agreed legal costs of HK$850,000 (US$109,700) towards Seller’s attorney fees described above plus HK400,000 (US$51,600), (b) settling the First Adjustment and other miscellaneous amounts due Seller pursuant to the China Motion SPA in the amount of HK$676,216 (US$87,300), and (c) up to HK$10,000 (US$1,300) for any potential shortfall in payments to be made by Borrower to Sellers in US funds based on bank fees and exchange rate fluctuations. Borrower is required to repay China Motion the Agreed Loan on or before December 15, 2013.

 

(vi)  During the time any of the loan amount is outstanding, Lender shall have the right to appoint one of not more than three of members of China Motion’s board of directors.

 

(vii) During the time any of the loan amount is outstanding, Lender shall have the right to approve the terms of contracts related to the upgrade (including financing) of China Motion’s core network to confirm that the terms are consistent with preliminary terms negotiated with vendors as of the effective date of and as summarized in the Loan Agreement.

 

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Share Charge as Collateral for Loan Agreement

 

As collateral for repayment of the Loan Agreement, Gulfstream Seychelles (as Chargor) and Xin Hua (as Chargee) entered into a Share Charge agreement, the material terms of which are:

 

(i)  Chargor shall deliver to Chargee all share certificates representing Chargor’s ownership interest in China Motion, together with undated instruments of transfer and other documents authorizing the certificates to be re-issued in the name of Chargee upon any default under the Loan Agreement.

 

(ii) Chargor retains all right to exercise the voting interests represented by the charged shares until such time as the security of the charge becomes enforceable upon a default in the Loan Agreement.

 

(iii) During the time the Share Charge remains effective, Chargor shall not transfer any of the charged shares and shall not grant any option to acquire any of the charged shares without the written consent of the Chargor, which shall be given if the terms of such option provide that such option: (a) is subordinate to the option granted to Chargor pursuant to the Option Deed (described immediately below), (b) shall not be exercisable prior to full repayment of the loan amount, and (c) shall be null and void upon an exercise of the option granted to Chargee pursuant to the Option Deed.

 

(iv) Promptly upon repayment of the loan amount, Chargee shall deliver back to Chargor the charged shares and all signed and undated instruments of transfer.

 

Option Deed to Enforce Share Charge

 

As the instrument to enforce the security of the Share Charge, Gulfstream Seychelles (as Grantor) and Xin Hua (as Grantee) entered into an Option Deed agreement, the material terms of which are:

 

(i) Grantor grants to Grantee the option to purchase 100% of the outstanding shares of China Motion (“Option Shares”) for an Option Price equal to the aggregate amount of all moneys owed by the Grantor to the Grantor pursuant to the Loan Agreement as of the date three business days after the exercise of the Option, which Option Price shall be set off against the loan amount outstanding. The option may be exercised only as to 100% of the Option Shares, and only in the event of a default under the Loan Agreement.

 

(ii) The option granted under the Option Deed shall expire upon repayment in full of all amounts due under the Loan Agreement.

 

(iii) The Option Deed contains the same restrictions against transfer or grant of other options against the Option Shares as are contained in the Share Charge.

 

Terms Common to all Agreements

 

Each of the Deed of Settlement, the Loan Agreement, the Share Charge, and the Option Deed include representations and warranties regarding the corporate status of Gulfstream Seychelles and the Company, and the corporate and financial status of China Motion, and other terms the Company considers to be standard in transactions of a similar nature. Each of the agreements provides that it is governed by Hong Kong law, with jurisdiction of disputes exclusively before the courts of Hong Kong, and with the parties agreeing to submit to such jurisdiction.

 

Performance of all Agreements

 

On or about October 29, 2013, Gulfstream paid Sellers US$1,007,000 (less wire transfer charges), Lender paid Sellers HK$26,540,637, and China Motion paid Sellers and attorneys for Sellers and Lenders the remaining amounts called for under the Deed of Settlement and Loan Agreement, as described above. Thereafter, Sellers’ representative to China Motion’s board of directors joined in signing resolutions to change bank mandates, which resolutions were submitted to the appropriate banks of China Motion; the parties confirmed dismissal of the arbitration proceeding; and Gulfstream Seychelles delivered the required share certificates, signed and undated instruments of transfer, and other documents authorizing the certificates to be re-issued in the name of Lender upon any default under the Loan Agreement.

 

Copies of the Deed of Settlement, the Loan Agreement, the Share Charge, and the Option Deed, respectively, are attached as Exhibits 10.53 through 10.56 to this Report.

 

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Turnkey and Vendor Contracts for Upgrade of China Motion Network

 

Through the date this Report is filed, the Company and its subsidiary China Motion have been negotiating contracts for the upgrade of China Motion’s telephony core network from 2G to 4G technology, and associated customer billing and accounting functions. The first contract to be completed was a Turnkey Upgrade Agreement that contemplates finalization of three contracts with separate vendors for discrete components of the overall upgrade. Each contract is described separately below.

 

Turnkey Upgrade Agreement with New Host

 

On November 11, 2013, the Company and China Motion entered into a Turnkey Upgrade Agreement with New Host International Co., Ltd. (“New Host”) for project management and financing of the upgrade of China Motion’s telephony core network and associated customer billing and accounting functions. The material terms of the Turnkey Upgrade Agreement are:

 

(i) New Host will subcontract with three vendors China Motion has previously negotiated pricing and scope of services, ZTE Corporation (“ZTE”), Niceuc Communication Co., Ltd. (“Niceuc”)and Tectura Hong Kong Limited (“Tectura” and together with ZTE and Niceuc collectively “Subcontractors”). New Host will provide project management services to coordinate the work of the Subcontractors and pay each according to the tenor of their respective contracts. The aggregate amount payable to Subcontractors is US$2,437,139 (“Subcontracted Amount”).

 

(ii) New Host is entitled to a Management Fee equal to 15% of the Subcontracted Amount (initially US$365,571, subject to any future additions to the Subcontracted Amount). Following a 12 month Deferral Period, Finance Charges equal to 7.5% interest per annum accrue on the Subcontracted Amount but not the Management Fee (the Subcontracted Amount, the Management Fee and the Finance Charges collectively, “Purchase Price”).

 

(iii) Repayment of the Purchase Price shall be in 60 equal monthly installment, commencing on the same calendar day of the month following expiration of the Deferral Period, broken into separate installments for Subcontracted Amount plus amortized Finance Charges (“P&I Installments,” initially US$48,835) and Management Fee Installments (initially US$6,093). In the event of future increase in the Subcontracted Amount, Installment amounts shall be re-calculated so that any unpaid Installments remain equal. Customer may prepay the P&I Installments in whole or in part without penalty and subject to reduction in future Finance Charges, provided that partial prepayment of either the Management Fee or the Subcontracted Amount shall not decrease subsequent P&I Installments or Management Fee Installments until one or both have been paid in full.

 

(iv) Title to all equipment, software, and other property included in the Project, whether tangible or intangible, shall pass to China Motion upon delivery to its business premises, provided that until the Purchase Price is paid in full, New Host shall have a purchase money security interest in all such equipment, software and other tangible and intangible property. New Host shall assign to China Motion all warranties provided by each Subcontractor.

 

(v) The Turnkey Upgrade Agreement is subject to Hong Kong law, with disputes to be resolved through arbitration before Hong Kong International Arbitration Centre.

 

Sales Agreement with ZTE

 

On November 18, 2013, China Motion and New Host entered into a sales contract with ZTE (“ZTE Sales Agreement”) for the primary components of hardware and software (including installation and optimization) required to upgrade China Motion’s core telephony network from 2G to 4G technology, and to increase the capacity of the network to meet the future projected growth of China Motion’s subscribers. The total contract amount is US$2,050,609, payable (by New Host pursuant to the Turnkey Upgrade Agreement) upon certain milestones associated with delivery, acceptance and testing of the integrated network components. Title or ownership to the products covered by the ZTE Sales Contract passes to China Motion upon delivery of the products to China Motion’s premises, subject to a security interest in favor of ZTE against the full payment of the contract amount. The contract price includes training of China Motion’s personnel on proper operations of the products, and a one year warranty against defect. The parties have negotiated the terms and price of an operations and maintenance agreement for further protection of the products beyond warranty expiration. The ZTE Sales Agreement is subject to Hong Kong law, with disputes to be resolved through arbitration before Hong Kong International Arbitration Centre.

 

30
 

Sales Agreement with Niceuc

 

On November 18, 2013, China Motion and New Host entered into a sales contract with Niceuc Communication Co., Limited (“Niceuc Sales Contract”) for value added services and components (including installation and optimization) associated with specialty functions of the planned upgrade of China Motion’s core telephony network, including functions beneficial to China Motion’s performance of the StarHub Cooperation Agreement described below. The total contract amount is US$256,314, payable (by New Host pursuant to the Turnkey Upgrade Agreement) upon certain milestones associated with delivery, acceptance and testing of the integrated network components. The contract price includes a one year warranty against defect. The parties have negotiated the terms and price of an operations and maintenance agreement for further protection of the products beyond warranty expiration. The Niceuc Sales Agreement is subject to Hong Kong law, with disputes to be resolved through arbitration before Hong Kong International Arbitration Centre

 

ERP Purchase and Implementation Agreement with Tectura

 

On November 18, 2013, New Host and Tectura Hong Kong Limited (“Tectura”) entered into an agreement for purchase and implementation of an enterprise resource planning solution utilizing Microsoft Dynamics NAV accounting software (“Tectura Agreement”). The contract amount is HK$375,690 (~US$48,500), which is Tectura’s estimate of the quantity of end user licenses to meet China Motion’s requirements, plus estimated implementation and training services to be provided by Tectura on a time and materials basis. The contract amount is payable upon certain milestones contained in the Tectura Agreement.

 

Copies of the Turnkey Upgrade Agreement, the ZTE Sales Agreement, and the Niceuc Sales Agreement and the Tectura Agreement, respectively, are attached as Exhibits 10.57 through 10.59 to this Report. The Company considers the Tectura Agreement to not be sufficiently material to require attaching a copy as an Exhibit to this Report. A brief summary of the contract terms is provided because the scope of the contract is contained in the Turnkey Upgrade Agreement.

 

Cooperation Agreement between China Motion and a Tier One Mobile Network Operator in Asia

 

As of the date of this Report, the Company is in final negotiations for China Motion to enter into a Cooperation Agreement with a tier one mobile network operator in Asia. Because the Company’s management referred to the potential contract in a recent investor conference call, specific forward looking reference to the contract is included here. The Company will disclose the material terms of the contract on a Current Report on SEC Form 8-K as soon as the contract is finalized and signed.

 

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Sale of Stock of Zapna

 

On September 30, 2013, Gulfstream Seychelles and Aerial Investments, LLC (“Aerial”) entered into a stock purchase agreement (“Aerial SPA”) for Aerial to acquire the 75 shares of capital stock of Zapna (“Zapna Stock”) owned by Gulfstream Seychelles, representing 75% of the total equity ownership of Zapna. The material terms of the Zapna SPA are:

 

(i) The transaction is subject to a right of first refusal and tag along rights in favor Ahmad Holdings and/or Omair Khan (collectively “Minority Owner”), the owner of the remaining 25 shares of capital stock of Zapna, such rights granted pursuant to the 2012 stock purchase agreement (“2012 SPA”) by which Minority Owner sold 75 shares of Zapna Stock to Gulfstream Seychelles. Aerial agrees to honor Minority Owner’s tag along rights by also acquiring Minority Owner’s 25 shares of Zapna Stock for US$25 if Minority Owner delivers a timely notice of election.

 

(ii) The purchase price is US$75. As additional consideration, Gulfstream Seychelles agrees to assign to Aerial at closing without warranty, all rights, if any, Gulfstream Seychelles may have (1) against Minority Owner related to the Company, whether arising from breach of any representation or warranty Minority Owner made in connection with the 2012 SPA, from Minority Owner’s Management of the Company since closing of the 2012 SPA, and/or from conduct or circumstances described in Section 2.5 of the Aerial SPA, and/or (2) for financial benefits (or detriments) applicable to Gulfstream Seychelles’ ownership of the Zapna Stock for the period commencing July 1, 2013 and through Closing of this Agreement (“Assignment”). Aerial agrees to waive the Assignment if Minority Owner exercises either its right of first refusal or its tag along rights.

 

(iii) Gulfstream Seychelles warrants only its corporate qualifications, the capital structure of Zapna, and its ownership of the Zapna Shares. Gulfstream Seychelles expressly disclaims any representations or warranties regarding the past or future financial, legal or other status of Zapna. Aerial acknowledges that the transaction is made “as is, where is,” and that the purchase price reflects the disclaimers. Aerial acknowledges that Minority Owner has refused to cooperate with Gulfstream Seychelles to provide financial information regarding the Company for the period of time commencing July 1, 2013, and that the inability of the parent company of Gulfstream Seychelles to accurately report the financial results of Zapna on its consolidated financial statements for the period of time commencing July 1, 2013 is the basis of granting the Assignment.

 

On October 9, 2013, the Company delivered a copy of the signed Aerial SPA to Minority Owner, together with notice of its rights for a period of 30 days to exercise either its right of first refusal or its tag along rights. Minority Owner did not formally respond to the notice.

 

On November 19, 2013, after expiration of Minority Owner’s rights, closing of the Aerial SPA occurred when Aerial paid the Company, on behalf of Gulfstream Seychelles, the purchase price of US$75, and caused the delivery of instruments of ownership of the 75 shares of Zapna Stock to be delivered to Aerial and in Aerial’s name.

 

A complete copy of the Aerial SPA is attached as Exhibit 10.60 to this Report.

 

Item 2.  Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

 

Forward-Looking Statements

 

This following information specifies certain forward-looking statements of our management.  Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact.  Forward-looking statements may be identified by the use of forward-looking terminology, such as “may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”, “continue”, or similar terms, variations of those terms or the negative of those terms.  The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable.  Our future operating results, however, are impossible to predict, and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

 

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Forward-looking statements include, but are not limited to, the following:

 

·Statements relating to our future business and financial performance;

 

·Our competitive position;

 

·Growth of the telecommunications industry in China; and

 

·Other material future developments that you may take into consideration

 

We believe it is important to communicate our expectations to our shareholders.  However, there may be events in the future that we are not able to predict accurately over which we have no control.  The risk factors and cautionary language discussed in this report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations we described in our forward-looking statements, including among other things:

 

·Competition in the industry in which we do business;

 

·Legislation or regulatory environments;

 

·Requirements or changes adversely affecting the businesses in which we are engaged; and

 

·General economic conditions.

 

You are cautioned not to place undue reliance on these forward-looking statements.  The assumptions used for purposes of the forward-looking statements represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances.  As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment.  To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements.  We cannot guaranty that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statement.

 

Corporate History

 

VelaTel Global Communications, Inc. (sometimes referred to in this Report as “Company”, “us”, “our” and “we”) was incorporated under the laws of the State of Nevada on September 19, 2005 under its former name, Mortlock Ventures, Inc., for the purpose of acquiring and developing mineral properties.  During the quarter ended March 31, 2008, the Company changed its business purpose and commenced concentrating on the telecommunications industry.  The Company changed its name to China Tel Group, Inc. on April 8, 2008 and acquired Trussnet Nevada (defined below) on May 21, 2008.

 

On May 21, 2008, we entered into a Reorganization and Merger Agreement pursuant to which our wholly owned subsidiary, Chinacomm Acquisition, Inc. (“Acquisition Subsidiary”), merged with and into Trussnet USA, Inc., a Nevada corporation (“Trussnet Nevada”).  Pursuant to the terms of the Reorganization and Merger Agreement, the Acquisition Subsidiary and Trussnet Nevada conducted a short-form merger under Nevada law, as a result of which Trussnet Nevada, as the surviving corporation, became our wholly owned subsidiary.  In exchange for all of the issued and outstanding shares of common stock of Trussnet Nevada, we issued 66,909,089 shares of the Company’s Series B Common Stock.  In addition, pursuant to the Reorganization and Merger Agreement, certificates representing 57,500,000 Shares held by our shareholders prior to the merger were returned to us and cancelled.

 

On July 25, 2011, we changed our name to VelaTel Global Communications, Inc.  We did so to better define our positioning as a key leader in deploying and operating wireless broadband access networks worldwide.

 

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During the first quarter of 2012, we commenced our planned operations as we deployed our wireless broadband telecommunications network in Peru (VelaTel Peru”). Prior to that, from our inception we were a “Development Stage Company” as defined by the ASC subtopic 915 Development Stage Entities. We accumulated a deficit during our development stage of $253,660,984.

 

You are cautioned not to place undue reliance on these forward-looking statements. The assumptions used for purposes of the forward-looking statements represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry and other circumstances.  As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We cannot guaranty that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statement

 

The following information should be read in conjunction with the information contained in the unaudited Consolidated Financial Statements included within this Report.

 

Our Businesses

 

The Company currently holds investments or contracts in six active projects that we refer to as:

 

(i) VN Tech Fuel Cell Business;

 

(ii) Business Agreement with NGSN;

 

(iii) Aerostrong Exclusive Agreements;

 

(iv) Novi-Net Network;

 

(v) Montenegro Connect Network; and

 

(vi) China Motion MVNO Network.

 

During the nine-month period covered by the accompanying unaudited consolidated financial statements, the Company also held investments or contracts in two additional projects that were disposed of prior to the date this Report is filed:

 

(vii) VelaTel Peru Network (disposition completed September 4, 2013);

 

(viii) Zapna Wireless Broadband Solutions Business (disposition completed November 12, 2013).

 

The Company’s primary business model is to combine its engineering and deployment expertise, its equity funding relationships, its vendor partnership, radio frequency spectrum, fiber optic cable and concession rights assets acquired through a subsidiary or a joint venture relationship to create and operate wireless broadband networks worldwide.  We offer, or will offer, internet access, voice, video, and data services to the subscribers of the various wireless broadband networks we operate.  The Company’s secondary business model is to distribute products and services used in connection with wireless broadband networks. Thus far, we are in the business of offering: (i) hydrogen fuel cells used as a back-up power source for certain transmission of power to wireless broadband equipment and devices; and (ii) services that enable lower cost voice long distance and voice and data roaming fees to subscribers of cellular, voice over internet protocol or wireless broadband networks.   We have included in this Report references to projects or milestone events that may no longer be active to the extent such events are material to overall financial condition and/or our ongoing operations of the Company.

 

The Company’s present operational focus is on the deployment of wireless broadband networks in emerging international markets, using primarily either 2.5 GHz or 3.5 GHz radio frequency spectrum, and in the case of China Motion, the expansion of its legacy MVNO telephony operations.

 

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Results of Operations

 

Three-month period ended September 30, 2013 as compared to the three-month period ended September 30, 2012.

 

Our revenue, cost of revenue, expenses and other income for the three-month periods ended September 30, 2013 and 2012 are as follows:

 

Revenue:

2013   2012 
$462,880   $214,486 

 

Our revenue for the three-month period ended September 30, 2013 increased by $248,394 from the same period ended September 30, 2012.  The increase in revenue for 2013 is due to higher revenue from our subsidiary, Herlong.

 

Cost of Revenue:

 

2013   2012 
$61,245   $36,543 

 

Our cost of revenue for the three-month period ended September 30, 2013 was $61,245, or 13.2% of sales as compared to $36,543 or 17.0% of sales for the same period ended September 30, 2012.  The increase in cost of revenue in actual dollars is attributed to the increase in sales and the decease as a percentage of revenue in 2013 is a result of higher margins on the sales generated by our subsidiary, Herlong.

 

Selling, General and Administrative Expenses:

 

2013   2012 
$2,842,284   $2,551,572 

 

Our selling, general and administrative expenses for the three-month period ended September 30, 2013 was $2,842,284, as compared with $2,551,572 for the same period in 2012, a decrease of $290,712.  The decrease in the selling, general and administrative expenses during the three-month period in 2013 is a result of a reduction in general corporate overhead.

 

Impairment Loss:

 

2013   2012 
$   $1,010,000 

 

During the three-month period ended September 30, 2012 we wrote off our investment in GBNC Network. GBNC indicated it would not honor the terms of the GBNC Agreement. Specifically, GBNC maintained that GBNC should have control over bank accounts and decisions regarding capital expenditures. Based on the duration of the impasse between us and GBNC regarding these matters, we determined it was appropriate to fully impair our $1,010,000 investment in GBNC.

 

Gain (Loss) on Change in Fair Value of Debt Derivative:

 

2013   2012 
$(24,200)   53,098 

 

For the three-month period ended September 30, 2013, we incurred a non-cash loss of $24,200 from the change in the fair value of our debt derivatives relating to our Amended and Restated Convertible Note Purchase Agreements dated November 17, 2008 (“Amended Convertible Note”), conversion feature of our Series B Preferred Stock, and convertible notes issued in 2013 as compared to a non-cash gain of $53,098 for same period in 2012.  The increase in the loss for 2013 is attributable to the change in fair value of the derivative liability as of the respective balance sheet dates.

 

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Loss on Settlement of Debt:

 

2013   2012 
$1,514,810    133,720 

 

For the three-month period ended September 30, 2013, we issued shares of our Series A Common Stock and warrants in settlement of debt. The settlement price was less than the fair value of the shares and warrants issued resulting in a loss of $1,514,810 compared to 133,720 in the same period in 2012.

 

Interest Expense:

 

2013   2012 
$676,604   $243,099 

 

For the three-month period ended September 30, 2013, our interest expense was $676,604 as compared to $243,099 for the same period in 2012.  The change in interest expense is attributable to the change in outstanding in notes payable and amortization of debt discounts in 2013 compared to 2012.

 

Net Income (Loss):

 

2013   2012 
$357,367   $(4,028,887)

 

Net income for the three months ended September 30, 2013 was $357,367 as a result of a gain on the sale of Velatel Peru of $5,817,986.

 

Nine-month period ended September 30, 2013 as compared to the nine-month period ended September 30, 2012.

 

Our revenue, cost of revenue, expenses and other income for the nine-month periods ended September 30, 2013 and 2012 are as follows:

 

Revenue:

 

2013   2012 
$1,031,134   $438,840 

 

Our revenue for the nine-month period ended September 30, 2013 increased by $592,294 from the same period ended September 30, 2012.  The increase in revenue for 2013 is attributed to higher revenue from our subsidiary, Herlong, and a full nine months of reporting Herlong’s results as compared to five and one half months during 2012 based on completing our acquisition of Herlong on April 12, 2012.

 

Cost of Revenue:

 

2013   2012 
$128,472   $77,076 

 

Our cost of revenue for the nine-month period ended September 30, 2013 was $128,472, or 13.5% of sales as compared to $77,076 or 17.6% of sales for the same period ended September 30, 2012.  The increase in cost of revenue in actual dollars is attributed to the increase in sales and the decease as a percentage of revenue in 2013 is a result of higher margins on the sales generated by acquired subsidiary, Herlong.

 

Selling, General and Administrative Expenses:

 

2013   2012 
$6,173,062   $8,248,744 

 

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Our selling, general and administrative expenses for the nine-month period ended September 30, 2013 was $6,173,062 as compared with $8,248,744 for the same period in 2012, a decrease of $2,075,682.  The decrease in the selling, general and administrative expenses during the nine-month period in 2013 is a result of a reduction in general corporate overhead.

 

Impairment Loss:

 

2013   2012 
$6,387,100   $1,010,000 

 

During the nine months ended September 30, 2013 we wrote off our investment in China Motion for $6,387,100, which represents the entire purchase price for the acquisition when we determined we did not have effective control China Motion. The management of China Motion continued to follow instructions of the Seller that blocked significant decisions we made in the ordinary course of China Motion’s business, including efforts to change signature authority on the bank accounts in a manner that would allow us to approve or issue payments from those accounts without also obtaining the authority or counter-signature from a representative of the selling shareholders from whom we acquired China Motion.

 

During the nine months ended September 30, 2012 we wrote off our investment in the GBNC Network.

 

Gain (Loss) on Change in Fair Value of Debt Derivative:

 

2013   2012 
$(1,151,633)   14,714 

 

For the nine-month period ended September 30, 2013, we incurred a non-cash loss of $1,151,633 from the change in the fair value of our debt derivatives relating to our Amended and Restated Convertible Note Purchase Agreements dated November 17, 2008 (“Amended Convertible Note”), conversion feature of our Series B Preferred Stock, and convertible notes issued in 2013 as compared to a non-cash loss of $38,384 for same period in 2012.  The increase in the loss for 2013 is attributable to the change in fair value of the derivative liability as of the respective balance sheet dates.

 

Gain (Loss) on Settlement of Debt:

 

2013   2012 
$(6,763,365)   1,723,817 

 

For the nine-month period ended September 30, 2013, we issued shares of our Series A Common Stock and warrants in settlement of debt. The settlement price was less than the fair value of the shares and warrants issued resulting in a loss of $6,763,365. In 2012, the settlement price was greater than the fair value of the shares that resulted in a gain of $1,723,817.

 

Interest Expense:

 

2013   2012 
$1,517,408   $1,151,705 

 

For the nine-month period ended September 30, 2013, our interest expense was $1,517,408 as compared to $1,151,705 for the same period in 2012.  The change in interest expense is attributable to the change in outstanding in notes payable and amortization of debt discounts in 2013 compared to 2012.

 

Net Loss:

 

2013   2012 
$15,273,243   $9,469,601 

 

Net cash provided by financing activities consist of net cash proceeds from the issuance of convertible and other notes, Share subscriptions and advances from shareholders.  Our Convertible Note Purchase Agreements dated February 17, 2008 (“Convertible Note”) matured on December 31, 2008, unless they were extended by signing an Amended Convertible Note.  In that case, the due date is 90 days from the date we receive a notice of redemption from the convertible note holder. Both the Convertible Notes and the Amended Convertible Notes have an interest rate of 10% per annum.

 

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Our liquidity needs consist of our working capital requirements, indebtedness payments, research and development expenditure funding, and general and administrative expenses.  Our known liquidity demands include the following categories and amounts as of September 30, 2013:

 

(i) Litigation installment payments of $821,735;

 

(ii) Notes payable to related parties of $870,138;

 

(iii) Notes payable of $15,274,800;

 

(iv) Convertible Notes and Amended Convertible Notes of $573,868;

 

(v) Advances from officers of $64,076 and

 

(vi) Accounts payable and accrued expenses of $15,215,541and sales, general and administrative expenses of approximately $1.2 million per month for our San Diego, Taiwan, Cyprus, Croatia and Montenegro operations.

 

Historically, we have financed our operations through the sale of equity and convertible debt, as well as borrowings from related parties and from Isaac Organization, Inc.

 

From our date of inception through September 30, 2013, we have incurred accumulated losses of approximately $322.6 million.  As of September 30, 2013, we had cash of $1.1 million and liabilities of approximately $51.6 million, of which $48.2 million are deemed to be current liabilities.  We expect to continue to incur net losses for the foreseeable future. Our independent accountants have expressed substantial doubt about our ability to continue as a going concern in their audit report, dated May 17, 2013, for the period ended December 31, 2012.  In order to continue to operate our businesses, we will need to raise substantial amounts of additional capital.

 

Our equity capital consists of Series A Common Stock, Series B Common Stock, Series B Preferred Shares, Convertible Notes and Amended Convertible Notes, each of which is discussed in further detail below.

 

Effective September 19, 2013, we increased (post-reverse) the number of authorized Series A Shares from 1 billion to 10 billion by filing a Certificate of Amendment of our Articles of Incorporation with the Nevada Secretary of State.  As of September 30, 2013, we had issued and outstanding 657,160,092 Series A Shares. As of the date of this Report, the total number of Series A Shares issued and outstanding is 1,113,412,415.

 

As of September 30, 2013, we had authorized the issuance of up to 1,000,000,000 Series B Shares, of which 80,000,000 shares were issued and outstanding. As of the date of this Report, 130,000,000 Series B Shares are issued and outstanding.  Each Series B Share has the right to cast ten votes for each action on which each Series A Share has a right to vote.  The consent of 80% of the issued and outstanding Series B Shares is required in order to sell, assign or transfer any of the Series B Shares.  Series B Shares do not participate in any declared dividends. Series B Shares are redeemable on May 23, 2023 at the par value of $0.001 per share. Due to the limitations on transfer of Series B Shares, we do not consider the issuance of Series B Shares to be a viable source for funding our operations.

 

In addition, we have authorized the issuance of up to 25,000,000 shares of Preferred Stock, with rights and preferences to be determined by our Board of Directors. We have designated 2,500 shares of our Preferred Stock as Series B Preferred Stock, of which 270 such shares had been issued to Ironridge Technology as of September 30, 2012. As of the date of this Report, a total of 285 shares of Series B Preferred Stock are issued and outstanding.

 

As of September 30, 2013, we have raised approximately $28.5 million related to our Convertible Notes and our Amended Convertible Notes.  These notes bear interest at 10% per annum and are all either past due or have been converted.  As of September 30, 2013, the outstanding balance of principal and interest on unpaid Convertible Notes and Amended Convertible Notes was approximately $0.3 million.  The proceeds from our Convertible Notes and Amended Convertible Notes helped fund our operations during 2008 and 2009.  However, interest accruing and settlement of litigation associated with our Convertible Notes contributed to our liquidity needs for the period ended September 30, 2013 and is expected to continue to do so in the future.  

 

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Also as of September 30, 2013 we have raised approximately $0.9 million for the issuance of Series B Preferred Stock and approximately $0.7 million from the issuance of convertible notes payable.

 

As of September 30, 2013, we owed approximately $0.9 million as a result of borrowings from related parties.  We have sometimes relied on borrowings from related parties as a means of financing our operations, but only when other capital resources were not readily available.  We have no present plans to rely on further borrowings from related parties as a means of financing our operations.

 

During 2010 and 2012, we negotiated equipment vendor financing that, if continued in the future, we expect will reduce our short term need for capital from the sources described above as a percentage of our total capital needs.  However, no assurances can be given that we will continue to obtain equipment financing on the same terms as secured during 2010 and 2012.  Repayment of such equipment financing will increase our liquidity demands in the future.

 

The following table presents a summary of our sources and uses of cash for the nine-month period ended September 30, 2013 and 2012:

 

   Nine Months Ended September 30, 
   2013   2012 
Net cash provided by (used in) operating activities:  $(791,982)  $4,673,480 
Net cash used in investing activities  $(386,527)  $(7,128,461)
Net cash provided by financing activities  $2,046,974   $2,551,556 
Effect of currency rate exchange  1,192      
Increase in cash and cash equivalents  $869,657   $96,575 

 

Operating Activities

 

The cash used in operating activities for the nine months ended September 30, 2013 is a result of our net loss offset by an increase in accounts payable and accrued expenses and non-cash expenses for the settlement of debt and the change in fair value of the derivative liability.

 

Investing Activities

 

The cash used in investment activities for the nine months ended September 30, 2013 consisted of the cash paid in connection with the purchase of China Motion offset by cash proceeds from the sale of Velatel Peru.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2013 consisted of proceeds from the issuance of Series B Preferred Stock, issuance of notes payable and the issuance of convertible notes.

 

Off-Balance Sheet Arrangements

 

At September 30, 2013, we have no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).  The preparation of our unaudited Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our unaudited Consolidated Financial Statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

 

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These accounting policies are described at relevant sections in this discussion and analysis and in the Notes to the unaudited Consolidated Financial Statements included in this Report for the periods ended September 30, 2013 and 2012.

 

Revenue Recognition

 

We recognize revenue from product sales and services in accordance with ASC subtopic 605-10, Revenue Recognition requiring four basic criteria to be met before revenue can be recognized:

 

(i) Persuasive evidence of an arrangement exists;

 

(ii) Delivery has occurred or services have been rendered;

 

(iii) The selling price is fixed and determinable; and

 

(iv) Collectability is reasonably assured.  Determination of criteria (iii) and (iv) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.

 

Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and the customer jointly determine that the product has been delivered or no refund will be required. ASC 605-10 incorporates ASC subtopic 605-25, “Multiple-Element Arraignments.” ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing ASC 605-25 on our financial position and results of operations was not significant.

 

Cash and Cash Equivalents

 

For purposes of our unaudited Consolidated Statement of Cash Flows, we consider all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.

 

Fair Values

 

ASC subtopic 825-10, Financial Instruments requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, as well as short-term borrowings, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the unaudited Consolidated Financial Statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable, the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise, only available information pertinent to fair value has been disclosed.

 

Accounting For Bad Debt and Allowances

 

Bad debts and allowances are provided based on historical experience and management's evaluation of outstanding accounts receivable. Management evaluates past due or delinquency of accounts receivable based on the open invoices aged on a due date basis.

 

Inventories

 

The inventory consists of finished goods ready for resale purposes.  The Company purchases the merchandise on delivered duty paid basis.  Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out method.

 

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Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses.  Depreciation is computed over the estimated useful lives of the respective assets.

 

The estimated useful lives of property, plant and equipment are as follows:

 

Machinery and equipment 10 years
Vehicles 4 years
Furniture and fixtures 10 years
Leasehold improvements  *  
Constructed assets (towers) 10 years
Computers 5 years

 

* Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease.

 

We evaluate the carrying value of items of property, plant and equipment to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  The carrying value of an item of property, plant and equipment is considered impaired when the projected undiscounted future cash flows related to the asset are less than its carrying value.  We measure impairment based on the amount by which the carrying value of the respective asset exceeds its fair value.  Fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved.

 

Long-Lived Assets

 

We have adopted ASC subtopic 360-10, Property, Plant and Equipment. ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets would be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

Intangible Assets and Goodwill

 

We account for acquisitions in accordance with the provisions of ASC 805-10. We assign to all identifiable assets acquired (including intangible assets), and to all identifiable liabilities assumed, a portion of the cost of the acquired company equal to the estimated fair value of such assets and liabilities at the date of acquisition. We record the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed, if any, as goodwill.

 

We amortize our identifiable intangible assets over their estimated period of benefit. The estimated useful life of developed software is ten years.  We periodically evaluate the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or indicate that impairment exists.

 

We account for and report acquired goodwill and other intangible assets under ASC subtopic 305-10, Intangibles, Goodwill and Other. In accordance with ASC 305-10, test our intangible assets for impairment on an annual basis and when there is reason to suspect that their values have been diminished or impaired.  Any write-downs are included in our results from operations.

 

Functional Currency

 

Transactions of VelaTel Peru are in US Dollars; accordingly, this subsidiary’s functional currency is the US Dollar. The accounts of Zapna are maintained in Danish Kroner, the accounts of Novi-Net are maintained in Croatian Kuna, the accounts of Herlong and Montenegro Connect are maintained in the Euro, and the accounts of China Motion are maintained in Hong Kong Dollars. The accounts of these foreign subsidiaries are translated into US Dollars in accordance with ASC Topic 830 “Foreign Currency Matters.” In accordance with ASC Topic 830: (i) all assets and liabilities are translated at the exchange rate on the balance sheet dates; (ii) stockholders’ equity is translated at historical rates; and (iii) statement of operation items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income.

 

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Foreign Currency Transactions and Comprehensive Income

 

GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Translation gains are classified as an item of accumulated other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.

 

Advertising Costs

 

Advertising costs, which are included in selling, administrative and general, are expensed as incurred.  Advertising costs for the nine months ended September 30, 2013 and 2012 were not significant.

 

Net Loss Per Share

 

We have adopted ASC subtopic 260-10, Earnings Per Share.  This requires the computation, presentation and disclosure requirements of earnings per Share information.  Basic earnings per Share have been calculated based upon the weighted average number of Shares outstanding.  Stock options and warrants have been excluded as common stock equivalents in the diluted earnings per Share, because they are anti-dilutive.

 

Concentrations of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit.

 

Stock Based Compensation

 

We have adopted ASC subtopic 718-10, Compensation.  ASC 718-10 requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to an employee stock purchase plan based on the estimated fair values.

 

Research and Development

 

We account for research and development costs in accordance with the ASC subtopic 730-10, Research and Development. Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred.  Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved.  Company sponsored research and development costs related to both present and future products and services are expensed in the period incurred.

 

Reclassifications

 

Certain reclassifications have been made to prior periods’ data to conform to the presentation set forth in this registration statement.  These reclassifications had no effect on reported income or losses.

 

Going Concern Disclosure

 

The accompanying unaudited Consolidated Financial Statements included in this Report have been prepared in conformity with GAAP, and contemplates our continuance as a going concern. Our independent registered accounting firm, in its report dated May 17, 2013, has expressed substantial doubt about our ability to continue as a going concern. Our viability is dependent upon our ability to obtain future financing and the success of our future operations. We have incurred a net loss of $15.3 million for the period ended September 30, 2013, a cumulative net loss of $322.6 million since inception, a negative working capital of $46.8 million and a stockholders' deficiency of $49.1 million.

 

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In addition, we require substantial additional capital to finance our planned business operations and expect to incur operating losses in future periods due to the expense of deploying and/or the continued deployment of our projects.

 

We have not realized material revenue since inception, and we are not without doubt that we will be successful in generating revenues in the future.  If we are not able to raise substantial additional capital in a timely manner, we may lose our rights to participate in the operation of the networks and businesses identified above and may be forced to cease operations. Our continued existence is dependent upon management's ability to develop profitable operations and resolve our liquidity problems. The accompanying unaudited Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

 

To attain profitable operations, management continues focus its efforts on the deployment and operation of our wireless broadband networks.  As stated in the beginning of this Item 2, we have nine projects, six of which are deploying wireless broadband networks and three of which offer services or products related to the wireless broadband networks we are deploying. The nine projects span Hong Kong, China, Croatia, Montenegro, Peru and Denmark. We will continue to be dependent on outside capital to fund our projects and selling, general and administrative expenses for the foreseeable future. Any financing obtained may further dilute or otherwise impair the ownership interest of the current stockholders. If we fail to generate positive cash flows or fail to obtain additional capital when required, we could modify, delay or abandon some or all of our projects.

 

Recent Accounting Pronouncements

 

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 Comprehensive Income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations, or its financial condition.

 

The FASB has issued ASU No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.

 

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforward in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s financial position and results of operations.

 

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

The Company is a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and is not required to provide the information called for by this Item.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act) that are designed to insure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods required under the Rules and Forms of the United States Securities and Exchange Commission (“SEC”) and that the information is gathered and communicated to our senior management team, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Report.  They concluded that our disclosure controls and procedures were not effective with respect to financial reporting of complex transactions as of September 30, 2012.

 

Our Chief Financial Officer, and others in the Company, as appropriate, will be undertaking efforts to insure that the Company’s controls and procedures meet all legal requirements. It is anticipated that such efforts will be concluded by the time our Form 10-K for the period ended December 31, 2013 is filed with the SEC.

 

Changes in Internal Control over Financial Reporting

 

During the fiscal quarter ended September 30, 2013, there were no changes in our internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

There have been no material developments in any of the pending litigation against the Company since we filed our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 1A.  Risk Factors.

 

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect the Company’s business, financial position and results of operations. There are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the period ended December 31, 2012.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

With the exception of the following sales of unregistered equity securities, all information required by Item 701 of Regulation S-K has been previously included in a Current Report on Form 8-K:

 

On July 1, 2013, the Company issued 5,787,037 Shares to Redwood Management, LLC (“Redwood”) in partial payment of a promissory note in the amount of $500,000 in favor of Isaac Organization, Inc. (“Isaac”) and assigned by Isaac to America Orient, LLC (“AO”) and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and payment of accrued interest of $0. The Company also issued 5,787,263 warrants to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00432 and an exercise term of three years.

 

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On July 2, 2013, the Company issued 5,000,000 Shares to Asher Enterprises, Inc. (“Asher”) in partial payment of a promissory note in the amount of $103,500 in favor of Asher. This sale of Shares resulted in a principal reduction of $30,000 in notes payable of the Company and payment of accrued interest of $0.

 

On July 2, 2013, the Company issued 20,000,000 Shares to Ironridge Global as partial fulfillment of the court approved settlement of the lawsuit brought by Ironridge Global as assignee of certain trade creditors.

 

On July 8, 2013, the Company issued 5,787,037 Shares to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 5,787,037 warrants to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00432 and an exercise term of three years.

 

On July 8, 2013, the Company issued 11,500,000 Shares to AO in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO. The Company also issued 11,500,000 warrants to James Shaw (“Shaw”) at the direction of AO. Each warrant has an exercise price of $0.006 and an exercise term of three years.

 

On July 9, 2013, the Company issued 4,918,033 Shares to Asher in partial payment of a promissory note in the amount of $103,500 in favor of Asher. This sale of Shares resulted in a principal reduction of $13,500 in notes payable of the Company and penalties and accrued interest of $16,500.

 

On July 10, 2013, the Company issued 3,071,253 Shares to Continental Equities, LLC (“Continental”) in partial payment of a promissory note in the amount of $50,000 in favor of Continental. This sale of Shares resulted in a principal reduction of $15,000 in notes payable of the Company and accrued interest of $0.

 

On July 12, 2013, the Company issued 6,565,000 Shares to Asher in partial payment of a promissory note in the amount of $103,500 in favor of Asher. This sale of Shares resulted in a principal reduction of $0 in notes payable of the Company and penalties and accrued interest of $39,390.

 

On July 12, 2013, the Company issued 5,787,037 Shares to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 5,787,037 warrants to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00432 and an exercise term of three years.

 

On July 15, 2013, the Company issued 4,000,000 Shares to AO in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO. This sale of Shares resulted in a principal reduction of $23,200 in notes payable of the Company and accrued interest of $0. The Company also issued 4,000,000 warrants to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0058 and an exercise term of three years.

 

On July 19, 2013, the Company issued 2,777,777 Shares to Continental in partial payment of a promissory note in the amount of $50,000 in favor of Continental. This sale of Shares resulted in a principal reduction of $10,000 in notes payable of the Company and accrued interest of $0.

 

On July 19, 2013, the Company issued 13,500,000 Shares to Isaac in partial payment of two promissory notes in the amount of $500,000 each in favor of Isaac. This sale of Shares resulted in a principal reduction of $74,250 in notes payable of the Company and accrued interest of $0. The Company also issued 13,500,000 warrants to Isaac in connection with this Share issuance. Each warrant has an exercise price of $0.0055 and an exercise term of three years.

 

On July 23, 2013, the Company issued 6,944,444 Shares to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 6,944,444 warrants to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0036 and an exercise term of three years.

 

On July 29, 2013, the Company issued 5,319,149 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $75,000 in favor of WHC. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0.

 

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On July 30, 2013, the Company issued 6,944,444 Shares to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 6,944,444 warrants to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0036 and an exercise term of three years.

 

On August 6, 2013, the Company issued 2,000,000 Shares to Continental in partial payment of a promissory note in the amount of $50,000 in favor of Continental. This sale of Shares resulted in a principal reduction of $6,880 in notes payable of the Company and accrued interest of $0.

 

On August 7, 2013, the Company issued 6,944,444 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 6,944,444 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0036 and an exercise term of three years.

 

On August 20, 2013, the Company issued 6,799,996 Shares to Continental in partial payment of a promissory note in the amount of $50,000 in favor of Continental. This sale of Shares resulted in a principal reduction of $18,120 in notes payable of the Company and accrued interest of $2,280.

 

On August 20, 2013, the Company issued 6,756,757 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $75,000 in favor of WHC. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0.

 

On August 20, 2013, the Company issued 33,000,000 Shares to Ironridge Global as partial fulfillment of the court approved settlement of the lawsuit brought by Ironridge Global as assignee of certain trade creditors.

 

On August 21, 2013, the Company issued 13,157,894 Shares to Asher in partial payment of a promissory note in the amount of $78,500 in favor of Asher. This sale of Shares resulted in a principal reduction of $50,000 in notes payable of the Company and accrued interest of $0.

 

On August 21, 2013, the Company issued 10,416,666 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 10,416,666 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0024 and an exercise term of three years.

 

On August 26, 2013, the Company issued 11,538,462 Shares to Asher in partial payment of a promissory note in the amount of $78,500 in favor of Asher. This sale of Shares resulted in a principal reduction of $28,500 in notes payable of the Company and penalties and accrued interest of $21,500.

 

On August 26, 2013, the Company issued 23,900,000 Shares to Isaac in partial payment of a promissory note in the amount of $500,000 in favor of Isaac. This sale of Shares resulted in a principal reduction of $95,600 in notes payable of the Company and accrued interest of $0. The Company also issued 23,900,000 warrants to Isaac in connection with this Share issuance. Each warrant has an exercise price of $0.004 and an exercise term of three years.

 

On August 27, 2013, the Company issued 8,928,571 Shares to Continental in partial payment of a promissory note in the amount of $50,000 in favor of Continental. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0.

 

On August 29, 2013, the Company issued 10,416,666 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 10,416,666 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0024 and an exercise term of three years.

 

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On August 30, 2013, the Company issued 7,397,143 Shares to Asher in partial payment of a promissory note in the amount of $78,500 in favor of Asher. This sale of Shares resulted in a principal reduction of $0 in notes payable of the Company and penalties and accrued interest of $25,890.

 

On September 4, 2013, the Company issued 6,326,815 Shares to Continental in partial payment of a promissory note in the amount of $50,000 in favor of Continental. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $2,506.

 

On September 9, 2013, the Company issued 10,162,201 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 10,162,201 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00246 and an exercise term of three years.

 

On September 13, 2013, the Company issued 13,020,833 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 13,020,833 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00192 and an exercise term of three years.

 

On September 23, 2013, the Company issued 14,880,952 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 14,880,952 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00168 and an exercise term of three years.

 

On September 24, 2013, the Company issued 55,000,000 Shares to Ironridge Global as partial fulfillment of the court approved settlement of the lawsuit brought by Ironridge Global as assignee of certain trade creditors.

 

On September 25, 2013, the Company issued 10,000,000 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $75,000 in favor of WHC. This sale of Shares resulted in a principal reduction of $17,000 in notes payable of the Company and accrued interest of $0.

 

On September 26, 2013, the Company issued 16,025,641 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 16,025,641 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00156 and an exercise term of three years.

 

On October 2, 2013, the Company issued 7,157,532 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $75,000 in favor of WHC. This sale of Shares resulted in a principal reduction of $8,000 in notes payable of the Company and accrued interest of $3,452.

 

On October 2, 2013, the Company issued 25,000,000 Shares to Isaac in partial payment of a promissory note in the amount of $500,000 in favor of Isaac. This sale of Shares resulted in a principal reduction of $40,000 in notes payable of the Company and accrued interest of $0. The Company also issued 25,000,000 warrants to Isaac in connection with this Share issuance. Each warrant has an exercise price of $0.016 and an exercise term of three years.

 

On October 3, 2013, the Company issued 20,077,144 Shares to Bursztyn Family Trust in payment of compensation owed to Leon Eric Bursztyn pursuant to an independent contractor agreement. This sale of Shares resulted in reduction of $46,379 of accounts payable of the Company.

 

On October 7, 2013, the Company issued 759,017 shares to WHC in partial payment of a promissory note in the amount of $150,000 in favor of WHC. This sale of Shares resulted in a principal reduction of $0 in notes payable of the Company and accrued interest of $1,366. The Company also issued 759,017 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0018 and an exercise term of three years.

 

47
 

On October 14, 2013, the Company issued 16,666,666 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 16,666,666 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0015 and an exercise term of three years.

 

On October 15, 2013, the Company issued 17,857,143 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and partially assigned by Isaac to WHC. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0.

 

On October 18, 2013, the Company issued 17,857,143 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 17,857,143 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0014 and an exercise term of three years.

 

On October 21, 2013, the Company issued 55,000,000 Shares to Ironridge Global as partial fulfillment of the court approved settlement of the lawsuit brought by Ironridge Global as assignee of certain trade creditors.

 

On October 21, 2013, the Company issued 38,000,000 Shares to Isaac in partial payment of a promissory note in the amount of $500,000 in favor of Isaac. This sale of Shares resulted in a principal reduction of $53,200 in notes payable of the Company and accrued interest of $0. The Company also issued 38,000,000 warrants to Isaac in connection with this Share issuance. Each warrant has an exercise price of $0.014 and an exercise term of three years.

 

On October 22, 2013, the Company issued 17,857,143 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and partially assigned by Isaac to WHC. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0.

 

On October 28, 2013, the Company issued 16,025,641 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 16,025,641 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.0016 and an exercise term of three years.

 

On October 31, 2013, the Company issued 45,000,000 Shares to Isaac in partial payment of a promissory note in the amount of $500,000 in favor of Isaac. This sale of Shares resulted in a principal reduction of $63,000 in notes payable of the Company and accrued interest of $0. The Company also issued 45,000,000 warrants to Isaac in connection with this Share issuance. Each warrant has an exercise price of $0.014 and an exercise term of three years.

 

On October 31, 2013, the Company issued 19,230,770 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and partially assigned by Isaac to WHC. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0.

 

On November 4, 2013, the Company issued 80,000,000 Shares to Ironridge Global as partial fulfillment of the court approved settlement of the lawsuit brought by Ironridge Global as assignee of certain trade creditors.

 

On November 5, 2013, the Company issued 19,841,269 to Redwood in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and assigned by Isaac to AO and partially assigned by AO to Redwood. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0. The Company also issued 19,841,269 to AO in connection with this Share issuance. Each warrant has an exercise price of $0.00176 and an exercise term of three years.

 

On November 13, 2013, the Company issued 25,000,000 Shares to WHC Capital, LLC in partial payment of a promissory note in the amount of $500,000 in favor of Isaac and partially assigned by Isaac to WHC. This sale of Shares resulted in a principal reduction of $25,000 in notes payable of the Company and accrued interest of $0.

 

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On November 14, 2013, the Company issued 55,000,000 Shares to Isaac in partial payment of a promissory note in the amount of $500,000 in favor of Isaac. This sale of Shares resulted in a principal reduction of $55,000 in notes payable of the Company and accrued interest of $0. The Company also issued 55,000,000 warrants to Isaac in connection with this Share issuance. Each warrant has an exercise price of $0.01 and an exercise term of three years.

 

The restricted Shares issued to the aforementioned entities and individuals relied upon exemptions provided for in Sections 4(2) and 4(5) of the Securities Act of 1933, as amended (“Securities Act”), including Regulation D promulgated thereunder, based on the knowledge possessed by those entities or individuals regarding the Company’s operations and financial condition and their experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these Shares. The Shares issued to Ironridge Global are exempt from registration under Section 3(a)(10) of the Securities Act.

 

Item 3.  Defaults on Senior Securities.

 

As of September 30, 2013, the Company is in default on payment of the principal and interest on approximately $468,641 of our Convertible Notes and Amended Convertible Notes.  We intend to cure the defaults and satisfy the convertible notes as soon as funds are available to the Company to do so.

 

Item 4.  Removed and Reserved.

 

Item 5.  Other Information.

 

(a) All information required to be disclosed on Form 8-K during the period ended September 30, 2013 has been so reported.

 

(b) The Company does not have procedures in place by which security holders may recommend nominees to the Company’s Board of Directors.

 

(c) Effective May 16, 2013, the Company reduced the size of its Board of Directors from four Directors to two Directors. The Company also eliminated the positions of Chief Operating Officer (the duties of which were transferred to our Chief Executive Officer) and Chief Administrative Officer (the duties of which continue to be performed by a Manager of Administration). The Company’s intent is to consolidate decision making authority in the Board of Directors and in those executive officers who are also directors (the Chief Executive Officer and the President). Other officers who have previously been considered executive officers have had their management responsibilities and decision making authority curtailed. These include: (i) Carlos Trujillo, who holds the title Chief Financial Officer; (ii) Kenneth L. Waggoner, who until his resignation effective November 13, 2013 held the titles of Secretary, Executive Vice-President, Legal and General Counsel; (iii) Kenneth Hobbs, who holds the titles of Secretary, Vice-President, Mergers & Acquisitions and General Counsel; and (iv) Isidoro Gutierrez, who formerly held the title of Chief Administrative Officer and now holds the title of Manager of Administration.

 

(d) Effective November 13, 2013, Kenneth L. Waggoner resigned as Secretary, General Counsel, and Executive Vice-President, Legal. Mr. Waggoner’s resignation was not the result of any disagreements with the Company on any matter relating to the Company’s operations or policies and practices. Kenneth Hobbs will assume the duties and responsibilities of the Company’s General Counsel and Secretary, in addition to his prior duties as Vice-President, Mergers & Acquisitions. The Company considers it unnecessary for its General Counsel to also hold the office of Vice-President, Legal, and has eliminated that position.

 

Item 6.  Exhibits.

 

The following is a list of documents either referred to in this current Report on Form 10-Q or in prior Reports for which the transaction reported remains material to the Company’s operations or as a contingency or commitment. The exhibit list includes a reference to the specific prior Report where the same document was attached as an Exhibit to that Report. Reference in this Exhibit List to “the Company” refers to either VelaTel Global Communications, Inc. or its prior name, China Tel Group, Inc.

 

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Exhibit No. Description of each Exhibit
   
  Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
2.1 Reorganization and Merger Agreement, dated May 21, 2008, among the Company, Chinacomm Acquisition, Inc., Trussnet USA, Inc., a Nevada corporation (“Trussnet Nevada”), and the stockholders of Trussnet Nevada [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]
  Articles of Incorporation and Bylaws
3.1 Articles of Incorporation [Incorporated by reference to the Company’s Registration Statement on Form SB-2 (No. 333-134883) filed on June 9, 2006]
3.2 Certificate of Amendment of Articles of Incorporation [Incorporated by reference to the Company’s Information Statement on Schedule 14-C filed on February 10, 2011]
3.3 Bylaws [Incorporated by reference to the Company’s Registration Statement on Form SB-2 (No. 333-134883) filed on June 9, 2006]
3.4 Amended Bylaws [Incorporated by reference to the Company’s Information Statement on Schedule 14-C filed on February 10, 2011]
3.5 Certificate of Amendment of Articles of Incorporation [Incorporated by reference to the Company’s Information Statement filed on Schedule 14-C filed on February 17, 2012
3.6 Certificate of Change amending Articles of Incorporation [Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 23, 2012]
3.7 Certificate of Amendment and Restatement of Articles of Incorporation [Incorporated by reference to the Company’s Information Statement on Schedule 14-C filed on August 20, 2013]
  Contracts for Professional Services, Employment and/or Strategic Relationships
10.1 Memorandum of Understanding of Global Strategic Cooperation, dated August 9, 2010, between the Company and ZTE Corporation (ZTE”) [Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 12, 2010]
10.2 Executive Employment Agreement, dated April 4, 2011 but retroactive to November 1, 2010, between the Company and Tay Yong Lee “Colin Tay” [Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 6, 2011]
10.3 Agreement for Professional Services, dated May 6, 2011, between the Company and ChangeWave, Inc. [Incorporated by reference to the Company’s Report on Form 10-Q filed on May 16, 2011].
  Contracts Related to ChinaComm Joint Venture
10.4 Framework Agreement, dated April 7, 2008, between the Company and CECT-Chinacomm Communications Co., Ltd. (“Chinacomm”) et al. [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]
10.5 Subscription and Shareholder’s Agreement relating to ChinaComm Limited (“Chinacomm Cayman”), dated May 23, 2008, between Gulfstream Capital Partners Ltd.(“Gulfstream Seychelles”) (as Investor), Thrive Century Limited, Newtop Holdings Limited (as Founders), Chinacomm Cayman (as Company), Qui Ping and Yuan Yi (as Guarantors) and Chinacomm and CECT Chinacomm Shanghai Co. Ltd. (as Warrantors)
10.6 Exclusive Technical Services Agreement, dated May 23, 2008, between Trussnet Gulfstream (Dalian) Co., Ltd. and Yunji Communications Technology (China) Co (“Yunji China”). [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]
10.7 Exclusive Technical and Management Consulting Services Agreement, dated May 23, 2008, between Yunji China and Chinacomm [Incorporated by reference to the Company’s Annual Report Form on 10-K filed on May 15, 2009]
10.8 Equipment Lease Agreement, dated May 23, 2008, between Trussnet Gulfstream (Dalian) Co., Ltd.(“TCP”) and Yunji China. [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]
10.9 Equipment Sublease Agreement, dated May 23, 2008, between Yunji China and Chinacomm [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]
10.10 Subscription and Shareholder’s Agreement relating to ChinaComm Limited (“Chinacomm Cayman”), dated February 16, 2009, between Trussnet Capital Partners, Ltd. (“TCP”) (as Investor), Thrive Century Limited, Newtop Holdings Limited (as Founders), Chinacomm Cayman (as Company), Qui Ping and Yuan Yi (as Guarantors), Chinacomm and CECT Chinacomm Shanghai Co. Ltd.(“Chinacomm Shanghai”) (as Warrantors) [Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 3, 2011]
10.11 Addendum to Subscription and Shareholders Agreement, dated February 16, 2009, between TCP and Chinacomm [Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 3, 2011]

 

50
 

 

Exhibit No. Description of each Exhibit

 

10.12 Asset Purchase Agreement, Promissory Note and Security Agreement, all dated March 9, 2009, between the Company and TCP [Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 10, 2009]
10.13 First Amendment to Promissory Note, dated March 5, 2010, between the Company and TCP [Incorporated by reference to the Company’s Current Report on Form 8-K/A filed on March 5, 2010]
  Second Amendment to Promissory Note, dated March 18, 2010.[Incorporated by reference to the Company’s Current Report on Form 8-K/A filed on March 18, 2010]
10.14 Third Amendment to Promissory Note, dated April 9, 2009, between the Company and TCP [Incorporated by reference to the Company’s Current Report on Form 8-K/A filed on April 13, 2010]
10.15 Fourth Amendment to Promissory Note, dated May 9, 2009, between the Company and TCP [Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 12, 2010]
10.16 Assignment and Subscription Agreement and Cancellation of Promissory Note, dated April 4, 2011, between the Company and TCP [Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 6, 2011]
  Contracts Related to Acquisition of Peru Subsidiary VelaTel Peru, S.A. (formerly Perusat, S.A.)
10.17 Stock Purchase Agreement, dated February 22, 2009, between Mario Octavio Navarro Alvarez and Rafael Isaias Samanez Zacarias, as sellers, and Gulfstream Seychelles, as buyer, regarding capital stock of Perusat, S.A. [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]
  Contracts Related to Golden Bridge Joint Venture  
10.18 Subscription and Shareholder Agreement for “New Co,” dated December 13, 2010, between the Company and Golden Bridge Network Communications Co., Ltd. (“GBNC”) [Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 15, 2010]  
10.19 Equipment Contract for Haixi Wireless Broadband Project (GBNC), dated March 14, 2011, among the Company, Gulfstream Seychelles and ZTE [Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 16, 2011]  
  Contracts Related to Sino Crossing Joint Venture  
10.20 Subscription and Shareholder Agreement for “JV,” dated November 11, 2010, between the Company, Shanghai Ying Yue Network Technology Ltd.(“YYNT”), and Azur Capital SDN BHD (“Azur”) [Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 16, 2010]  
10.21 Subscription and Shareholder Agreement for “New Co,” dated November 11, 2010, between the Company and Azur [Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 16, 2010]  
10.22 Addendum to Subscription and Shareholder Agreement between Azur and the Company, dated December 2, 2011. [Incorporated by reference to the Company’s Current Report on Form 8-K on December 9, 2011].  
  Contracts Related to VN Tech Joint Venture  
10.23 Subscription and Shareholder Agreement for “New Co,” dated April 1, 2011, between Shenzhen VN Technologies Co., Ltd (“VN Tech”) and the Company [Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 6, 2011]  
10.24 Amended and Restated Subscription and Shareholder Agreement for VN Tech between Gulfstream Seychelles, Luo Hongye and VN Tech. [Incorporated by reference to the Company’s Current Report on Form 8-K on April 24, 2012].  
  Contracts Related to Equity and Convertible Debt Instruments  
10.25 Convertible Note Purchase Agreement, dated February 12, 2008 [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]  
10.26 Amended and Restated Convertible Note Purchase Agreement, dated November 17, 2008 [Incorporated by reference to the Company’s Annual Report on Form 10-K filed on May 15, 2009]  
10.27 Stock Purchase Agreement, dated February 9, 2010, between the Company and Isaac Organization, Inc.(“Isaac”) [Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 9, 2010]  
10.28 First Amendment to Stock Purchase Agreement, dated March 5, 2010, between the Company and Isaac [Incorporated by reference to the Company’s Current Report on Form 8-K/A filed on March 5, 2010]  
10.29 Amended and Restated Stock Purchase Agreement, dated May 9, 2010, between the Company and Isaac [Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 12, 2010]  

 

51
 

 

Exhibit No. Description of each Exhibit

 

10.30 Line of Credit Loan Agreement and Promissory Note dated July 1, 2011 between the Company and Isaac [Incorporated by reference to the Company’s Report on Form 10-Q filed on August 15, 2011].
10.31 Agreement to Extend and Increase First Line of Credit Loan Agreement and Promissory Note, To Cancel Stock Purchase Agreement, and To Grant Option in VN Tech Agreement, between the Company and Isaac, dated February 23, 2012 [Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 29, 2012].
10.32 Second Line of Credit Loan Agreement and Promissory Note between the Company and Isaac, dated February 23. 2012 [Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 29, 2012].
10.33 Line of Credit Promissory Note between the Company and Weal Group, Inc., dated March 5, 2012. [Incorporated by reference to the Company’s Current Report on Form 8-K dated March 9, 2012].
  Contracts related to NGSN
10.34 Exclusive Consulting and Technical Service Agreement between New Generation Special Network Co. Ltd (“NGSN”)  and Gulfstream Seychelles, dated February 1, 2012.[Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 6, 2012].
10.35 Business Agreement with NGSN and the Company dated August 26, 2011. [Incorporated by reference on the Company’s Current Report on Form 8-K on October 25, 2011].
  Contracts related to Aerostrong
10.36 Business Agreement with Aerostrong Company Limited (“Aerostrong”) and the Company, dated November 11, 2011. [Incorporated by reference on the Company’s Current Report on Form 8-K on November 14, 2011].
10.37 Strategic Cooperation Agreement between Aerostrong and Beijing Yunji Communications Technical Service Co., Ltd., dated April 19, 2012. [Incorporated by reference on the Company’s Current Report on Form 8-K on April 20, 2012].
  Contracts related to Acquisition of Zapna, APS
10.38 Stock Purchase Agreement, dated April 3, 2012, between the Company., Gulfstream Seychelles and Zapna, ApS [Incorporated by reference to the Company’s Current Report on Form 8-K on April 5, 2012]
  Contracts related to Acquisition of Herlong Investments, Ltd. and its Subsidiaries, and Balkans Wireless Broadband Deployment
10.39 Business Cooperation Agreement between 7L Capital Partners Emerging Europe LP (7LCPEELP), Karlo Vlah, Durda Vlah, Josip Vlah, the Company, Novi-Net d.o.o and Montenegro Connect, d.o.o, dated December 6, 2011. [Incorporated by reference to the Company’s Current Report on Form 8-K December 9, 2011].
10.40 Equipment Contract and Purchase Order between Novi-Net and ZTE, dated May 10, 2012. [Incorporated by reference to the Company’s Current Report on Form 8-K December 14, 2012]
10.41 Equipment Contract and Purchase Order between Montenegro Connect and ZTE, dated May 10, 2012. [Incorporated by reference to the Company’s Current Report on Form 8-K December 14, 2012]
10.42 Software Contract and Purchase Order between Herlong Investments, Ltd. and ZTE, dated May 10, 2012. [Incorporated by reference to the Company’s Current Report on Form 8-K December 14, 2012]
  Contracts Related to Sale of Stock and Assets of VelaTel Peru, S.A.
10.43 Share Purchase Agreement between Gulfstream Seychelles, Mario Navarro, and Rafael Samanez, as Sellers, First Global Projects Management, Inc., as Purchaser, and the Company, as Guarantor, for the Shares of VelaTel Peru S.A. and Go Movil Resources, S.A.C., dated August 16, 2013. [Incorporated by reference to the Company’s Current Report on Form 10-Q on August 19, 2013]
10.44 Loan Agreement between the Company and AQT, LLC, dated August 16, 2013. [Incorporated by reference to the Company’s Current Report on Form 10-Q on August 19, 2013]
10.44 Asset Purchase Agreement between VelaTel Peru, as Seller, and Inversiones Balesia, S.A.C., as Purchaser, for 30 Cellular Towers, dated August 16, 2013. [Incorporated by reference to the Company’s Current Report on Form 10-Q on August 19, 2013]
10.45 Mutual Warranty Agreement between VelaTel Peru and Inversiones Balesia, dated August 16, 2013. [Incorporated by reference to the Company’s Current Report on Form 10-Q on August 19, 2013]
  Contracts related to Acquisition of China Motion Telecom (HK) Limited, the Upgrade of its Core Telephony Network, and Roaming Agreement with Option to Purchase 25% of Shares
10.46 Stock Purchase Agreement for China Motion (“China Motion SPA”) between China Motion Telecom International, China Motion Holdings, China Motion InfoServices (collectively “Seller”) and Gulfstream Seychelles, dated November 27, 2012. [Incorporated by reference to the Company’s Report on Form 8-K on November 27, 2012]

 

52
 

 

Exhibit No. Description of each Exhibit

 

10.47 Corporate Guaranty by the Company of the obligations of Gulfstream Seychelles under China Motion SPA, dated November 27, 2012. [Incorporated by reference to the Company’s Report on Form 8-K on November 27, 2012]
10.48 First Amendment to China Motion SPA, dated February 4, 2013. [Incorporated by reference to the Company’s Report on Form 8-K on February 4, 2013]
10.49 Second Amendment to China Motion SPA, dated March 3, 2013. [Incorporated by reference to the Company’s Report on Form 8-K on March 8, 2013]
10.50 Promissory Note of Gulfstream Seychelles to Sellers under China Motion SPA, dated March 3, 2013. [Incorporated by reference to the Company’s Report on Form 8-K on March 8, 2013]
10.51 Stock Pledge Deed and Stock Escrow Agreement for China Motion Stock, dated March 3, 2013. [Incorporated by reference to the Company’s Report on Form 8-K on March 8, 2013]
10.52 Notice of Arbitration of the Company and Gulfstream Seychelles against China Motion Sellers, dated July 20, 2013. [Incorporated by reference to the Company’s Current Report on Form 10-Q on August 19, 2013]
10.53 Deed of Settlement between the Company, Gulfstream Seychelles, and China Motion Sellers, dated October 28, 2013. [Exhibit attached to this Current Report on Form 10-Q]
10.54 Loan Agreement between the Gulfstream Seychelles, as Borrower, the Company, as Guarantor, and Xin Hua, as Lender for payment of amounts due China Motion Sellers, dated October 28, 2013. [Exhibit attached to this Current Report on Form 10-Q]
10.55 Share Charge between Gulfstream Seychelles and Xin Hua for pledge of China Motion shares as collateral for Xin Hua Loan Agreement, dated October 28, 2013. [Exhibit attached to this Current Report on Form 10-Q]
10.56 Option Deed between Gulfstream Seychelles and Xin Hua for enforcement of security in the event of default under Xin Hua Loan Agreement, dated October 28, 2013. [Exhibit attached to this Current Report on Form 10-Q]
10.57 Turnkey Upgrade Equipment between the Company, China Motion Telecom (HK), Ltd., and New Host International Co., Ltd. (“New Host”), dated November 11, 2013. [Exhibit attached to this Current Report on Form 10-Q]
10.58 Sales Contract between China Motion, New Host, and ZTE, dated November 18, 2013. [Exhibit attached to this Current Report on Form 10-Q]
10.59 Sales Contract between China Motion, New Host, and Niceuc Communication Co., Ltd., dated November 18, 2013. [Exhibit attached to this Current Report on Form 10-Q]
  Contracts related to Sale of Stock of Zapna
10.60 Stock Purchase Agreement between Gulfstream Seychelles and Aerial Investments, LLC, dated September 30, 2013. [Exhibit attached to this Current Report on Form 10-Q]
  Certifications filed with this Report on Form 10-Q for the Period Ended September 30, 2012
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Temporary Hardship Exemption
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema*
101.CAL XBRL Taxonomy Extension Calculation Linkbase*
101.DEF XBRL Taxonomy Extension Definition Linkbase*
101.LAB XBRL Taxonomy Extension Label Linkbase*
101.PRE XBRL Taxonomy Extension Presentation Linkbase*

__________

* To be furnished by amendment per Temporary Hardship Exemption under Regulation S-T.

 

53
 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Dated: November 19, 2013  VELATEL GLOBAL COMMUINICATIONS, INC.  
       
  By: /s/ George Alvarez  
   

George Alvarez

Chief Executive Officer

 
       
  By: /s/ Carlos Trujillo  
   

Carlos Trujillo

Chief Financial Officer

 

 

 

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