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EX-32.1 - World Surveillance Group Inc.v179812_ex32-1.htm
EX-31.1 - World Surveillance Group Inc.v179812_ex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
OR

o 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: 0-23532

SANSWIRE CORP.
(Exact name of Registrant as specified in its charter)

Delaware
 
88-0292161
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
 
17501 Biscayne Blvd, Suite 430, Aventura, Florida 33160
(Address of Principal Executive Offices) (Zip Code)

Issuer’s telephone number: (786) 288-0717

Securities registered under Section 12 (b) of the Exchange Act:

Title of each class
Name of exchange on which registered

Securities registered pursuant to Section 12 (g) of the Exchange Act: Common Stock Par Value $.00001 per share
 
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  Yes £     No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £     No R

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 R No £     

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K .  £



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.   (Check one):

Large accelerated filer £               Accelerated filer £             Non-accelerated filer £   Smaller Reporting Company R

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

State issuer’s revenues for its most recent fiscal year ended December 31, 2009: $0.
 
As of March 30, 2010, there were 267,040,586 shares of the issuer's common stock issued and outstanding. Affiliates of the issuer own 7,435,586 shares of the issuer's issued and outstanding common stock and the remaining 259,605,000 shares are held by non-affiliates. The aggregate market value of the shares held by non-affiliates at March 30, 2010 was $12,461,040.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
There are documents incorporated by reference in this Annual Report on Form 10-K, which are identified in Part III, Item 13.

(*) Affiliates for the purposes of this Annual Report refer to the officers, directors of the issuer and subsidiaries and/or persons or firms owning 10% or more of issuer’s common stock, both of record and beneficially.
 
2

 
TABLE OF CONTENTS

PART I
     
Item 1. Business
 
5
 
Item 1A. Risk Factors
 
9
 
Item 1B. Unresolved Staff Comments
 
12
 
Item 2. Properties
 
12
 
Item 3. Legal Proceedings
 
12
 
Item 4. Submission of Matter to a Vote of Security Holders
 
14
 
       
PART II
 
       
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
15
 
Item 6. Selected Financial Data
 
18
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
19
 
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
 
23
 
Item 8. Financial Statements and Supporting Data
 
24
 
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
51
 
Item 9a. Controls and Procedures
 
51
 
Item 9b. Other Information
 
53
 
       
PART III
 
       
Item 10. Directors and Executive Officers and Control Persons
 
54
 
Item 11. Executive Compensation
 
55
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
56
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
56
 
Item 14. Principal Accountant Fees and Services
 
57
 
Item 15. Exhibits, Financial Statements Schedules
 
58
 

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Forward-Looking Statements and Risk Factors

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

Those statements include statements regarding our intent, belief or current expectations, and those of our officers and directors and the officers and directors of our subsidiaries as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results and the timing of certain events may differ materially from those contemplated by such forward-looking statements.

We are filing the following summary to identify important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or on our behalf. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying forward-looking statements are reasonable, any of the assumptions could be incorrect, and there can be no assurance that forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made. We do not undertake any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events, or circumstances arising after the date that the forward-looking statement was made.

The following risk factors may affect our operating results and the environment within which we conduct our business. If our projections and estimates regarding these factors differ materially from what actually occurs, our actual results could vary significantly from any results expressed or implied by forward-looking statements. These risk factors include, but are not limited to, changes in general economic, demographic, geopolitical or public safety conditions which affect consumer behavior and spending, including the armed conflict in Iraq or other potential countries; various factors which increase the cost to develop airships, including factors under the influence and control of government agencies and others; fluctuations in the availability and/or cost of helium, carbon fiber or other resources necessary to successfully assemble our airships; our Company’s ability to raise prices sufficiently to offset cost increases, including increased costs for resources; the feasibility and commercial viability of our Stratellite project; related contemplated funding from third parties to finance the project, and necessary cooperation with various military and non-military agencies of the United States government, and similar agencies of foreign governments; depth of management and technical expertise and source of intellectual and technological resources; adverse publicity about us and our airships; relations between our Company and its employees and partners; legal claims and litigation against the Company; including the recently commenced SEC lawsuit; the availability, amount, type, and cost of capital for the Company and the deployment of such capital, including the amounts of planned capital expenditures; changes in, or any failure to comply with, governmental regulations; the amount of, and any changes to, tax rates and the success of various initiatives to minimize taxes; and other risks and uncertainties referenced in this Annual Report on Form 10-K. This statement, and any other statements that are not historical facts, are forward-looking statements.

This annual report also contains certain estimates and plans related to the airship industry. The estimates and plans assume that certain events, trends and activities will occur, of which there can be no assurance. In particular, we do not know what level of growth will exist, if any, in the market for lighter than air unmanned aerial vehicles. Our growth will be dependent upon our ability to compete with larger, well-established companies. If our assumptions are wrong about any events, trends and activities, then our estimates for the future growth of Sanswire and our consolidated business operations may also be wrong. There can be no assurance that any of our estimates as to our business growth will be achieved.
 
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General

Sanswire Corp. (“Sanswire,” “Globetel”, “we”, “us”, “our”, or the “Company”) is focused on the design, construction and marketing of various aerial vehicles most of which would be capable of carrying payloads that provide persistent surveillance and security solutions at various altitudes. The airships and auxiliary products are intended for end users that include military, defense and government-related entities.

From 2002 to 2007, the Company was involved in the following business sectors: stored value card services; wholesale telecommunications services; voice over IP; wireless broadband; and high altitude airships. These businesses were run through various subsidiaries. The Company discontinued operations in all but the high altitude airship sector.

In 2007, we began focusing exclusively on opportunities through our wholly-owned subsidiary at the time, Sanswire Networks. The opportunities associated with Sanswire Networks were related to the Lighter Than Air (LTA) Unmanned Aerial Vehicle (UAV) market, and we, through the subsidiary, sought to build and run a UAV business that includes low-, mid- and high-altitude, lighter-than-air vehicles intended to provide customers advanced seamless wireless broadband capabilities and surveillance sensor suites. 

On September 22, 2008, we effected a name change to Sanswire Corp. in recognition of the entity that contained our sole business focus (See “Recent Developments”). Thus, moving forward, the Company is Sanswire Corp., whose primary business is the design, construction and marketing of a variety of aerial vehicles through a joint venture with TAO Technologies, Stuttgart, Germany, named Sanswire-TAO Corp.

The High Altitude class of prospective airships are generally referred to as HAAs (High Altitude Airships) but have also been called HAPs and HALEs (High Altitude Platforms, High Altitude Long Endurance). They have been designed to be able to keep a station in one location in the Stratosphere, at approximately 65,000 ft for durations of 30 days or more.

Reverse Stock Split

Sanswire is authorized to issue up to 250,000,000 shares of Common Stock, par value $0.00001 per share, (subsequent to a 15-for-1 reverse stock split on May 23, 2005 and subsequent to an increase in the authorized shares from 150,000,000 to 250,000,000 at the shareholder meeting on June 21, 2006) and 10,000,000 shares of Preferred Stock, par value $0.001. The post split share calculation will be used throughout this report, unless noted. On May 3, 2009, the Board of Directors approved the creation of a Series E Preferred Stock. The Company is authorized to issue 10,000,000 shares of preferred stock. 860,000 shares of Preferred Stock has been allocated into different series of issuance and the remaining 9,140,000 shares is a so-called “blank check” preferred, meaning that its terms such as dividends, liquidation and other preferences, are to be fixed by our Board of Directors at the time of issuance. On November 2, 2009, holders of a majority of voting shares of the Company, Sanswire Corp., acted by written consent in lieu of a special meeting of shareholders to an adopt amendment to the articles of incorporation to increase the number of shares of common stock which the Company is authorized to issue from 250,000,000 shares to 500,000,000 shares.

Recent Developments

On October 5, 2007, Sanswire received a “Wells Notice” from the Securities and Exchange Commission (the “SEC”) in connection with the SEC’s ongoing investigation of the Company. The Wells Notice provides notification that the staff of the SEC intends to recommend to the Commission that it bring a civil action against the Company for possible violations of the securities laws including violations of Sections 5 and 17(a) of the Securities Act of 1933; Sections 10(b), 13(a), and 13(b)(2)(A) & (B) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and seeking as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest.  The staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of the Company’s securities pursuant to Section 12(j) of the Exchange Act.
 
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On November 26, 2007 the SEC announced that it had filed a civil lawsuit against two former employees of Sanswire alleging that Joseph J. Monterosso, former Chief Operating Officer of Sanswire and former president of the Company’s Centerline Communications Subsidiary, and Luis Vargas, an employee of Centerline, engaged in a scheme to create $119 million in revenue that was subsequently reported in the Company’s financial statements as filed with the Commission. Securities and Exchange Commission v. Joseph J. Monterosso and Luis E. Vargas , Civil Action No. 07-61693 (S.D. Fla., filed on November 21, 2007).

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

The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Commission subsequently consolidated this action with another pending action involving former officers of the Company. The Commission has also moved to amend its complaint against the Company to include additional allegations of wrongdoing beginning in 2002, but which does not add any new defendants. The Company has been vigorously defending itself in this action.

Background

We were previously a wholly-owned subsidiary of American Diversified Group, Inc. (“ADGI”). During the period ended July 24, 2002, ADGI’s business activities included (i) sale of telecommunication services primarily involving Internet telephony using VoIP through its Global Transmedia Communications Corporation subsidiary, and (ii) wide area network and local area network services provided through its NCI Telecom, Inc. subsidiary.

When ADGI exchanged all of its outstanding shares of common stock for Sanswire common stock, ADGI became a wholly-owned subsidiary of Sanswire and Sanswire began conducting the business formerly conducted by ADGI. 

In 2004, we formed wholly-owned subsidiaries: Sanswire Networks, LLC (“Sanswire-FL”) for our Stratellite project; and Centerline Communications, LLC, (“Centerline” or “CLC”) and its wholly-owned subsidiaries, EQ8, LLC, G Link Solutions, LLC, Volta Communications, LLC, and Lonestar Communications, LLC for the purpose of the recording and managing the sale of wholesale minutes and related network management functions. We have since closed Centerline and its subsidiaries.

In 2004, we acquired a 73.15% interest in Consolidated Global Investments, Ltd. (“CGI”), formerly known as Advantage Telecommunications, Ltd. (“ATC”), an Australian company. CGI was to be utilized in the carrier sales sector of our business and was later to be a licensee of the Sanswire Networks, LLC in Australia. However, we have since sold our shares in CGI back to the Company and no longer have any interest in CGI. Certain shares of Sanswire acquired by CGI were sold by CGI. The Securities and Exchange Commission has questioned the validity of the exemption used for the sale of such shares as more fully discussed below in Item 3 “Legal Proceedings.”

In 2008, we incorporated Sanswire Corp., a Florida corporation and wholly-owned subsidiary, to deal directly with airship opportunities based upon our agreement with TAO Technologies, GmbH. We also incorporated Sanswire-TAO Corp., a Florida corporation that is a 50/50 joint venture with TAO Technologies. The agreements with TAO are discussed below.
 
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On September 22, 2008 we filed a Certificate of Merger with the Secretary of State of the State of Delaware pursuant to which our wholly owned subsidiary, Sanswire Corp., a Delaware corporation, was merged into us. As a result of the filing of the Certificate of Merger, our corporate name was changed from GlobeTel Communications Corp. to Sanswire Corp.
 
Business of Sanswire
 
Sanswire Corp. has sharply refined its operating model ─ focusing exclusively on opportunities in Lighter Than Air (LTA) Unmanned Aerial Vehicles (UAV). We seek to build and run a UAV business that includes low-, mid- and high-altitude, lighter-than-air vehicles; adding value to their security, surveillance and broadcasting abilities through the integration of wireless technologies with a wide array of customer payloads. Our long-term objective is to provide commercial and government customers advanced seamless wireless broadband capabilities and surveillance sensor suites utilizing a state of the art High Altitude Airship technology.  Building upon this high altitude technology, our near term goal is to penetrate the military/government use market for low to mid altitude unmanned airships. The company is focused on the development and of the STS-111 Lighter than air (LTA) Mid Altitude Long Endurance (MALE) Unmanned Aerial Vehicle (UAV) platform for providing surveillance and reconnaissance capabilities.   

Our main products are airships, which provide a platform to transmit wireless capabilities from air to ground.

The High Altitude class of prospective airships are generally referred to as HAAs (High Altitude Airships) but have also been called HAPs and HALEs (High Altitude Platforms, High Altitude Long Endurance). They have been designed to be able to keep a station in one location in the Stratosphere, at approximately 65,000 ft for durations of 30 days or more.  65,000 ft is the sweet spot in the stratosphere for optimal wind conditions to keep station using the least amount of power.
 
STRATELLITE™ The brand name for our HAA offering is the Stratellite™, so named because they offer the functionality of a satellite, but in the stratosphere. This class of airship will consist of several models to suit various purposes. Stratellites™ were conceived to help solve infrastructure issues that plague many parts of the world, including the so called “last mile” (building expensive ground based infrastructure for very low density areas) issues.  The Stratellite™ can bring a full range of telecommunications or broadcasting capabilities to any area of the world, accessible to people with customer premise equipment that is inexpensive and available. We are not yet producing the Stratellite.
 
The Stratellite™ is a high altitude long endurance airship intended to populate “near space” with telecommunications capability.  A presence in near space with high tech sensors and communications suites offers enormous potential for both commercial and government applications.  Whether hovering at 65,000 feet or flying a variety of mission profiles, the Stratellite offers many of the features of satellites with cost savings, refurbishment ability, and opportunity for regular system upgrades.

There is a great need for information-transmission in the future performed by High Altitude Platforms in various fields;

 
·
mobile broadband communications
 
·
emergencies, use in disaster areas
 
·
marine radio service
 
·
new traffic engineering systems
 
·
weather observation
 
·
water surveillance (pollution)
 
·
ozone and smog monitoring
 
·
radiation monitoring (UV and radioactive)
 
·
astronomic and terrestrial observation
 
·
documentation of conditions in the upper atmosphere
 
·
border control, coastal surveillance
 
·
private communication services e.g. cellular phones
 
·
transmission of radio- and television programmers etc.
 
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SANSWIRE-TAO

Sanswire first entered into an agreement with TAO Technologies GmbH, Stuttgart, Germany, in 2005.  At that time, TAO provided engineering support to the efforts of former subsidiary Sanswire Networks, LLC then working out of facilities in California. In September 2007, the companies reached an agreement in principle to share sales and marketing rights of various aerial vehicles developed and currently owned by TAO. Additionally, upon closing of definitive agreements, TAO transferred to Sanswire-TAO the respective patents and intellectual property rights covering the products, including the AirChain segmented airship.

In November 2007, the Company entered into a Licensing and Technical Cooperation Agreement with TAO. TAO granted to Sanswire an exclusive license for the territories of the US, Canada, Mexico and Chile for the marketing and distribution of airships based upon the technologies patented and developed by TAO. TAO will also provide testing and engineering support for the development of airships to meet the criteria required by Sanswire customers. Sanswire was obligated to provide TAO with engineering orders of at least $1,000,000 per year and certain cash and stock payments on a quarterly basis.

On June 3, 2008, Sanswire and TAO restructured the November 2007 agreement and entered into a new agreement to form a 50/50 US based joint venture to place, among other things, the rights to the TAO intellectual property in US, Canada, and Mexico into the US based JV company to be called Sanswire-TAO.  This integration of Sanswire and Stuttgart, Germany-based TAO Technologies Gmbh took place to create various strategic advantages for both companies. Each group entered the relationship with synergistic, yet very distinct core competencies. Sanswire’s business development, its inroads into the U.S. Government review process as well as inroads into overseas markets and other marketing resources complement TAO’s vast airship product research and development ability.

On June 19, 2008, we announced that we had agreed to form and commence operations of Sanswire-TAO Corp., a Florida corporation equally owned by the Company and TAO, for the customized production, marketing and sales of unmanned aerial vehicles for the markets of the United States, Canada and Mexico.

The Sanswire-TAO research and development efforts are centered in Stuttgart, taking advantage of the relationship between TAO and the University of Stuttgart. This relationship provides cost-effective access to aerospace testing facilities including wind tunnels, environmental test chambers, structural testing devices, computer aided design and a legion of aerospace and physics professionals along with their more than 10 years of solar powered airship experience. The Sanswire-TAO joint venture is focused on developing and/or utilizing the following:

(1)
Multiple Airship Platforms – Ranging from short range low altitude platforms to Stratospheric solutions.
(2)
Access to Resources – Through contractual relationships with universities, including their hometown University of Stuttgart.
(3)
Research and Development – More than a decade of knowledge and experience resulting from significant data gathered from vital airship testing.
(4)
Proprietary Systems – Custom developed systems from the design and modeling of airships to specialized flight control systems.
(5)
Intellectual Property – Patented designs and concepts providing worldwide protection.
(6)
Constructed Airships – Several platforms built for demonstrations
(7)
Testing Facilities – Including aerospace laboratories, assembly and storage hangars, wind tunnels, certified launch and flight facilities, and certified manufacturing and production facilities.

Competitive Business Conditions

We are aware of other companies that are also developing high altitude platforms similar in nature to our Stratellite project. Our competitors, though, may have more resources available to develop their respective products. Even if a properly functioning, commercially viable product is established there can be no assurance that revenues will be achieved from the sales of the Stratellite or other airships or that the costs to produce such revenues will not exceed the revenues or that the project will otherwise be profitable. There can be no assurance that we will be able to successfully achieve the results we anticipate with this project.
 
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Sources and Availability of Hardware and Software

Equipment for the Stratellite, STS-111, SkySat, SAS-51 and the prototypes thereof are custom made for those products and are dependent upon either single or limited number of suppliers for certain goods. Failure of a supplier could cause significant delays in delivery of the airships if another supplier cannot be promptly found.

Sources and Availability of Technical Knowledge and Component Parts
The Sanswire project requires a high level of technological knowledge and adequately functioning component parts and sub-assemblies to continue the project and achieve commercial viability. We have current and contemplated arrangements for supply of both internal and external technical knowledge to provide the intellectual capital to continue with this project. Similarly, we have current and contemplated arrangements for supply required component parts, both internally developed, as well as, outsourced from specialty contractors to provide component parts to continue with this project in the near term.

Dependence on a Few Customers

As discussed below in Item 6, Management Discussion and Analysis and Plan of Operation, we are currently dependent on a limited number of perspective customers.

Trademarks

We have filed for registration of the names “Stratellite” and “Sanswire” under the Madrid Protocol (that includes the United States) and in many non-Madrid Protocol countries.

We have additionally entered into an agreement with TAO Technologies GmbH, with whom Sanswire has collaborated with since 2005. The current agreement provides exclusive licensing and existing and future patent rights for TAO’s airship technologies and allows Sanswire to register the TAO patents in the United States.  As soon as the design and engineering for the Stratellite are finalized, we intend to file for patents covering unique design and intellectual property.

Regulatory Matters

The export of the airship products may be subject to United States Department of State restrictions on the transfer of technology. We are currently investigating whether or not the export of the Sanswire products would require export licenses and how the production of these vehicles in Germany through our agreement with TAO Technologies, GmbH would impact this.

During 2007 and 2008, Sanswire and its subsidiaries incurred payroll tax liability during the normal course of business at each payroll cycle. The Company submitted certain withholding tax payments during the first quarter through a payroll processor, ADP. Subsequent thereto, the Company no longer processed its payroll through ADP. During this time, the Company did not file the appropriate tax forms or deposit the appropriate withholding amounts. The Company has recognized this issue and contacted the IRS accordingly to bring its filings up-to-date and pay any taxes due. The Company may be subject to penalties and interest from the IRS.

Number of Total Employees and Number of Full-Time Employees

As of March 31, 2010, we have 4 full-time employees, including our executive officers and employees of our subsidiaries. We do not believe that we will have difficulty in hiring and retaining qualified individuals for our general operations and any technical personnel required for the aerospace projects will primarily be hired overseas to work with the existing TAO personnel.


Risks Related to Our Business and Industry

We need to raise a significant amount of additional capital to meet our current and future business requirements and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.
 
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We need to raise $5 million of additional financing in order to meet our cash requirements for the next twelve (12) months and to fully implement our business plan during the next twelve months.  The funds would be used to increase manufacturing of our products, expand our research and development efforts, and attract a larger talented sales force.  We intend to raise the financing from the sale of common stock in one or more private placements or public offerings and/or from bank financing.  We do not have any firm commitments or identified sources of additional capital from third parties or from our officers, directors or shareholders.  Although our officers and directors or their affiliates have in the past facilitated capital for us, or provided us with capital, they are not legally bound to do so.  There can be no assurance that additional capital will be available to us, or that, if available, it will be on terms satisfactory to us.  Any additional financing may involve dilution to our shareholders.  If we are unable to raise additional financing on terms satisfactory to us, or at all, we would not be able to fully implement our business plan which would have a materially adverse effect our business and financial position and could cause us to delay, curtail, scale back or forgo some or all of our operations or we could cease to exist.

We have a history of operating and net losses which we anticipate will continue.

We have a history of losses from operations.  We anticipate that for the foreseeable future, we will continue to experience losses from operations.  We had a net loss from continuing operations of $9,414,507 during fiscal 2009 and a net loss from continuing operations of $4,598,076 during fiscal 2008.  We anticipate that our net loss will increase for fiscal 2010.

Our independent auditors have issued a report questioning our ability to continue as a going concern. This report may impair our ability to raise additional financing and adversely affect the price of our common stock.
 
The report of our independent auditors contained in our financial statements for the years ended December 31, 2009 and 2008 includes a paragraph that explains that we have incurred substantial losses. This report raises substantial doubt about our ability to continue as a going concern. Reports of independent auditors questioning a company’s ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This report may make it difficult for us to raise additional debt or equity financing necessary to continue the development of our airships.  We urge potential investors to review this report before making a decision to invest in the Company.
 
We have material weaknesses in our internal control over financial reporting structure which until remedied, may cause errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.
 
We have identified two material weaknesses in our internal control over financial reporting and cannot assure you that additional material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

If we fail to protect our intellectual property rights, our competitors may take advantage of our ideas to compete more effectively with us.

Our proprietary rights are one of the keys to our performance and ability to remain competitive. We rely on a combination of patent, trademark, copyright and trade secret laws in the U.S. and other jurisdictions as well as confidentiality agreements and procedures, non-compete agreements and other contractual provisions to protect our intellectual property, other proprietary rights and our brand.  Our intellectual property rights may be challenged, invalidated or circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Litigation may be necessary to enforce our intellectual property rights which could result in substantial costs to us and substantial diversion of management attention. If we do not adequately protect our intellectual property, our competitors could use it to enhance their products.  Our inability to adequately protect our intellectual property rights could adversely affect our business and financial condition, and the value of our brand name and other intangible assets. 
 
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Risk Related To Ownership of Our Common Stock

There is currently a small market for our common stock, and we expect that any market that does develop will be illiquid and extremely volatile.

As of March 31, 2010, we had approximately twenty two thousand (22,000) shareholders of record, and we had been subject to the reporting requirements of the Exchange Act for at least ninety (90) days.  There were shares of our common stock that had been held by non-affiliates for a minimum of one year which could be freely resold under Rule 144, and shares of our common stock that had been held by such persons for a minimum of six months which could be resold under Rule 144 subject to public information requirements for reporting issuers.  There were also shares of our common stock that had been held by affiliates for a minimum of six months which could be resold under Rule 144 subject to the volume limitations, manner of sale provisions, public information requirements for reporting issuers and notice requirements.  

The market for our common stock is illiquid and subject to wide fluctuations in response to several factors, including, but not limited to:
 
 
·
limited numbers of buyers and sellers in the market;
 
·
actual  or  anticipated  variations  in  our  results  of  operations;
 
·
our ability or inability to generate new revenues;
 
·
increased competition; and
 
Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance which include stock market fluctuations, general economic, political and overall global market conditions, such  as  recessions, interest rates or international currency fluctuations. Any and all of these factors, while unrelated directly to us, may adversely affect the market price and liquidity of our common stock.

We have authorized preferred stock which can be designated by our board of directors without shareholder approval.

We have authorized 10,000,000 shares of preferred stock.  The shares of preferred stock may be issued from time to time in one or more series, each of which shall have distinctive designation or title as shall be determined by our board of directors prior to the issuance of any shares thereof. The preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as adopted by our board of directors. Because our board of directors is able to designate the powers and preferences of the preferred stock without the vote of the holders of our common stock, the holders of our common stock will have no control over what designations and preferences our preferred stock will have. As a result of this, our board of directors could designate one or more series of preferred stock with superior rights to the rights of the holders of our common stock.

We do not expect to pay dividends for the foreseeable future.

We have not declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our common stock.  Our ability to pay dividends is dependent upon, among other things, our future earnings, operating and financial condition, our capital requirements, general business conditions and other pertinent factors, and is subject to the discretion of our board of directors.  Accordingly, there is no assurance that any dividends will ever be paid on our common stock.

Investors may face significant restrictions on the resale of our common stock due to federal regulations of penny stock.

Our common stock is subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the SEC defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.  In addition, various state securities laws impose restrictions on transferring penny stocks.
 
11


ITEM 1B. UNRESOLVED STAFF COMMENTS

As a smaller reporting company, the Company is not required to include the disclosure in this Item 1B.

ITEM 2. PROPERTIES

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


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

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

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

The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Commission subsequently consolidated this action with another pending action involving former officers of the Company. The Commission has also moved to amend its complaint against the Company to include additional allegations of wrongdoing beginning in 2002, which motion to amend is still pending with the Court.  On March 23, 2009 the Court granted the SEC’s motion and extended the fact discovery deadline in the case until July 31, 2009.  The parties are currently engaged in discovery.  The Company has been vigorously defending itself in this action.
 
12


Joseph Monterosso

In October 2007, the Company filed a lawsuit in the Circuit Court for Broward County, Florida against Joseph J. Monterosso alleging Libel, Slander and Defamation, Tortuous Interference, Violations of FS § 836.05 (Threats Extortion)  and violations of FS §517 (Securities Fraud). Mr. Monterosso has not yet been served with the complaint pending additional information arising from the SEC lawsuit. This action has been dismissed for lack of prosecution but may be refiled by the Company in the future.

Hudson Bay Fund LP et al.

Hudson Bay Fund LP and Hudson Bay Overseas Fund Ltd. filed an action in Supreme Court of the State of New York, New York County against the Company claiming declaratory judgment, specific performance, and breach of contract relating to the warrants it acquired in connection with its investment.  The Hudson Bay entities are seeking to reprice the warrants, increase the number of shares they can purchase pursuant to the warrants, certain equitable remedies, and unspecified damages. The Company has retained outside counsel and has filed an answer and affirmative defenses in the case. The Company intends to vigorously defend the action, but the outcome of the action cannot be predicted.

Wachovia v. GlobeTel

In connection with the operations of Globetel Wireless Europe GmbH and the acquisition of Altvater GmbH, the Company guaranteed a letter of credit in the amount of $600,000. Upon Globetel Wireless Europe GmbH ceasing operations, the letter of credit was drawn upon. The letter of credit was not collateralized. In September 2007, Wachovia filed a lawsuit in Broward County in an attempt to recover the amount through arbitration with the American Arbitration Association. On June 2, 2008, the American Arbitration Association awarded Wachovia $762,902. This liability was previously recorded in the Company’s accounts payable as incurred.


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

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

The Company entered into an agreement with Mr. Milo and Mr. Quattrocchi as consultants on June 25, 1998. The agreement was amended on August 15, 1998. On November 30, 1998, both Mr. Milo and Mr. Quattrocchi resigned from their positions as consultants to the Company without fulfilling all of their obligations under their consulting agreement. The Company issued 3 million pre split shares each to Mr. Milo and Mr. Quattrocchi as consideration under the consulting agreement. The Company has taken the position that Mr. Milo and Mr. Quattrocchi received compensation in excess of the value of the services that they provided and the amounts that they advanced as loans.

Mr. Milo and Mr. Quattrocchi disagreed with the Company’s position and commenced action against us that is pending in the Supreme Court of the State of New York. Mr. Milo and Mr. Quattrocchi claim that they are entitled to an additional 24,526,000 pre split shares of common stock as damages under the consulting agreement and to the repayment of the loan balance. The Company believes that it has meritorious defenses to the Milo and Quattrocchi action, and the Company has counterclaims against Mr. Milo and Mr. Quattrocchi.

With regard to the issues related to original index number 12119/00, as a result of a summary judgment motion, the plaintiffs were granted a judgment in the sum of $15,000. The rest of the plaintiff’s motion was denied. The court did not order the delivery of 24,526,000 pre split shares of ADGI common stock as the decision on that would be reserved to time of trial.
 
13


An Answer and Counterclaim had been interposed on both of these actions. The Answer denies many of the allegations in the complaint and is comprised of eleven affirmative defenses and five counterclaims alleging damages in the sum of $1,000,000. The counterclaims in various forms involve breach of contract and breach of fiduciary duty by the plaintiffs.

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

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

This case went before a Judicial Hearing Officer on July 6 and 7, 2006. No resolution occurred during the July hearing and the Judicial Hearing Officer has asked for written statements of facts and law. The outcome cannot be projected with any certainty.  However, the Company does not believe that it will be materially adversely affected by the outcome of the proceeding. The Company has not been informed of any further developments since the hearing.

American Express

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

Tsunami Communications v. GlobeTel

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


14

 
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a) MARKET PRICE

Effective October 8, 2008 our shares of common stock have been quoted on the Pink Sheets quotation system under the symbol “SNSR” and effective August 7, 2009 our shares of common stock have been quoted on the OTCBB quotation system under the symbol “SNSR”

The following information sets forth the high and low bid price of our common stock during fiscal 2009 and 2008 and was obtained from the National Quotation Bureau. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
 
   
HIGH
   
LOW
 
CALENDAR 2008
           
Quarter Ended March 31
  $ 0.14     $ 0.07  
Quarter Ended June 30
  $ 0.09     $ 0.03  
Quarter Ended September 30
  $ 0.10     $ 0.04  
Quarter Ended December 31
  $ 0.08     $ 0.03  
                 
CALENDAR 2009
               
Quarter Ended March 31
  $ 0.06     $ 0.02  
Quarter Ended June 30
  $ 0.19     $ 0.05  
Quarter Ended September 30
  $ 0.15     $ 0.11  
Quarter Ended December 31
  $ 0.15     $ 0.05  

(b) HOLDERS

As of the date of this report, there were approximately 22,000 holders of our common stock.

(c) DIVIDENDS

The Company has never paid a dividend and does not anticipate that any dividends will be paid in the foreseeable future.

(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth the information indicated with respect to our compensation plans as of December 31, 2009, under which our common stock is authorized for issuance.

   
Number of Securities to be
issued
upon exercise of outstanding
options, warrants and rights
(a)
 
Weighted average
exercise price of
outstanding options,
warrants and rights
(b)
 
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
             
Equity compensation plans approved by security holders
 
38,042,499
   
$
0.298
   
Equity compensation plans not approved by security holders
 
   
 
Total
 
38,042,499
 
$
0.298
 
 
15


In February 2009, the Company entered into subscription agreement with 3 accredited investors. The Company sold $140,000 of the Company’s 7% Convertible Debentures, 3-year warrants to purchase 666,667 of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase 444,444 of the Company’s common stock at an exercise price of $0.315. The Debentures are convertible into shares of the Company’s common stock at $.105 per share.

On January 5, February 12, and April 23, 2009, the Company issued a total of 1,096,407 shares of common stock to Mitchell Siegel for the settlement of debts.

During the 1st Quarter 2009, the Company issued 1,750,000 shares of common stock to 2 parties for the settlement of debts.

During the 2nd Quarter 2009, the Company issued 123,939 shares of common stock to a vendor for the settlement of debts.

During the 2nd Quarter 2009, the Company issued 10,785,000 shares of common stock to 5 parties for consulting services.

During the 3rd Quarter 2009, the Company issued 833,333 shares of common stock to a party for consulting services.

During the 4th Quarter 2009, the Company issued 6,316,666 shares of common stock to 3 parties for consulting services.

On June 30, 2009, the Company issued 75,000 shares of common stock to a former employee for exercised options.

During the 1st Quarter 2009, the Company issued 1,238,096 shares of common stock to 3 noteholders for converted notes payable and accrued interest.

During the 2nd Quarter 2009, the Company issued 2,964,737 shares of common stock to 2 noteholders for converted notes payable and accrued interest.

During the 3rd Quarter 2009, the Company issued 21,480,379 shares of common stock to 7 noteholders for converted notes payable and accrued interest.

On June 1 and December 29, 2009, the Company issued a total of 2,500,000 shares of common stock and 2,500,000 options exercisable at $.14 and $.073 per share to the Company’s CFO for signing and performance bonus’ related to an employment agreement.

On May 29 and December 29, 2009, the Company issued a total of 9,000,000 shares of common stock to the Company’s previous CEO for a performance bonus related to an employment agreement.

On May 1, 2009, the Company issued 1,000,000 shares of common stock to an employee for a performance bonus related to an employment agreement.

During the 1st Quarter 2009, the Company issued 952,381 shares of common stock to an accredited investor for stock for cash.
 
16


During the 2nd Quarter 2009, the Company issued 8,752,378 shares of common stock to 16 accredited investors for stock for cash. They also received 3-year warrants to purchase 3,138,094 of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase 3,138,094 shares issuable upon conversion of the debenture shares of the Company’s common stock at an exercise price of $0.315.

During the 3rd Quarter 2009, the Company issued 3,185,237 shares of common stock to 16 accredited investors for stock for cash. They also received 3-year warrants to purchase 1,592,618 of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase 1,783,095 of the Company’s common stock at an exercise price of $0.315.

During the 4th Quarter 2009, the Company issued 5,233,018 shares of common stock to 11 accredited investors for stock for cash. They also received 3-year warrants to purchase 2,854,603 of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase 2,854,603 of the Company’s common stock at an exercise price of $0.315.

On May 1 and December 29, 2009, the Company issued a total of 750,000 shares of common stock and 250,000 options exercisable at $.073 per share to Gen. Wayne Jackson for stock for director’s fees.

On May 1, 2009, the Company issued 250,000 shares of common stock to David Christian for stock for director’s fees.

On July 31, 2009, the Company issued 50,000 shares of common stock to William Hotz for stock for director’s fees.

On April 10, 2009, the Company issued 5,305,556 options exercisable at $.08 and $.09 per share to its non-executive employees.

On May 6, 2009, the Company issued 8,311,116 options exercisable at $.045 per share to its non-executive employees.

On December 31, 2009, the Company issued 4,500,000 options exercisable at $.073 per share to its non-executive employees.

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

On May 5, 2009, the Company entered into a conversion agreement with Rocky Mountain Advisors Corp., a consultant to the Company (“RMAC”), pursuant to which the Company agreed to convert $185,387 in consulting fees owed to RMAC for consulting services performed from October 19, 2007 to April 9, 2009 into 29,615 shares of Series E Preferred Stock.

On May 5, 2009, the Company entered into a conversion agreement with Daniyel Erdberg, the Company’s Vice President of Operations, pursuant to which the Company agreed to convert $121,487.99 in outstanding wages owed to Mr. Erdberg from July 1, 2008 to April 3, 2009 into 19,407 shares of Series E Preferred Stock.

On May 5, 2009, the Company entered into a conversion agreement with Jonathan Leinwand, the former Chief Executive Officer, pursuant to which the Company agreed to convert $ 319,118.85 in outstanding wages owed to Mr. Leinwand from October 17, 2007 to April 3, 2009 into 50,978 shares of Series E Preferred Stock.

During 2010, the Company issued an additional 2,027,160 shares of common stock to 4 accredited investors for stock for cash. They also received 3-year warrants to purchase 1,013,580 of the Company’s common stock at an exercise price of $0.21, and three-year warrants to purchase 1,013,580 of the Company’s common stock at an exercise price of $0.315.
 
17


The above issuances were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506 promulgated under Regulation D thereunder.   The holders of the above securities are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the year ended December 31, 2009, the Company and the Affiliated Purchasers (as defined in Rule 10b-18(a)(3)) did not engage in any repurchases of the Company securities.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected historical financial data for the periods indicated. The selected statement of operations data for the years ended December 31, 2009 and 2008, and the selected balance sheet data as of December 31, 2009 and 2008, have been derived from our audited financial statements and related notes thereto included elsewhere in this annual report.
 
The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this annual report.
 
   
Year Ended December 31,
 
   
2009
   
2008
 
         
(Restated)
 
Statement of Operations Data:
           
Revenue
  $     $  
Operating expenses
               
General and administrative expenses
    451,775       476,827  
Consulting fees
    1,771,372       1,415,235  
Payroll and related taxes
    554,065       887,283  
Officers’ and directors’ compensation
    3,744,070       435,000  
Loss from operations
    (7,570,707 )     (3,214,345 )
(Loss) gain on extinguishment of debt
          (1,096,650 )
Extinguishment of derivative liability
    629,563       465,173  
Change in fair value of derivative liability
    (1,287,984 )     375,166  
Interest expense, net
    (1,185,379 )     (1,127,420 )
Loss from continuing operations
    (9,414,507 )     (4,598,076 )
Loss/Gain from discontinued operations
          (197 )
Net loss
  $ (9,414,507 )   $ (4,598,273 )
Net loss per share
               
Basic and diluted
  $ (0.04 )   $ (0.03 )

 
As of December 31,
 
 
2009
 
2008
 
     
(Restated)
 
Balance Sheet Data:
       
Cash and cash equivalents
  $ 12     $ 4,809  
Inventories
    1,545,490          
Investment in joint venture
          3,229,000  
Intangible assets, net
    2,179,574        
Total assets
    3,742,632       3,240,215  
Total liabilities
    17,716,981       18,692,369  
Stockholders’ deficit
    (13,974,349 )     (15,452,154 )

18

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

GENERAL

Twelve months ended December 31, 2009 (“Fiscal 2009” or “2009” or “the current year”) compared to twelve months ended December 31, 2008 (“Fiscal 2008” or “2008” or “the prior year”).

RESULTS OF OPERATIONS

REVENUES. During fiscal 2009 and 2008, we had no gross sales.

OPERATING EXPENSES. Our operating expenses consist primarily of payroll and related taxes, professional and consulting services, expenses for executive and administrative personnel and insurance, investor and public relations, research and development, telephone and communications, facilities expenses, travel and related expenses, and other general corporate expenses. Our operating expenses for fiscal 2009 were $7,570,707 compared to fiscal year 2008 operating expenses of $3,214,345 an increase of $4,356,362 or 136%.

Included in our operating results are employee payroll and related taxes for fiscal 2009 of $554,065 compared to $887,283 in 2008, a decrease of $333,218 or 37.6%. This decrease was due to our continued reduction of our operations, facilities and workforce during 2009.

The overall increase is primarily due to an increase in officers’ and directors’ compensation to $3,744,070 (including non-cash compensation), from $435,000 in the prior year and amortization expenses of $1,049,425 in 2009 due to the amortization of the intangible asset.

During 2008 and 2007, Sanswire and its subsidiaries incurred payroll tax liability during the normal course of business at each payroll cycle. The Company submitted certain withholding tax payments during the first and second quarters of 2007 through a payroll processor, ADP. Subsequent thereto, the Company no longer processed its payroll through ADP. The Company did not file its 2007 tax forms until 2008 but during 2008 the Company has reported its payroll tax liabilities on a timely basis; however the Company failed to deposit the appropriate withholding amounts. The Company has recognized this issue and contacted the IRS accordingly to make arrangement to pay any taxes due, which is currently estimated to be at least $200,000 including liabilities associated with the Company’s subsidiaries that are classified in discontinued operations. The Company may be subject to penalties and interest from the IRS.

We incurred $1,771,372 of consulting fees, an increase of $356,137 or 25.1% for 2009 compared to $1,415,235 in 2008. This increase is primarily related to contracts for services required to develop and expand our geographical and product markets.
 
During 2009, we incurred $451,775 of general and administrative expenses as compared to $476,827 during 2008. The $25,052 decrease was due to a continued reduction of expenses related to our operations, facilities and workforce during 2009.

LOSS FROM OPERATIONS. We had an operating loss of ($7,570,707) for fiscal year 2009 as compared to an operating loss of ($3,214,345) for fiscal 2008, primarily due to increased operating expenses as described above, including lower operating costs and reductions of our various programs.

OTHER INCOME (EXPENSE). We had net other expenses totaling ($1,843,800) during fiscal year 2009 compared to ($1,383,731) during fiscal 2008. This variance was due primarily to the non cash charges related to derivatives of ($658,421) during fiscal year 2009 compared to income of $840,339 for fiscal year 2008.  Also included are the 2008 non cash charges related to the modifications of our convertible debentures of ($1,096,650) compared to a no activity for 2009.

Interest expense for fiscal year 2009 was $1,185,379 compared to $1,127,420 for the prior year. Interest expense increase was primarily due to a financing charges associated with the Company’s convertible debentures.
 
19


LOSS FROM DISCONTINUED OPERATIONS. We had no activity during 2009 compared to a loss of $197 related to our discontinued operations during 2008. See note 2 in the financial statements for more information regarding the discontinued operations.

NET LOSS. We had a net loss of ($9,414,507) in fiscal year 2009 compared to a net loss of ($4,598,273) in fiscal 2008. The increase in net loss is primarily attributable to the increase in the operating expenses as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

ASSETS. At December 31, 2009, we had total assets of $3,742,632 compared to total assets of $3,240,215 as of December 31, 2008.

The current assets at December 31, 2009, were $1,551,908 compared to $11,215 at December 31, 2008. As of December 31, 2009, we had $12 of cash and cash equivalents compared to $4,809 at December 31, 2008.

The Company had $11,150 of deposits as of December 31, 2009 compared to no deposits as of December 31, 2008.  The $11,150 relates to payments associated with the Company’s new office space lease.

We had $6,406 of current assets from discontinued operations as of December 31, 2009 and 2008. See note 2 in the financial statements for more information regarding the discontinued operations.

LIABILITIES. At December 31, 2009, we had total liabilities of $17,716,981 compared to total liabilities of $18,692,369 as of December 31, 2008.

The current liabilities at December 31, 2009 were $17,716,981 compared to $18,692,369 at December 31, 2008, a decrease of $975,388. The decrease is principally due to the decrease in notes payable of $1,873,014 (see note 7 of the financial statements), the increase in accounts payable of $417,390, and the decrease in accrued expenses of $178,185 and the increase in derivative liabilities of $658,421.
 
CASH FLOWS. Our cash used in operating activities was $1,990,590 compared to $909,608 for the prior year. The increase was primarily due to the increased level of operations and operating activities and changes in our current assets and liabilities.

During 2009, there was $11,150 used in investing activities which was a deposit on a new office lease compared to $385,000 in 2008 used in investing activities which was a payment on the Sanswire-Tao joint venture.
 
Net cash provided by financing activities was $1,996,943 in 2009 principally from the sales of the Company’s common stock, as compared to $1,267,139 in the prior year.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company had a net loss of $9,414,507 and a negative cash flow from operations of $1,990,590 for the year ended December 31, 2009, and had a working capital deficiency of $16,165,073 and a stockholders’ deficit of $13,974,349 at December 31, 2009.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds to develop and implement a successful business plan. The Company has a business plan which, if successful, will allow the Company to sell unmanned aerial systems for a profit, which in turn will reduce the dependency of raising additional funds from outside sources.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Throughout 2009 and continuing into 2010, the Company has been dependent upon monthly funding from its existing debt holders. Funding decisions have typically not extended beyond thirty days at any given time, and the Company does not currently have a defined funding source. Funding delays and uncertainties have seriously damaged vendor relationships, new product development and revenues. In the absence of continued monthly funding by its current debt holders, the Company would not have sufficient funds to continue its operations. There is no assurance that additional funding from the current debt holders will be available or available on terms and conditions acceptable to the Company.
 
20


During 2010, the Company has subsequently raised approximately $132,000 from investors; however this is not adequate funding to cover the estimated working capital deficit of approximately $16.2 million or the net loss for 2009 of approximately $9.4 million.  The Company is currently working to secure additional funding for its current operations as well as for the payments associated with the Company’s joint venture.

As reflected in the accompanying financial statements, for the year ended December 31, 2009 we had a net loss of ($9,414,507) compared to a 2008 net loss of ($4,598,273). Consequently, there is an accumulated deficit of ($134,717,089) at December 31, 2009 compared to ($125,302,582) at December 31, 2008.

CRITICAL ACCOUNTING POLICIES

REGISTRATION RIGHTS

In connection with the sale of debt or equity instruments, the Company may enter into Registration Rights Agreements. Generally, these Agreements require the Company to file registration statements with the Securities and Exchange Commission to register common shares that may be issued on conversion of debt or preferred stock, to permit re-sale of common shares previously sold under an exemption from registration or to register common shares that may be issued on exercise of outstanding options or warrants.
These Agreements usually require us to pay penalties for any time delay in filing the required registration statements, or in the registration statements becoming effective, beyond dates specified in the Agreement. These penalties are usually expressed as a fixed percentage, per month, of the original amount the Company received on issuance of the debt or preferred stock, common shares, options or warrants. The Company accounts for these penalties when it is probable that a penalty will be incurred. At December 31, 2009, the Company has no registration rights agreement requiring penalties to be recorded.

REVENUE RECOGNITION

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

STOCK-BASED COMPENSATION

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

We are using the Black-Scholes option-pricing model as its method of valuation for share-based awards.  Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.
 
Stock-based compensation expense recognized under ASC 718 for the years ended December 31, 2009 and 2008 were $3,744,000 and $435,000, respectively.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.  Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
 
21


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

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

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

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

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

In June 2009, the FASB issued the standard that established the FASB Accounting Standards Codification (the “Codification”).  The Codification will become the source of authoritative United States generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.  The Company adopted the standard in the quarter ended September 30, 2009.  Other than the manner in which accounting guidance is referenced in its financial reporting, the adoption of the Codification had no impact on the Company’s financial position, results of operations or cash flows.
 
In August 2009, the FASB issued guidance which provides clarification for the fair value measurement of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available. This guidance is effective for interim periods beginning after August 28, 2009. The Company adopted this guidance in the quarter ended September 30, 2009.  The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company does not expect the adoption of this staff position to have a material impact on its financial condition and results of operations.

22


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a smaller reporting company, the Company is not required to include the disclosure under this Item 7A.

23


 
 
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of
Sanswire Corp. and Subsidiaries:

We have audited the accompanying consolidated balance sheet of Sanswire Corp. and subsidiaries (the “Company”), as of December 31, 2009 and the related consolidated statements of operations, cash flows and stockholders’ deficit for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.  

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sanswire Corp. and subsidiaries as of December 31, 2009 and the consolidated results of their of operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company has experiences significant losses and negative cash flows, resulting in decreased capital and increased accumulated deficits. These conditions raise substantial doubt about its ability to continue as a going concern. In addition, on May 2, 2008, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the United States District Court for the Southern District of Florida against GlobeTel Communications Corp. (the “Company”) and three former officers of the Company, Timothy J. Huff, Thomas Y. Jimenez and Lawrence E. Lynch. The SEC alleges, among other things, that the Company recorded $119 million in revenue on the basis of fraudulent invoices created by Joseph Monterosso and Luis Vargas, two individuals formerly employed by the Company who were in charge of its wholesale telecommunications business. The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Company has advised that it intends to vigorously defend itself in this action. The SEC lawsuit states that the staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of Company’s securities pursuant to Section 12(j) of the Exchange Act. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  Management’s plans regarding those matters are described in Note 10.

/s/ Rosen Seymour Shapss Martin & Company LLP
CERTIFIED PUBLIC ACCOUNTANTS

New York, New York
March 31, 2010

24

 
To the Board of Directors and Stockholders of:
Sanswire Corp. (formerly known as GlobeTel Communications Corp.) and Subsidiaries

We have audited the accompanying consolidated balance sheet of Sanswire Corp. (formerly known as GlobeTel Communications Corp.) and Subsidiaries (the “Company”), as of December 31, 2008 (as restated) and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

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

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

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

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

As discussed in Note 1, on May 2, 2008, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the United States District Court for the Southern District of Florida against GlobeTel Communications Corp. (the “Company”) and three former officers of the Company, Timothy J. Huff, Thomas Y. Jimenez and Lawrence E. Lynch. The SEC alleges, among other things, that the Company recorded $119 million in revenue on the basis of fraudulent invoices created by Joseph Monterosso and Luis Vargas, two individuals formerly employed by the Company who were in charge of its wholesale telecommunications business. The SEC alleges that the Company violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 under the Exchange Act. The SEC seeks as relief a permanent injunction, civil penalties, and disgorgement with prejudgment interest. The Company has advised that it intends to vigorously defend itself in this action. The SEC lawsuit states that the staff is also considering recommending that the SEC authorize and institute proceedings to revoke the registration of Company’s securities pursuant to Section 12(j) of the Exchange Act. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Weinberg & Company, P.A.

Boca Raton, Florida
March 30, 2009, except for Note 4 and 7, as to which the date is September 8, 2009
 
25


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

See accompanying notes to consolidated financial statements
 
26


SANSWIRE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,  

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

27


SANSWIRE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (as Restated)

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

See accompanying notes to consolidated financial statements

28


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


SANSWIRE CORP.  AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
 
   
2009
   
2008
 
         
(Restated)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (9,414,507 )   $ (4,598,273 )
Adjustments to reconcile net loss to net cash used by operating activities:
               
Amortization of debt discount
    176,465       314,549  
Amortization of intangible asset
    1,049,425        
Loss on extinguishment of debt
          1,096,650  
Fair value of stock based compensation
    3,102,725       712,501  
Fair value of vested options
    2,134,120       244,831  
    Change in fair value of derivative liabilities
    (629,563 )     (375,166 )
    Extinguishment of derivative liabilities
    1,287,984       (465,173 )
    Fair value of modification of warrants
    443,305        
    Accrued interest expense on convertible notes payable
    482,966       569,590  
    Common stock exchanged for interest and financing costs
          227,081  
Change in operating assets and liabilities:
               
    Inventories
    (1,545,490 )      
    Assets from discontinued operations
          12,272  
Accounts payable
    615,808       746,729  
Accrued expenses and other liabilities
    306,172       604,776  
Liabilities from discontinued operations
          25  
NET CASH USED IN OPERATING ACTIVITIES
    (1,990,590 )     (909,608 )
CASH FLOWS FROM INVESTING ACTIVITIES
               
Payment on joint venture
          (385,000 )
Deposits
    (11,150 )      
Investing activities from discontinued operations
           
NET CASH USED IN INVESTING ACTIVITIES
    (11,150 )     (385,000 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Issuance of common stock – exercises of warrants
           
Payments on notes payable
    (25,411     (25,139 )
Proceeds from notes and loans payable
    140,000       1,292,278  
Proceeds from sale of common stock
    1,882,354        
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    1,996,943       1,267,139  
NET CHANGE IN CASH AND EQUIVALENTS
    (4,797     (27,469 )
CASH AND EQUIVALENTS – BEGINNING OF PERIOD
    4,809       32,278  
CASH AND EQUIVALENTS – END OF PERIOD
  $ 12     $ 4,809  
                 
SUPPLEMENTAL DISCLOSURES
               
Cash paid during the period for:
               
Interest
  $ 2,903     $ 16,200  
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Shares issued for joint venture
          268,000  
Common stock for accrued expenses
    43,750       367,920  
Common stock for accounts payable
    13,031       99,674  
Deposit applied to accrued expenses
          659,000  
Accrued expense for joint venture
          2,844,000  
Conversion of notes payable to common stock
    2,618,973       1,788,838  
Non-cash equity-warrant valuation and intrinsic value of beneficial conversion associated with convertible notes
    28,060       288,260  
Preferred stock for accrued expenses
    440,607        
Preferred stock for accounts payable
    185,387        
 
See accompanying notes to consolidated financial statements

30


SANSWIRE CORP.  AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

NATURE OF OPERATIONS

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

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

ORGANIZATION AND CAPITALIZATION

The Company was organized in July 2002, under the laws of the State of Delaware. Upon its incorporation, Sanswire was a wholly-owned subsidiary of American Diversified Group, Inc. (ADGI). ADGI was organized January 16, 1979, under the laws of the State of Nevada. Subsequently, ADGI was merged into the Company, which is now conducting the business formerly conducted by ADGI and its subsidiaries, and all references to ADGI in these financial statements now apply to Sanswire interchangeably.

In May 2005, the Company approved a reverse split of shares of common stock on a one for fifteen (1:15) basis and changed the number of shares authorized to 100,000,000. In the Company’s annual shareholders meeting on August 1, 2005, the shareholders voted to increase the shares authorized from 100,000,000 to 150,000,000. Common stock amounts in this report have accounted for the reverse stock split retroactively, unless otherwise noted.

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

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

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

BASIS OF PRESENTATION

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


The Company applied the provision of Financial Accounting Standards Board (“FASB”) ASC 810 “Consolidation of Variable Interest Entities (revised December 2003)” (“ASC 810”) to its investment in Sanswire-TAO. Under ASC 810, a variable interest entity (VIE) is subject to consolidation if the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. As of December 31, 2009, the Company determined that that consolidation of Sanswire-TAO was appropriate. Inter-company accounts and transactions have been eliminated in consolidation.

GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company had a net loss of $9,414,507 and a negative cash flow from operations of $1,990,590 for the year ended December 31, 2009, and had a working capital deficiency of $16,165,073 and a stockholders’ deficit of $13,974,349 at December 31, 2009.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds to develop and implement a successful business plan. The Company has a business plan which, if successful, will allow the Company to sell unmanned aerial systems for a profit, which in turn will reduce the dependency of raising additional funds from outside sources.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Additional cash will still be needed to support operations. Management believes it can continue to raise capital from various funding sources, which when added to current working capital, will be sufficient to sustain operations at its current level through December 31, 2010. However, if the Company’s plans are not achieved and/or if significant unanticipated events occur, or if it is unable to obtain the necessary funding, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for all or part of its assets to continue as a going concern. As of the date of this report the Company has continued to raise capital to sustain its current operations which have been reduced since January 1, 2008.  The Company will need to periodically seek investment to provide cash for operations until such time that operations provide sufficient cash flow to cover expenditures. (see also next paragraph)

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

CASH AND CASH EQUIVALENTS

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

VALUATION HIERARCHY

FASB ASC 820, “Fair Value Measurements”, establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.  Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
 
32


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

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

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

REGISTRATION RIGHTS
 
In connection with the sale of debt or equity instruments, the Company may enter into Registration Rights Agreements. Generally, these Agreements require the Company to file registration statements with the Securities and Exchange Commission to register common shares that may be issued on conversion of debt or preferred stock, to permit re-sale of common shares previously sold under an exemption from registration or to register common shares that may be issued on exercise of outstanding options or warrants.
 
These Agreements usually require us to pay penalties for any time delay in filing the required registration statements, or in the registration statements becoming effective, beyond dates specified in the Agreement. These penalties are usually expressed as a fixed percentage, per month, of the original amount the Company received on issuance of the debt or preferred stock, common shares, options or warrants. The Company accounts for these penalties when it is probable that a penalty will be incurred. At December 31, 2009, the Company has no registration rights agreement requiring penalties to be recorded.
 
REVENUE RECOGNITION

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

INVENTORIES

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

INCOME TAXES

Income taxes are computed under the provisions of the Financial Accounting Standards Board (FASB) ASC 740, “Accounting for Income Taxes.” ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of the difference in events that have been recognized in the Company’s financial statements compared to the tax returns.

ADVERTISING AND MARKETING COSTS

Advertising and marketing costs are charged to operations in the period incurred. There was no advertising and marketing expense for the years ended December 31, 2009 and 2008.
 
33


FAIR VALUE OF FINANCIAL INSTRUMENTS

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

FOREIGN CURRENCY TRANSACTIONS

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

USE OF ESTIMATES

The process of preparing financial statements in conformity with generally accepted accounting principles in the United States requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share has been computed based upon the weighted average number of shares of common stock outstanding during each period. The basic and diluted net loss is computed by dividing the net loss by the weighted average number of common shares outstanding during each period. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. If all outstanding options, warrants and convertible shares were to be converted or exercised as of December 31, 2009, the shares outstanding would be 341,630,205.  As of March 30, 2010, the Company had 267,040,586 shares of our common stock outstanding. The Company is obligated under various existing agreements, options and warrants to issue additional shares of our common stock.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company follows FASB ASC 360, “Accounting for the Impairment of Long-Lived Assets.” ASC 360 requires that long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.
 
STOCK-BASED COMPENSATION

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

We are using the Black-Scholes option-pricing model as its method of valuation for share-based awards.  Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.
 
Stock-based compensation expense recognized under ASC 718 for the years ended December 31, 2009 and 2008 were $3,744,070 and $435,000, respectively.
 
34


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

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

In June 2009, the FASB issued the standard that established the FASB Accounting Standards Codification (the “Codification”).  The Codification will become the source of authoritative United States generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.  The Company adopted the standard in the quarter ended September 30, 2009.  Other than the manner in which accounting guidance is referenced in its financial reporting, the adoption of the Codification had no impact on the Company’s financial position, results of operations or cash flows.
 
In August 2009, the FASB issued guidance which provides clarification for the fair value measurement of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available. This guidance is effective for interim periods beginning after August 28, 2009. The Company adopted this guidance in the quarter ended September 30, 2009.  The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
35

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

NOTE 2. DISCONTINUED OPERATIONS

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

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

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

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

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

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

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

2008
 
Telecom
   
GlobeTel Wireless
   
Total
 
Cash
  $ 6,406     $     $ 6,406  
Total assets
  $ 6,406     $     $ 6,406  
                         
Accounts payable
  $ 140,116     $ 1,216,208     $ 1,356,324  
Accrued liabilities
    9,605       21,477       31,082  
Total current liabilities
    149,721       1,237,685       1,387,406  
                         
Net liabilities of discontinued operations
  $ 143,315     $ 1,237,685     $ 1,381,000  
 
36

 
NOTE 3. JOINT VENTURE AND INTANGIBLE ASSETS

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

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

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

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

On September 4, 2009, the Company concluded, with the concurrence of the Company’s Board of Directors, that an accounting error had been made in the Company’s historical December 31, 2008 consolidated financial statements in relation to the provisions of FASB ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities” and the recording of certain warrants and the beneficial conversion feature of the Company’s convertible notes payable. In accordance with ASC 815, the fair value of certain of the Company’s options and warrants and the embedded conversion feature of the Company’s convertible notes payable, have been re-characterized as derivative liabilities effective January 1, 2007. ASC 815 requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations. As a result, the Company’s consolidated financial statements as of December 31, 2008 have been restated.
 
37


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

   
December 31, 2008
 
Account
 
(As Initially Reported)
   
(Adjustment)
   
(As Restated)
 
Current Assets
                       
Cash
 
$
4,809
   
$
   
$
4,809
 
Current assets from discontinued operations
   
6,406
     
     
6,406
 
    Total current assets
   
11,215
     
     
11,215
 
Investment in joint venture
   
3,229,000
     
     
3,229,000
 
Total Assets
 
$
3,240,215
   
$
   
$
3,240,215
 
Liabilities and Stockholders’ Deficit
                       
Current liabilities
                       
Accounts payable
 
$
3,802,777
   
$
   
$
3,802,777
 
Notes and notes payable, net of discount of $134,423
   
9,264,732
     
     
9,264,732
 
Accrued expenses and other liabilities
   
3,489,210
     
     
3,489,210
 
Derivative liabilities
   
     
748,244
1
   
748,244
 
Current liabilities from discontinued operations
   
1,387,406
     
     
1,387,406
 
Total current liabilities
   
17,944,125
     
748,244
     
18,692,369
 
Stockholders’ Deficit
                       
Common stock
   
1,848
     
     
1,848
 
Additional paid-in capital
   
111,128,580
     
(1,280,000
)  1
   
109,848,580
 
Accumulated deficit
   
(125,834,338
)
   
531,756
1
   
(125,302,582
)
Total Stockholders’ Deficit
   
(14,703,910
   
(748,244
)
   
(15,452,154
Total Liabilities and Stockholders’ Deficit
 
$
3,240,215
   
$
   
$
3,240,215
 
 
   
Year ended December 31, 2008
 
Account
 
(As Initially Reported)
   
(Adjustment)
   
(As Restated)
 
Revenue
 
$
   
$
   
$
 
Cost of revenues
   
     
     
 
Gross margin
   
     
     
 
                         
Payroll and related taxes
   
(887,283
)
   
     
(887,283
)
Consulting fees
   
(1,415,235
)
   
     
(1,415,235
)
Noncash officers’ and directors’ compensation
   
(435,000
)
   
     
(435,000
)
General and administrative expenses
   
(476,827
)
   
     
(476,827
)
Loss from operations
   
(3,214,345
)
   
     
(3,214,345
)
                         
Loss on extinguishment of debt
   
(1,096,650
)
   
     
(1,096,650
)
Interest expense
   
(1,127,420
)
   
     
(1,127,420
)
Extinguishment of derivative liabilities
   
     
465,173
3
   
465,173
 
Change in fair value of warrants and conversion feature
   
— 
     
375,166
2
   
375,166
 
Net other expense
   
(2,224,070
)
   
840,339
     
(1,383,731
)
Loss from continuing operations
   
(5,438,415
   
840,339
     
(4,598,076
Loss from discontinued operations
   
(197
)
   
     
(197
)
Net loss
 
$
(5,438,612
)
 
$
840,339
   
$
(4,598,273
)
Net loss per share from continuing operations, basic and diluted
 
$
(0.04
)
   
0.01
4
   
(0.03
)
Net loss per share from discontinuing operations, basic and diluted
 
$
(0.00
)
   
   
$
(0.00
)
Weighted average shares outstanding, basic and diluted
   
151,534,774
             
151,534,774
 

38

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

Description of adjustments:
 
(1)
To record $748,244 increase to derivative liability, $531,756 decrease to accumulated deficit for prior period recognition of derivative liability, and $1,280,000 decrease to additional paid in capital for cumulative effect of correction of accounting for warrants and conversion feature of convertible notes as derivative liabilities.
   
(2)
To record $375,166 decrease in derivative liability for the year ended December 31, 2008.
   
(3)
To record $465,173 decrease from the extinguishment of derivative liabilities for the year ended December 31, 2008.
   
(4)
Effect on Earnings per share of restatements
 
NOTE 5. INVENTORIES

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

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