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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended January 31, 2003
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to _____
Commission File Number 0-22636
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DIAL THRU INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-2461665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17383 Sunset Boulevard, Suite 350
Los Angeles, California 90272
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(Address of principal executive offices) (Zip Code)
(310) 566-1700
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of March 13, 2003,
16,031,942 shares of common stock, $.001 par value per share, were
outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ January 31, October 31,
2003 2002
---------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 634,524 $ 488,868
Trade accounts receivable, net of allowance for
doubtful accounts of $555,121 at January 31,
2003 and $548,467 at October 31, 2002 1,154,304 1,369,955
Prepaid expenses and other current assets 293,912 147,209
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Total current assets 2,082,740 2,006,032
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PROPERTY AND EQUIPMENT, net 2,796,879 3,203,663
ADVERTISING CREDITS, net 2,376,678 2,376,678
INTANGIBLE ASSETS, net 340,950 330,613
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 90,873 73,525
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TOTAL ASSETS $ 9,485,037 $ 9,787,428
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Current portion of capital leases 345,431 389,450
Trade accounts payable 5,009,555 5,405,356
Accrued liabilities 2,561,160 2,313,873
Deferred revenue 389,566 331,786
Deposits and other payables 444,204 444,204
---------- ----------
Total current liabilities 8,749,916 8,884,669
CAPITAL LEASES, net of current portion 57,323 72,365
NOTES PAYABLE, net of debt discount of
$39,967 at January 31, 2003 1,210,033 -
NOTES PAYABLE TO RELATED PARTIES, net of debt
discount of $338,708 at January 31, 2003 and
$423,291 at October 31, 2002 2,009,693 1,925,110
CONVERTIBLE DEBENTURE, net of debt discount
of $163,510 at October 31, 2002 550,000 880,365
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value; 44,169,100 shares
authorized; 15,798,728 shares issued at January
31, 2003 and 15,074,916 at October 31, 2002 15,799 15,075
Additional paid-in capital 38,994,751 38,894,064
Accumulated deficit (41,713,506) (40,631,392)
Accumulated other comprehensive income (332,201) (196,057)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
Subscription receivable - common stock (1,901) (1,901)
---------- ----------
Total shareholders' deficit (3,091,928) (1,975,081)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 9,485,037 $ 9,787,428
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
January 31,
2003 2002
---------- ----------
REVENUES $ 5,654,701 $ 6,586,754
COSTS AND EXPENSES
Cost of revenues 4,138,833 4,545,744
Sales and marketing 313,377 365,545
General and administrative 1,411,083 2,000,411
Depreciation and amortization 499,831 677,533
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Total costs and expenses 6,363,124 7,589,233
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Operating loss (708,423) (1,002,479)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (377,177) (268,441)
Foreign exchange 3,486 (23,526)
Gain on sales of equipment - 8,553
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Total other income (expense) (373,691) (283,414)
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NET LOSS $(1,082,114) $(1,285,893)
========== ==========
LOSS PER SHARE:
Basic and diluted loss per share $ (0.07) $ (0.10)
========== ==========
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted common shares 15,720,053 12,729,932
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
January 31,
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,082,114) $(1,285,893)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain from disposal of fixed assets - (8,553)
Stock and warrants issued for services - 13,750
Bad debt expense 11,367 319,512
Non-cash interest expense 260,396 182,672
Depreciation and amortization 499,831 677,533
(Increase) decrease in:
Trade accounts receivable 204,284 (12,895)
Prepaid expenses and other current assets (146,703) (154,756)
Effects of changes in foreign exchange rates (206,804) 57,673
Other assets 23,500 14,464
Increase (decrease) in:
Trade accounts payable (386,847) (1,051,134)
Accrued liabilities 252,146 416,457
Deferred revenue 57,780 47,367
---------- ----------
Net cash used in operating activities (513,164) (783,803)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (32,724) (43,217)
Refund of license fee - 1,424,899
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Net cash provided by (used in) investing activities (32,724) 1,381,682
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 1,250,000 -
Proceeds from convertible debentures - 550,000
Payments on capital leases (68,015) (87,847)
Deferred financing fees (47,441) (92,625)
Payments on convertible debentures (443,000) -
---------- ----------
Net cash provided by financing activities 691,544 369,528
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 145,656 967,407
Cash and cash equivalents at beginning of period 488,868 94,985
---------- ----------
Cash and cash equivalents at end of period $ 634,524 $ 1,062,392
========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Conversion of convertible debenture and accrued
interest to common stock $ 55,734 $ -
Fair value of warrants issued with debt 45,677 154,973
Conversion of convertible note to common stock - 350,000
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements of Dial Thru International Corporation
and its subsidiaries, "DTI" or "the Company", included in this Form 10-Q are
unaudited. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of the financial position and operating results for the three
month period ended January 31, 2003 have been included. Operating results
for the three month period ended January 31, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 2003. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended October 31, 2002.
The Company is a full service, facility-based provider of communication
products to small and medium size businesses, both domestically and
internationally. The Company provides a variety of international and
domestic communication services including international dial thru, Internet
voice and fax services, e-commerce solutions and other value-added
communication services, using its Voice over Internet Protocol ("VoIP")
Network to effectively deliver these services to the end user.
In addition to helping customers achieve significant savings on long-
distance voice and fax calls by routing calls over the Internet or the
Company's private network, the Company also offers new opportunities for
existing Internet Service Providers who want to expand into voice services,
private corporate networks seeking to lower long-distance costs, and Web-
enabled corporate call centers engaged in electronic commerce.
The Company has also introduced VoIP to a new segment of customers by
delivering a high quality, reliable and scaleable solution that uniquely
addresses the needs of the rapidly growing VoIP industry.
Estimates and Assumptions
-------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - GOING CONCERN
The Company has an accumulated deficit of approximately $41.7 million as of
January 31, 2003, as well as a working capital deficit of approximately $6.7
million. Funding of the Company's working capital deficit, current and
future operating losses, and expansion will require continuing capital
investment. The Company's strategy is to fund these cash requirements
through operations, debt facilities and additional equity financing.
In November 2002, the Company obtained additional financing of $1,250,000, a
portion of which was used to repay the balance of the Company's April 11,
2001 convertible debenture with Global Capital Funding Group L.P.
Although the Company has been able to arrange debt facilities and equity
financing to date, there can be no assurance that sufficient debt or equity
financing will continue to be available in the future or that it will be
available on terms acceptable to the Company. Failure to obtain sufficient
capital could materially affect the Company's operations and expansion
strategies. As a result of the aforementioned factors and related
uncertainties, there is doubt about the Company's ability to continue as a
going concern.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" ("SFAS 148"), which amends SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent disclosures in financial statements of the effects of stock-
based compensation. These expanded disclosures will be required for the
Company's second quarter ending April 30, 2003. The Company anticipates that
it will continue to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, the Company
believes that the adoption of this standard will have no material impact on
its financial position, results of operations or cash flows.
NOTE 4 - ADVERTISING CREDITS
On September 8, 2000, the Company issued 914,285 shares (which are fully
vested and non-forfeitable) of the Company's common stock in exchange for
$3.2 million face value of advertising credits. These credits were issued
by Millenium Media Ltd. and Affluent Media Network, national advertising
agencies and media placement brokers. The Company recorded the advertising
credits on the date the shares were issued, September 8, 2000, using the
Company's quoted common stock price of $3.3125, totaling $3,028,569. During
the fiscal year ended October 31, 2000, the Company recorded an impairment
charge of $575,542 to reduce the credits to their estimated fair value, and
sold a portion of the credits for cash, reducing the balance by an
additional $76,349. The estimated fair value was established at the end of
fiscal 2000 using a discount of 25% off the face value, which was based on
management's estimate of the dollar value of the credits to be used in
settling various outstanding trade obligations. Such credits can be used by
the Company to place electronic media and periodical advertisements. The
primary use for the media credits is to advertise products and services
domestically. As the Company's focus to date has been on foreign traffic,
the Company has not utilized any of the media credits. The Company is
currently developing domestic products and services and management intends
to utilize the media credits to advertise these new services. There is no
contractual expiration date for these trade credits and there are no
limitations relating to the use of these credits.
NOTE 5 - NOTE PAYABLE
In November 2002, the Company executed a 12% note payable (the "GC-Note")
with Global Capital Funding Group, L.P., which provided financing of
$1,250,000. The GC-Note's maturity date is November 8, 2004. The GC-Note is
secured by $1,518,267 of certain property and equipment. In connection with
the GC-Note, the Company paid $47,441 as financing fees, which are being
amortized over the life of the GC-Note. During the three months ended
January 31, 2003, the Company recorded approximately $6,000 as interest
expense and financing fees. The Company also issued to the holder of the
GC-Note warrants to acquire an aggregate of 500,000 shares of common stock
at an exercise price of $0.14 per share, which expire on February 28, 2008.
The Company recorded a debt discount of approximately $46,000 relating to
the issuance of the warrants. The Company determined the additional debt
discount by allocating the relative fair value to the GC-Note and the
warrants. The Company is amortizing the debt discount over the two year
life of the GC-Note. During the three months ended January 31, 2003, the
Company has recorded interest expense of approximately $6,000 relating to
the warrants.
NOTE 6 - NOTES PAYABLE - RELATED PARTY
In October 2001, the Company executed 10% convertible notes (the "Notes")
with three executives of the Company, which provided financing in the
aggregate principal amount of $1,945,958. The original maturity date of each
note was October 24, 2003. In January 2003, the Company extended the
maturity date of each note to February 24, 2004. The Notes are secured by
all Company assets. Each Note is convertible into the Company's common
stock at the option of the holder at any time. The conversion price
is equal to the closing bid price of the Company's common stock on the
last trading day immediately preceding the conversion. The Company has
calculated the beneficial conversion feature embedded in the Notes in
accordance with EITF No. 00-27 and recorded debt discount of approximately
$171,000 which is being amortized over two years. The Company also issued
to the holders of the Notes warrants to acquire an aggregate of 1,945,958
shares of common stock at an exercise price of $0.78 per share, which expire
on October 24, 2006. Additional debt discount of approximately $657,000 was
recorded during the fourth quarter of fiscal 2001. The Company determined
the additional debt discount by allocating the relative fair value to the
Notes and the warrants. The Company is amortizing the additional debt
discount over the life of the Notes. During the three months ended January
31, 2003, the Company has recorded approximately $82,000 of interest
expense. In January 2002, an additional $102,433 was added to the Notes in
exchange for an existing note payable. The Company also issued to the
holder of the Notes warrants to acquire an additional 102,433 shares of
common stock at an exercise price of $0.75, which expire on January 28,
2007. Additional debt discount of approximately $24,000 was recorded during
the first quarter of fiscal 2002. The Company determined the additional
debt discount by allocating the relative fair value to the Notes and the
warrants. The Company is amortizing the additional debt discount over the
remaining life of the Notes. During the three months ended January 31,
2003, the Company has recorded approximately $3,000 of interest expense
relating to the warrants. In July 2002, an additional $300,000 was added to
the Notes, representing incremental monies loaned by a shareholder. The
Company also issued to the holder of the Notes warrants to acquire an
additional 300,000 shares of common stock at an exercise price of $0.75,
which expire on July 8, 2007.
NOTE 7 - CONVERTIBLE DEBT
Convertible Debenture with Global Capital Funding Group L.P.
In April 2001, the Company executed a 6% convertible debenture (the
"Debenture") with Global Capital Funding Group L.P. ("Global"), which
provided financing of $1,000,000. In November 2002, the Debenture's
outstanding balance of $443,000 was paid in full following the issuance of
a new note to Global (see Note 5). In November 2002, the remaining
unamortized deferred financing fees of approximately $131,000 on the
Debenture were recorded to interest expense.
Convertible Debenture with GCA Strategic Investment Fund Limited
In January 2002, the Company executed a 6% convertible debenture (the
"Second Debenture") with GCA Strategic Investment Fund Limited ("GCA"),
which provided financing of $550,000. The Second Debenture's original
maturity date was January 28, 2003. The Second Debenture is secured by
certain property and equipment held for sale. The conversion price is equal
to the lesser of (i) 100% of the volume weighted average of sales price as
reported by the Bloomberg L.P. of the common stock on the last trading day
immediately preceding the Closing Date and (ii) 85% of the average of the
three lowest volume weighted average sales prices as reported by Bloomberg
L.P. during the twenty Trading Days immediately preceding but not including
the date of the related Notice of Conversion (the "Formula Conversion
Price"). In an event of default the amount declared due and payable on the
Debenture shall be at the Formula Conversion Price. In connection with the
Second Debenture, the Company paid $92,625 in financing fees, which were
amortized over the original life of the Second Debenture. During the three
months ended January 31, 2003, the Company has recorded interest expense
of approximately $23,000 relating to these financing fees. The Company
calculated the beneficial conversion feature embedded in the Second
Debenture in accordance with EITF No. 00-27 and recorded approximately
$114,000 as debt discount. This debt discount was amortized over the
original life of the Second Debenture. For the three months ended January
31, 2003, the Company has recorded approximately $28,000 as interest
expense. The Company also issued to the holder of the debenture warrants to
acquire an aggregate of 50,000 shares of common stock at an exercise price
of $0.41 per share, which expire on January 28, 2007. The Company recorded
debt discount of approximately $17,000 related to the issuance of the
warrants. The Company determined the debt discount by allocating the
relative fair value to the Second Debenture and the warrants, and the
Company amortized the debt discount over the original life of the Second
Debenture. For the three months ended January 31, 2003, the Company has
recorded interest expense of approximately $4,000 relating to the warrants.
In January 2003, the Company and GCA agreed to extend the maturity date of
the Second Debenture to November 8, 2004. In consideration for this
extension, in February 2003, the Company adjusted the exercise price of the
previously issued warrants to $0.21 per share. The Company also issued to
the holder of the Second Debenture warrants to purchase 100,000 shares of
common stock also at an exercise price of $0.21 per share, which warrants
expire on February 8, 2008.
NOTE 8 - SHAREHOLDERS' EQUITY
During the three months ended January 31, 2003, the holder of the Company's
Debenture converted $50,875 of debt and $4,859 of accrued interest into
approximately 724,000 shares of the Company's common stock.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
On June 12, 2001, Cygnus Telecommunications Technology, LLC ("Cygnus"),
filed a patent infringement suit (case no. 01-6052) in the United States
District court, Central District of California, with respect to the
Company's "international call-back" technology. This technology drives the
Company's Re-Origination Services and allows its foreign based customers to
initiate international telephone calls by first calling a switch in the
United States, which then initiates a "call-back" to the customer site
providing the customer with an open phone line to place a call anywhere in
the world. The injunctive relief that Cygnus sought in this suit has been
denied, but Cygnus continues to seek compensatory and punitive damages as
well as attorney's fees and costs.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent the Company from providing "call back" services. The Company filed
a cross motion for summary judgment of non-infringement. Both motions were
denied. The Company intends to refile the motion for summary judgment for
non-infringement. The Company intends to continue defending this case
vigorously, though its ultimate legal and financial liability with respect
to such legal proceeding cannot be estimated with any certainty at this
time.
NOTE 10 - RECLASSIFICATIONS
Certain reclassifications were made to the 2002 consolidated financial
statements to conform to current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These statements relate to
expectations concerning matters that are not historical facts. Words such as
"projects", "believe", "anticipates", "estimate", "plans", "expect",
"intends", and similar words and expressions are intended to identify
forward-looking statements. Although the Company believes that such forward-
looking statements are reasonable, we cannot assure you that such
expectations will prove to be correct. Factors that could cause actual
results to differ materially from such expectations are disclosed herein.
All forward-looking statements attributable to the Company are expressly
qualified in their entirety by such language and we do not undertake any
obligation to update any forward-looking statements. You are also urged to
carefully review and consider the various disclosures we have made
throughout this Report which describe certain factors which affect our
business. The following discussion and analysis of financial condition and
results of operations covers the three months ended January 31, 2003 and
2002 and should be read in conjunction with our Financial Statements and the
Notes thereto.
General
On November 2, 1999, we consummated the DTI Acquisition and, in the second
quarter of fiscal 2000, we shifted focus toward our global VoIP strategy.
This change in focus has lead to a significant shift from our prepaid long
distance operations toward higher margin international wholesale and retail
telecommunication opportunities. This strategy allows us to form local
partnerships with foreign Postal, Telephone and Telegraph companies (those
entities responsible for providing telecommunications services in foreign
markets and are usually government owned or controlled) and to provide IP
enabled services based on the in-country regulatory environment affecting
telecommunications and data providers. In the third quarter of fiscal
2000, we further concentrated our efforts toward our global VoIP
telecommunications strategy by moving our operations to Los Angeles,
California. This refocusing and consolidation of operations has resulted in
not only greater savings, but also higher profits and more sustainable
revenues. This consolidation and reduction in staff has allowed us to
significantly reduce our overhead, and although our operations have not yet
produced positive cash flow, we believe that continued cost reductions and
moderate revenue growth would allow us to achieve positive results in the
near future.
On October 12, 2001, we completed the acquisition from Rapid Link of certain
assets and executory contracts of Rapid Link, USA, Inc. and 100% of the
common stock of Rapid Link Telecommunications, GmbH, a German company.
Rapid Link provides integrated data and voice communications services to
both wholesale and retail customers around the world. Rapid Link built a
large residential retail customer base in Europe and Asia using Rapid
Link's network to make international calls anywhere in the world.
Furthermore, Rapid Link developed a VoIP network using Clarent and Cisco
technology which we have used to take advantage of wholesale opportunities
where rapid deployment and time to market are critical. A significant
majority of our revenue in our 2002 fiscal year was derived from our Rapid
Link acquisition.
On November 19, 2002 we entered into an agreement with Global Capital
Funding Group, L.P. that provided us with a two year loan of $1.25 million.
A portion of the proceeds from this financing were used to pay off the
remaining balance of Dial Thru's April 2001 convertible debenture with
Global Capital while the remaining $807,000 has been and will be used for
the Company's ongoing working capital needs.
Critical Accounting Policies
The consolidated financial statements include accounts of our Company and
all of our majority-owned subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these consolidated
financial statements, we have made our best estimates and judgments of
certain amounts included in the consolidated financial statements, giving
due consideration to materiality. We do not believe there is a great
likelihood that materially different amounts would be reported related to
the accounting policies described below. However, application of these
accounting policies involves the exercise of judgment and use of assumptions
as to future uncertainties and, as a result, actual results could differ
from these estimates.
Revenue Recognition
Our revenues are generated at the time a customer uses our network to make a
phone call. We sell our services to small and medium-sized enterprises and
end-users who utilize our network for international re-origination and dial
thru services, and to other providers of long distance usage who utilize our
network to deliver domestic and international termination of minutes to
their own customers. At times we receive payment from our customers in
advance of their usage, which we record as deferred revenue, recognizing
revenue as calls are made. The Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition", provides guidance on the
application of generally accepted accounting principles to selected revenue
recognition issues. We have concluded that our revenue recognition policy
is appropriate and in accordance with generally accepted accounting
principles and SAB No. 101.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. All of our receivables are due from commercial
enterprises and residential users in both domestic and international
markets. The estimated allowance for uncollectible amounts is based
primarily on our evaluation of the financial condition of the customer, and
our estimation of the customer's willingness to pay amounts due. We review
our credit policies on a regular basis and analyze the risk of each
prospective customer individually in order to minimize our risk.
Goodwill, Intangible and Other Long-Lived Assets
Property, plant and equipment, certain intangible and other long-lived
assets are amortized over their useful lives. Useful lives are based on our
estimate of the period that the assets will generate revenue. Goodwill is
assessed for impairment at least annually and other intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Financing, Warrants and Amortization of Warrants and Fair Value Determination
We have traditionally financed our operations through the issuance of debt
instruments that are convertible into our common stock, at conversion rates
at or below the fair market value of our common stock at the time of
conversion, and typically include the issuance of warrants. We have
recorded these financing transactions in accordance with Emerging Issues
Task Force No. 00-27. Accordingly, we recognize the beneficial conversion
feature imbedded in the financings and the fair value of the related
warrants on the balance sheet as debt discount. The debt discount is
amortized over the life of the respective debt instrument.
Carrier Disputes
We review our vendor bills on a monthly basis and periodically dispute
amounts invoiced by our carriers. Prior to the second quarter of fiscal
2001, we recorded as trade accounts payable the entire amounts owed to our
vendors, including amounts in dispute. Any disputes resolved and credited
to us were recorded as other income at the time the credit was issued. We
subsequently changed our policy to record cost of revenues excluding
disputed amounts. We review our outstanding disputes on a quarterly basis
as part of the overall review of our accrued carrier costs and adjust our
liability based on management's estimate of amounts owed.
Revenues
Our primary source of revenue is the sale of voice and fax traffic
internationally over our VoIP network, which is measured in minutes,
primarily to SMEs, residential users, and wholesale customers. We charge
our customers a fee per minute of usage that is dependent on the destination
of the call and is recognized in the period in which the call is completed.
Expenses
Our costs of revenues are termination fees, purchased minutes and fixed
costs for specific international and domestic Internet circuits and private
lines used to transport our minutes. Termination fees are paid to local
service providers and other international and domestic carriers to terminate
calls received from our network. This traffic is measured in minutes, at a
negotiated contract cost per minute.
General and administrative expenses include salaries, payroll taxes, benefit
expenses and related costs for general corporate functions, including
executive management, finance and administration, legal and regulatory,
information technology and human resources. Sales and marketing expenses
include salaries, payroll taxes, benefits and commissions that we pay for
sales personnel and advertising and marketing programs, including
expenses relating to our outside public relations firms. Interest expense
and financing costs relate primarily to the amortization of deferred
financing fees and debt discounts on our various debt instruments.
Recent Accounting Pronouncements
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" ("SFAS 148"), which amends SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent disclosures in financial statements of the effects of stock-
based compensation. These expanded disclosures will be required for our
second quarter ending April 30, 2003. We anticipate that we will continue
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, we believe that the adoption of this
standard will have no material impact on our financial position, results
of operations or cash flows.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JANUARY 31, 2003 COMPARED TO THE
THREE MONTHS ENDED JANUARY 31, 2002
REVENUES
For the three months ended January 31, 2003, we had revenues of $5,655,000 a
decrease of $932,000, or 14%, over the same period in 2002. For the three
months ended January 31, 2003, 52% and 48% of our revenues were derived from
our retail and wholesale customers, respectively, compared to 65% and 35%,
respectively, for the three months ended January 31, 2002. In absolute
dollars, our wholesale revenues have increased by 18% from the three months
ended January 31, 2002 compared to the three months ended January 31, 2003,
while our retail revenues have decreased by 32% over the same period. The
decrease in retail revenues for the three months ended January 31, 2003 is
primarily attributable to increased competition in our largest foreign
markets, including competition from the incumbent phone company in each
market. The increase in wholesale revenues for the three months ended
January 31, 2003 is attributable to additions to our wholesale sales force
which focuses on developing greater wholesale opportunities. We also plan
on using our advertising credits to promote our retail products through
focused advertising targeted at ethnic markets in the United States.
OPERATING EXPENSES
For the three months ended January 31, 2003, we had total direct costs of
revenues of $4,139,000, a decrease of $407,000, or 9%, over the same period
in 2002. As a percentage of revenues, costs of revenues were 73% of
revenues for the three months ended January 31, 2003 compared to 69% of
revenues for the three months ended January 31, 2002. Our costs of
revenues as a percentage of revenues has increased due to a decline in our
retail traffic which realizes higher margins than our wholesale traffic.
Costs of revenues as a percentage of revenues will fluctuate depending on
the traffic mix between our wholesale and retail products.
General and administrative expenses were $1,411,000 and $2,000,000 for the
three months ended January 31, 2003 and 2002, respectively. As a percentage
of revenues, general and administrative expenses were 25% and 30% of
revenues for the three months ended January 31, 2003 and 2002, respectively.
Included in general and administrative expenses is bad debt expense of
$11,000 and $320,000 for the three months ended January 31, 2003 and 2002,
respectively. Bad debt expense for the three months ended January 31, 2002
is primarily attributable to non-payment from one wholesale customer. We
have implemented strict credit policies and systems to closely monitor our
wholesale traffic daily to reduce the risk of bad debt. We have further
reduced our general and administrative costs by approximately $262,000
through the elimination of personnel and personnel related costs. We review
our general and administrative expenses regularly, and continue to manage
the costs accordingly to support the current business as well as anticipated
near term growth.
Sales and marketing expenses were $313,000, or 6% of revenues for the three
months ended January 31, 2003 compared to $366,000, or 6% of revenues, for
the same period last year. A majority of our revenues are generated by
outside agents or through newspaper and periodical advertising, which is
managed by a small in-house sales and marketing organization. We will
continue to focus our sales and marketing efforts on newspaper and
periodical advertising and agent related expenses to generate additional
revenues. The use of our advertising credits is expected to increase sales
and marketing expenses in absolute dollars in future periods.
Depreciation and amortization expenses were $500,000 and $678,000 for the
three months ended January 31, 2003 and 2002, respectively. Depreciation and
amortization has decreased as a majority of our assets still in use have
become fully depreciated, including a majority of the assets acquired from
Rapid Link. A majority of our depreciation and amortization expense relates
to the equipment utilized in our VoIP network, which requires the deployment
of sophisticated routers and gateways strategically placed in our Points of
Presence and vendor sites around the world.
Interest expense and financing costs are primarily attributable to the
amortization of deferred financing fees and debt discounts relating to our
various debt instruments. For the three months ended January 31, 2003,
interest expense and financing costs of $377,000 was primarily attributable
to the amortization of deferred financing fees and debt discounts relating
to our convertible debentures with Global Capital and GCA and our related
party notes payable.
As a result of the foregoing, we incurred a net loss of $1,082,000 or $0.07
per share, for the three months ended January 31, 2003, compared with a net
loss of $1,285,893 or $0.10 per share, for the three months ended January
31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The growth model for our business is scaleable, but the rate of growth is
dependent on the availability of future financing for capital resources.
Our funding of additional infrastructure development will be provided
through the operations of our telecommunications business and externally
through debt and/or equity offerings. We plan to obtain vendor financing
for any equipment needs associated with expansion. We believe that, with
sufficient capital, we can significantly accelerate our growth plan. Our
failure to obtain additional financing could delay the implementation of our
business plan and have a material adverse effect on our business, financial
condition and operating results.
At January 31, 2003, we had cash and cash equivalents of $635,000, an
increase of $146,000 from the balance at October 31, 2002. As of January
31, 2003, we had a working capital deficit of $6,667,000, compared to a
working capital deficit of $6,879,000 at October 31, 2002. As of January
31, 2003, our current assets of $2,083,000 included net accounts receivable
of $1,154,000, which has decreased over the balance of $1,370,000 at October
31, 2002 as a result of the Company implementing more stringent credit
requirements during fiscal 2002.
Net cash used in operating activities was $513,000 for the three months
ended January 31, 2003, compared to $784,000 for the three months ended
January 31, 2002. The net cash used in operating activities for the three
months ended January 31, 2003 was primarily due to a net loss of $1,082,000
adjusted for: non-cash interest expense of $260,000; depreciation and
amortization of $500,000; and net changes in operating assets and
liabilities of ($203,000). For the three months ended January 31, 2002, the
net cash used in operating activities was comprised of a net loss of
$1,286,000 adjusted for: bad debt expense of $320,000, depreciation and
amortization of $678,000; non-cash interest expense of $183,000; and net
changes in operating assets and liabilities of ($683,000).
During the three months ended January 31, 2003, net cash used in investing
activities was $33,000, compared to net cash provided by investing
activities of $1,382,000 for the three months ended January 31, 2002. The
net cash used in investing activities for the three months ended January 31,
2003 is due to capital expenditures of $33,000. For the three months ended
January 31, 2002, net cash provided by investing activities is primarily
attributable to a refund of a license fee previously paid on behalf of our
German subsidiary of $1,425,000 offset by capital expenditures of $43,000.
Net cash provided by financing activities for the three months ended January
31, 2003, totaled $692,000, compared to net cash provided by financing
activities of $370,000 for the three months ended January 31, 2002. For the
three months ended January 31, 2003, significant components of net cash
provided by financing activities include $1,250,000 in net proceeds from a
note payable, offset by $443,000 in payments on convertible debentures,
$68,000 in payments on capital leases, and $47,000 of deferred financing
fees. For the three months ended January 31, 2002, the significant
components of net cash provided by financing activities include $550,000 in
proceeds from the issuance of a convertible debenture, offset by $88,000 in
payments on capital leases, and $93,000 of deferred financing fees.
We are subject to various risks in connection with the operation of our
business including, among other things, (i) changes in external competitive
market factors, (ii) inability to satisfy anticipated working capital or
other cash requirements, (iii) changes in the availability of transmission
facilities, (iv) changes in our business strategy or an inability to
execute our strategy due to unanticipated changes in the market, (v) various
competitive factors that may prevent us from competing successfully in the
marketplace, (vi) our lack of liquidity, and (vii) our ability to raise
additional capital. We have an accumulated deficit of approximately $41.7
million as of January 31, 2003, as well as a working capital deficit of
approximately $6.7 million. Funding of our working capital deficit, current
and future operating losses, and expansion will require continuing capital
investment. Our strategy is to fund these cash requirements through
operations, debt facilities and additional equity financing.
We obtained additional financing of $1,250,000 in November 2002, a portion
of which was used to fully pay the April 11, 2001 convertible debenture with
Global Capital Funding Group L.P.
Although we have been able to arrange debt facilities and equity financing
to date, there can be no assurance that sufficient debt or equity financing
will continue to be available in the future or that it will be available on
terms acceptable to us. Failure to obtain sufficient capital could
materially affect the Company's operations and expansion strategies. As a
result of the aforementioned factors and related uncertainties, there is
doubt about our Company's ability to continue as a going concern.
Our current capital expenditure requirements are not significant, primarily
due to the equipment acquired from Rapid Link. Our capital expenditures for
the three months ended January 31, 2003 were $33,000 and we do not
anticipate significant spending for the remainder of fiscal 2003.
In April 2001, we executed a 6% convertible debenture with Global Capital
Funding Group L.P, which provided financing of $1,000,000. During November
2002, the Debenture's outstanding balance of $443,000 was paid in full.
In October 2001, we executed 10% convertible notes (the "Notes") with three
of our executives, who provided an aggregate financing of $1,945,958. The
original maturity date of each note was October 24, 2003. In January 2003,
we extended the maturity date of each note to February 24, 2004. The Notes
are secured by all Company assets and are convertible into our common stock
at any time prior to maturity. The conversion price is equal to the closing
bid price of our common stock on the last trading day immediately preceding
the conversion. We also issued to the holders of the Notes warrants to
acquire an aggregate of 1,945,958 shares of common stock at an exercise
price of $0.78 per share, which expire on October 24, 2006. In January
2002, an additional $102,433 was added to the Notes in exchange for an
existing note payable. We also issued to the holder of the Notes warrants
to acquire an additional 102,433 shares of common stock at an exercise price
of $0.75, which expire on January 28, 2007. In July 2002, an additional
$300,000 was added to the Notes, representing incremental monies loaned by
an executive. We also issued to the holder of the Notes, warrants to
acquire an additional 300,000 shares of common stock at an exercise price of
$0.75, which expire on July 8, 2007.
In January 2002, we executed a 6% convertible debenture (the "Second
Debenture") with Global Capital Funding Group L.P, which provided financing
of $550,000. The Second Debenture's original maturity date was January 28,
2003. The conversion price is equal to the lesser of (i) 100% of the volume
weighted average of sales price as reported by the Bloomberg L.P. of the
common stock on the last trading day immediately preceding the Closing Date
("Fixed Conversion Price") and (ii) 85% of the average of the three (3)
lowest volume weighted average sales prices as reported by Bloomberg L.P.
during the twenty (20) Trading Days immediately preceding but not including
the date of the related Notice of Conversion ("the "Formula Conversion
Price"). In an event of default the amount declared due and payable on the
Second Debenture shall be at the Formula Conversion Price. We also issued
to the holder of the Second Debenture warrants to acquire 50,000 shares of
common stock at an exercise price of $0.41 per share which expire on January
28, 2007. In January 2003, we extended the maturity date of the Second
Debenture to November 8, 2004. In consideration for this extension, in
February 2003, we adjusted the exercise price of the previously issued
warrants to $0.21 per share and issued additional warrants to purchase
100,000 shares of common stock also at an exercise price of $0.21 per share,
which warrants expire on February 8, 2008.
In November 2002, we executed a 12% note payable (the "GC-Note") with Global
Capital Funding Group, L.P., which provided financing of $1,250,000. The
GC-Note's maturity date is November 8, 2004. The GC-Note is secured by
$1,518,267 of certain property and equipment. We also issued to the holder
of the GC-Note warrants to acquire 500,000 shares of common stock at an
exercise price of $0.14 per share, which expire on February 28, 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provide services primarily to customers located outside of the U.S. Thus,
our financial results could be impacted by foreign currency exchange rates
and market conditions abroad. However, the aggregate impact of any likely
exchange rate fluctuations would be immaterial as most of our services are
paid for in U.S. dollars. A strong dollar could make the cost of our
services more expensive than the services of non-U.S. based providers in
foreign markets. We have not used derivative instruments to hedge our
foreign exchange risks though we may choose to do so in the future.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Within the 90
days prior to the filing of this Quarterly Report on Form 10-Q, our Company
carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
Company's disclosure controls and procedures. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
Company's disclosure controls and procedures are effective in timely
alerting them to material information required to be included in this
report. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless
of how remote.
(b) Changes in Internal Controls. There have been no significant
changes in our Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the most
recent evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 12, 2001, Cygnus Telecommunications Technology, LLC ("Cygnus"),
filed a patent infringement suit (case no. 01-6052) in the United States
District court, Central District of California, with respect to our
"international call-back" technology. This technology drives our Re-
Origination Services and allows our foreign based customers to initiate
international telephone calls by first calling a switch in the United
States, which then initiates a "call-back" to the customer site providing
the customer with an open phone line to place a call anywhere in the world.
The injunctive relief that Cygnus sought in this suit has been denied, but
Cygnus continues to seek compensatory and punitive damages as well as
attorney's fees and costs.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent us from providing "call back" services. We filed a cross motion for
summary judgment of non-infringement. Both motions were denied. We intend
to refile the motion for summary judgment for non-infringement. We intend
to continue defending this case vigorously, though our ultimate legal and
financial liability with respect to such legal proceeding cannot be
estimated with any certainty at this time.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Certification of the Chief Executive Officer, dated March 17,
2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer, dated March 17,
2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAL THRU INTERNATIONAL CORPORATION
By: /s/ Allen Sciarillo
--------------------------------------------
Allen Sciarillo
Executive Vice President and Chief Financial
Officer (Principal Financial and Principal
Accounting Officer)
Dated March 17, 2003
CERTIFICATIONS
--------------
I, John Jenkins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dial Thru
International Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003 /s/ John Jenkins
-------------------------------
John Jenkins, Chairman, Chief
Executive Officer and President
I, Allen Sciarillo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dial Thru
International Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003 /s/ Allen Sciarillo
-------------------------------
Allen Sciarillo,
Chief Financial Officer and
Executive Vice President