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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 July 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 September 12,
2003, 16,201,803 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
------ July 31, October 31,
2003 2002
----------- -----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,054,940 $ 488,868
Trade accounts receivable, net of allowance for
doubtful accounts of $362,017 at July 31, 2003
and $548,467 at October 31, 2002 1,204,057 1,369,955
Prepaid expenses and other current assets 227,861 147,209
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Total current assets 2,486,858 2,006,032
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PROPERTY AND EQUIPMENT, net 1,696,193 3,203,663
ADVERTISING CREDITS, net 2,376,678 2,376,678
INTANGIBLE ASSETS, net - 330,613
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 160,795 73,525
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TOTAL ASSETS $ 8,517,441 $ 9,787,428
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LIABILITIES AND SHAREHOLDERS' DEFICIT
------------------------------------
CURRENT LIABILITIES
Current portion of capital leases 302,511 389,450
Trade accounts payable 5,563,426 5,405,356
Accrued liabilities 3,097,925 2,313,873
Deferred revenue 368,431 331,786
Deposits and other payables 438,570 444,204
Note payable, net of debt discount of $7,118
at July 31, 2003 542,882 -
Notes payable to related parties, net of debt
discount of $105,823 at July 31, 2003 and
$423,291 at October 31, 2002 2,242,578 1,925,110
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Total current liabilities 12,556,323 10,809,779
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CAPITAL LEASES, net of current portion 5,796 72,365
NOTE PAYABLE, net of debt discount of $28,548
at July 31, 2003 1,221,452 -
CONVERTIBLE DEBENTURE, net of debt discount
of $12,906 at July 31, 2003 and $163,510
at October 31, 2002 487,094 880,365
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; 16,172,968 shares issued at July
31, 2003 and 15,074,916 shares issued at
October 31, 2002 16,173 15,075
Additional paid-in capital 39,072,166 38,894,064
Accumulated deficit (44,352,635) (40,631,392)
Accumulated other comprehensive income (432,157) (196,057)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
Subscription receivable - common stock (1,901) (1,901)
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Total shareholders' deficit (5,753,224) (1,975,081)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 8,517,441 $ 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 Nine Months Ended
July 31, July 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
REVENUES $ 5,474,269 $ 6,138,790 $17,142,101 $18,811,698
COSTS AND EXPENSES
Cost of revenues 4,049,387 4,127,502 12,723,169 12,754,660
Sales and marketing 215,296 374,681 801,598 1,079,663
General and administrative 1,233,831 1,767,549 4,060,208 5,740,654
Depreciation and amortization 429,865 596,065 1,397,229 1,889,148
Write down of impaired assets 683,678 - 683,678 -
Sales tax settlement - - 350,000 -
---------- ---------- ---------- ----------
Total costs and expenses 6,612,057 6,865,797 20,015,882 21,464,125
---------- ---------- ---------- ----------
Operating loss (1,137,788) (727,007) (2,873,781) (2,652,427)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (204,718) (350,559) (852,126) (932,377)
Foreign exchange (4,831) (5,049) 4,664 (32,071)
Gain on sales of equipment - - - 8,553
---------- ---------- ---------- ----------
Total other income (expense) (209,549) (355,608) (847,462) (955,895)
---------- ---------- ---------- ----------
NET LOSS $(1,347,337) $(1,082,615) $(3,721,243) $(3,608,322)
========== ========== ========== ==========
LOSS PER SHARE:
Basic and diluted loss per share $ (0.08) $ (0.07) $ (0.23) $ (0.27)
========== ========== ========== ==========
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted common shares 16,138,033 14,436,350 15,940,612 13,558,049
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
July 31,
------------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,721,243) $(3,608,322)
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 30,378 550,120
Non-cash interest expense 543,212 684,413
Depreciation and amortization 1,397,229 1,889,148
Effects of changes in foreign exchange rates (340,215) (99,621)
Write down of impaired assets 683,678 -
(Increase) decrease in:
Trade accounts receivable 135,520 (101,800)
Prepaid expenses and other current assets (80,652) (129,565)
Other assets (45,632) 24,916
Increase (decrease) in:
Trade accounts payable 158,603 (1,011,715)
Accrued liabilities 792,374 600,821
Deferred revenue 36,645 (24,928)
Deposits and other payables (5,634) 1,422
---------- ----------
Net cash used in operating activities (415,737) (1,219,914)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (138,709) (263,769)
Refund of license fee - 1,424,899
---------- ----------
Net cash provided by (used in) investing activities (138,709) 1,161,130
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 1,800,000 -
Proceeds from related party note payable - 300,000
Proceeds from convertible debentures - 550,000
Payments on capital leases (154,041) (141,395)
Deferred financing fees (82,441) (92,625)
Subscription receivable-common stock - 15,179
Payments on convertible debentures (443,000) -
---------- ----------
Net cash provided by financing activities 1,120,518 631,159
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NET INCREASE IN CASH AND CASH EQUIVALENTS 566,072 572,375
Cash and cash equivalents at beginning of period 488,868 94,985
---------- ----------
Cash and cash equivalents at end of period $ 1,054,940 $ 667,360
========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Conversion of convertible debenture and accrued
interest to common stock $ 109,197 $ -
Fair value of warrants issued with debt 70,002 176,858
Conversion of convertible note to common stock - 500,000
Exercise of stock options in exchange for
retirement of 100,000 common shares - 70,000
Acquisition of customer base for payable - (340,931)
The accompanying notes are an integral part of these consolidated financial
statement
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 and 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 and nine month
periods ended July 31, 2003 have been included. Operating results for the
three and nine month periods ended July 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 $44.4 million as
well as a working capital deficit of approximately $10.1 million as of July
31, 2003. Funding of the Company's working capital deficit, current and
future operating losses, and expansion will require continuing capital
investment. The Company expects to fund these cash requirements through
operations, debt facilities and additional equity financing.
The Company obtained additional debt financing of $1,250,000 in November
2002, 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.,
and $550,000 in July 2003.
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 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company provided wholesale services to a single customer who accounted
for 12% of the overall revenue of the Company for the three months ended
July 31, 2003.
NOTE 4 - STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company accounts for its stock-based employee compensation
plans using the intrinsic valued method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related interpretations. As such, compensation expense is recorded on
the date of grant to the extent the current market price of the underlying
stock exceeds the option exercise price. The Company did not record any
stock-based compensation expense in the three and nine months ended July 31,
2003 and 2002.
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"), which amends 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. The Company anticipates that it will
continue to apply APB 25. 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.
Had the Company determined compensation based on the fair value at the grant
date for its stock options in accordance with SFAS 123, as amended by SFAS
148, net loss and loss per share would have been increased as follows:
Three Months Nine Months
Ended July 31, Ended July 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss, as reported $(1,347,337) $(1,082,615) $(3,721,243) $(3,608,322)
Deduct: Stock based
employee compensation
expense determined
under fair value
based method (45,364) (85,925) (153,424) (257,775)
---------- ---------- ---------- ----------
Pro forma net loss $(1,392,701) $(1,168,540) $(3,874,667) $(3,866,097)
========== ========== ========== ==========
Net loss per share
As reported
Basic and diluted $ (0.08) $ (0.07) $ (0.23) $ (0.27)
========== ========== ========== ==========
Pro forma
Basic and diluted $ (0.09) $ (0.08) $ (0.24) $ (0.29)
========== ========== ========== ==========
The fair values under FAS 123 for options granted were estimated at the date
of grant using the Black-Scholes option pricing model with the following
assumptions:
2003 2002
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Expected life (years) 3 5
Interest rate 4% 4%
Volatilty 133% 99% - 157%
Dividend yield 0% 0%
NOTE 5 - 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 6 - NOTES PAYABLE
Note Payable with Global Capital Funding Group, L.P.
----------------------------------------------------
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 were
capitalized and are being amortized over the life of the GC-Note. During
the three and nine months ended July 31, 2003, the Company recorded
approximately $6,000 and $18,000, respectively, as interest expense relating
to these deferred 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, the
fair value of the warrants, relating to the issuance of the warrants. The
Company is amortizing the debt discount over the two year life of the GC-
Note. During the three and nine months ended July 31, 2003, the Company has
recorded interest expense of approximately $6,000 and $17,000, respectively,
relating to the warrants.
Note Payable with GCA Strategic Investment Fund Limited
-------------------------------------------------------
In July 2003, the Company executed a 10% note payable (the "GCA-Note") with
GCA Strategic Investment Fund Limited, which provided financing of $550,000.
The GCA-Note's maturity date is December 23, 2003. In the event the GCA-
Note is not repaid in full within 10 days of the maturity date, the terms of
the GCA-Note shall become the same as those of the Second Debenture (see
Note 8). In the event the terms of the GCA-Note become the same as the
Second Debenture, the GCA-Note would have a beneficial conversion feature.
In accordance with EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios", the intrinsic value of the beneficial conversion feature has been
calculated as approximately $104,000 at the commitment date using the stock
price as of that date. The value of the beneficial conversion feature will
only be recorded at the date in which the future event occurs, which, in
this case, is 10 days after the maturity date of the note. In connection
with the GCA-Note, the Company paid $35,000 as financing fees, which are
being amortized over the life of the GCA-Note. During the three and nine
months ended July 31, 2003, the Company recorded approximately $2,000 as
interest expense relating to these deferred financing fees. The Company
also issued to the holder of the GCA-Note warrants to acquire an aggregate
of 100,000 shares of common stock at an exercise price of $0.14 per share,
which expire on July 24, 2008. The Company recorded a debt discount of
approximately $7,000, the fair value of the warrants, relating to the
issuance of the warrants. The Company will amortize the debt discount over
the life of the GCA-Note, beginning in the fourth quarter of fiscal 2003.
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
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
certain 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 relating to these
warrants. 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 and nine months ended July 31, 2003, the Company has recorded
approximately $102,000 and $307,000, respectively, 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, related to these warrants, 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 and nine months
ended July 31, 2003, the Company has recorded approximately $3,000 and
$10,000, respectively, 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.
Additional debt discount of approximately $22,000 was recorded as interest
expense during the third quarter of fiscal 2002 relating to these warrants.
The Company determined the additional debt discount by allocating the
relative fair value to the Notes and the warrants.
NOTE 8 - CONVERTIBLE DEBENTURES
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
the GC-Note (see Note 6). In November 2002, the remaining unamortized
deferred financing fees of approximately $131,000 on the Debenture were
recorded as interest expense. During the three months ended January 31,
2003, Global converted $50,875 of debt and $4,859 of accrued interest into
approximately 724,000 shares of the Company's common stock.
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
and nine months ended July 31, 2003, the Company has recorded interest
expense of approximately $0 and $23,000, respectively, 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 and
nine months ended July 31, 2003, the Company has recorded approximately $0
and $28,000, respectively, as interest expense relating to the amortization
of the debt discount. 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 and nine months ended July 31, 2003, the
Company has recorded interest expense of approximately $0 and $4,000,
respectively, 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 an additional
100,000 shares of common stock also at an exercise price of $0.21 per share,
which expire on February 8, 2008. The Company recorded additional debt
discount of approximately $17,000 related to the warrant exercise price
adjustment and the issuance of the new warrants. The Company is amortizing
the additional debt discount over the Second Debenture's extension period.
For the three and nine months ended July 31, 2003, the Company has recorded
interest expense of approximately $2,000 and $4,000, respectively, relating
to the warrants.
During the three and nine months ended July 31, 2003, GCA converted $15,000
and $50,000 of debt, respectively, and $1,192 and $3,463 of accrued
interest, respectively, into approximately 153,000 and 374,000 shares of the
Company's common stock, respectively.
NOTE 9 - IMPAIRMENT OF ASSETS
The Company accounts for the impairment and disposition of long-lived assets
other than goodwill in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". In accordance with SFAS No. 144, long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying value may not be recoverable. These evaluations include
comparing the future undiscounted cash flows of such assets to their
carrying value. The Company recognizes an impairment loss only if an
impairment is indicated by its carrying value not being recoverable through
undiscounted cash flows. The impairment loss is the difference between the
carrying amount and the fair value of the asset estimated using discounted
cash flows. During the three months ended July 31, 2003, the Company wrote
off certain assets of its German subsidiary which were considered impaired
as a result of an insolvency filing during August 2003 (see Note 12). These
assets consist of property and equipment totaling $382,498 and $301,180 of
intangible assets. These assets were determined to be impaired as they have
no future revenue stream and no sale value. The write off of these impaired
assets is presented as a separate line item in the accompanying consolidated
statement of operations.
NOTE 10 - 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 reorigination" technology. The injunctive relief
that Cygnus sought in this suit has been denied, but Cygnus continues to
seek a license fee for the use of the technology. The Company believes that
no license fee is required as the technology described in the patent is
different from the technology used by the Company.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent the Company from providing "reorigination" services. The Company
filed a cross motion for summary judgment of non-infringement. Both motions
were denied. On August 22, 2003, the Company refilled the motion for
summary judgment for non-infringement. The Company has not received a
decision regarding this filing. 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.
The State of Texas ("State") performed a sales tax audit of the Company's
former parent, Canmax Retail Systems ("Canmax"), for the years 1995 to 1999.
The State determined that the Company did not properly remit sales tax on
certain transactions, including asset purchases and software development
projects that Canmax performed for specific customers. The Company's
current and former managements filed exceptions, through its outside sales
tax consultant, to the State's audit findings, including the non-taxable
nature of certain transactions and the failure of the State to credit the
Company's account for sales tax remittances. In correspondence from the
State in June 2003, the State agreed to consider offsetting remittances
received by Canmax during the audit period. The State has refused to
consider other potential offsets. Based on this correspondence, the Company
recorded an estimated liability of approximately $350,000 during the quarter
ended April 30, 2003. The entire estimated liability of $350,000 remains
accrued at July 31, 2003.
The Company is continuing to pursue its options to appeal the decision by
the State. Furthermore, the Company is aggressively pursuing the collection
of unpaid sales taxes from former customers of Canmax.
NOTE 11 - RECLASSIFICATIONS
Certain reclassifications were made to the 2002 consolidated financial
statements to conform to current year presentation.
NOTE 12 - SUBSEQUENT EVENT
On August 1, 2003, the Company's German Subsidiary, Rapid Link
Telecommunications GmbH ("RLGmbH"), received approval for it's insolvency
filing. RLGmbH has been turned over to a trustee who is responsible for
liquidating the operation. The Company believes that creditors of RLGmbH
will have no recourse against the Company. Upon completion of the
liquidation, the Company will record an entry to remove all remaining
assets and liabilities from its books. Past operations of RLGmbH will be
categorized on the Consolidated Statement of Operations as from
Discontinued Operations.
The following table presents selected unaudited financial information for
RLGmbH at July 31, 2003:
Current Assets $ 405,449
Total Assets $ 405,449
Total Liabilities $ 3,558,682
Three Months Ended Nine Months Ended
July 31, 2003 July 31, 2003
----------------- ----------------
Revenue $ 873,633 $ 3,645,829
Net Loss $ 949,482 $ 1,519,558
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations covers the three and nine months ended July 31, 2003 and 2002 and
should be read in conjunction with our financial statements and the notes
thereto.
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 we 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 in our annual report on Form
10-K for the year ended October 31, 2002. All of our forward-looking
statements 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 on Form 10-Q which describe certain
factors which affect our business.
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,
Incorporated ("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 provided 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 portion of our revenue in our
2002 fiscal year was derived from the operating assets acquired through 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
our ongoing working capital needs.
On July 24, 2003, we entered into an agreement with GCA Strategic Investment
Fund Limited that provided us with a short-term loan of $550,000 which has
been and will be used for our ongoing working capital needs.
On August 1, 2003, our German Subsidiary, Rapid Link Telecommunications GmbH
received approval for it's insolvency filing and has been turned over to a
trustee who is responsible for liquidating the operation.
Critical Accounting Policies
The consolidated financial statements include our accounts and those 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 certain estimates and judgments of
amounts included in the consolidated financial statements, giving due
consideration to materiality. The application of these accounting policies
involves the exercise of judgment and use of available information,
historical results and other assumptions. 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
("SMEs") 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. Goodwill 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. We record cost of revenues excluding
these 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.
Components of Statements of Operations
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.
Costs of Revenues
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
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.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE AND NINE MONTHS ENDED JULY
31, 2003 AND 2002
REVENUES
For the three months ended July 31, 2003, we generated revenues of
$5,474,000, a decrease of $665,000, or 11%, from the same period in 2002.
For the three months ended July 31, 2003, 43% and 57% of our revenues were
derived from our retail and wholesale customers, respectively, compared to
58% and 42%, respectively, for the three months ended July 31, 2002. In
absolute dollars, our wholesale revenues have increased by 19% from the
three months ended July 31, 2002 compared to the three months ended July 31
2003, while our retail revenues have decreased by 33% over the comparable
period.
For the nine months ended July 31, 2003, we generated revenues of
$17,142,000 a decrease of $1,670,000, or 9%, over the same period in 2002.
For the nine months ended July 31, 2003, our retail and wholesale customers
each accounted for 50% of our revenues, compared to 60% and 40%,
respectively, for the nine months ended July 31, 2002. In absolute dollars,
our wholesale revenues have increased by 15% from the nine months ended July
31, 2002 compared to the nine months ended July 31, 2003, while our retail
revenues have decreased by 25% over the comparable period.
The decrease in retail revenues for the three and nine months ended July 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 and nine
months ended July 31, 2003 is attributable to additions to our wholesale
sales force which focuses on developing greater wholesale opportunities. We
are exploring opportunities to grow our retail business through use of our
advertising credits and newspaper advertising.
OPERATING EXPENSES
Costs of revenues: During the three months ended July 31, 2003 and 2002, we
incurred total costs of revenues of $4,049,000 and $4,128,000, respectively,
or 74% and 67% of revenues, respectively. During the nine months ended July
31, 2003 and 2002, we incurred total costs of revenues of $12,723,000 and
$12,755,000, respectively, or 74% and 68% of revenues, respectively. 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, from
period to period, depending on the traffic mix between our wholesale and
retail products.
General and Administrative Expenses: During the three months ended July 31,
2003 and 2002, we incurred total general and administrative expenses of
$1,234,000 and $1,768,000, respectively, or 23% and 29% of revenues,
respectively. During the nine months ended July 31, 2003 and 2002, we
incurred total general and administrative expenses of $4,060,000 and
$5,741,000, respectively, or 24% and 31% or revenues, respectively.
Included in general and administrative expenses is bad debt expense of
$1,000 and $136,000 for the three months ended July 31, 2003 and 2002,
respectively, and $30,000 and $550,000 for the nine months ended July 31,
2003 and 2002, respectively. Bad debt expense for the nine months ended
July 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
$309,000 and $900,000, for the three and nine months ended July 31, 2003,
respectively, 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 and
anticipated future business.
Sales and Marketing Expenses: During the three months ended July 31, 2003
and 2002, sales and marketing expenses were $215,000 and $375,000,
respectively, or 4% and 6% of revenues, respectively. During the nine
months ended July 31, 2003 and 2002, sales and marketing expenses were
$802,000 and $1,080,000, respectively, or 5% and 6% of revenues,
respectively. 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
Depreciation and amortization expenses were $430,000 and $596,000 for the
three months ended July 31, 2003 and 2002, respectively, and $1,397,000 and
$1,889,000 for the nine months ended July 31, 2003 and 2002, respectively.
Depreciation and amortization has decreased as a portion 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.
WRITE DOWN OF IMPAIRED ASSETS
In connection with the insolvency filing of our Germany Subsidiary, Rapid
Link Telecommunications, GmbH, on August 1, 2003, we reviewed the carrying
value of its long term assets, principally property and equipment and
intangibles and determined that they were impaired. Accordingly, during the
three months ended July 31, 2003, we recorded an impairment charge totaling
$684,000 relating to these impaired assets.
SALES TAX SETTLEMENT
We recorded an expense of $350,000 during the quarter ended April 30, 2003.
This estimated cost is attributable to audit findings on our former parent,
Canmax Retail Systems, from the State of Texas for the years 1995 to 1999.
The State of Texas determined that we did not properly remit sales tax on
certain transactions. Our current and former managements have filed
exceptions, through our outside sales tax consultant, to the State's audit
findings. (See Note 10.)
INTEREST EXPENSE AND FINANCING COSTS
Interest expense and financing costs were $205,000 and $351,000 for the
three months ended July 31, 2003 and 2002, respectively, and $852,000 and
$932,000 for the nine months ended July 31, 2003 and 2002, respectively.
Interest expense and financing costs are primarily attributable to interest
amounts due on notes, the amortization of deferred financing fees and debt
discounts relating to our various debt instruments.
NET LOSS
As a result of the foregoing, for the three months ended July 31, 2003 and
2002, we incurred a net loss of $1,347,000 or $0.08 per share and $1,083,000
or $0.07 per share, respectively. For the nine months ended July 31, 2003
and 2002, we incurred a net loss of $3,721,000 or $0.23 per share and
$3,608,000 or $0.27 per share, respectively.
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 July 31, 2003, we had cash and cash equivalents of $1,055,000 an increase
of $566,000 from the balance at October 31, 2002. As of July 31, 2003, we
had a working capital deficit of $10,069,000, compared to a working capital
deficit of $8,804,000 at October 31, 2002. As of July 31, 2003, our current
assets of $2,487,000 included net accounts receivable of $1,204,000, which
has decreased from 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 $416,000 for the nine months ended
July 31, 2003, compared to $1,220,000 for the nine months ended July 31,
2002. The net cash used in operating activities for the nine months ended
July 31, 2003 was primarily due to a net loss of $3,721,000 adjusted for:
non-cash interest expense of $543,000; depreciation and amortization of
$1,397,000; effects of changes in foreign exchange rates of ($340,000);
write down of impaired assets of $683,000; and net changes in operating
assets and liabilities of $991,000. For the nine months ended July 31,
2002, the net cash used in operating activities was primarily due to a net
loss of $3,608,000 adjusted for: bad debt expense of $550,000; depreciation
and amortization of $1,889,000; non-cash interest expense of $684,000;
effects of changes in foreign exchange rates of ($100,000); and net changes
in operating assets and liabilities of ($640,000).
During the nine months ended July 31, 2003, net cash used in investing
activities was $139,000, compared to net cash provided by investing
activities of $1,161,000 for the nine months ended July 31, 2002. The net
cash used in investing activities for the nine months ended July 31, 2003 is
due to capital expenditures of $139,000. For the nine months ended July 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 $264,000.
Net cash provided by financing activities for the nine months ended July 31,
2003, totaled $1,121,000, compared to $631,000 for the nine months ended
July 31, 2002. For the nine months ended July 31, 2003, significant
components of net cash provided by financing activities include $1,800,000
in net proceeds from notes payable, offset by $443,000 in payments on
convertible debentures, $154,000 in payments on capital leases, and $82,000
of deferred financing fees. For the nine months ended July 31, 2002, the
significant components of net cash provided by financing activities include
$550,000 in proceeds from the issuance of a convertible debenture, $300,000
in proceeds from the issuance of a related party note, offset by $141,000 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 $43.7
million as of July 31, 2003, as well as a working capital deficit of
approximately $10.1 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. As of the date
of this report:
1. we obtained additional debt 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.
2. we and GCA Strategic Investment Fund Limited agreed to extend the
maturity date of the January 2002 debenture from January 28, 2003 to
November 8, 2004.
3. we obtained additional financing of $550,000 in July 2003.
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 nine months ended July 31, 2003 were $139,000 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 certain 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.
To the extent that these Convertible Debentures are converted into common
stock, a significant number of shares of common stock may be sold into the
market, which could decrease the price of our common stock and encourage
shorts sales by selling security holders or others. Short sales could place
further downward pressure on the price of our common stock. In that case,
we could be required to issue an increasingly greater number of shares of
our common stock upon future conversions of these Convertible Debentures,
sales of which could further depress the price of our common stock.
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.
In July 2003, we executed a 10% note payable (the "GCA-Note") with GCA
Strategic Investment Fund Limited, which provided financing of $550,000.
The GCA-Note's maturity date is December 23, 2003. In the event the GCA-
Note is not repaid in full within 10 days of the maturity date, the terms of
the GCA-Note shall become the same as those of the Second Debenture. We
also issued to the holder of the GCA-Note warrants to acquire 100,000 shares
of common stock at an exercise price of $0.14 per share, which expire on
July 24, 2008.
On August 1, 2003, our German Subsidiary, Rapid Link Telecommunications GmbH
("RLGmbH"), received approval for it's insolvency filing. RLGmbH has been
turned over to a trustee who is responsible for liquidating the operation.
We believe that creditors of RLGmbH will have no recourse against us.
During the quarter ending September, 30, 2003, the assets and liabilities of
RLGmbH will be written down to their fair market value and categorized on
the Consolidated Balance Sheet as Discontinued Operations. Past operations
of RLGmbH will be categorized on the Consolidated Statement of Operations as
from Discontinued Operations.
The following summarizes our obligations at July 31, 2003, and the effect
such obligations are expected to have on our liquidity and cash flow in
future periods (excluding interest due of $601,768 as of July 31, 2003 on
the Company's "Other Commercial Commitments"):
Contractual
Obligations Payments Due by Period
----------------- ------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 year years years years
--------- --------- --------- ------- -------
Contractual lease
obligations $ 308,307 $ 302,511 $ 5,796 $ - $ -
Operating leases $ 958,902 $ 454,339 $ 504,563 $ - $ -
--------- --------- --------- ------- -------
Total contractual
obligations $1,267,209 $ 756,850 $ 510,359 $ - $ -
========= ========= ========= ======= =======
Other Commercial Less than 1-3 4-5 After 5
Commitments Total 1 year years years years
----------------- --------- --------- --------- ------- -------
Convertible
Debentures $ 500,000 $ - $ 500,000 $ - $ -
Notes payable $1,800,000 $ 550,000 $1,250,000 $ - $ -
Related party
notes $2,348,401 $2,348,401 $ - $ - $ -
--------- --------- --------- ------- -------
$4,648,401 $2,898,401 $1,750,000 $ - $ -
========= ========= ========= ======= =======
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations
For the nine months ended July 31, 2003 and years ended October 31, 2002 and
2001, we recorded net losses of approximately $3.7 million, $4.7 million and
$2.7 million, respectively, on revenues of approximately $17.1 million,
$24.9 million and $7.0 million, respectively. As a result, we currently
have a working capital deficit of over $10 million. In addition, we have
a significant amount of trade payables and accrued liabilities, of which
approximately 21% is past due, excluding disputes for overcharges with our
underlying carriers of approximately $250,000. To be able to service our
debt obligations over the course of the 2003 fiscal year we must generate
significant cash flow and obtain additional financing. If we are unable to
do so or otherwise to obtain funds necessary to make required payments on
our trade debt and other indebtedness, we may not be able to continue our
operations.
Our operating history makes it difficult to accurately assess our general
prospects in the VoIP portion of the telecommunications industry and the
effectiveness of our business strategy. In addition, we have limited
meaningful historical financial data upon which to forecast our future sales
and operating expenses. Our future performance will also be subject to
prevailing economic conditions and to financial, business and other factors.
Accordingly, we cannot assure you that we will successfully implement our
business strategy or that our actual future cash flows from operations will
be sufficient to satisfy our debt obligations and working capital needs.
To implement our business strategy, we will also need to seek additional
financing. There is no assurance that adequate levels of additional
financing will be available at all or on acceptable terms. In addition, any
additional financing will likely result in significant dilution to our
existing stockholders. If we are unable to obtain additional financing on
terms that are acceptable to us, we could be forced to dispose of assets to
make up for any shortfall in the payments due on our debt under
circumstances that might not be favorable to realizing the highest price for
those assets. A portion of our assets consist of intangible assets, the
value of which will depend upon a variety of factors, including the success
of our business. As a result, if we do need to sell any of our assets, we
cannot assure you that our assets could be sold quickly enough, or for
amounts sufficient, to meet our obligations.
We face competition from numerous, mostly well-capitalized sources
The market for our products and services is highly competitive. We face
competition from multiple sources, many of which have greater financial
resources and a substantial presence in our markets and offer products or
services similar to our services. Therefore, we may not be able to
successfully compete in our markets, which could result in a failure to
implement our business strategy, adversely affecting our ability to attract
and retain new customers. In addition, competition within the industries in
which we operate is characterized by, among other factors, price and the
ability to offer enhanced services. Significant price competition would
reduce the margins realized by us in our telecommunications operations.
Many of our competitors have greater financial resources to devote to
research, development and marketing, and may be able to respond more quickly
to new or merging technologies and changes in customer requirements. If we
are unable to provide value-added Internet products and services then we
will be unable to compete in certain segments of the market, which could
have an adverse impact on our business.
The regulatory environment in our industry is very uncertain
The legal and regulatory environment pertaining to the Internet is uncertain
and changing rapidly as the use of the Internet increases. For example, in
the United States, the FCC is considering whether to impose surcharges or
additional regulations upon certain providers of Internet telephony.
In addition, the regulatory treatment of Internet telephony outside of the
United States varies from country to country. There can be no assurance
that there will not be legally imposed interruptions in Internet telephony
in these and other foreign countries. Interruptions or restrictions on the
provision of Internet telephony in foreign countries may adversely affect
our ability to continue to offer services in those countries, resulting in a
loss of customers and revenues.
New regulations could increase the cost of doing business over the Internet
or restrict or prohibit the delivery of our products or services using the
Internet. In addition to new regulations being adopted, existing laws may
be applied to the Internet. Newly existing laws may cover issues that
include sales and other taxes, access charges, user privacy, pricing
controls, characteristics and quality of products and services, consumer
protection, contributions to the Universal Service Fund, an FCC-administered
fund for the support of local telephone service in rural and high-cost
areas, cross-border commerce, copyright, trademark and patent infringement,
and other claims based on the nature and content of Internet materials.
Changes in the technology relating to Internet telephony could threaten our
operations
The industries in which we compete are characterized, in part, by rapid
growth, evolving industry standards, significant technological changes and
frequent product enhancements. These characteristics could render existing
systems and strategies obsolete and require us to continue to develop and
implement new products and services, anticipate changing consumer demands
and respond to emerging industry standards and technological changes. No
assurance can be given that we will be able to keep pace with the rapidly
changing consumer demands, technological trends and evolving industry
standards.
We need to develop and maintain strategic relationships around the world to
be successful
Our international business, in part, is dependent upon relationships with
distributors, governments or providers of telecommunications services in
foreign markets. The failure to develop or maintain these relationships
could have an adverse impact on our business.
We rely on two key senior executives
Our success is dependent on our senior management team of John Jenkins and
Allen Sciarillo and our future success will depend, in large part, upon our
ability to retain these two individuals.
The expansion of our VoIP product offerings is essential to our survival
We intend to expand our VoIP network and the range of enhanced
telecommunications services that we provide. Our expansion prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets.
Our OTC Bulletin Board listing negatively affects the liquidity of our
common stock
Our common stock currently trades on the OTC Bulletin Board. Therefore, no
assurances can be given that a liquid trading market will exist at the time
any investor desires to dispose of any shares of the our common stock. In
addition, our common stock is subject to the so-called "penny stock" rules
that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and
accredited investors (generally defined as an investor with a net worth in
excess of $1 million or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by the penny stock rules,
a broker-dealer must make a suitability determination for the purchaser and
must have received the purchaser's written consent to the transaction prior
to sale. Consequently, both the ability of a broker-dealer to sell our
common stock and the ability of holders of our common stock to sell
their securities in the secondary market may be adversely affected. The
Securities and Exchange Commission has adopted regulations that define a
"penny stock" to be an equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require the delivery,
prior to the transaction, of a disclosure schedule relating to the penny
stock market. The broker-dealer must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is to sell the securities as a
market maker, the broker-dealer must disclose this fact and the broker-
dealer's presumed control over the market. Finally, monthly statements must
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
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. Our management
carried out an evaluation, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of the end of the period covered by this report, our
disclosure controls and procedures were effective. Disclosure controls
and procedures mean our controls and other procedures that are designed to
ensure that information required to be disclosed by us in our reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our reports that we file or submit under
the Securities Exchange Act of 1934 is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls. There have been no changes in our
internal control over financial reporting that occurred during the period
covered by this report that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among Canmax
Inc., CNMX MergerSub, Inc. and US Communications Services, Inc. (filed as
Exhibit 2.1 to Form 8-K dated January 30, 1998 (the "USC 8-K"), and
incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated January
15, 1998 (the "USC Rescission 8-K"), and incorporated herein by reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3, 1998 (filed
as Exhibit 10.1 to the Company's Form 8-K dated December 7, 1998 and
incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS Telecom
& Technologies, Inc., Dial Thru International Corporation, a Delaware
corporation, Dial Thru International Corporation, a California corporation,
and John Jenkins (filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated November 2, 1999 and incorporated herein by reference)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001, by
and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru International
Corporation. (filed as Exhibit 2.1 to the Company's Form 8-K dated October
29, 2001 and incorporated herein by reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.2 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as of
October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.3 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as of
October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.4 to the Company's
Form 8-K dated December 28, 2001 and incorporated herein by reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as of
November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.5 to the Company's
Form 8-K dated December 28, 2001 and incorporated herein by reference)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1999 (the "1999 Form 10-K") and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Dial Thru International Corporation
(filed as Exhibit 3.2 to the 1999 Form 10-K and incorporated herein by
reference)
31.1 Certification of the Chief Executive Officer, dated September 15, 2003,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer, dated September 15, 2003,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer, dated September 15,
2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer, dated September 15,
2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) The following reports on Form 8-K were filed or required to be filed for
the last quarter.
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 September 15, 2003