United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 2005
-----------
or
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to _____
Commission File Number 0-22636
-------
DIAL THRU INTERNATIONAL CORPORATION
---------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 75-2461665
------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17383 Sunset Boulevard, Suite 350
Los Angeles, California 90272
---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(310) 566-1700
---------------------------------------------------------------------------
(Issuer's Telephone number)
N/A
---------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of September 10, 2005, 23,788,323 shares of common stock, $.001 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
------ July 31, October 31,
2005 2004
---------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 371,823 $ 586,389
Trade accounts receivable (net of allowance
for doubtful accounts of $435,112 at July 31,
2005 and $122,291 at October 31, 2004) 411,373 841,127
Prepaid expenses and other current assets 169,000 197,968
---------- ----------
Total current assets 952,196 1,625,484
---------- ----------
PROPERTY AND EQUIPMENT, net 454,764 869,957
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 71,248 69,050
---------- ----------
TOTAL ASSETS $ 3,275,125 $ 4,361,408
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Capital lease obligation $ 126,196 $ 126,196
Trade accounts payable 3,349,686 2,791,545
Accrued liabilities 890,667 1,142,829
Accrued interest (including $870,012 to related
parties at July 31, 2005 and $759,692 at
October 31, 2004) 967,838 1,154,284
Deferred revenue 391,220 380,444
Deposits and other payables 418,109 428,109
Note payable - 1,250,000
Convertible debentures, current portion (net of
debt discount of $299,796 at July 31, 2005) 390,204 1,040,000
Convertible notes payable to related parties - 1,470,890
Net current liabilities from
discontinued operations 1,162,000 1,100,000
---------- ----------
Total current liabilities 7,695,920 10,884,297
---------- ----------
CONVERTIBLE DEBENTURES, less current portion (net
of debt discount of $1,367,202 at July 31, 2005) 560,254 -
CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES (net
of debt discount of $85,482 at July 31, 2005) 1,385,409 -
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, $.001 par value; 84,169,100 shares
authorized; 23,484,944 shares issued at July 31,
2005 and 23,034,151 at October 31, 2004 23,485 23,034
Additional paid-in capital 42,153,969 40,055,719
Accumulated deficit (48,489,042) (46,546,772)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
---------- ----------
Total shareholders' deficit (6,366,458) (6,522,889)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 3,275,125 $ 4,361,408
========== ==========
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,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
REVENUES $ 2,347,374 $ 2,940,023 $ 7,996,586 $10,627,607
COSTS AND EXPENSES
Costs of revenues 1,872,577 2,223,331 6,255,156 8,144,577
Sales and marketing 50,277 112,969 163,156 327,300
General and administrative 965,216 781,958 2,549,883 2,458,395
Depreciation and amortization 142,046 153,994 438,695 462,034
Gain on disposal of equipment - - (8,800) -
Gain on settlement of liabilities - - - (225,000)
---------- ---------- ---------- ----------
Total costs and expenses 3,030,116 3,272,252 9,398,090 11,167,306
---------- ---------- ---------- ----------
Operating loss (682,742) (332,229) (1,401,504) (539,699)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (261,253) (99,474) (369,434) (287,293)
Related party interest expense and
financing costs (39,029) (54,434) (112,573) (171,854)
Foreign currency exchange
gains (losses) (4,118) (2,136) 3,241 9,025
---------- ---------- ---------- ----------
Total other expense, net (304,400) (156,044) (478,766) (450,122)
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (987,142) (488,273) (1,880,270) (989,821)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, net of income taxes of
$0 for all periods (62,000) - (62,000) 1,501,147
---------- ---------- ---------- ----------
NET INCOME (LOSS) $(1,049,142) $ (488,273) $(1,942,270) $ 511,326
========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income
(loss) per share
Continuing operations $ (0.04) $ (0.03) $ (0.08) $ (0.06)
Discontinued operations (0.00) 0.00 0.00 0.09
---------- ---------- ---------- ----------
$ (0.04) $ (0.03) $ (0.08) $ 0.03
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 23,201,563 16,244,381 23,082,377 16,208,114
========== ========== ========== ==========
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,
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES OF
CONTINUING OPERATIONS
Net loss from continuing operations $(1,880,270) $ (989,821)
Adjustments to reconcile net loss from
continuing operations to net cash (used
in) provided by operating activities:
Gain from disposal of fixed assets (8,800) -
Bad debt expense 357,976 20,000
Non-cash interest expense 214,879 124,685
Gain on settlement of liabilities - (225,000)
Depreciation and amortization 438,695 462,034
Fair value of warrants issued for services 159,695 -
(Increase) decrease in:
Trade accounts receivable 71,778 (158,089)
Prepaid expenses and other current assets 28,968 (7,152)
Other assets (5,168) (9,989)
Increase (decrease) in:
Trade accounts payable 558,141 173,662
Accrued liabilities (88,991) 729,485
Deferred revenue 10,776 48,692
Deposits and other payables (10,000) (2,500)
---------- ----------
Net cash (used in) provided by operating
activities of continuing operations (152,321) 166,007
CASH FLOWS FROM INVESTING ACTIVITIES
OF CONTINUING OPERATIONS
Purchase of property and equipment (24,702) (134,115)
Proceeds from sale of fixed assets 10,000 -
---------- ----------
Net cash used in investing activities
of continuing operations (14,702) (134,115)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
OF CONTINUING OPERATIONS
Payment on convertible debenture (47,543) -
Payments on capital leases - (34,397)
---------- ----------
Net cash used in financing activities
of continuing operations (47,543) (34,397)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (214,566) (2,505)
Cash and cash equivalents at beginning of period 586,389 505,256
---------- ----------
Cash and cash equivalents at end of period $ 371,823 $ 502,751
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 79,803 $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND
FINANCING ACTIVITIES
Conversion of convertible debenture and accrued
interest into common stock $ - $ 10,729
Conversion of convertible debenture
to common stock $ 25,000 $ -
Beneficial conversion feature of convertible
debentures recorded as debt discount $ 1,362,649 $ 104,085
Note payable exchanged for convertible debenture $ 1,250,000 $ 550,000
Accrued interest converted
to convertible debenture $ 349,617 $ -
Fair value of common stock issued in connection
with amendments to debt agreements $ 99,469 $ -
Fair value of warrants issued in connection
with amendments to debt agreements $ 451,887 $ -
Convertible debenture issued for financing fees $ 50,383 $ -
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-QSB
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, 2005 and 2004 have been included. Operating results
for the three and nine month periods ended July 31, 2005 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 2005. 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, 2004.
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 facsimile 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 facsimile calls by routing calls over the Internet, 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 recently introduced Internet phones to the end user,
business or consumer. These phones allow the user to make calls from phone
to phone absolutely free and enjoy huge savings using these phones at their
home or office and traveling domestically or abroad as their phone and
number follow them everywhere. Not only does the customer enjoy huge
savings in local, long distance and international calling, they can save by
not having to pay for taxes and regulatory fees customary with normal phone
lines. In addition, bulk minute buying, such as unlimited calling to the
U.S. from abroad for a single user has set a new standard for international
calling.
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 is subject to various risks in connection with the operation of
its 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 the Company's business strategy or
an inability to execute is strategy due to unanticipated changes in the
market, (v) various competitive factors that may prevent the Company from
competing successfully in the marketplace, and (vi) the Company's lack of
liquidity and its ability to raise additional capital. The Company has an
accumulated deficit of approximately $48.4 million as well as a working
capital deficit of approximately $6.7 million as of July 31, 2005. 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 debt facilities,
additional equity financing and potentially through cash generated by
operations. The Company currently has no commitments for additional funding
or credit facilities.
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 substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments to reflect the possible effects of recoverability and
classification of assets or classification of liabilities which may result
from the inability of the Company to continue as a going concern.
NOTE 3 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company provided wholesale services to three customers, each of which
accounted for 19%, 17% and 13%, respectively, of the overall revenue of the
Company for the three months ended July 31, 2005. For the nine months ended
July 31, 2005, the Company provided wholesale services to two customers,
each of which accounted for 12%, respectively, of the overall revenue of the
Company. The Company provided wholesale services to another customer which
accounted for 21% of the Company's trade accounts receivable at July 31,
2005.
The Company provided wholesale services to a single customer who accounted
for 18% and 20% of the overall revenue of the Company for the three and nine
months ended July 31, 2004, respectively, and 24% of the Company's trade
accounts receivable at July 31, 2004. The Company also provided wholesale
services to another customer who accounted for 13% of the overall revenue of
the Company for the nine months ended July 31, 2004.
NOTE 4 - STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the
date of grant, of fair value of the Company's stock over the exercise price.
Accordingly, no compensation expense has been recognized for its employee
stock options in the financial statements during the three and nine months
ended July 31, 2005 and 2004 as the fair market value on the grant date
approximates the exercise price. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No. 123, as amended by SFAS No. 148, the Company's pro forma net loss
from continuing operations for the three and nine months ended July 31, 2005
and 2004 would have been as follows:
Three Months Nine Months
Ended July 31, Ended July 31,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net loss from
continuing operations,
as reported $ (987,142) $ (488,273) $(1,880,270) $ (989,821)
Deduct: Stock based
employee compensation
expense determined
under fair value
based method (1,777) (35,352) (8,965) (108,463)
---------- ---------- ---------- ----------
Pro forma net loss $ (988,919) $ (523,625) $(1,889,235) $(1,098,284)
========== ========== ========== ==========
Net loss per share
from continuing
operations
As reported
Basic and diluted $ (0.04) $ (0.03) $ (0.08) $ (0.06)
========== ========== ========== ==========
Proforma
Basic and diluted $ (0.04) $ (0.03) $ (0.08) $ (0.07)
========== ========== ========== ==========
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Because
options vest over a period of several years and additional awards are
generally made each year, the pro forma information presented above is not
necessarily indicative of the effects on reported or pro forma net earnings
or losses for future periods.
No options were granted during the nine months ended July 31, 2005. During
the nine months ended July 31, 2004, the Company granted 405,000 options.
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004) ("Statement
123(R)"), "Share-Based Payment", which revised SFAS No. 123 and supercedes
APB Opinion No. 25. The revised statement addresses the accounting for
share-based payment transactions with employees and other third parties,
eliminates the ability to account for share-based compensation transactions
with employees using APB Opinion No. 25 and requires that the fair value of
such share based payments be recognized in the consolidated statement of
operations. The revised statement is effective as of the first interim or
annual financial reporting period beginning after December 15, 2005. The
Company will adopt the statement on November 1, 2006 using the modified
prospective method. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had the Company adopted Statement
123(R) in prior periods, the impact of that standard would have approximated
the impact of SFAS No. 123 as described in the disclosure of pro forma net
loss and net loss per share in the table above.
NOTE 5 - DISCONTINUED OPERATIONS
Rapid Link Telecommunications GMBH
----------------------------------
In the fourth quarter of fiscal year 2003, the Company's German Subsidiary,
Rapid Link Telecommunications GMBH ("Rapid Link Germany"), filed for
insolvency. During the first quarter of fiscal year 2004, the Company
determined that it no longer controlled the operations of this subsidiary
and that the parent entity had no legal obligation to pay the liabilities of
Rapid Link Germany. Accordingly, the Company wrote off the remaining net
liability of $2,251,000 and included the gain in Discontinued Operations
during the first quarter of fiscal year 2004.
Canmax Retail Systems
---------------------
During the first quarter of fiscal year 2004, the Company received final
written communications from the State of Texas that it is demanding payment
of sales taxes (including penalties and interest) totaling $1.1 million.
The Company had previously accrued an estimated settlement amount of
$350,000. During the first quarter of fiscal year 2004, the Company accrued
an additional $750,000 (See Note 11). The sales tax amount due is
attributable to audit findings associated with the Company's former parent,
Canmax Retail Systems, from the State of Texas for the years 1995 to 1999.
These operations were previously classified as discontinued after the
Company changed its business model from a focus on domestic prepaid phone
cards to international wholesale and retail business, operating as a
facilities-based global Internet protocol communications company providing
connectivity to international markets. The State of Texas determined that
the Company did not properly remit sales tax on certain transactions. The
Company's current and former management believes that the amount due has not
been properly assessed and will continue to pursue a lesser settlement
amount. Since this sales tax liability represents an adjustment to amounts
previously reported in Discontinued Operations, the amount was classified as
Discontinued Operations. The amount that the State of Texas assessed of
$1.1 million has been accrued as a liability and is included in the Balance
Sheet as Discontinued Operations. During the quarter ended July 31, 2005,
the Company recorded additional penalties and interest of $62,000(See Note
8.)
NOTE 6 - RESOLUTION OF VENDOR DISPUTE
During the first quarter of fiscal year 2005, the Company recorded a
reduction of $283,138 to Costs of Revenues in its Consolidated Statement of
Operations. This amount represents the favorable resolution of a dispute
with one of the Company's vendors. This amount had been recorded as Costs
of Revenues in prior periods.
NOTE 7 - CONVERTIBLE DEBENTURES
On June 1, 2005, the Company and GCA Strategic Investment Fund ("GCA")
agreed to extend the maturity dates of the Company's two 6% convertible
debentures, each convertible debenture providing financing of $550,000 in
January 2002 and July 2003, respectively. For the convertible debenture
originally issued in January 2002, the maturity date was extended to
November 26, 2005. The balance of this debenture was $490,000 at July 31,
2005. In connection with the extension, the Company issued GCA warrants to
acquire 110,000 shares of common stock at an exercise price of $0.11 and
150,000 warrants to acquire common stock at an exercise price of $0.38.
Both warrants expire in June 2010. The Company recorded $104,693 as debt
discount, representing the fair value of the warrants on June 1, 2005. This
amount was calculated using the Black-Scholes pricing model with the
following assumptions: applicable risk-free interest rate based on the
current treasury-bill interest rate at the grant date of 4%; dividend
yields of 0%; volatility factors of the expected market price of the
Company's common stock of 1.64; and an expected life of the warrants
of three years. The debt discount is being amortized over the extension
period of the convertible debenture. In addition, the Company issued to GCA
100,000 shares of common stock valued at $0.45 per share, the Company's
closing stock price on June 1, 2005, the date of issuance. In connection
with the stock issuance, the Company has recorded $45,000 as debt discount,
and is amortizing the debt discount over the extension period of the
convertible debenture. For the three and nine months ended July 31, 2005,
approximately $50,000 of debt discount amortization has been recorded as
interest expense. For the convertible debenture originally issued in July
2003, the maturity date was extended to November 26, 2006. The balance of
this debenture was approximately $550,000 at July 31, 2005. In connection
with the extension, the Company issued GCA warrants to acquire 150,000
shares of common stock at an exercise price of $0.38, which expire in June
2010. The Company recorded $58,458 as debt discount, representing the fair
value of the warrants on June 1, 2005. This amount was calculated using
the Black-Scholes pricing model with the following assumptions:
applicable risk-free interest rate based on the current treasury-bill
interest rate at the grant date of 4%; dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of 1.64;
and an expected life of the warrants of three years. The debt
discount is being amortized over the extension period of the convertible
debenture. In addition, the Company issued to GCA 40,000 shares of common
stock valued at $0.45 per share, the Company's closing stock price on June
1, 2005, the date of issuance. In connection with the stock issuance, the
Company has recorded $18,000 as debt discount and is amortizing the debt
discount over the extension period of the convertible debenture. For the
three and nine months ended July 31, 2005, approximately $8,000 of debt
discount amortization has been recorded as interest expense.
On June 1, 2005, the Company and Global Capital Funding Group, LP ("Global")
agreed to extend the maturity date of the Company's 12% note payable (the
"GC-Note"), which provided financing of $1,250,000 in November 2002. The
maturity date was extended to February 29, 2008. In connection with the
extension, the GC-Note was converted to a 10.08% Convertible Note ("GC-
Conote"). The conversion price is equal to 80% 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 the related Notice of
Conversion (the "Formula Conversion Price"). The Company calculated the
beneficial conversion feature embedded in the GC-Conote in accordance with
EITF 98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" ("EITF-98-5") and
EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments" ("EITF 00-27") and recorded $1,013,032 as debt discount. This
debt discount is being amortized over the life of the GC-Conote. The
Company also issued to the holder of the GC-Conote warrants to acquire an
aggregate of 500,000 shares of common stock at an exercise price of $0.38,
and 125,000 warrants to purchase common stock at $0.11 per share, both
warrants expiring in June 2010. The Company recorded $200,498 as debt
discount, the relative fair value of the warrants on June 1, 2005. This
amount was calculated using the Black-Scholes pricing model with the
following assumptions: applicable risk-free interest rate based on the
current treasury-bill interest rate at the grant date of 4%; dividend
yields of 0%; volatility factors of the expected market price of the
Company's common stock of 1.64; and an expected life of the warrants
of three years. The debt discount is being amortized over the life of the
GC-Conote. In addition, the Company issued to Global 100,000 shares of
common stock valued at $0.45 per share, the Company's closing stock price
on June 1, 2005, the date of issuance. The Company has recorded $36,469
as debt discount, the relative fair value of the stock issued, and is
amortizing the debt discount over the life of the GC-Conote. For the three
and nine months ended July 31, 2005, approximately $76,000 of debt discount
amortization has been recorded as interest expense.
In connection with the extension of the maturity date of the GC-Note, the
interest due on the GC-Note of approximately $350,000 as of May 31, 2005 was
converted to a $400,000 non-interest bearing convertible Note Payable (the
"GC-Note2) to Global Capital Funding Group, LP. The GC-Conote2 requires
quarterly payments of $50,000 on the last day of March, June, September and
December of each year until the March 31, 2007 maturity Date, commencing on
June 30, 2005. In addition, the GC-Conote2 provides for conversion based on
a conversion price equal to 80% 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 the related Notice of Conversion
(the "Formula Conversion Price"). The Company calculated the beneficial
conversion feature embedded in the GC-Note2 in accordance with EITF 98-5 and
EITF 00-27 and recorded approximately $350,000 as debt discount. This debt
discount is being amortized over the life of the GC-Note2. The approximate
$50,000 difference between the accrued interest at May 31, 2005 and the
value of the GC-Note2 ($400,000) represents a financing fee and was recorded
as debt discount and is being amortized over the life of the GC-Note2. For
the three and nine months ended July 31, 2005, approximately $75,000 of debt
discount amortization has been recorded as interest expense.
On July 21, 2005, the Company and the three executives that hold a 10%
convertible debenture (the "Notes") with an outstanding balance of
$1,470,890 at July 31, 2005, agreed to extend the maturity date of the Notes
to February 29, 2008. The original maturity date was October 24, 2003. In
connection with the extension, the Company issued to the three executives
warrants to acquire 640,000 shares of common stock at an exercise price of
$0.16. The warrants expire in July 2010. The Company recorded $88,238 as
debt discount, the fair value of the warrants on June 1, 2005. This amount
was calculated using the Black-Scholes pricing model with the following
assumptions: applicable risk-free interest rate based on the current
treasury-bill interest rate at the grant date of 4%; dividend yields of
0%; volatility factors of the expected market price of the Company's
common stock of 1.65; and an expected life of the warrants of three
years. The debt discount is being amortized over the extension period of
the Notes. For the three and nine months ended July 31, 2005, approximately
$3,000 of debt discount amortization has been recorded as interest expense.
NOTE 8 - 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. As the Company's main
focus is now on providing VoIP originated services, the Company believes
that this lawsuit should have little bearing on future revenues.
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 re-filed the motion for
summary judgment for non-infringement. In response to this filing, during
August 2004, the court narrowly defined the issue to relate to a certain
reorigination technology which the Company believes it does not now, nor has
it ever utilized to provide any of its telecommunications services. The
Company intends to continue defending this case vigorously, and though its
ultimate legal and financial liability with respect to such legal proceeding
is therefore expected to be minimal, it cannot be estimated with any
certainty at this time. (See Subsequent Events).
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 management filed exceptions, through its outside sales
tax consultant, to the State's audit findings, including the non-taxable
nature of certain transactions. In correspondence from the State in June
2003, the State agreed to consider certain offsetting remittances received
by Canmax during the audit period. The State has refused to consider
other potential offsets. Based on this correspondence with the State,
management's estimate of the potential liability was originally recorded at
$350,000 during the fiscal year ended October 31, 2003. Based on further
correspondence with the State, this estimated liability was increased to
$1.1 million during the first quarter of fiscal year 2004 (See Note 11).
Since this sales tax liability represents an adjustment to amounts
previously reported in discontinued operations, it was classified separately
during the first quarter of fiscal year 2004 in discontinued operations, and
is included in the July 31, 2005 and October 31, 2004 consolidated balance
sheets in "Net current liabilities from discontinued operations".
On August 5, 2005, the State of Texas filed a lawsuit in the 53rd Judicial
District Court of Travis County, Austin, Texas against the Company.
The lawsuit requests payment of approximately $1.162 million including
penalties, interest and attorneys fees of approximately $50,000 for state
and local sales. During the three months ended July 31, 2005, the Company
has accrued an additional $62,000 of penalties and interest. The Company
will continue to aggressively pursue the collection of unpaid sales taxes
from former customers of Canmax, primarily Southland Corporation, as a
majority of the amount owed to the State of Texas is the result of
uncollected taxes from the sale of software to Southland during the period
under audit (see below). However, there can be no assurance that the
Company will be successful with respect to such collections.
On January 12, 2004, the Company filed a suit against Southland Corporation
("Southland") in the 162nd District Court in Dallas, Texas. The Company's
suit claims a breach of contract on the part of Southland in failing to
reimburse it for taxes paid to the State as well as related taxes for which
the Company is currently being held responsible by the State. The Company's
suit seeks reimbursement for the taxes paid and a determination by the court
that Southland is responsible for paying the remaining tax liability to
the State. The Company is discussing possible settlement options with
Southland, but as of yet, no agreement has been reached.
On July 20, 2004, the Company filed a suit against Q Comm International,
Inc. ("Q Comm") in Federal Court in the Central District of Utah. The
Company's suit claimed damages of $4 million plus attorney's fees and costs
resulting from the breach of a purchase agreement on the part of Q Comm
relating to the sale of the Company's internally constructed equipment for
the prepaid telecommunications industry. Pursuant to the terms of the
purchase agreement, the Company would deliver the source code of certain
proprietary software in consideration for an aggregate purchase price of $4
million, of which $1 million was due at closing and the remainder was due
over three years. Following execution of the agreement, the Company
tendered the software source code to Q Comm, however, Q Comm failed to pay
the Company the initial amount due under the agreement. The Company
believes that Q Comm used this source code in the development of point of
sale software and subsequently generated revenues in excess of $10 million
from this software. (See Subsequent Events).
NOTE 9 - WARRANTS ISSUED FOR PROFESSIONAL SERVICES
During the quarter ended April 30, 2005, the Company issued, to a provider
of legal and investment consulting services, warrants to acquire 1,000,000
shares of common stock at an exercise price of $0.78, which expire on
February 28, 2008. The Company recorded $159,695, the fair value of the
warrants, to general and administrative expense during the quarter ended
April 30, 2005. The fair value of the warrants was calculated using the
Black-Scholes pricing model with the following assumptions: applicable
risk-free interest rate based on the current treasury-bill interest
rate at the grant date of 4%; dividend yields of 0%; volatility factors
of the expected market price of the Company's common stock of 1.13; and an
expected life of the warrants of three years.
Note 10 - Shareholders' Deficit
Common Stock Issuances
On June 1, 2005, in connection with the extension of the maturity date of
the Company's note payable to Global Capital Funding Group LP, ("Global")
the Company issued Global 100,000 shares of common stock.
On June 1, 2005, in connection with the extension of the maturity dates of
the Company's two convertible debentures with GCA Strategic Investment Fund
("GCA"), the Company issued GCA 140,000 shares of common stock.
On July 21, 2005, Global converted $25,000 of principal on the Company's
$400,000 convertible note into 210,793 shares of common stock.
NOTE 11 - SUBSEQUENT EVENTS
On August 3, 2005, the Company entered into a Settlement and Release
Agreement with QComm. The Agreement releases QComm from any and all claims
in connection with the Company's lawsuit against QComm for breach of a
purchase agreement. In connection with the release, the Company agreed to a
cash settlement of $225,000, which was received on August 10, 2005. This
amount will be recorded as "Gain on legal settlement" in operations in the
Company's fourth fiscal quarter.
On August 5, 2005, the State of Texas filed a lawsuit in the 53rd Judicial
District Court of Travis County, Austin, Texas against the Company. The
lawsuit requests payment of approximately $1.162 million plus penalties,
interest and attorneys fees of approximately $50,000 for state and local
sales. The Company previously recorded an estimated liability of $1.1
million, as of January 31, 2004, representing the entire amount due as
determined by the state of Texas. During the three months ended July 31,
2005, the Company has accrued an additional $62,000. Management believes
that it will be able to negotiate a reduced settlement amount with the
state, although there can be no assurance that the Company will be
successful with respect to such negotiations. The Company has previously
accrued the full amount of the liability. (See Notes 5 and 8).
On August 17, 2005, the United States District Court for the Northern
District of California issued a stay in the Company's patent infringement
lawsuit with Cygnus for the purpose of reexamining Cygnus patent. This stay
is the result of a reexamination request received by the United States
Patent and Trademark Office ("USPTO"), whereby the USPTO has found that
there is a "substantial new question of patentability." All hearing and
scheduling dates have been vacated by the court. A Case Management
Conference to review the status of the lawsuit and the appropriateness of a
continued stay is scheduled for December 2, 2005.
On August 30, 2005, the Company entered into a binding letter of intent to
acquire certain assets and customer base of Integrated Communications, Inc,
a privately owned Delaware corporation ("Integrated"). Integrated is an
international long distance carrier providing Voice over Internet Protocol
services to retail customers in the United States, and wholesale services to
customers worldwide. The closing date is scheduled to occur no later than
September 30, 2005, unless extended by mutual consent of the parties.
Pursuant to the terms of the agreement the Company will issue up to an
aggregate of 1,500,000 shares of the Company's common stock and warrants to
purchase up to 1,000,000 shares of the Company's common stock as follows:
(i) 750,000 shares of common stock will be issued within five (5) days of
the closing of the transaction, provided that Integrated's total monthly
gross revenue from its retail and wholesale customer base is in excess of
$300,000 per month with a minimum gross margin of $40,000; (ii) 750,000
shares within twelve (12) months of the closing date provided retail revenue
is in excess of $1,500,000 in total for the twelve months after the closing
date with a related gross margin of $350,000, and wholesale revenue exceeds
$2,100,000 in total for the twelve months after the closing date with a
related gross margin of not less than $130,000. If the gross revenue
targets are not achieved, then the shares will be adjusted based on the
actual revenue and margin amounts achieved; (iii) 250,000 warrants to be
issued each quarter, the exercise price to be determined on the grant date,
provided that retail and wholesale revenue and gross margin increase by a
minimum of 25% each quarter, as measured against the immediate preceding
quarter. The Company agreed to register the stock issued in connection with
the acquisition at the time the Company files any registration statement
after the closing date.
Completing the acquisition of Integrated is subject to the execution of a
definitive acquisition agreement with additional mutually acceptable terms
and closing conditions. In the event Integrated terminates the letter of
intent prior to the execution of a definitive agreement, it must pay the
Company a break-up fee in the amount of $100,000 cash. However, Integrated
will not be required to pay a break-up fee if the letter of intent is
terminated prior to the execution of a definitive agreement due to a breach
of the letter of intent by the other party for any reason beyond the control
of either respective party. Furthermore, if the Company is not able to
raise approximately $1,000,000 within 90 days of the signing of the Letter
of Intent, Integrated shall have the right to terminate the Letter of Intent
with paying the break-up fee.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLYSIS OR PLAN OF OPERATION.
The following discussion and analysis of financial condition and results of
operations covers the three and nine-month periods ended July 31, 2005 and
2004 and should be read in conjunction with our financial statements and the
notes thereto.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB 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 believe 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, 2004 and throughout this report on Form
10-QSB. 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.
General
On November 2, 1999, we acquired substantially all of the business and
assets of Dial Thru International Corporation, a California corporation,
and, on January 19, 2000, we changed our name from ARDIS Telecom &
Technologies, Inc. to "Dial Thru International Corporation." Our common
stock currently trades on the OTC Bulletin Board under the symbol "DTIX."
In the second quarter of fiscal 2000, we shifted focus toward our global
Voice over Internet Protocol, or VoIP, strategy. This strategy allows us to
form local partnerships with foreign postal, telephone and telegraph
companies (entities that are responsible for providing telecommunications
services in foreign markets and which are usually government owned or
controlled) and to provide IP enabled services based on the in-country
regulatory environment affecting telecommunications and data providers.
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 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.
On August 1, 2003, our German subsidiary, Rapid Link Telecommunications
GmbH, received approval for its insolvency filing and was turned over to
a trustee who is responsible for liquidating the operation. We have
determined that we no longer control the operations of this subsidiary and
that our parent entity has no legal obligation to pay the liabilities of
Rapid Link Telecommunications GmbH.
The telecommunications industry continues to evolve towards an increased
emphasis on IP related products and services. We have focused our business
towards these types of products and services for the last couple of years.
Furthermore, we believe the use of the Internet to provide IP related
telephony services to the end user customer, either as a stand alone
solution or bundled with other IP products, will continue to impact the
industry as large companies like Time Warner and AT&T look to capitalize on
their existing cable infrastructures, and smaller companies look to provide
innovative solutions to attract commercial and residential users to their
product offerings.
We will focus on the growth of our VoIP business by adding new products and
services that we can offer to end user customers. We are also exploring
opportunities to provide current customers, and attract new customers,
through the sale of specialized Internet phones to allow customers to
connect their phones to their existing Dial-Up or DSL Internet connections.
These Internet phones will allow the user to originate phone calls over the
Internet, thereby bypassing the normal costs associated with originating
phone calls over existing land lines. By avoiding these costs, we are able
to offer lower priced services to our customers, which we believe will allow
us to attract additional users. We also believe there will be considerable
demand for this type of product in certain foreign markets, where end users
pay a significant premium to their local phone companies to make long
distance phone calls. While we expect the growth in our customers and
suppliers and the introduction of innovative product offerings to retail
users, specifically Internet phones, to have a positive impact on our
revenues and earnings, we cannot predict when this will happen, or be
certain that it will happen at all. The revenue and costs associated with
the Internet phone product offerings will depend on the number of customers
and contracts we obtain. In many ways, our ability to maintain operations
in the foreseeable future will be dictated by our ability to quickly deploy
VoIP products into selected markets and to realize high quality revenues
from these products and related telecommunications sources. Any delay in
our expansion of VoIP products and services will adversely affect our
financial condition and cash flow and could ultimately cause us to greatly
reduce or even cease operations.
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 financial
statements, we have made our best estimates and judgments of certain amounts
included in the 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 estimates associated with
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 recognized 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 wholesale 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. 104, "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. 104.
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
Effective November 1, 2001, we adopted SFAS No 141, "Business Combinations"
("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, and also specifies
the criteria for the recognition of intangible assets separately from
goodwill. Under SFAS 142, goodwill is no longer amortized, but is subject
to an impairment test at least annually or more frequently if impairment
indicators arise. In accordance with SFAS 142, an annual impairment test of
goodwill was performed by an independent valuation firm in the fourth
quarter of fiscal year 2004. The results of this impairment test indicated
goodwill was not impaired. The impairment test process is detailed below.
We record goodwill when the consideration paid for an acquisition exceeds
the fair value of net tangible and identifiable intangible assets acquired.
Performance of the impairment test involves a two-step process. The first
step compares the fair value of our single reporting unit to its carrying
amount. The fair value of the reporting unit is determined by calculating
the market capitalization of the reporting unit as derived from quoted
market prices, and further substantiated through the use of other generally
accepted valuation methods. A potential impairment exists if the fair value
of the reporting unit is lower than its carrying amount. Historically, the
impairment test has shown that the carrying value is less than fair value.
The second step of the process is only performed if a potential impairment
exists, as indicated by step one, and involves determining the difference
between the fair values of the reporting unit's net assets, other than
goodwill, as compared to the fair value of the reporting unit. If the
difference is less than the net book value of goodwill, impairment exists
and is recorded. We determine our reporting units, for purposes of testing
for impairment, by determining (i) how we manage our operations, (ii) if a
component of an operating unit constitutes a business for which discrete
financial information is available and our management regularly review such
financial information, and (iii) how the acquired entity is integrated with
our operations. Based on these criteria, we determined that we have a single
reporting unit.
In order to determine the fair value of our reporting unit under SFAS 142,
we consider the following two approaches:
* Market Approach - Under the market approach, recent sales of
comparable companies or securities are analyzed to determine
the value for a particular asset under study. Adjustments are
made to the sales data to account for differences between the
subject asset and the comparables. The market approach is most
applicable to assets that are homogenous in nature and are
actively traded. Relative to other approaches to value, the
key strength of the market approach is that it provides
objective indications of value while requiring that relatively
few assumptions be made.
* Income Approach - This approach measures the present worth of
anticipated future net cash flows generated by the business.
Net cash flows are forecast for an appropriate period and then
discounted to present value using an appropriate discount rate.
Net cash flow forecasts require analysis of the significant
variables influencing revenues, expenses, working capital,
and capital investment. An income approach methodology is
generally useful because it accounts for the specific
contribution of fundamental factors impacting those variables
that affect the value of the business.
According to SFAS 142, quoted market prices in active markets are the best
evidence of fair value and shall be used as the basis for the measurement of
fair value, if available. As of October 31, 2004, our market capitalization
was $2,303,415, determined by taking the shares outstanding as of that date
multiplied by our stock price of $0.10. We added interest bearing debt and
operating liabilities (excluding net current liabilities of discontinued
operations), adjusted downward to a fair value estimate of 25%, resulting in
a fair value of assets of approximately $4.75 million. This amount exceeds
the carrying value of our assets (the value of our assets as reported in our
financial statements), including goodwill, of $4,361,408. While our market
capitalization renders a minority interest valuation, because shares of the
Company represent minority interests, the fair value of assets exceeds its
carrying value even without the application of a control premium as
recommended by SFAS 142. However, we believe that the application of the
market approach necessitates additional analysis for three reasons (i) we
have generated no analyst coverage to provide information about the stock to
the public, suggesting that the market price may not reflect available
information, (ii) our stock price demonstrated volatility as of the
valuation date, and (iii) our stock is thinly traded with no organization
making an active market in the stock. These factors suggest that our stock
price, when taken in isolation, may not be sufficient evidence of fair
value. In estimating the fair value of a reporting unit, a valuation
technique based on multiples of earnings or revenues or a similar
performance measure may be used if that technique is consistent with the
objective of measuring fair value. As further support for our market
approach, we calculated the Business Enterprise Value (BEV) for five other
telecommunications companies which provide services similar to those that we
provide. The BEV is determined by taking the market capitalization of a
public enterprise, adding their debt and subtracting any cash equivalents.
The resulting value is divided by annual revenue in order to determine a
reasonable multiple that can be applied to us. We averaged the multiple of
these five companies, trading on average at 2.1 times their annual revenue
obtained from their most recent published financials, and applied the result
to our 2004 fiscal year revenues. The resulting BEV for us was well in
excess of the fair value of our assets calculated above. As a result, we
determined that the fair value of our Company exceeds its carrying amount,
and therefore that goodwill is not impaired.
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 debt discounts in connection with these financing transactions in
accordance with Emerging Issues Task Force Nos. 98-5 and 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 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.
RESULTS OF OPERATIONS
The following table presents our operating results for the three and nine-
month periods ended July 31, 2005 and 2004 as well as a comparison of the
percentage change of our operating results from the three and nine-month
periods ended July 31, 2005 to the corresponding periods ended July 31,
2004:
% of Revenue % of Revenue
Three Months Nine Months
Three Months Ended Ended Nine Months Ended Ended
July 31, July 31, July 31, July 31,
-------------------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------------------
REVENUES $2,347,374 $2,940,023 100% 100% $ 7,996,586 $10,627,607 100% 100%
COSTS AND EXPENSES
Costs of revenues 1,872,577 2,223,331 80% 76% 6,255,156 8,144,577 78% 77%
Sales and marketing 50,277 112,969 2% 4% 163,156 327,300 2% 3%
General and administrative 965,216 781,958 41% 27% 2,549,883 2,458,395 32% 23%
Depreciation and amortization 142,046 153,994 6% 5% 438,695 462,034 5% 4%
Gain on disposal of equipment - - - - (8,800) - - -
Gain on settlement of liabilities - - - - - (225,000) - (2%)
-------------------------------------------------------------------------------------
Total costs and expenses $3,030,116 $3,272,252 129% 111% 9,398,090 11,167,306 118% 105%
-------------------------------------------------------------------------------------
Operating loss (682,742) (332,229) (29%) (11%) (1,401,504) (539,699) (18%) (5%)
OTHER INCOME (EXPENSE)
Interest expense and
financing costs (261,253) (99,474) 11% 3% (369,434) (287,293) 5% 3%
Related party interest
expense and financing
costs (39,029) (54,434) 2% 2% (112,573) (171,854) 1% 2%
Foreign currency exchange
gains (losses) (4,118) (2,136) - - 3,241 9,025 - -
-------------------------------------------------------------------------------------
Total other expense, net (304,400) (156,044) 10% 5% (478,766) (450,122) 5% 4%
-------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (987,142) (488,273) (39%) (17%) (1,880,270) (989,821) (23%) (9%)
INCOME (Loss) FROM DISCONTINUED
OPERATIONS, net of income
taxes of $0 for all periods (62,000) - (3%) - (62,000) 1,501,147 (1%) 14%
-------------------------------------------------------------------------------------
NET INCOME (LOSS) $(1,049,142) $(488,273) (42%) (17%) $(1,942,270) $ 511,326 (24%) 5%
=====================================================================================
RESULTS OF OPERATIONS - COMPARISON OF THE THREE AND NINE-MONTH PERIODS ENDED
JULY 31, 2005 and 2004
REVENUES
For the three-month period ended July 31, 2005, 73% and 27% of our revenues
were derived from our wholesale and retail customers, respectively, compared
to 72% and 28%, respectively, for the three-month period ended July 31 2004.
Our wholesale revenues have decreased by 11% from the three-month period
ended July 31, 2004 compared to the three-month period ended July 31, 2005,
while our retail revenues have decreased by 25% during the three month
period ended July 31, 2005 over the comparable period in 2004.
For the nine-month period ended July 31, 2005, 76% and 24% of our revenues
were derived from our wholesale and retail customers, respectively, compared
to 75% and 25%, respectively, for the nine-month period ended July 31, 2004.
Our wholesale revenues have decreased by 27% from the nine-month period
ended July 31, 2004 compared to the nine-month period ended July 31, 2005,
while our retail revenues have decreased by 17% during the nine months ended
July 31, 2005 over the comparable period in 2004.
The decrease in wholesale revenues for the three and nine-month periods
ended July 31, 2005 compared to the same period in fiscal 2004 is
attributable to a decrease in the number of termination opportunities
available to us to offer our customers. Due to the competitive nature of
the wholesale telecommunications business, our customers frequently request
a reduction in the per minute termination rates that we offer them. At
times, our suppliers are not able to offer us lower rates in order to
maintain the minutes we are terminating to them. As a result, our wholesale
revenues fluctuate depending on the number of termination opportunities
available to us at any one time. We are working with new providers in an
effort to recapture our lost revenue, though the ultimate results of these
discussions cannot be predicted with any certainty. If we are unable to
attract and retain new wholesale customers, our wholesale revenues will
continue to erode.
The decrease in retail revenues for the three and nine-month periods ended
July 31, 2005 compared to the same period in fiscal 2004 is primarily
attributable to increased competition in our largest foreign markets,
including competition from the incumbent phone company in each market.
Furthermore, a significant portion of our retail business comes from members
of the United States military stationed in foreign markets. The March 2003
redeployment of troops into Iraq, where we have not historically provided
long distance service, resulted in a decline in our retail sales to these
military customers who were previously stationed in foreign markets that we
serviced. During the first five months of the current fiscal year, we
offered services to U.S. troops in Iraq on a limited basis. We are
attempting to offer these services again during the latter part of fiscal
year 2005. We are exploring opportunities to grow our retail business,
utilizing our in-house sales group and our outside agents, through the
introduction of new products and services, focusing our efforts principally
on the sale of Internet phones that allow users to connect these specialized
phones to their existing Dial-Up or DSL Internet connections. If we are
unable to stabilize our retail revenues from the U.S. military and grow our
retail revenues from VoIP-based products, this category of revenue will also
continue to decline.
OPERATING EXPENSES
Costs of Revenues: Our costs of revenues as a percentage of revenues have
increased from 76% for the three-month period ended July 31, 2004 to 80% for
the three-month period ended July 31, 2005. This increase was primarily due
to a lower average margin per minute relating to our wholesale business. As
a majority of our costs of revenues are variable, based on per minute
transportation costs, 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 and total revenue for each period.
Our costs of revenues as a percentage of revenues have increased from 77%
for the nine-month period ended July 31, 2004 to 78% for the nine-month
period ended July 31, 2005. Included within our costs of revenues for the
nine-month period ended July 31, 2005 is a reduction of costs in the amount
of $283,138 relating to the favorable resolution of a dispute with one of
our vendors. These costs were originally recorded to costs of revenues in
prior periods. Had this dispute resolution not occurred during the nine-
month period ended July 31, 2005, our costs of revenues as a percentage of
revenues would have been 82% for the period. The increase from the nine-
month period ended July 31, 2004 to the nine-month period ended July 31,
2005 is primarily due to the reason cited above for the three-month period
comparison.
Sales and Marketing Expenses: A significant component of our revenue is
generated by outside agents or through periodic newspaper advertising, which
is managed by a small in-house sales and marketing organization.
Our sales and marketing costs have decreased from 4% to 2% of revenues,
respectively, for the three months ended July 31, 2005 compared to the prior
year period, and from 3% to 2%, respectively, for the nine month period
ended July 31, 2005, compared to the prior year period. The reduction in
our sales and marketing costs is primarily due to a reduction in our sales
personnel and lower agent commission costs, which are paid as a percentage
of our revenue. During the three and nine-month periods ended July 31,
2005, we have focused our attention on increasing revenues through the
efforts of our agents. We will continue to focus our sales and marketing
efforts on periodic newspaper advertising, the establishment of distribution
networks to facilitate the introduction and growth of new products and
services, and agent related expenses to generate additional revenues.
General and Administrative Expenses: Our general and administrative expenses
have increased to 41% of revenues for the three months ended July 31, 2005
from 27% for the three months ended July 31, 2004. For the nine months
ended July 31, 2005 compared to the nine months ended July 31, 2004, our
general and administrative expenses have increased from 23% to 32% of
revenues, respectively. During the three-month period ended July 31, 2005,
our bad debt expense was $336,976. This includes approximately $291,000 from
our prepaid calling card distributor in Iraq. As a result of nonpayment, we
are no longer providing services out of Iraq and we are pursuing legal
action to collect this receivable. During the nine-month period ended July
31, 2005, we issued, to a provider of legal and investment consulting
services, warrants to acquire 1,000,000 shares of common stock. Relating to
this issuance of warrants, we recorded $159,695, the fair value of the
warrants, to general and administrative expense. Excluding the bad debt
expense, general and administrative expenses would have been 27% of revenues
for the three months ended July 31, 2005, comparable to the prior year
period. Excluding the bad debt expense and warrant expense for the nine
months ended July 31, 2005, general and administrative expenses would been
26% of revenues compared to 23% for the prior year period. Although general
and administrative expenses as a percentage of revenues has either stayed
the same, or increased slightly for the three and month periods ended July
31, 2005 compared to the prior year periods, excluding the bad debt and
warrant expense, in absolute dollars, general and administrative expenses
have decreased by 20% and 16% for the three and nine-month periods ended
July 31, 2005 compared to the three and nine-month periods ended July 31,
2004, respectively. This reduction has been accomplished primarily through
the elimination of personnel and personnel related costs. However, due to
the overall decline in revenue and the fixed nature of our general and
administrative expenses, as a percentage of revenue, our general and
administrative expenses have remained the same for the three month period
ended July 31, 2005 compared to the prior year period, and increased for the
nine months ended July 31, 2005 compared to the prior year period. We
review our general and administrative expenses regularly and continue to
manage the costs accordingly to support the current and anticipated future
business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization has decreased as a larger 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.
INTEREST EXPENSE AND FINANCING COSTS
Interest expense and financing costs for the three and nine-month periods
ended July 31, 2005 were due primarily to interest expense of approximately
$87,000 and $267,000, respectively, on our convertible debentures notes
payable and notes payable to related parties. In addition, for the three
and nine month period ended July 31, 2005, interest expense includes
approximately $212,000 and $214,000, respectively, of amortization of
deferred financing fees and debt discount relating to the extension of the
maturity dates on our debts to GCA, Global and related parties. Interest
expense and financing costs for the three and nine-month periods ended July
31, 2004 were due primarily to interest expense and the amortization of
deferred financing fees and debt discount on our convertible debentures,
notes payable and notes payable to related parties. The increase in
interest expense and financing costs from the three and nine-month periods
ended July 31, 2004 to the three and nine-month periods ended July 31, 2005
primarily relates to the extension of the maturity dates of our convertible
debt instruments with both our third party and related party lenders. A
further explanation of these changes can be found in the Liquidity and
Capital Resources section.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Income from discontinued operations for the nine-month period ended July 31,
2004 relates to an increase in the Company's estimated sales tax liability
of $750,000, offset by the write-off of the remaining net liability of our
German subsidiary, Rapid Link Telecommunications GMBH, totaling $2,250,000.
In the fourth quarter of fiscal 2003, Rapid Link Telecommunications GMBH
filed for insolvency. The net liability associated with the disposal of
the assets and liabilities of Rapid Link Telecommunications GMBH of
approximately $2.3 million was included in the balance sheet at October 31,
2003 and classified as Discontinued Operations. During fiscal year 2004, we
determined that we no longer controlled the operations of this subsidiary
and that the parent entity had no legal obligation to pay the liabilities of
Rapid Link Telecommunications GMBH. Accordingly, we wrote off the remaining
net liability of $2,250,000 and included the gain in Discontinued Operations
during the first quarter of fiscal year 2004.
During the first quarter of fiscal year 2004, we received final written
communications from the State of Texas that it is demanding payment of sales
taxes (including penalties and interest) totaling $1.1 million. We had
previously accrued an estimated settlement amount of $350,000. Accordingly,
we accrued an additional $750,000. On August 5, 2005, the State of Texas
filed a lawsuit in the 53rd Judicial District Court of Travis County,
Austin, Texas against the Company. The lawsuit requests payment of
approximately $1.162 million plus penalties, interest and attorneys fees of
approximately $50,000 for state and local sales. During the three months
ended July 31, 2005, the Company has accrued an additional $62,000. The
sales tax amount due is attributable to audit findings of our former parent,
Canmax Retail Systems, from the State of Texas for the years 1995 to 1999.
These operations were previously classified as discontinued after we changed
our business model from a focus on domestic prepaid phone cards to
international wholesale and retail business. The State of Texas determined
that we did not properly remit sales tax on certain transactions. Since
this sales tax liability represents an adjustment to amounts previously
reported in Discontinued Operations, this amount was classified during the
three-month period ended January 31, 2004 as Discontinued Operations. (See
Note 5 to the Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
Our operating loss has increased and to date we have been generally unable
to achieve positive cash flow on a quarterly basis or annual basis primarily
due to the fact that our present lines of business do not generate a volume
of business sufficient to cover our overhead costs. Our audit report for
the fiscal year ended October 31, 2004 includes an explanatory paragraph
indicating substantial doubt about our ability to continue as a going
concern.
We have violated certain requirements of our convertible debt agreements
relating to failure to register the underlying securities, and timely
payment of principal and interest, including payment in full on the maturity
date of the notes, either through the issuance of common stock, or payment
in cash. Our lenders have not declared us in default and have allowed us to
continue to operate. On June 1, 2005, we and our third-party lenders agreed
to amendments to our notes payable and convertible debenture agreements to
extend the maturity dates to various times ranging from November 26, 2005
through February 29, 2008. Approximately $2.3 million is due to two of our
executives and a director.
Furthermore, we frequently are not able to make timely payment to our trade
creditors. As of July 31, 2005, approximately $4.2 million, representing
approximately 68% of our trade accounts payable and accrued liabilities,
were past due. Although formal payment terms have not been negotiated with
most of these vendors, we continue to make regular payments, or provide
opportunities for the vendors to send us telecommunications traffic in
return for a reduction in our debt to them. These vendors have not stopped
providing services to us. If these vendors were to stop providing services
to us, our ability to continue to operate would be jeopardized. We continue
to seek sources of working capital sufficient to fund delinquent balances
and meet ongoing obligations, though our success on that front has been
limited.
Our future operating success is dependent on our ability to quickly generate
positive cash flow from our VoIP lines of products and services. Our major
growth areas are anticipated to include the establishment of additional
wholesale points of termination to offer our existing wholesale and retail
customers, and the introduction of new retail VoIP products (see "General"),
both domestically and internationally. We anticipate a $500,000-700,000 cash
shortfall from operations during the next 12 months, however we are
currently pursuing retail and wholesale opportunities that we believe will
reduce this shortfall. There can be no assurance that we will be successful
in implementing these opportunities. We do not have any capital equipment
commitments during the next 12 months. We are actively pursuing debt or
equity financing opportunities to continue our business. Any failure of our
business plan, including the risk and timing involved in rolling out retail
products to end users, to generate positive cash flow could result in a
significant cash flow crisis and could force us to seek alternative sources
of financing as discussed, or to greatly reduce or discontinue operations.
Although various possibilities for obtaining financing or effecting a
business combination (see Subsequent Events) have been discussed from time
to time, there are no agreements with any party to raise money and we cannot
assure you that we will be successful in our search for investors or
lenders. Any additional financing we may obtain will involve material
and substantial dilution to existing stockholders. In such event, the
percentage ownership of our current stockholders will be materially reduced,
and any new equity securities sold by us may have rights, preferences or
privileges senior to our current common stockholders. If we are unable to
obtain additional financing, our operations in the short term will be
materially affected and we may not be able to remain in business. These
circumstances raise substantial doubt as to the ability of our Company to
continue as a going concern.
At July 31, 2005, we had cash and cash equivalents of $372,000, a decrease
of $215,000 from the balance at October 31, 2004. We had significant
working capital deficits at both July 31, 2005 and October 31, 2004.
Net cash provided by (used in) operating activities of continuing operations
was ($152,000) and $166,000 for the nine-month periods ended July 31, 2005
and 2004, respectively. The net cash used in operating activities of
continuing operations for the nine-month period ended July 31, 2005 was
primarily due to a net loss from continuing operations of $1,880,000
adjusted for: non-cash interest expense of $215,000, depreciation and
amortization of $439,000; warrants issued for professional services of
$160,000; net changes in operating assets and liabilities of $566,000; bad
debt expense of $358,000. For the three months ended July 31, 2005, bad debt
expense included $291,000 relating to the write off of the remaining balance
due from our prepaid card distributor in Iraq. We will continue to
vigorously pursue this receivable. For the nine-month period ended July 31,
2004, the net cash provided by operating activities of continuing operations
was due to a net loss from continuing operations of $990,000 adjusted for:
bad debt expense of $20,000; non-cash interest expense of $125,000;
depreciation and amortization of $462,000; net changes in operating assets
and liabilities of $774,000; offset by gain on settlement of liabilities of
$225,000.
Net cash used in investing activities of continuing operations for the nine-
month periods ended July 31, 2005 and 2004 was ($15,000) and ($134,000),
respectively. For the nine months ended July 31, 2005, net cash used in
investing activities includes ($25,000) for the purchase of property and
equipment offset by $10,000, representing the proceeds from the sale of
fixed assets. For the nine months ended July 31, 2004, the net cash used in
investing activities relates to the purchase of property and equipment.
Net cash used in financing activities of continuing operations for the nine-
month periods ended July 31, 2005 and 2004 was ($48,000) and ($34,000),
respectively. For 2005, this amount is due to repayments on our convertible
notes. For 2004, this amount is due to payments on capital leases.
We have an accumulated deficit of approximately $48.4 million as of July 31,
2005 as well as a significant working capital deficit. Funding of our
working capital deficit, current and future operating losses, and expansion
will require continuing capital investment which may not be available to us.
Since the beginning of April 2001, we have raised $5.7 million in debt
financing.
Although to date we have been able to arrange debt facilities and equity
financing, 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. As of July 31, 2005, we had a
significant amount of trade payables and accrued liabilities which are past
due. We will continue to explore external financing opportunities in order
to fund these past due amounts Our management is committed to the success
of our Company as is evidenced by the level of financing it has made
available to our Company. Failure to obtain sufficient capital will
materially affect our Company's operations and financial condition. As a
result of the aforementioned factors and related uncertainties, there is
significant 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-month period ended July 31, 2005 were $25,000 and we do not
anticipate significant spending for the remainder of fiscal year 2005.
In October 2001, we executed 10% convertible notes (the "Notes") with three
of our executives, which provided financing of $1,945,958. With an original
maturity date of October 24, 2003, these Notes were amended subsequent to
fiscal year 2002 to mature on February 24, 2004. These Notes are secured
by selected Company assets and are convertible into our common stock at the
option of the holder at any time. 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. For
the year ended October 31, 2002, an additional $402,433 was added to the
Notes and an additional 402,433 warrants to acquire our common stock were
issued in connection with the financing. During fiscal year 2004, the
holders of the Notes elected to convert $877,500 of the Notes into 6,750,000
shares of our common stock. On July 21, 2005, the Company and the three
executives agreed to extend the maturity date of the Notes to February 29,
2008. In connection with the extension, the Company issued to the three
executives warrants to acquire 640,000 shares of common stock at an exercise
price of $0.16. The warrants expire in July 2010. The outstanding balance
of these Notes at July 31, 2005 totals $1,470,890.
In January 2002, we executed a 6% convertible debenture (the "Debenture")
with GCA Strategic Investment Fund Limited ("GCA"), which provided financing
of $550,000 and had an original maturity date of January 28, 2003. We 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 Debenture was amended in January 2003 to
mature on November 8, 2004. In connection with this January 2003 amendment
of the Debenture, we adjusted the exercise price of the previously issued
warrants to $0.21 per share and also issued to the holder of the Debenture
warrants to acquire an aggregate of 100,000 shares of common stock at an
exercise price of $0.21 per share, which expire on February 8, 2008. The
Debenture was amended again in June 2005, which extended the maturity date
to November 26, 2005. In connection with this June 2005 amendment of the
Debenture, we also issued to the holder of the Debenture 100,000 shares of
our common stock, warrants to purchase 150,000 shares of our common stock at
an exercise price of $0.38 per share and warrants to purchase 110,000 shares
of our common stock at an exercise price of $0.11 per share, all of which
warrants expire on June 1, 2010. The conversion price of the Debenture 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 lowest volume weighted
average sales prices as reported by Bloomberg L.P. during the 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 Debenture shall be automatically
converted into shares of our common stock at the Formula Conversion Price.
During fiscal year 2003, GCA converted $50,000 of the Debenture and $3,463
of accrued interest into approximately 374,000 shares of common stock.
During fiscal year 2004, GCA converted $10,000 of the Debenture and $730 of
accrued interest into approximately 82,000 shares of our common stock. The
outstanding balance on the Debenture is $490,000 at July 31, 2005.
In November 2002, we executed a 12% note payable (the "GC-Note") with Global
Capital Funding Group, L.P., ("Global") which provided financing of
$1,250,000. The GC-Note matured on November 8, 2004. We 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
November 8, 2007. In June 2005, the GC-Note was replaced by a convertible
note ("GC-Conote"). The GC-Conote matures on February 29, 2008, and the
annual interest rate due on this convertible note is 10.08%. The conversion
price is equal to 80% 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 the date of the related notice of
conversion. In addition, we issued to the holder of the GC-Conote 100,000
shares of our common stock, warrants to purchase 500,000 shares of our
common stock at an exercise price of $0.38 per share and warrants to
purchase 125,000 shares of our common stock at an exercise price of $0.11
per share, all of which warrants expire on June 1, 2010. In addition,
interest of approximately $350,000 due on the GC-Note at the time of
replacement by the GC-Conote was converted into a $400,000 non-interest
bearing note payable ("GC-Note2"), which matures on March 30, 2007. The
approximate $50,000 difference between the accrued interest at the time of
replacement and the value of this new note was recorded as deferred
financing fees, and is being amortized over the life of the GC-Note2.
During the three months ended July 31, 2005, Global converted $25,000 of the
GC-Note2 into approximately 211,000 shares of our common stock.
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 was December 23, 2003. We 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. Per the terms of the GCA-Note agreement, in the event the GCA-
Note is not repaid in full within ten days of the maturity date, the terms
of the GCA-Note shall become the same as those of the Debenture. Effective
January 2, 2004, the GCA-Note was replaced by a convertible debenture ("GCA-
Debenture") with the same terms as those of the Debenture, which had a
maturity date of November 8, 2004. The principal balance of the GCA-
Debenture was $574,597, which included $24,597 of interest due on the GCA-
Note at the time it was replaced by the GCA-Debenture. The GCA-Debenture
was amended in June 2005, to extend the maturity date to November 26, 2006.
In connection with this, we also issued to the holder of the GCA-Debenture
40,000 shares of our common stock, and warrants to purchase 150,000 shares
of our common stock at an exercise price of $0.38 per share, which warrants
expire on June 1, 2010. The outstanding balance on the GCA-Debenture is
$552,457 at July 31, 2005.
Risk Factors
Our cash flow may not be sufficient to satisfy our operations
For the nine-month period ended July 31, 2005, we recorded a net loss of
approximately $1,809,000, for the year ended October 31, 2004, we recorded a
net profit of approximately $707,000, which included discontinued operations
non-cash income of approximately $1.5 million, and for the year ended
October 31, 2003, we recorded a net loss of $6.6 million on revenues of $5.6
million, $13.4 million and $17.7 million, respectively. As a result, we
currently have a significant working capital deficit. In addition, we have
a significant amount of trade accounts payables and accrued liabilities, of
which approximately 68% is past due. To be able to service our debt
obligations over the remainder of the 2005 fiscal year we must generate
significant cash flow and obtain additional financing. If we are unable to
do so or otherwise unable to obtain funds necessary to make required
payments on our trade debt and other indebtedness, it is likely that we will
not be able to continue our operations.
Our independent auditors have included a going concern paragraph in their
audit opinion on our consolidated financial statements for the fiscal
year ended October 31, 2004, which states that "The Company has suffered
recurring losses from continuing operations during each of the last three
fiscal years. Additionally, at October 31, 2004, the Company's current
liabilities exceeded its current assets by $9.3 million and the Company had
a shareholders' deficit totaling $6.5 million. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern."
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, virtually all 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 derive significant revenue from a customer
We provided wholesale services to a customer who accounted for 14% of our
overall revenue for the three-month period ended January 31, 2005. The loss
of this customer could have an adverse effect on our financial position.
We rely on three key senior executives
Our success is dependent on our senior management team of John Jenkins,
David Hess and Allen Sciarillo and our future success will depend, in large
part, upon our ability to retain these three 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 stockholder desires to dispose of any shares of 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. 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 1. Legal Proceedings
On August 3, 2005, the Company entered into a Settlement and Release
Agreement with QComm. The Agreement releases QComm from any and all claims
in connection with the Company's lawsuit against QComm for breach of a
purchase agreement. In connection with the release, the Company agreed to a
cash settlement of $225,000, which was received on August 10, 2005. This
amount will be recorded as "Gain on legal settlement" in operations during
the Company's fourth fiscal quarter.
On August 5, 2005, the State of Texas filed a lawsuit in the 53rd Judicial
District Court of Travis County, Austin, Texas against the Company. The
lawsuit requests payment of approximately $1.1 million plus penalties,
interest and attorneys fees of approximately $50,000 for state and local
sales. Management believes that it will be able to negotiate a reduced
settlement amount with the state, although there can be no assurance that
the Company will be successful with respect to such negotiations. The
Company has previously accrued the full amount of the liability. (See Note
8).
On August 17, 2005, the United States District Court for the Northern
District of California issued a stay in the Company's patent infringement
lawsuit with Cygnus for the purpose of reexamining Cygnus patent. This stay
is the result of a reexamination request received by the United States
Patent and Trademark Office ("USPTO"), whereby the USPTO has found that
there is a "substantial new question of patentability." All hearing and
scheduling dates have been vacated by the court. A Case Management
Conference to review the status of the lawsuit and the appropriateness of a
continued stay is scheduled for December 2, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On June 1, 2005, Dial Thru International Corporation issued to GCA Strategic
Investment Fund Ltd. ("GCA") warrants to acquire and aggregate of 410,000
shares of our common stock at an exercise price of $0.11 for 110,000 of the
warrants, and $0.38 for the remaining 300,000 warrants. The warrants expire
in June 2010. In addition, the Company issued to GCA 140,000 shares of
common stock at $0.45, the Company's closing stock price on June 1, 2005.
The warrants and common stock were issued to GCA in connection with an
extension of the maturity dates of our two convertible debentures with GCA.
We relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 for this non-public offering because the securities
were issued to a single purchaser with financial experience who had a pre-
existing relationship with us.
One June 1, 2005, Dial Thru International Corporation issued to Global
Capital Funding Group LP, ("Global") warrants to acquire 625,000 share of
common stock at an exercise price of $0.38 per share for 500,000 warrants,
and $0.11 per share for 125,000 warrants, both warrants expiring in June
2010. In addition, the Company issued to Global 100,000 shares of common
stock at $0.45, the Company's closing stock price on June 1, 2005. The
warrants and common stock were issued to Global in connection with an
extension of the maturity date of our $1.25 million note payable ("Note")
with Global, and the conversion of interest due on the Note into a $400,000
convertible note payable with Global. We relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 for this
non-public offering because the securities were issued to a single purchaser
with financial experience who had a pre-existing relationship with us.
On July 21, 2005, the Company issued Global 210,793 shares of common stock
in connection with a partial conversion of approximately $25,000 on the
Company's $400,000 non-interest bearing convertible note payable with
Global. We relied on the exemption from registration provided by Section
4(2) of the Securities Act of 1933 for this non-public offering.
Item 6. Exhibits and Reports on Form 8-K.
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)
4.1 Registration Rights Agreement between Canmax and the Dodge Jones
Foundation (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form 10-Q
for the period ended April 30, 1997 and incorporated herein by reference)
4.2 Registration Rights Agreement between Canmax and Founders Equity Group,
Inc. (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form 10-Q for
the period ended April 30, 1997 and incorporated herein by reference)
4.3 Amended and Restated Stock Option Plan of Dial Thru International
Corporation (filed as Exhibit 4.3 to the 1999 Form 10-K and incorporated
herein by reference)
4.4 Securities Purchase Agreement dated April 11, 2001 (filed as Exhibit
4.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended
April 30, 2001 and incorporated herein by reference)
4.5 Registration Rights Agreement dated April 6, 2001 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed as
Exhibit 4.2 to the Company's Form S-3, File #333-71406, filed on October 11,
2001 and incorporated herein by reference)
4.6 6% Convertible Debenture of Dial Thru International Corporation and
Global Capital Funding Group, L.P. (filed as Exhibit 4.3 to the Company's
Form S-3, File 333-71406, filed on October 11, 2001 and incorporated herein
by reference)
4.7 Form of Common Stock Purchase Warrant dated April 11, 2001 between
Global Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 4.4 to the Company's Form S-3, File 333-71406, filed
October 11, 2001 and incorporated herein by reference)
4.8 Form of Common Stock Purchase Warrant dated April 6, 2001 between D.P.
Securities, Inc. and Dial Thru International Corporation (filed as Exhibit
4.5 to the Company's Form S-3, File 333-71406, filed on October 11, 2001 and
incorporated herein by reference)
4.9 Securities Purchase Agreement issued January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed
as Exhibit 4.1 to the Company's Form S-3, File 333-82622, filed on February
12, 2002 and incorporated herein by reference)
4.10 Registration Rights Agreement dated January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed
as Exhibit 4.2 to the Company's Form S-3, File 333-82622, filed on February
12, 2002 and incorporated herein by reference)
4.11 6% Convertible Debenture of Dial Thru International Corporation and GCA
Strategic Investment Fund Limited (filed as Exhibit 4.3 to the Company's
Form S-3, File 333-82622, filed on February 12, 2002 and incorporated herein
by reference)
4.12 Common Stock Purchase Warrant dated January 28, 2002 between GCA
Strategic Investment Fund Limited and Dial Thru International Corporation
(filed as Exhibit 4.4 to the Company's Form S-3, File 333-82622, filed on
February 12, 2002 and incorporated herein by reference)
10.1 Employment Agreement, dated June 30, 1997 between Canmax Retail
Systems, Inc. and Roger Bryant (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-3, File No. 333-33523 (the "Form S-3"), and
incorporated herein by reference)
10.2 Commercial Lease Agreement between Jackson--Shaw/Jetstar Drive Tri-star
Limited Partnership and the Company (filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K dated October 31, 1998, and incorporated herein
by reference)
10.3 Employment Agreement, dated November 2, 1999 between ARDIS Telecom &
Technologies, Inc. and John Jenkins (filed as Exhibit 4.3 to the 2000 Form
10-K and incorporated herein by reference)
14.1 Code of Business Conduct and Ethics for Employees, Executive Officers
and Directors (filed as Exhibit 14.1 to the 2003 Form 10-K and incorporated
herein by reference)
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934*
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934*
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section
1350*
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section
1350*
* Filed herewith.
(b) The following reports on Form 8-K were filed or required to be filed
for the last quarter.
A report filed on July 26, 2005 described the registrant's agreement
with the holders of is related party notes to extend the maturity
date of the notes.
A report filed on July 14, 2005 described the registrant's hiring
of David R. Hess as President and Chief Operating Officer.
A report filed on June 7, 2005 described the registrant's agreement
with the holders of the Company's convertible debentures and notes
payable to extend the maturity dates of each respective debt
instrument.
SIGNATURES
In accordance with the requirements of the Exchange Act, 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
Chief Financial Officer and Executive Vice
President (Principal Financial and Principal
Accounting Officer)
Dated September 14, 2005