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 January 31, 2005
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or
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act
For the transition period from ______ to _____
Commission File Number 0-22636
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DIAL THRU INTERNATIONAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 75-2461665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17383 Sunset Boulevard, Suite 350
Los Angeles, California 90272
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(Address of principal executive offices) (Zip Code)
(310) 566-1700
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(Telephone number)
N/A
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(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 March 11, 2005, 23,022,129 shares of common stock, $.001 par value per
share, were outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ January 31, October 31,
2005 2004
---------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 291,671 $ 586,389
Trade accounts receivable, net of allowance for
doubtful accounts of $119,199 at January 31,
2005 and $122,291 at October 31, 2004 1,068,855 841,127
Prepaid expenses and other current assets 217,388 197,968
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Total current assets 1,577,914 1,625,484
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PROPERTY AND EQUIPMENT, net 741,970 869,957
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 73,010 69,050
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TOTAL ASSETS $ 4,189,811 $ 4,361,408
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Capital lease obigation $ 126,196 $ 126,196
Trade accounts payable 2,884,432 2,791,545
Accrued liabilities 1,026,163 1,142,829
Accrued interest (including $796,467 to related
parties at January 31, 2005 and $759,692 at
October 31, 2004) 1,244,156 1,154,284
Deferred revenue 378,754 380,444
Deposits and other payables 428,109 428,109
Convertible debentures 1,040,000 1,040,000
Note payable 1,250,000 1,250,000
Notes payable to related parties 1,470,890 1,470,890
Net current liabilities from
discontinued operations 1,100,000 1,100,000
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Total current liabilities 10,948,700 10,884,297
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COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 7)
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, $.001 par value; 44,169,100 shares
authorized; 23,034,151 shares issued at January
31, 2005 and October 31, 2004 23,034 23,034
Additional paid-in capital 40,055,719 40,055,719
Accumulated deficit (46,782,772) (46,546,772)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
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Total shareholders' deficit (6,758,889) (6,522,889)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,189,811 $ 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
January 31,
-----------------------
2005 2004
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REVENUES $ 2,784,252 $ 4,344,692
COSTS AND EXPENSES
Costs of revenues 1,997,414 3,327,061
Sales and marketing 54,609 133,078
General and administrative 750,081 851,790
Depreciation and amortization 146,234 154,754
Gain on disposal of equipment (8,800) -
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Total costs and expenses 2,939,538 4,466,683
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Operating loss (155,286) (121,991)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (54,089) (95,595)
Related party interest expense (36,772) (58,710)
Foreign currency exchange gains 10,147 14,748
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Total other expense, net (80,714) (139,557)
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LOSS FROM CONTINUING OPERATIONS (236,000) (261,548)
INCOME FROM DISCONTINUED OPERATIONS,
net of income taxes of $0 for all periods - 1,501,147
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NET INCOME (LOSS) $ (236,000) 1,239,599
========== ==========
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income (loss) per share
Continuing operations $ (0.01) $ (0.01)
Discontinued operations 0.00 0.09
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$ (0.01) $ 0.08
========== ==========
WEIGHTED AVERAGE SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted weighted average common shares 23,022,129 16,189,781
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
January 31,
-----------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
OF CONTINUING OPERATIONS
Net loss from continuing operations $ (236,000) $ (261,548)
Adjustments to reconcile net loss from
continuing operations to net cash provided
by (used in) operating activities:
Gain from disposal of fixed assets (8,800) -
Bad debt expense (10,000) -
Non-cash interest expense - 41,128
Depreciation and amortization 146,234 154,754
(Increase) decrease in:
Trade accounts receivable (217,728) 36,648
Prepaid expenses and other current assets (19,420) (17,869)
Other assets (3,960) (2,000)
Increase (decrease) in:
Trade accounts payable 92,887 (74,541)
Accrued liabilities (26,794) 272,013
Deferred revenue (1,690) (26,403)
Deposits and other payables - (2,500)
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Net cash provided by (used in) operating
activities of continuing operations (285,271) 119,682
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CASH FLOWS FROM INVESTING ACTIVITIES
OF CONTINUING OPERATIONS
Purchase of property and equipment (19,447) (29,701)
Proceeds from sale of fixed assets 10,000 -
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Net cash used in investing activities
of continuing operations (9,447) (29,701)
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CASH FLOWS FROM FINANCING ACTIVITIES
OF CONTINUING OPERATIONS
Payments on capital leases - (21,958)
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Net cash used in financing activities
of continuing operations - (21,958)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (294,718) 68,023
Cash and cash equivalents at beginning of period 586,389 505,256
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Cash and cash equivalents at end of period $ 291,671 $ 573,279
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Beneficial conversion feature of convertible
debentures recorded as debt $ - $ 104,085
Note payable exchanged for convertible debenture - 550,000
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements of Dial Thru International Corporation
and its subsidiaries, "DTI" or "the Company", included in this Form 10-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 month periods
ended January 31, 2005 and 2004 have been included. Operating results for
the three month period ended January 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 US
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 has an accumulated deficit of approximately $46.8 million as
well as a working capital deficit of approximately $9.4 million as of
January 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. The Company's short-term debt to third parties has matured and
is currently due on demand. Although no event of default has been declared
by these parties, the Company is technically in default under these
agreements. The Company will continue to explore external financing
opportunities and renegotiation of its short-term debt with its current
financing partners in order to extend the terms or retire these
obligations. At January 31, 2005, approximately 39% of the short-term debt
is due to the senior management of the Company.
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 a customer who accounted for 14%
of the overall revenue of the Company for the three months ended January 31,
2005. The Company provided wholesale services to a customer who accounted
for 20% of the overall revenue of the Company for the three months ended
January 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 months ended
January 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 months ended January 31 2005 and
2004 would have been as follows:
Three Months
Ended January 31,
--------------------------
2005 2004
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Net loss from continuing operations,
as reported $ (236,000) $ (261,548)
Deduct: Stock based employee
compensation expense determined
under fair value based method (3,634) (44,553)
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Pro forma net loss from continuing operations $ (239,634) $ (306,101)
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Net loss per share from continuing operations
As reported
Basic and diluted $ (0.01) $ (0.01)
=========== ===========
Proforma
Basic and diluted $ (0.01) $ (0.02)
=========== ===========
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.
The fair values under SFAS 123 for options granted were estimated at the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
Three Months
Ended January 31,
-----------------
2005 2004
------ ------
Expected life (years) N/A 2
Interest rate N/A 3%
Volatility N/A 215%
Dividend yield N/A 0%
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, "Accounting for
Stock-Based Compensation". This statement supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". 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 using APB 25 and requires that the compensation
costs relating to such transactions be recognized in the consolidated
statement of operations. The revised statement is effective as of the
first interim period beginning after June 15, 2005. The Company will adopt
the statement on August 1, 2005 as required. 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 Statement 123 as described in
the disclosure of pro forma net loss and net loss per share in the stock-
based compensation accounting policy note included in Note 4 to the
consolidated financial statements.
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 determined based
on final written communications with the State of Texas that the Company has
a liability for 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. 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. (See Note 7.)
NOTE 6 - RESOLUTION OF VENDOR DISPUTE
During the three months ended January 31, 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 to Costs
of Revenues in prior periods.
NOTE 7 - 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.
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 and the failure of the State to credit the
Company's account for sales tax remittances. In correspondence from the
State in June 2003, the State agreed to consider 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. 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 January 31, 2005 and October 31, 2004
consolidated balance sheets in "Net current liabilities from discontinued
operations". Management believes that Canmax properly remitted an
appropriate amount of sales tax to Texas, and management does not believe
the State's position reflects the appropriate amount of tax remitted during
the audit period mentioned above and will continue to pursue this issue with
the State. The Company is also aggressively pursuing the collection of
unpaid sales taxes from former customers of Canmax, though 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 claims 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. The Company continues to pursue this matter, and, to
date, there have been no settlement discussions with Q Comm.
NOTE 8 - SUBSEQUENT EVENT
During February 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.
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-month periods ended January 31, 2005 and 2004
and should be read in conjunction with our audited financial statements and
the notes thereto included in our Annual Report on Form 10-K for the year
ended October 31, 2004.
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 it's 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 these 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 valuation process appraised our assets and
liabilities using a combination of present value and multiple of earnings
valuation techniques. The results of this impairment test indicated goodwill
was 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.
Components of Statements of Operations
Revenues
Our primary source of revenue is the sale of voice and facsimile traffic
internationally over our VoIP network, which is measured in minutes,
primarily to SMEs, residential users, and wholesale customers. We charge
our customers a fee per minute of usage that is dependent on the destination
of the call and is recognized in the period in which the call is completed.
Costs of Revenues
Our costs of revenues are termination fees, purchased minutes and fixed
costs for specific international and domestic Internet circuits and private
lines used to transport our minutes. Termination fees are paid to local
service providers and other international and domestic carriers to terminate
calls received from our network. This traffic is measured in minutes, at a
negotiated contract cost per minute. Our fixed costs of revenues are
insignificant, consisting primarily of low cost Internet access.
General and Administrative Expenses
General and administrative expenses include salaries, payroll taxes, benefit
expenses and related costs for general corporate functions, including
executive management, finance and administration, legal and regulatory,
information technology and human resources. Sales and marketing expenses
include salaries, payroll taxes, benefits and commissions that we pay
for sales personnel and advertising and marketing programs, including
expenses relating to our outside public relations firms. Interest expense
and financing costs relate primarily to the amortization of deferred
financing fees and debt discounts on our various debt instruments.
RESULTS OF OPERATIONS
The following table presents our operating results as a percentage of
revenue for the three-month periods ended January 31, 2005 and 2004 as well
as a comparison of the percentage change of our operating results from the
three-month period ended January 31, 2004 to the corresponding period ended
January 31, 2005:
% Change
% of Revenue Q1 2005 to Q1 % of Revenue
Quarter Ended Quarter Ended 2004 Increase Quarter Ended Quarter Ended
Jan 31 2005 Jan 31 2005 (Decrease) Jan 31 2004 Jan 31 2004
------------ ------------ --------------- ------------ ------------
REVENUES $ 2,784,252 100% (36%) $ 4,344,692 100%
COSTS AND EXPENSES
Costs of revenues 1,997,414 72% (40%) 3,327,061 77%
Sales and marketing 54,609 2% (59%) 133,078 3%
General and administrative 750,081 27% (12%) 851,790 20%
Depreciation and amortization 146,234 5% (6%) 154,754 4%
Gain on disposal of equipment (8,800) - - - -
------------ ------------ --------------- ------------ ------------
Total costs and expenses 2,939,538 106% (34%) 4,466,683 103%
------------ ------------ --------------- ------------ ------------
Operating loss (155,286) (6%) 27% (121,991) (3%)
OTHER INCOME (EXPENSE)
Interest expense and
financing costs (54,089) (2%) (43%) (95,595) (2%)
Related party
interest expense (36,772) (1%) (37%) (58,710) (1%)
Foreign currency
exchange gains 10,147 - (31%) 14,748 -
------------ ------------ --------------- ------------ ------------
Total other expense, net (80,714) (3%) (42%) (139,557) (3%)
------------ ------------ --------------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS (236,000) (8%) (10%) (261,548) (6%)
INCOME FROM DISCONTINUED
OPERATIONS, net of income
taxes of $0 for all periods - - (100%) 1,501,147 35%
------------ ------------ --------------- ------------ ------------
NET INCOME (LOSS) $ (236,000) (8%) (119%) $ 1,239,599 29%
============ ============ =============== ============ ============
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income
(loss) per share
Continuing operations $ (0.01) $ (0.01)
Discontinued operations - 0.09
------------ ------------
$ (0.01) $ 0.08
============ ============
WEIGHTED AVERAGE SHARES USED
IN THE CALCULATION OF PER
SHARE AMOUNTS:
Basic and diluted weighted
average common shares 23,022,129 16,189,781
===========
RESULTS OF OPERATIONS - COMPARISON OF THE THREE-MONTH PERIODS ENDED
JANUARY 31, 2005 and 2004
REVENUES
For the three-month period ended January 31, 2005, 71% and 29% of our
revenues were derived from our wholesale and retail customers, respectively,
compared to 78% and 22%, respectively, for the three-month period ended
January 31, 2004. Our wholesale revenues have decreased by 42% from the
three-month period ended January 31, 2004 compared to the three-month period
ended January 31, 2005, while our retail revenues have decreased by 15% over
the comparable period.
The decrease in wholesale revenues for the three-month period ended January
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
are not presently known. 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-month period ended January 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.
We currently offer services to U.S. troops in Iraq on a limited basis and
hope to increase these services during 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 specialized Internet 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
decreased for the three-month period ended January 31, 2005 compared to the
three-month period ended January 31, 2004. Included within our costs of
revenues for the three-month period ended January 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 three-month period ended January 31, 2005, our costs of
revenues as a percentage of revenues would have increased for the three-
month period ended January 31, 2005 compared to the three-month period ended
January 31, 2004. 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.
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.
The reduction in our sales and marketing costs for the three-month period
ended January 31, 2005 compared to the three-month period ended January 31,
2004 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-month period ended January 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: We have reduced our general and
administrative costs for the three-month period ended January 31, 2005
compared to the three-month period ended January 31, 2004 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 increased. 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-month period ended
January 31, 2005 were due primarily to interest expense on our convertible
debentures, notes payable and notes payable to related parties. Interest
expense and financing costs for the three-month period ended January 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 decrease in interest
expense and financing costs from the three-month period ended January 31,
2004 to the three-month period ended January 31, 2005 primarily relates to
the reduction in such amortization due to our convertible debentures and
note payable reaching their maturity dates during fiscal year 2004 and all
associated debt discounts and deferred financing fees being fully amortized.
A further explanation of these changes can be found in the Liquidity and
Sources of Capital section.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations for the three-month period ended January
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 the 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 $2,251,000 and included the gain in
Discontinued Operations during the three-month period ended January 31,
2004.
During the three-month period ended January 31, 2004, we determined based on
final written communications with the State of Texas that the liability for
sales taxes (including penalties and interest) totaled $1.1 million. We had
previously accrued an estimated settlement amount of $350,000. Accordingly,
we accrued an additional $750,000. 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. Management believes that the amount due
has been improperly assessed and will continue to pursue a lesser settlement
amount, though we cannot assure you that this matter will be resolved in our
favor. 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
To date, we have been generally unable to achieve positive cash flow on a
quarterly 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.
Furthermore, approximately 51% of our trade accounts payable and accrued
liabilities are past due. Our future operating success is extremely
dependent on our ability to quickly generate positive cash flow from our
VoIP lines of products and services. Any failure of this business plan will
result in a cash flow crisis and could force us to seek alternative sources
of financing or to greatly reduce or discontinue operations. Although
various possibilities for obtaining financing or effecting a business
combination have been discussed from time to time, there are no agreements
with any party to raise money or combine with another entity. Further,
negotiations with our existing lenders have not resulted in any extension of
past due obligations, which could therefore be declared due and accelerated
at any time. 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 January 31, 2005, we had cash and cash equivalents of $292,000, a
decrease of $295,000 from the balance at October 31, 2004. We had
significant working capital deficits at both January 31, 2005 and October
31, 2004.
Net cash used in operating activities of continuing operations was $285,000
for the three-month period ended January 31, 2005, compared to net cash
provided by operating activities of continuing operations of $120,000 for
the three-month period ended January 31, 2004. The net cash used in
operating activities of continuing operations for the three-month period
ended January 31, 2005 was primarily due to a net loss from continuing
operations of $236,000 adjusted for: depreciation and amortization of
$146,000; and net changes in operating assets and liabilities of ($177,000).
For the three-month period ended January 31, 2004, the net cash provided by
operating activities of continuing operations was due to a net loss from
continuing operations of $262,000 adjusted for: non-cash interest expense of
$41,000; depreciation and amortization of $155,000; and net changes in
operating assets and liabilities of $185,000.
Net cash used in investing activities of continuing operations for the
three-month periods ended January 31, 2005 and 2004 was $9,000 and $30,000,
respectively, and primarily relates to the purchase of property and
equipment.
Net cash used in financing activities of continuing operations for the
three-month period ended January 31, 2004 was $22,000 and was due to
payments on capital leases.
We have an accumulated deficit of approximately $46.8 million as of January
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 the debt facilities and equity
financing described below, 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 January 31, 2005, we had $3.8
million of notes payable and convertible debentures which have matured as
well as a significant amount of trade payables and accrued liabilities which
are past due. We will continue to explore external financing opportunities
and renegotiation of our short-term debt with our current financing partners
in order to extend the terms or retire these obligations. Approximately
39% of the short-term debt is due to our senior management. 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 three-month period ended January 31, 2005 were $19,000 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. Currently,
these Notes have matured and are due on demand. These Notes continue to
accrue interest at the stated rate. 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. The outstanding balance of these Notes at January 31, 2005
totals $1,470,890.
In January 2002, we executed a 6% convertible debenture (the "Second
Debenture") with GCA Strategic Investment Fund Limited ("GCA"), which
provided financing of $550,000 and had an original maturity date of January
28, 2003. The Second Debenture was amended subsequent to fiscal year 2002
to mature on November 8, 2004. The Second Debenture matured in November
2004 and is currently due on demand. Although no event of default has been
declared by the lender, we are technically in default under this agreement
and are currently negotiating with this party to extend the maturity date.
The Second Debenture continues to accrue interest at the stated rate. The
conversion price is equal to the lesser of (i) 100% of the volume weighted
average of sales price as reported by the Bloomberg L.P. of the common stock
on the last trading day immediately preceding the Closing Date ("Fixed
Conversion Price") and (ii) 85% of the average of the three (3) lowest
volume weighted average sales prices as reported by Bloomberg L.P. during
the twenty (20) Trading Days immediately preceding but not including the
date of the related Notice of Conversion ("the "Formula Conversion Price").
In an event of default the amount declared due and payable on the Second
Debenture shall be at the Formula Conversion Price. During fiscal year
2003, GCA converted $50,000 of the Second 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 Second Debenture and $730 of accrued
interest into approximately 82,000 shares of our common stock. The
outstanding balance on the Second Debenture is $490,000 at January 31, 2005.
In November 2002, we executed a 12% note payable (the "GC-Note") with Global
Capital Funding Group, L.P., which provided financing of $1,250,000. The
GC-Note matured on November 8, 2004 and is currently due on demand.
Although no event of default has been declared by the lender, we are
technically in default under this agreement and are currently negotiating
with this party to extend the maturity date. The GC-Note continues to
accrue interest at the stated rate. 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 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. Per the terms of the
GCA-Note agreement, in the event the GCA-Note is not repaid in full within
10 days of the maturity date, the terms of the GCA-Note shall become the
same as those of the Second Debenture. Effective January 2, 2004, the GCA-
Note's terms became the same as those of the Second Debenture which had a
maturity date of November 8, 2004. The GCA-Note matured in November 2004
and is currently due on demand. Although no event of default has been
declared by the lender, we are technically in default under this agreement
and are currently negotiating with this party to extend the maturity date.
The GCA-Note continues to accrue interest at the stated rate. 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.
Recent Developments
During February 2005, we 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.
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations
For the three-month period ended January 31, 2005, we recorded a net loss of
$236,000, for the year ended October 31, 2004, we recorded a net profit of
$707,000 which included discontinued operations non-cash income of $1.5
million, and for the year ended October 31, 2003, we recorded a net loss of
$6.6 million on revenues of $2.8 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 51% is past due.
To be able to service our debt obligations over the course 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 has
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 two key senior executives
Our success is dependent on our senior management team of John Jenkins and
Allen Sciarillo and our future success will depend, in large part, upon our
ability to retain these two individuals.
The expansion of our VoIP product offerings is essential to our survival
We intend to expand our VoIP network and the range of enhanced
telecommunications services that we provide. Our expansion prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets.
Our OTC Bulletin Board listing negatively affects the liquidity of our
common stock
Our common stock currently trades on the OTC Bulletin Board. Therefore, no
assurances can be given that a liquid trading market will exist at the time
any 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 6. Exhibits
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among Canmax
Inc., CNMX MergerSub, Inc. and US Communications Services, Inc. (filed as
Exhibit 2.1 to Form 8-K dated January 30, 1998 (the "USC 8-K"), and
incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated January
15, 1998 (the "USC Rescission 8-K"), and incorporated herein by reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3, 1998 (filed
as Exhibit 10.1 to the Company's Form 8-K dated December 7, 1998 and
incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS Telecom
& Technologies, Inc., Dial Thru International Corporation, a Delaware
corporation, Dial Thru International Corporation, a California corporation,
and John Jenkins (filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated November 2, 1999 and incorporated herein by reference)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001, by
and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru International
Corporation. (filed as Exhibit 2.1 to the Company's Form 8-K dated October
29, 2001 and incorporated herein by reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.2 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as of
October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.3 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as of
October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.4 to the Company's
Form 8-K dated December 28, 2001 and incorporated herein by reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as of
November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.5 to the Company's
Form 8-K dated December 28, 2001 and incorporated herein by reference)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1999 (the "1999 Form 10-K") and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Dial Thru International Corporation
(filed as Exhibit 3.2 to the 1999 Form 10-K and incorporated herein by
reference)
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.
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 March 17, 2005