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 April 30, 2006
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Or
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to _____
Commission File Number 0-22636
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RAPID LINK, INCORPORATED
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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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(Issuer's 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 [ ]
Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 14, 2006, 30,386,794 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
RAPID LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ April 30, October 31,
2006 2005
---------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 167,841 $ 172,164
Trade accounts receivable, net of allowance
for doubtful accounts of $452,109 at
April 30, 2006 and $427,099 at
October 31, 2005 703,820 564,039
Prepaid expenses and other current assets 100,179 164,978
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Total current assets 971,840 901,181
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PROPERTY AND EQUIPMENT, net 225,138 353,726
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS, net 327,916 219,043
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TOTAL ASSETS $ 3,321,811 $ 3,270,867
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LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Capital lease obligation 126,196 126,196
Trade accounts payable 3,462,734 3,451,801
Accrued liabilities 795,077 887,975
Accrued interest (including $952,019 to related
parties at April 30, 2006 and $901,849 at
October 31, 2005) 1,150,454 1,007,322
Deferred revenue 427,636 401,640
Deposits and other payables 418,109 418,109
Convertible debentures, current portion, net of
debt discount of $1,038,067 at April 30, 2006
and $223,167 at October 31, 2005 1,169,391 481,833
Net current liabilities from
discontinued operations 1,162,000 1,162,000
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Total current liabilities 8,711,597 7,936,876
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CONVERTIBLE DEBENTURES, net of current portion and
net of debt discount of $833,333 at April 30, 2006
and $1,140,824 at October 31, 2005 416,667 686,633
CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES, net
of debt discount of $60,664 at January 31, 2006
and $77,208 at October 31, 2005 942,726 926,182
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, $.001 par value; 175,000,000 shares
authorized; 30,398,816 shares issued at April
30, 2006 and 29,297,183 at October 31, 2005 30,400 29,298
Additional paid-in capital 43,938,910 42,858,862
Accumulated deficit (50,663,619) (49,112,114)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
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Total shareholders' deficit (6,749,179) (6,278,824)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 3,321,811 $ 3,270,867
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
RAPID LINK INCORPORATED AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
April 30, April 30,
------------------------ ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
REVENUES $ 2,121,018 $ 2,864,960 $ 4,107,130 $ 5,649,212
COSTS AND EXPENSES
Costs of revenues 1,612,960 2,385,165 3,141,075 4,382,579
Sales and marketing 99,827 42,919 242,209 97,528
General and administrative 732,995 849,937 1,390,419 1,600,018
Depreciation and amortization 99,967 150,415 204,179 296,649
(Gain) Loss on disposal of
property and equipment 34,229 - 34,229 (8,800)
---------- ---------- ---------- ----------
Total costs and expenses 2,579,978 3,428,436 5,012,111 6,367,974
---------- ---------- ---------- ----------
Operating loss (458,960) (563,476) (904,981) (718,762)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (355,370) (54,092) (603,751) (108,181)
Related party interest expense and
financing costs (33,357) (36,772) (66,414) (73,544)
Foreign currency exchange gains (loss) 1,358 (2,788) 23,641 7,359
---------- ---------- ---------- ----------
Total other income (expense), net (387,369) (93,652) (646,524) (174,366)
---------- ---------- ---------- ----------
NET LOSS $ (846,329) $ (657,128) $(1,551,505) $ (893,128)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE:
Basic and diluted net loss per share $ (0.03) $ (0.03) $ (0.05) $ (0.04)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES USED IN
THE CALCULATION OF PER SHARE AMOUNTS:
Basic and diluted 30,237,903 23,022,129 29,759,747 23,022,129
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
RAPID LINK INCORPORATED AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
April 30,
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2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,551,505) $ (893,128)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
(Gain) loss from disposal of property and
equipment 34,229 (8,800)
Bad debt expense (25,010) (21,000)
Non-cash interest expense 510,126 -
Depreciation and amortization 204,179 296,649
Warrants issued for legal services - 159,695
(Increase) decrease in:
Trade accounts receivable (114,771) (125,969)
Prepaid expenses and other current assets (35,201) (19,703)
Other assets (1,784) (1,388)
Increase (decrease) in:
Trade accounts payable 10,933 634,448
Accrued liabilities 56,384 21,015
Deferred revenue 25,996 (8,286)
Deposits and other payables - (10,000)
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Net cash provided by (used in) operating activities (886,424) 23,533
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (73,749) (22,561)
Proceeds from sale of property and equipment - 10,000
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Net cash used in investing activities (73,749) (12,561)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debenture 1,000,000 -
Payment of financing fees (44,150) -
Proceeds from shareholder advance 500,000 -
Payment of shareholder advance (500,000) -
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Net cash provided by financing activities 955,850 -
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,323) 10,972
Cash and cash equivalents at beginning of period 172,164 586,389
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Cash and cash equivalents at end of period $ 167,841 $ 597,361
========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Conversion of debt to common stock $ 75,000 $ -
Conversion of Accrued interest into common stock 6,150 -
Fair market value of warrants issued with debt 327,176 -
Beneficial conversion feature recorded in
connection with debt issuances 628,674 -
The accompanying notes are an integral part of these consolidated financial
statements.
RAPID LINK INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements of Rapid Link, Incorporated and its
subsidiaries, "Rapid Link" 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 six month
periods ended April 30, 2006 and 2005 have been included. Operating results
for the three and six month periods ended April 30, 2006 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 2006. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended October 31, 2005.
Rapid Link has served as a facilities-based, global Internet Protocol ("IP")
communications company providing connectivity to international markets
experiencing significant demand for IP enabled services. Rapid Link
provides a variety of international telecommunications services targeted to
small and medium sized enterprises ("SME's") and niche markets, such as the
United States Military and Armed Forces that include the transmission of
voice and data traffic and the provision of Web-based and other
communications services. Rapid Link utilizes Voice over Internet Protocol
("VoIP") packetized voice technology to improve both cost and efficiencies
of telecommunication transmissions. Rapid Link utilizes the Internet to
transport the Company's communications.
Beginning in the fourth quarter of fiscal 2004, the Company shifted its
retail product focus to value-added VoIP communication services to
customers, both domestically and internationally, although to date the
Company has not derived significant revenues from this new offering. Rapid
Link focuses on the US military and other key niche markets. The Company
offers PC-to-PC, PC-to-phone, and phone-to-phone calling on their set of
Internet Access Device's ("IAD's") that provide a low cost phone service
that is delivered through a broadband connection. Rapid Link offers VoIP
service plans to residential and business customers in addition to serving
the military. The Company's flat rate service plans provide unlimited
calling within the Unites States and Canada. These plans include free
features such as voice mail, call forwarding, three way calling and other
features as a part of the service. Rapid Link's VoIP IAD's for consumers
and businesses consists of single and multi-line routers, which enables
customers to convert their traditional phone into a VoIP phone, or a headset
that plugs directly into the customer's computer so that it can be used as a
phone as the customer travels. All of the services connect through the
Internet. The customer can then make and receive calls through their unique
phone number using VoIP.
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. As of April 30, 2006
the Company has an accumulated deficit of approximately $50.7 million as
well as a working capital deficit of approximately $7.7 million. In
addition, approximately 74% of the Company's trade accounts payable and
accrued liabilities are past due. Funding of the Company's working capital
deficit, it's current and future anticipated operating losses, and growth of
the Company's retail revenues will require continuing capital investment.
Historically, the Company has received significant funding from a major
shareholder. The Company's strategy is to fund these cash requirements
through debt facilities and additional equity financing.
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 would materially affect the Company's operations in the short term
and expansion strategies. 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. Currently, the Company is in negotiations with multiple parties
to obtain additional financing, and the Company will continue to explore
financing opportunities with additional parties. At April 30, 2006,
approximately 22% of the gross debt is due to the senior management and a
Director 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 one customer who accounted for
13% of the overall revenue of the Company for the three months ended April
30, 2006 and 13% of the Company's trade accounts receivable at April 30,
2006. The Company provided wholesale services to one customer who accounted
for 16% of the overall revenue of the Company for the six months ended April
30, 2006. For the three months ended April 30, 2006, two of the Company's
suppliers accounted for approximately 17% and 10%, respectively, of the
Company's total costs of revenues.
The Company provided wholesale services to two customers, each of which
accounted for 13% of the overall revenue of the Company for the three months
ended April 30, 2005. No customers accounted for more than 10% of sales
during the six months ended April 30, 2005. The Company provided wholesale
services to another customer which accounted for 15% of the Company's trade
accounts receivable at April 30, 2005. For the three months ended April 30,
2005, one of the Company's suppliers accounted for approximately 21% of the
Company's total costs of revenues.
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 cost has been recognized for its employee stock
options in the financial statements during the three months ended April 30,
2006 and April 30, 2005 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
for the three months ended April 30, 2006 and 2005 would have been as
follows:
Three Months Six Months
Ended April 30, Ended April 30,
------------------------ ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net loss $ (846,329) $ (657,128) $(1,551,505) $ (893,128)
Deduct: Stock based
employee compensation
expense determined
under fair value
based method (2,696) (3,554) (5,444) (7,188)
---------- ---------- ---------- ----------
Pro forma net loss $ (849,025) $ (660,682) $(1,556,949) $ (900,316)
========== ========== ========== ==========
Net loss per share
As reported
Basic and diluted $ (0.03) $ (0.03) $ (0.05) $ (0.04)
========== ========== ========== ==========
Proforma
Basic and diluted $ (0.03) $ (0.03) $ (0.05) $ (0.04)
========== ========== ========== ==========
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 six months ended April 30, 2006 and 2005.
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 annual
financial reporting period beginning after December 15, 2005. The Company
will adopt the statement on November 1, 2006 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 SFAS No. 123
as described in the disclosure of pro forma net loss and net loss per share
above.
NOTE 5 - 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 6 - CONVERTIBLE DEBENTURES AND CONVERTIBLE NOTES PAYABLE TO RELATED
PARTIES
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, 2006. The gross balance of this debenture was $430,000 at
April 30, 2006. 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 warrants to acquire 150,000 shares of our 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 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 was amortized over the extension
period of the convertible debenture and is fully amortized at April 30,
2006. 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 recorded $45,000 as debt discount, and amortized the debt discount
over the extension period of the convertible debenture which ended in the
first quarter of 2006. For the convertible debenture originally issued in
July 2003, the maturity date was extended to November 26, 2006. The gross
balance of this debenture was approximately $550,000 at April 30, 2006. 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 recorded $18,000 as debt discount and is amortizing the debt
discount over the extension period of the convertible debenture. For the
six months ended April 30, 2006, approximately $25,000 of deferred financing
fees and debt discount amortization has been recorded as interest expense.
The remaining unamortized discount is $29,733 at April 30, 2006.
During fiscal 2005, GCA elected to convert $35,000 of the gross principal
balance of the January 2002 convertible debenture into approximately 352,000
shares of common stock. During fiscal year 2006, GCA elected to convert
$25,000 of the gross principal balance of the January 2002 convertible
debenture into approximately 407,000 shares of common stock. There were no
other conversions during the quarter ended April 30, 2006. On March 8, 2006,
the Company and GCA Strategic Investment Fund ("GCA") agreed to extend the
maturity date of the Company's 6% convertible debenture, which originally
provided providing financing of $550,000 in January 2002 (GCA-Debenture).
The maturity date for the GCA-Debenture was extended to November 26, 2006.
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 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 six months ended
April 30, 2006, approximately $227,000 of debt discount amortization has
been recorded as interest expense. The remaining unamortized discount is
$833,333 at April 30, 2006.
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
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 represents a financing fee and was recorded as debt discount and is
being amortized over the life of the GC-Note2. For the six months ended
April 30, 2006, $50,000 of debt discount amortization has been recorded as
interest expense. The gross balance of the GC-Note2 was $225,000 at April
30, 2006. The remaining unamortized discount was $175,000 at April 30, 2006.
During fiscal year 2005, GCA elected to convert $75,000 of the GC-Note2 into
approximately 657,000 shares of common stock. During fiscal year 2006 GCA
elected to convert $50,000 of the GC-Note2 into approximately 694,000 shares
of common stock. Although the Company has not made its scheduled September
and December 2005 payments, and March 2006 payment, Global has not declared
the note to be in default, and continues to convert the balance into shares
of common stock.
On July 21, 2005, the Company and the three executives that hold a 10%
convertible debenture (the "Notes") 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. 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 six months ended April 30, 2006, approximately $17,000 of
debt discount amortization has been recorded as interest expense. The gross
balance of the Notes was $1,003,390 at April 30, 2006. The remaining
unamortized discount was $60,664 at April 30, 2006.
On March 8, 2006, the Company completed a private placement of two one year
10% convertible debentures ("Debentures"), for gross proceeds of $1,000,000.
In connection with the Debentures, the Company agreed to issue the investors
a total of 2,000,000 immediately exercisable five year warrants to purchase
the Company's common stock at an exercise price of $0.14 for 1,000,000
warrants, and $0.25 for an additional 1,000,000 warrants. The Company paid
$44,150 in financing fees in connection with the Debentures which were
recorded as financing fees. Additionally in connection with these Debentures
the Company recorded a debt discount of $1,000,000 related to the fair value
of warrants issued and the related beneficial conversion feature that will
be amortized over the life of the loan. 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 4.77%; dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of 0.25;
and an expected life of the warrants of three years. During the
three-months ended April 30, 2006 the Company recorded expense of $167,000
in relation to the amortization of these fees. The remaining unamortized
debt discount totaled $833,333 at April 30, 2006.
NOTE 7 - ADVANCES FROM SHAREHOLDER
During the three months ended January 31, 2006, the Company's chief
executive officer, and significant shareholder, John Jenkins, advanced funds
to the Company in the aggregate amount of $500,000. During the three-month
period ended April 30, 2006 the Company has re-paid this amount in full with
proceeds received from the Debentures.
NOTE 8 - DISCONTINUED OPERATIONS
During the first quarter of fiscal year 2004, the Company determined based
on final written communications with the State of Texas that the Company had
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 fiscal year 2003. During the first quarter of fiscal
year 2004, the Company 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 including penalties and interest for
state and local sales tax. During the fiscal year 2005, the Company accrued
an additional $62,000 in amounts due. The sales tax amount due is
attributable to audit findings of the State of Texas for the years 1995 to
1999 associated with Canmax Retail Systems, a current subsidiary of ours,
and former operating subsidiary providing retail automation software and
related services to the retail petroleum and convenience store industries.
The State of Texas determined that Canmax Retail Systems did not properly
remit sales tax on certain transactions. 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. These operations were previously classified as
discontinued after the Company sold its retail automation software business
in December 1998 and changed its business model to international wholesale
and retail business, operating as a facilities-based global Internet
protocol communications company providing connectivity to international
markets. 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
$1.162 million has been accrued as a liability and is included in the April
30, 2006 Balance Sheet as discontinued operations.
NOTE 9 - SUBSEQUENT EVENTS
On May 5, 2006, Rapid Link, Incorporated entered into a definitive stock
purchase agreement (the "Purchase Agreement") to acquire from Apex
Acquisitions, Inc. (the "Stockholder"), all of the issued and outstanding
shares of capital stock of Telenational Communications, Inc., a privately
owned Delaware corporation ("Telenational") that is a provider of domestic
and international long distance services, including internationally
originated direct access calling services and pre-paid and post-paid calling
card services. The total purchase price for this acquisition is $4.76
million. Pursuant to the terms of the Purchase Agreement, in consideration
for the acquisition of all of the issued and outstanding shares of
Telenational (the "Telenational Shares"), the Company has agreed to deliver
a $1 million note payable, due and payable on the 18-month anniversary
of closing which bears interest at the rate of 8% per annum. The note is
secured by all of the outstanding shares of the Telenational stock.
Additionally the Company issued 9,587,500 shares of its common stock (the
"Initial Stock Payment") as contemplated by the Purchase Agreement (the
"Closing"). If Telenational's monthly retail and wholesale gross margin
combined (the "Average Monthly Gross Profit") averages at least $300,000 per
month ("Target Average Gross Margin") for the calendar year ended December
31, 2005, then the Stockholder shall be entitled to all of the Initial Stock
Payment. If the Fiscal 2005 Average Monthly Gross Profit is less than the
Target Average Gross Margin, the Initial Stock Payment will be reduced
proportionately. In the event that Telenational's First Aggregate Monthly
Gross Profit is less than $900,000 (the "Target Aggregate Monthly Gross
Profit"), then the Contingent Stock Payment shall be reduced by a number of
shares to be determined by taking the product obtained by multiplying
$750,000 by a fraction whose numerator is the Target Aggregate Monthly Gross
Profit less the First Aggregate Monthly Gross Profit and whose denominator
is the Target Aggregate Monthly Gross Profit; and divided by the volume
weighted average closing price per share of our common stock as reported on
the Over-the-Counter Bulletin Board (or any other securities exchange or
inter-dealer quotation system on which our common stock is then listed) for
the 15 consecutive trading days ending on the day prior to the first
anniversary of the Closing (the "Per Share Price"); provided, however, that
such Per Share Price shall be not less than $0.13 per share and not greater
than $0.25 per share. Subject to adjustment based on any shortfall as
determined in accordance with above. The purchase price (adjusted downward
for this calculation by 25%) will be proportionately reduced by the
percentage shortfall of the actual gross margin achieved against the Target
Gross Margin. Any reduction in the adjusted purchase price will be applied
against the stock portion of the purchase price. Further, the "earn out"
shares in the amount of 9,587,500 additional shares that were to be issued
following the 12-month anniversary of the Closing (the "Contingent Stock
Payment") based on Telenational maintaining a $300,000 gross monthly margin
for that 12 month period was deemed earned and delivered to Apex
Acquisitions, Inc. by the Board of Directors on June 5, 2006, so that the
integration of the two company's would not be delayed in the best interest
of the company.
At the closing date of this acquisition, the shareholders of Telenational
will provide a working capital loan to the Company in the amount of a
minimum of $200,000. This loan will be payable in 12 equal monthly
installments of principal and interest. The loan will accrue interest at
the rate of eight percent per annum and will mature on the 12-month
anniversary of the closing of this transaction.
Rapid Link has also agreed to grant piggy-back registration rights to
Telenational, whereby the Company will register the common stock issued in
connection with the acquisition if Rapid Link files a registration statement
after the closing date, subject to certain approvals and customary
conditions and limitations.
The closing of the transactions contemplated by the Purchase Agreement and
the Amendment took place on May 5, 2006.
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 months ended April 30, 2006 and 2005 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-KSB for the year ended October 31, 2005 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." 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 ("RLI") 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. RLI provided integrated data
and voice communications services to both wholesale and retail customers
around the world. RLI built a large retail customer base in Europe and Asia
focusing mostly on the United States military sector, using RLI's network to
make international calls anywhere in the world. Furthermore, RLI 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 was responsible for liquidating the operation. We determined
that we no longer controlled the operations of this subsidiary and that our
parent entity has no legal obligation to pay the liabilities of Rapid Link
Telecommunications GmbH.
On October 25, 2005, at our annual shareholders meeting, our shareholders
approved a change in the Company's name to Rapid Link, Incorporated. The
Company believes that the name "Rapid Link, Incorporated" better reflects
the Company's business strategies and opportunities, and will receive better
market recognition and acceptance than its previous name, especially as the
Company continues to roll out Voice over Internet Protocol related services.
In addition, the Company also believes that the name, which was the name of
the Company we acquired in October 2001, is a recognized brand name with
members of the United States Military around the world, a significant source
of retail revenue for the Company since the acquisition. The name change
became effective on November 1, 2005.
On October 31, 2005, we completed the acquisition of the customer base of
Integrated Telecommunications, Inc., ("Integrated") 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 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 bundled IP
related 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 are focused on the growth of our VoIP business by adding new products and
services that we can offer to end user customers. We are attempting to
transition our current customers, and attract new customers through the sale
of specialized VoIP Internet Access Devices, or IAD's, that allow customers
to connect their phones to their existing high-speed Internet connections.
These IADs 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 or
international phone calls. We are targeting business and residential
customers, as well as niche markets, such as the United States military.
While we expect the growth in our customers and suppliers, and the
introduction of innovative product offerings to retail users, specifically
IADs, to have a positive impact on our revenues and earnings, we cannot
predict our ability to significantly grow this line of business. The
revenue and costs associated with the IAD 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
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.
Our common stock currently trades on the OTC Bulletin Board under the symbol
"RPID."
We continue to seek opportunities to grow our business through strategic
acquisitions that will complement our retail strategy as well as adding key
personnel that have demonstrated a proven track record in sales, marketing
and operations of retail telecommunications organizations, especially in the
area of retail VoIP.
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
For a majority of our products, our revenues are generated at the time a
customer uses our network to make a phone call. We sell our services to
SMEs and end-users that utilize our network for international origination
and dial thru services, and to other providers of long distance usage who
utilize our network to deliver domestic and international termination of
minutes to their own customers. At times we receive payment from our
customers in advance of their usage, which we record as deferred revenue,
recognizing revenue as calls are made.
For our newer VoIP product offerings, specifically our Rapid Link service,
we are required to recognize revenue in accordance with Emerging Issues Task
Force ("EITF") consensus No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables" which requires that revenue arrangements with
multiple deliverables be divided into separate units of accounting if the
deliverables in the arrangement meet specific criteria. In addition,
arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values, with certain limitations.
The provisioning of the Rapid Link service with the accompanying desktop
terminal adapter or other customer premise equipment constitutes a revenue
arrangement with multiple deliverables. In accordance with the guidance of
EITF No. 00-21, we allocate Rapid Link revenues, including activation fees,
among the customer premise equipment and subscriber services. Revenues
allocated to the customer premise equipment are recognized as product
revenues at the end of 30 days after order placement, provided the customer
does not cancel their Rapid Link service. All other revenues are recognized
as license and service revenues when the related services are provided. We
defer the cost of goods sold of products sold for which the end customer or
distributor has a right of return. The cost of the products sold is
recognized, contemporaneously with the recognition of revenue, when the
subscriber has accepted the service.
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 Staff
Accounting Bulletin 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 each of the
fourth quarters of fiscal year 2005 and 2004. The valuation process
appraised our assets and liabilities using a combination of present value
and multiple of earnings valuation techniques. The results of both
impairment tests indicated goodwill was not impaired.
We record goodwill when the consideration paid for an acquisition exceeds
the fair value of net tangible and identifiable intangible assets acquired.
We measure and test goodwill for impairment on an annual basis or more
frequently if we believe indicators of impairment exists. 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 considered 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 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, 2005, our market capitalization
was $3,222,690, determined by taking the shares outstanding as of that date
multiplied by our stock price of $0.11. 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 $5.3 million. This amount exceeds
the carrying value of our assets (the value of our assets as reported in our
financial statements), including goodwill, of $3,218,596. While our market
capitalization renders a minority interest valuation, because shares of our
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 our 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 2.6 times their annual revenue
obtained from their most recent published financials, and applied the result
to our 2005 fiscal year revenues. The resulting BEV for our Company 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 six
month periods ended April 30, 2006 and 2005 as well as a comparison of the
percentage change of our operating results from the three and six month
periods ended April 30, 2006 to the corresponding periods ended April 30,
2005:
% of Revenue % of Revenue
3 months Ended 3 months Ended 6 months Ended 6 months Ended
April 30, April 30, April 30, April 30,
------------------------------------ ------------------------------------
2006 2005 2006 2005 2006 2005 2006 2005
------------------------------------ ------------------------------------
REVENUES $2,121,018 $2,864,960 100% 100% $4,107,130 $5,649,212 100% 100%
COSTS AND EXPENSES
Costs of revenues 1,612,960 2,385,165 76% 83% 3,141,075 4,382,579 76% 78%
Sales and marketing 99,827 42,919 5% 1% 242,209 97,528 6% 2%
General and administrative 732,995 849,937 35% 30% 1,390,419 1,600,018 34% 28%
Depreciation and amortization 99,967 150,415 5% 5% 204,179 296,649 5% 5%
Gain on disposal of equipment 34,229 - 0% 0% 34,229 (8,800) 1% 0%
------------------------------------ ------------------------------------
Total costs and expenses 2,579,978 3,428,436 122% 120% 5,012,111 6,367,974 122% 113%
------------------------------------ ------------------------------------
Operating loss (458,960) (563,476) -22% -20% (904,981) (718,762) -22% -13%
OTHER INCOME (EXPENSE)
Interest expense and
financing costs (355,370) (54,092) -17% -2% (603,751) (108,181) -15% -2%
Related party interest
expense and financing costs (33,357) (36,772) -2% -1% (66,414) (73,544) -2% -1%
Foreign currency exchange gains 1,358 (2,788) 0% 0% 23,641 7,359 1% 0%
------------------------------------ ------------------------------------
Total other expense, net (387,369) (93,652) -18% -3% (646,524) (174,366) -16% -3%
------------------------------------ -------------------------------------
NET INCOME (LOSS) $ (846,329) $ (657,128) -40% -23% $(1,551,505) $ (893,128) -38% -16%
==================================== =====================================
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTH AND SIX MONTH PERIODS
ENDED APRIL 30, 2006 and 2005
REVENUES
For the three-month period ended April 30, 2006, 58% and 42%, of our
revenues were derived from our wholesale and retail customers, respectively,
compared to 77% and 23%, respectively, for the three-month period ended
April 30, 2005. Our wholesale revenues have decreased by 44% from the
three-month period ended April 30, 2005 compared to the three-month period
ended April 30, 2006, while our retail revenues have increased by 34%
during the three month period ended April 30, 2006 over the comparable
period in 2005.
For the six-month period ended April 30, 2006, 56% and 44%, of our revenues
were derived from our wholesale and retail customers, respectively, compared
to 74% and 26%, respectively, for the six-month period ended April 30, 2005.
Our wholesale revenues have decreased by 45% from the six-month period ended
April 30, 2005 compared to the six-month period ended April 30, 2006, while
our retail revenues have increased by 21% during the six month period ended
April 30, 2006 over the comparable period in 2005.
The decrease in wholesale revenues for the three month period ended April
30, 2006 compared to the same period in fiscal 2005 is attributable to the
Company's change in focus from its wholesale opportunities to its new VoIP
retail opportunities.
The increase in retail revenues for the three month period ended April 30,
2006 compared to the same period in fiscal 2005 is attributable to the
Company's focus on retail revenue and the acquisition of the customer
base of Integrated. We continue to experience 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 are currently able to
offer VoIP services into Iraq, with the hope of recapturing some of our
prior customers who have been transferred to Iraq and other Middle Eastern
Countries. 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 VoIP services which allow users to make phone calls over an
existing broadband internet connection. Furthermore, we will continue to
seek out acquisitions that will allow us to quickly grow our business in the
different niche markets we are targeting. If we are unable to stabilize our
retail revenues from the U.S. military and grow our retail revenues from
VoIP-based products, our retail revenues may remain flat or decline.
COSTS OF REVENUES
Our costs of revenues as a percentage of revenues have decreased 7% from 83%
for the three-month period ended April 30, 2005 to 76% for the three-month
period ended April 30, 2006. This decrease was primarily due to a change in
the mix of our revenue with a greater percentage of our revenue coming from
our retail products, which realize a higher margin than our wholesale
services. 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 decreased 2% from 78%
for the six-month period ended April 30, 2005 to 76% for the six-month
period ended April 30, 2006. Included within our costs of revenues for the
six-month period ended April 30, 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 six-
month period ended April 30, 2005, our costs of revenues as a percentage of
revenues would have decreased by 7% for the six-month period ended April 30,
2006 compared to the six-month period ended April 30, 2005.
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 increased from 1% to 5% and 2% to 6% of
revenues, respectively, for the three and six month periods ended April 30,
2006 compared to the prior year period. The increase in our sales and
marketing costs is primarily due to additional personnel and commission's
incurred as a result of the Integrated acquisition. During the three month
period ended April 30, 2006, we have focused our attention on increasing
revenues through the efforts of our agents and the initiation of advertising
on military websites. We will continue to focus our sales and marketing
efforts on periodic newspaper and internet 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 35% and 34% of
revenues for the three and six months ended April 30, 2006 from 30% and 28%
for the three and six months ended April 30, 2005. Although general and
administrative expenses as a percentage of revenues have increased for the
three and six months ended April 30, 2006 compared to the prior fiscal year,
in absolute dollars, general and administrative expenses have decreased by
approximately $117,000 and $210,000, respectively. This reduction has been
accomplished primarily through the elimination of personnel and personnel
related costs, consulting and professional fees and bad debt expense.
However, due to the overall decline in revenue and the primarily fixed
nature of our general and administrative expenses, as a percentage of
revenue, these expenses have increased for the three months ended April 30,
2006 compared to the prior period. We review our general and administrative
expenses regularly and continue to manage the costs accordingly to support
our current and anticipated future business, however it will be difficult to
achieve significant reductions in future periods due to the fixed nature of
our general and administrative expenses without accretive acquisitions in
the future.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization has decreased primarily as the result of
significant components of our property and equipment reaching the end of
their useful lives each quarter. Our major property and equipment additions
were the result of the RLI acquisition in fiscal 2001. In addition,
depreciation and amortization has decreased as we have disposed of certain
telecommunications switching equipment that was not in use.
INTEREST EXPENSE AND FINANCING COSTS
Interest expense and financing costs including related party interest
expense and financing costs, for the three month period ended April 30, 2006
and 2005 were due primarily to interest expense of approximately $86,000 and
$90,000, respectively, on our convertible debentures and notes payable to
related parties. In addition, for the three month period ended April 30,
2006, interest expense includes approximately $301,000 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. The
increase in interest expense and financing costs from the three months ended
April 30, 2005 to the three month period ended April 30, 2006 primarily
relates to the extension of the maturity dates of our convertible debt
instruments with both our third party and related party lenders during the
third quarter of fiscal 2005.
Interest expense and financing costs including related party interest
expense and financing costs, for the six month period ended April 30, 2006
and 2005 were due primarily to interest expense of approximately $161,000
and $182,000, respectively, on our convertible debentures and notes payable
to related parties. In addition, for the six month period ended April 30,
2006, interest expense includes approximately $509,000 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. The
increase in interest expense and financing costs from the six months ended
April 30, 2005 to the six month period ended April 30, 2006 primarily
relates to the extension of the maturity dates of our convertible debt
instruments with both our third party and related party lenders during the
third quarter of fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our operating loss for the three and six months ended April 30, 2006 over
the prior comparable periods has increased and to date we have been 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. Our audit report for the fiscal
year ended October 31, 2005 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, 2006
through February 29, 2008. Approximately $1.9 million of principal and
interest 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 April 30, 2006, approximately $4.3 million, representing
approximately 74% of our trade accounts payable and accrued liabilities,
were past due. A majority of the amounts past due are to foreign vendors
that have supplied us with low margin wholesale opportunities and we are no
longer sending significant, or any, telecommunications traffic to them. We
will continue to work with them to arrange for a reduction in the amount
owed to them through either formal or informal payment plans. We continue
to seek sources of working capital sufficient to fund delinquent balances
and meet ongoing obligations, though our success on this process has been
limited.
Our future operating success is dependent on our ability to generate
positive cash flow from our existing products and services and/or accretive
acquisitions. Our major growth areas are through the introduction of new
retail VoIP products, both domestically and internationally. We anticipate a
$400,000-600,000 cash shortfall from operations during the next 12 months;
however we are currently pursuing retail opportunities and acquisitions that
we believe will reduce this shortfall immediately. 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 have been discussed from time
to time, and we are having ongoing discussions with several potential
financing sources, there are no definitive agreements with any party to
raise money and we cannot assure you that we will be successful in our
search for investors or lenders. However, the acquisition of Telenational
(see Note 9 - Subsequent events) was consummated May 5, 2006, thus changing
the financial position of the Company substantially. Any additional
financing we may obtain may involve material and substantial dilution to
existing stockholders. In such event, the percentage ownership of our
current stockholders may 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 may 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.
On March 8, 2006, the Company completed a private placement of two one year
10% convertible debentures ("Debentures"), for gross proceeds of $1,000,000.
In connection with the Debentures, the Company agreed to issue the investors
a total of 2,000,000 immediately exercisable five year warrants to purchase
the Company's common stock at an exercise price of $0.14 for 1,000,000
warrants, and $0.25 for an additional 1,000,000 warrants. In addition, the
investors will receive an additional 50,000 warrants to vest and become
exercisable on the last day of each month prior to the Company's
satisfaction in full of the Debentures or the complete conversion of the
Debentures, at an exercise price of $0.25. A portion of the proceeds have
been used to repay the Advances from Shareholder (see Note 7 - Advances from
Shareholder).
At April 30, 2006, we had cash and cash equivalents of $168,000, a decrease
of $4,000 from the balance at October 31, 2005. We had significant working
capital deficits at both April 30, 2006 and October 31, 2005.
Net cash used in operating activities was $886,000 for the six months ended
April 30, 2006. The net cash used in operating activities for the six months
ended April 30, 2006 was primarily due to a net loss of $1.6 million
adjusted for: non-cash interest expense of $510,000, and depreciation and
amortization of $204,000. Net cash provided by operating activities was
$24,000 for the six months ended April 30, 2006. For the six month period
ended April 30, 2005, the net cash provided by operating activities was due
to a net loss from continuing operations of $893,000 adjusted for
depreciation and amortization of $269,000, warrants issued for services of
$160,000, and net changes in operating assets and liabilities of ($490,000).
Net cash used in investing activities for the six-month periods ended April
30, 2006 and 2005 was $74,000 and $13,000, respectively, and primarily
relates to the purchase of property and equipment.
Net cash provided by financing activities for the six months ended April 30,
2006 was $956,000. This amount represents proceeds received from a note
payable due to Trident Growth Fund L.P. and Charger Investments LLC, less
financing fees paid. During the three months ended January 31, 2006,
the Company's chief executive officer, and significant shareholder, John
Jenkins, advanced funds to the Company in the aggregate amount of $500,000.
During the three-month period ended April 30, 2006 the Company has re-paid
this amount in full with proceeds received from the Debentures.
We have an accumulated deficit of approximately $50.7 million as of April
30, 2006 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 $6.7 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 April 30, 2006 we have
approximately $2,207,000 principal balance of convertible debentures which
will mature within the next year as well as 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. We do not anticipate
significant spending for the remainder of fiscal year 2006.
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 extend the maturity date to 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 gross outstanding
balance of these Notes at April 30, 2006 totals $1,003,390.
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
extend the maturity date to November 8, 2004. In connection with this
January 2003 amendment 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 to extend the maturity date to
November 26, 2005. On March 8, 2006, the Debenture was amended again to
extend the maturity date to November 26, 2006. 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 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.
During fiscal year 2005, GCA converted $35,000 of the Debenture and $7,770
of accrued interest into approximately 352,000 shares of our common stock.
During fiscal year 2006, GCA converted $25,000 of the Debenture and $6,150
of accrued interest into approximately 407,000 shares of common stock. The
gross outstanding balance on the Debenture was $430,000 at April 30, 2006.
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
fiscal year 2006 GCA elected to convert $50,000 of the GC-Note2 into
approximately 694,000 shares of common stock. The gross outstanding balance
of the GC-Note2 was $225,000 at April 30, 2006.
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 amendment, 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 gross outstanding balance on the
GCA-Debenture was approximately $550,000 at April 30, 2006.
On March 8, 2006, the Company completed a private placement of two one year
10% convertible debentures ("Debentures"), for gross proceeds of $1,000,000.
In connection with the Debentures, the Company agreed to issue the investors
a total of 2,000,000 immediately exercisable five year warrants to purchase
the Company's common stock at an exercise price of $0.14 for 1,000,000
warrants, and $0.25 for an additional 1,000,000 warrants. The Company paid
$44,150 in financing fees in connection with the debentures which were
recorded as a discount on the debentures. Additionally in connection with
these Debentures the Company recorded a debt discount of $1,000,000 related
to the fair value of warrants issued and the related beneficial conversion
feature that it will amortize over the life of the loan.
During the three months ended January 31, 2006, the Company's chief
executive officer, and significant shareholder, John Jenkins, advanced funds
to the Company in the aggregate amount of $500,000. During the three-month
period ended April 30, 2006 the Company has re-paid this amount in full with
proceeds received from financing.
Risk Factors
An investment in us involves a high degree of risk and should be undertaken
only by persons whose financial resources are sufficient to enable them
to assume such risk and to bear the total loss of their investment. This
section sets forth a brief summary of some of the principal risk factors.
If the Company is unable to address and deal with one or more of the risks
described below or any other risks which it may face, then its business,
operating results and financial condition could be materially adversely
affected, and you could lose all or part of your investment. For these
reasons, prospective investors should carefully consider the risks described
below as well as any other possible risks that could be important.
Our cash flow may not be sufficient to satisfy our operations
For the three and six month period ended April 30, 2006, we recorded a net
loss of approximately $846,000 and $1,551,000, and for the year ended
October 31, 2005, we recorded a net loss of approximately $2,565,000. As a
result of these losses, and prior losses, 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 74% is
past due. To be able to service our debt obligations over the remainder of
the 2006 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, 2005, which states that "The Company has suffered
recurring losses from continuing operations during each of the last two
fiscal years. Additionally, at October 31, 2005, the Company's current
liabilities (which includes significant amounts of past due payables)
exceeded its current assets by $7.7 million and the Company has a
shareholders' deficit totaling $6.8 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 rely on three key senior executives
Our success is dependent on our senior management team of John Jenkins,
David Hess and Chris Canfield 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among
Canmax Inc., CNMX MergerSub, Inc. and US Communications Services,
Inc. (filed as Exhibit 2.1 to Form 8-K dated January 30, 1998 (the
"USC 8-K"), and incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated
January 15, 1998 (the "USC Rescission 8-K"), and incorporated herein
by reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3, 1998
(filed as Exhibit 10.1 to the Company's Form 8-K dated December 7,
1998 and incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS Telecom &
Technologies, Inc., Dial Thru International Corporation, a Delaware
corporation, Dial Thru International Corporation, a California
corporation, and John Jenkins (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 2, 1999 and incorporated
herein by reference)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001,
by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation. (filed as Exhibit 2.1 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation. (filed as Exhibit 2.2
to the Company's Form 8-K dated October 29, 2001 and incorporated
herein by reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as of
October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.3 to the
Company's Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as of
October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.4 to the
Company's Form 8-K dated December 28, 2001 and incorporated herein by
reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as of
November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation. (filed as Exhibit 2.5
to the Company's Form 8-K dated December 28, 2001 and incorporated
herein by reference)
2.10 Asset Purchase Agreement, dated as of October 25, 2005, by and
between Integrated Communications, Inc. and Dial Thru International
Corporation (filed as Exhibit 2.5 to the Company's Form 8-K dated
October 31, 2005 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)
3.3 Amendment to Certificate of Incorporation dated January 11, 2005 and
filed with the State of Delaware on January 13, 2005 (filed as
Exhibit 3.3 to the 2004 Form 10-K and incorporated herein by
reference)
3.4 Amendment to Certificate of Incorporation dated October 28, 2005 and
filed with the State of Delaware on November 1, 2005
4.1 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)
4.2 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)
4.3 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)
4.4 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)
4.5 Securities Purchase Agreement issued November 8, 2002 between Dial
Thru International Corporation and Global Capital Funding Group, L.P.
(filed as Exhibit 4.1 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.6 Secured Promissory Note issued November 8, 2002 between Dial Thru
International Corporation and Global Capital Funding Group, L.P.
(filed as Exhibit 4.2 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.7 Common Stock Purchase Warrant issued November 8, 2002 between Dial
Thru International Corporation and Global Capital Funding Group, L.P.
(filed as Exhibit 4.3 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.8 Registration Rights Agreement issued November 8, 2002 between Dial
Thru International Corporation and Global Capital Funding Group, L.P.
(filed as Exhibit 4.4 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.9 Securities Purchase Agreement issued July 24, 2003 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited
(filed as Exhibit 4.5 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.10 Promissory Note issued July 24, 2003 between Dial Thru International
Corporation and GCA Strategic Investment Fund Limited (filed as
Exhibit 4.6 to the Company's Form 8-K filed on September 23, 2003,
and incorporated herein by reference)
4.11 Common Stock Purchase Warrant issued July 24, 2003 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited
(filed as Exhibit 4.6 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.12 Secured Promissory Note dated June 1, 2005 between Global Capital
Funding Group, L.P. and Dial Thru International Corporation (filed
as Exhibit 4.1 to the Company's Form 8-K filed on June 7, 2005, and
incorporated herein by reference)
4.13 Common Stock Purchase Warrant dated June 1, 2005 between Global
Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 4.2 to the Company's Form 8-K filed on June 7,
2005, and incorporated herein by reference)
4.14 Common Stock Purchase Warrant dated June 1, 2005 between Global
Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 4.3 to the Company's Form 8-K filed on June 7,
2005, and incorporated herein by reference)
4.15 Common Stock Purchase Warrant dated June 1, 2005 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.5 to the Company's Form 8-K filed
on June 7, 2005, and incorporated herein by reference
4.16 Common Stock Purchase Warrant dated June 1, 2005 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.6 to the Company's Form 8-K filed
on June 7, 2005, and incorporated herein by reference
4.17 Common Stock Purchase Warrant dated June 1, 2005 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.7 to the Company's Form 8-K filed
on June 7, 2005, 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)
10.4 Amendment Number 1 to Securities Purchase Agreement dated June 1,
2005 between Global Capital Funding Group, L.P. and Dial Thru
International Corporation (filed as Exhibit 10.1 to the Company's
Form 8-K filed on June 7, 2005, and incorporated herein by reference)
10.5 Amendment Number 1 to Securities Purchase Agreement dated June 1,
2005 between GCA Strategic Investment Fund Limited and Dial Thru
International Corporation (filed as Exhibit 10.2 to the Company's
Form 8-K filed on June 7, 2005, and incorporated herein by reference)
10.6 Amendment Number 1 to Securities Purchase Agreement dated June 1,
2005 between GCA Strategic Investment Fund Limited and Dial Thru
International Corporation (filed as Exhibit 10.3 to the Company's
Form 8-K filed on June 7, 2005, 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.
Rapid Link, Incorporated
By: /s/ John Jenkins
--------------------------------------------
John Jenkins
Chief Executive Officer
Dated June 14, 2006