form10ksb.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC.
20549
FORM
10-KSB
(Mark
One)
x ANNUAL
REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended October 31,
2007
o TRANSITION
REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _________
to _________
COMMISSION
FILE NUMBER
0-22636
(Name
of small business issuer in its
charter)
|
DELAWARE
|
75-2461665
|
|
(State
or other jurisdiction
of incorporation
or
organization)
|
(I.R.S.
Employer Identification
No.)
|
5408
N.
99thStreet;
Omaha,
NE 68134
(Address
of principal executive offices)
(Zip Code)
Issuer’s
telephone number: (402)
392-7561
SECURITIES
REGISTERED UNDER SECTION
12(b) OF THE EXCHANGE ACT: None
SECURITIES
REGISTERED UNDER SECTION
12(g) OF THE EXCHANGE ACT:
COMMON
STOCK, $0.001 PAR
VALUE
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
o
Check
if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. x
Indicate
by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o
No
x
The
issuer’s revenues for the fiscal
year ended October 31, 2007 were $17,326,035.
The
aggregate market value of the voting
and non-voting common stock held by non-affiliates of the registrant as of
January 8, 2008 was
approximately $1,934,042, based
on the average bid and ask price
of a share of common stock as quoted on the OTC Bulletin Board of
$0.08.
As
of January 8, 2008, there were
65,149,522 shares
of registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
None
Transitional
Small Business Disclosure
Format (Check One): Yes o;
No
x
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-KSB (this
"Report") includes "forward-looking statements". Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward-looking statements may be identified
by the use of such terms as "expects,” "anticipates,” "estimates,” "believes,”
"plans" and words of similar meaning. These forward-looking
statements relate to business plans, programs, trends, results of future
operations, satisfaction of future cash requirements, funding of future growth,
acquisition plans, and other matters. In light of the risks and
uncertainties inherent in all such projected matters, the inclusion of
forward-looking statements in this Form 10-KSB should not be regarded as a
representation by us or any other person that our objectives or plans will
be
achieved or that our operating expectations will be
realized. Revenues and results of operations are difficult to
forecast and could differ materially from those projected in forward-looking
statements contained herein, including without limitation statements regarding
our belief of the sufficiency of capital resources and our ability to compete
in
the telecommunications industry. Actual results could differ from those
projected in any forward-looking statements for, among others, the following
reasons: (a) increased competition from existing and new competitors using
Voice
over Internet Protocol ("VoIP") to provide telecommunications services over
the
Internet, (b) the relatively low barriers to entry for start-up companies using
VoIP to provide telecommunications services over the Internet, (c) the
price-sensitive nature of consumer demand, (d) the relative lack of customer
loyalty to any particular provider of services over the Internet, (e) our
dependence upon favorable pricing from our suppliers to compete in the
telecommunications industry, (f) increased consolidation in the
telecommunications industry, which may result in larger competitors being able
to compete more effectively, (g) failure to attract or retain key employees,
(h)
continuing changes in governmental regulations affecting the telecommunications
industry and the Internet and (i) changing consumer demand, technological
developments and industry standards that characterize the industry. For a
discussion of these factors and others, please see "Risk Factors" in Item 1
of
this Report. Readers are cautioned not to place undue reliance on the
forward-looking statements made in this Report or in any document or statement
referring to this Report. In addition, we are not obligated, and do
not intend, to update any forward-looking statements at any time unless an
update is required by applicable securities laws.
PART
I
Item
1. Description of
Business.
General
Throughout
this Annual Report on Form
10-KSB, the terms "we,"
"Rapid Link," and the "Company" refer
to Rapid Link, Incorporated, a Delaware corporation,
and its
subsidiaries. The Company was incorporated on July 10, 1986 under the
Company Act of the Province
of
British
Columbia, Canada. On
August 7, 1992, we
renounced our original province of incorporation and elected to continue our
domicile under the laws of the State of Wyoming,
and on November 30, 1994, our name was
changed to "Canmax Inc.” On February 1, 1999, we reincorporated under
the laws of the State of Delaware under
the name "ARDIS Telecom &
Technologies, Inc.” On November 2, 1999, we acquired substantially
all of the business and assets of Dial Thru International Corporation, a
California corporation (the "DTI Acquisition"), and, on January 19, 2000, we
changed our name from ARDIS Telecom & Technologies, Inc. to Dial Thru
International Corporation. On November 1, 2005, we changed our name
to "Rapid Link, Incorporated" as we believe this name will receive better market
recognition and acceptance than its previous name, especially as the Company
continues to roll out wireless broadband internet
relatedservices.
Our
principal executive offices are
located at 5408 N.
99thStreet,
Omaha,
Nebraska,
68134;
our telephone number is (310)
566-1700; our website address is www.rapidlink.com;
and our common stock currently trades
on the OTC Bulletin Board under the symbol RPID.
Business
Strategy
Communication
Services
Rapid
Link, Incorporated, a Delaware corporation,
and its subsidiaries
(collectively referred to as “Rapid Link” or the “Company”), have served as
facilities-based, communication companies providing various forms of voice
and
data services to customers around the world. Rapid Link provides a
multitude of communication services targeted to individual customers, as well
as
small and medium sized enterprises. These services include the
transmission of voice and data traffic over public and private
networks. The Company also sells foreign and domestic termination of
voice traffic into the wholesale market.
The
Company has shifted its retail
product focus to wireless broadband niche markets that include
specific
ethnic demographics, targeted
rural geographic locations, and others. The Company’s strategy
includes plans to offer broadband access via its own facilities to insure
reliable delivery of its current and future services. Technology now
allows for swift and cost efficient deployment of broadband
networks. Wi-MAX and other technologies can bring fast, reliable,
high-speed internet access to areas that have traditionally been inaccessible
or
underserved. Through organic growth and acquisitions in targeted
areas, the Company believes it will possess a strategic advantage over carriers
that do not provide their own network access. The Company believes
the potential for unfair and/or
monopolistic behavior by incumbent providers, necessitates our strategy
to “own” the customer by
providing the service directly, rather than utilizing the networks of
others. This will allow the Company to provide its bundled products
and communication services without the threat of compromised service
quality.
Development
of Wireless Broadband
Internet
The
tremendous growth of internet
utilization worldwide has led to dramatic changes in how individuals and
business consumers are able to access the internet. Regional
incumbents are generally offering broadband services over their legacy cable
or
telephone networks in most metropolitan areas of the United States. Wireless
internet service
providers (“WISP’s”) are becoming much more prevalent, largely due to advances
in technology and the demand for service in areas not adequately served by
the
incumbents. During fiscal year 2007, we began offering wireless
broadband internet services to customers located in the geographic area of
Amador County,
California.
Recent
advances in wireless Ethernet
equipment now make it possible to build carrier-grade networks with
significantly less capital investment than required in the past. As
recently as three years ago, a service which provided broadband speeds of
100Mbps or more to an end-user, would have been prohibitively
expensive. Today, even faster speeds are available to business
customers. With the increased bandwidth now available to our
customers, we are able to tailor our service offerings to suit the
end-users’ needs. Synchronous
connections (those with MATCHING upload and download speeds) are more important
now than ever, and new wireless technologies make this
possible. Integrated voice services utilizing VoIP are a perfect
example of the flexibility and performance synchronous connections
allow.
Niche
Focus- Broadband service in rural
and underserved areas
The
Company has recognized that many
areas within the United
States are lacking viable
options for broadband internet access. Generally, these are rural
locations, which have not yet seen market penetration by regional telephony
and
cable incumbents. With recent advances in wireless broadband
technologies, we feel that we can offer a cost effective service, bringing
high
quality broadband internet to these underserved areas.
Niche
Focus - Non-traditional broadband
service offerings
The
legacy services provided by
telecommunications
incumbents have very
specific limitations with regard to speeds, and are relatively
expensive. Cable
incumbents
are generally not offering
synchronous broadband speeds at all, thus limiting the scope of their products
and services. Wireless broadband technology enables the Company to
provide services outside the limits of traditional telecommunications and cable
based offerings. Additionally, wireless broadband services can be
easily and cost effectively upgraded to match the consumers changing
needs.
Products
and
Services
Our
goal is to provide the best possible
communication experience to both residential and business users at affordable
prices, allowing them to communicate seamlessly and effortlessly to and from
anywhere in the world.
Rapid
Link Wireless Broadband
Service
Rapid
Link provides Broadband Internet
access via its wireless network equipment and service staff in rural
Amador County,
California. This
service has been
available starting
October
31, 2007, and is a
service that has
been marketed to consumers in the
area for over 7 years by Communications Advantage, LLC, and Web-Breeze Networks,
LLC. Rapid Link acquired all the assets of Communications Advantage,
LLC, and Web-Breeze Networks, LLC in October 2007. The wireless
broadband network covers over 350 square miles and serves more than 1400 users
from 36 points of presence. Other assets include web hosting, email,
and national dial-up internet access.
We
currently offer several internet
access rate plans tailored to the needs of small business, home office and
residential consumers. Our service plans are designed to provide our
customers the lowest possible rates while maintaining the service quality level
they require. Our broadband services feature synchronous internet
access, which is critical to providing a satisfying internet experience when
visiting newer “Web 2.0” sites. Social networking experiences found
with sites such as Myspace and Facebook benefit greatly from fast upload speeds,
which are generally unavailable from the incumbent carriers. In
addition, we offer our customers a variety of additional services, including
web
hosting and email. All of our broadband customers also receive a free
dial-up account for use when away from home.
Rapid
Link VoIP
Services
Rapid
Link provides an Internet-based
communication
service that works over virtually any high-speed Internet connection in the
world. Our service allows our customers to call to and/or from any
phone in the world. Rapid Link VoIP is a perfect complement to our
broadband access service. When used together, we are able to more
closely control quality, by keeping calls on our own network as long as possible
and avoiding the public internet as much as possible.
Wholesale
Voice
Termination
We
offer call completion on a wholesale
basis to domestic and international telecommunications
companies. This service enables our carrier customers to benefit from
our VoIP and TDM voice network expertise without having to establish dozens
of
new relationships with smaller providers. Our extensive experience
and exiting relationships with voice service providers, allow us to offer
reliable service to select destinations around the world at very competitive
prices.
Legacy
Products
These
services, while still contributing
a significant portion of our revenues, will continue to decrease as a percentage
of our total revenues as we continue to develop and market new
services.
International
Re-origination
Services
We
provide a variety of international
Re-origination services. Our “Dial Thru” service allows customers the
convenience of making local and/or international calls in the same manner as
traditional long distance dialing. In markets where we cannot
currently provide Dial Thru service, we offer our Re-origination service, which
allows a caller outside of the United States to place a long distance telephone
call that appears to have originated from our US-based switch to the customer's
location, and then connects the call through our network to anywhere in the
world. By completing the calls in this manner, we are able to provide
very competitive rates to the customer. Generally, the Dial Thru and
Re-origination services are provided to customers that establish deposits or
prepayments with us.
International
Calling
Cards
Our
“Global
Roaming” service provides
customers a single account number to initiate phone-to-phone calls from
locations throughout the world using specific toll-free access
numbers. This service enables customers to receive the cost benefits
associated with our telecommunications network throughout the
world.
1+
Long Distance
We
also offer traditional 1+ long
distance service to business and residential users throughout the U.S. We
currently focus on SMEs
through the agent channel, as well as our niche markets, which generally have
a
large amount of international calling. By leveraging our
long-standing international carrier relationships, we can provide low rates
and
excellent service when calling to countries that are not aggressively priced
by
the larger carriers.
Segment
Information
Management
regularly reviews one set of
financial information and all of our products share similar economic
characteristics. Therefore, the Company has determined that it has
one operating segment.
Recent
Acquisitions
On
October 31, 2007, the Company
acquired 100% of the assets of Communications Advantage, LLC (“Communications
Advantage”), and Web-Breeze Networks, LLC (“Web Breeze”). The assets
include a sizable wireless broadband network in a rural geographic area of
California that
fits into the Company’s niche
market business model, a base of customers and revenues that are immediately
accretive to our revenues and earnings, and a staff of tenured professionals
with vast knowledge and experience in the wireless broadband
sector.
On
May 5, 2006, the Company acquired
100% of the outstanding stock of Telenational Communications, Inc.
(“Telenational”). Telenational historically
serviced a
sizable base of both retail and commercial customers which very closely mirror
those customers Rapid Link has served. This acquisition allows us to
expand our market share
in
the telecommunications industry while taking advantage of several
significant
economies of scale, both in respect to direct cost reductions, as well as
operational efficiencies. We have subsequently
moved
substantially all of our operational and administrative functions to the
Telenational headquarters in Omaha,
Nebraska.
In
October 2005, the Company completed
the acquisition of the customer base of Integrated Telecommunications, Inc.,
an
international long distance carrier providing VoIP services to retail customers
in the United States
and
wholesale services to
customers worldwide.
Competition
The
“Diversified Communication Services” industry is highly competitive, rapidly
evolving, and subject to constant technological change. Other
providers currently offer one or more of each of the services offered by
us. Communications service companies compete for consumers based on
price and quality, with the dominant providers conducting extensive advertising
campaigns to capture market share. As a service provider in Broadband
Internet industry, we compete with dominant players such as Comcast Corp.
(CMCSA), AT&T (T), all of which are substantially larger than us and have
the resources, history and customer bases to dominate virtually every segment
of
the broadband internet market. As a service provider in the VoIP
telecommunications industry, we compete with such dominant providers as Skype
and Vonage (VG), which are substantially larger than us and have greater
resources, history and customer bases, and who may market services in areas
and
regions which may closely mirror ours.
We
also
compete with other smaller companies including Towerstream Corp. (TWER), and
KeyOn Communications Holdings, Inc (KEYO). We also believe that
existing competitors are likely to continue to expand their service offerings
to
appeal to retailers and consumers especially in the area of wireless broadband
internet service.
The
market for international voice completion services is also highly
competitive. We compete both in the market for enhanced Internet
communications services and in the market for carrier transmission
services. We believe that the primary competitive factors in the
Internet and VoIP communications business are quality of service, price,
convenience, and bandwidth. We believe that the ability to offer
enhanced service capabilities, including new services, will become an
increasingly important competitive factor in the near future.
Wireless
Broadband Internet Service
Providers
During
the past several years, a number
of companies have introduced services that make Wireless Broadband Internet
and
Internet voice services available to businesses and
consumers. Towerstream Corporation and KeyOn Communications Holdings,
Inc. offers wireless broadband internet and divisions of Net2Phone Inc. and
Deltathree.com
route traffic to
destinations worldwide, and compete directly with us. Other Internet
telephony service providers focus on a retail customer base and may in the
future compete with us. These companies offer the kinds of voice
services we are currently offering. In addition, companies currently
in related markets are providing wireless broadband internet and VoIP services,
or adapt their products to enable voice over the Internet
services. Many of these companies have migrated into the wireless
broadband and Internet telephony market as direct
competitors.
Suppliers
Our
principal suppliers consist of
domestic and international telecommunications carriers, Internet
Service
Providers,
and Broadband suppliers. Relationships currently
exist with a number of reliable carriers. During the fiscal year
ended October 31, 2007, three of the Company's suppliers accounted for
approximately 31%, 22%, and 12% of the Company's total costs of
revenues. Due to the highly competitive nature of the
telecommunications business, we believe that the loss of any carrier would
not
have a long-term material impact on our business.
Sales
and Marketing
We
sell and market our services through
vertical web portals, magazines, local military base events, and third-party
resellers. Our Company also receives a good deal of referrals from
existing customers. Our revenues are primarily derived from direct
sales to business and residential accounts, sales through commissioned agents
and wholesale sales to other telecommunications providers. We plan to
focus our sales efforts on expanding niche markets, as well as add products
and
services targeting residential customers in these niche
areas.
We
offer businesses and individuals
the opportunity to become
resellers of our services through our affiliate and reseller
programs. Resellers are able to purchase bulk accounts and hardware
at reseller specific pricing and they are then able to resell these accounts
to
private individuals under the Rapid Link brand.
We
have substantial revenues in foreign
markets. For the fiscal years ended October 31, 2007 and 2006, $6.4
million or 37% and $4.4 million or 33% of our total revenue from continuing
operations for each year, respectively, originated from foreign
markets.
Customers
We
focus our current retail sales and
marketing efforts on our Wireless Broadband Internet products and services,
targeting residential customers and SMEs. We rely heavily on the use
of local advertising to generate retail sales in markets where we offer our
Broadband service. Additionally, we
utilize agent sales channels to
generate revenues. By doing so, we believe that we establish a wide
base of customers with little vulnerability based on lack of customer
loyalty. Our wholesale customers are primarily large
telecommunications customers in the United States,
and medium to large foreign Postal,
Telephone and Telegraph companies, which are those entities responsible for
providing telecommunications services in foreign markets and are usually
government owned or controlled.
During
the fiscal year ended October 31,
2007, we did not provide wholesale services to any customer that accounted
for
more than 10% of our revenue. During the fiscal year ended October
31, 2006, we provided wholesale services to a customer who accounted for 12%
of
our revenues, and to another customer who accounted for 10% of
revenues. We believe the loss of any individual customer would not
materially impact our business. We generally do business with
approximately 25 wholesale customers, any of which either collectively, or
in
most cases individually, could compensate for the loss of a major
customer. Typically, we have limited capacity, imposed by our
suppliers, in which to transmit our telecommunications traffic. We
frequently offer this capacity to our larger customers, however it is possible
to offer these opportunities to all or a few of our wholesale customers at
any
time, thus reducing our reliance on any one customer and providing a relatively
quick transition between customers if we should lose a
customer.
Employees
As
of December 26, 2007, we have
twenty-eight full-time
employees, nine of
which perform administrative and
financial functions, fourteen of
which perform customer support
duties, and thirteen
of
which have experience in
telecommunications operations and/or sales. Seventeen employees are
located in Omaha,
Nebraska,
seven employees are located in
California,
and one employee is located in
Colorado. None
of our employees is
represented by a labor union, and we consider our employee relations to be
good.
Debt
Restructurings
On
October 31, 2007, the Company entered
into a series of agreements, which modified its debt structure with Global
Capital Funding Group Ltd. ("Global"), and with GCA Strategic Investment Fund
Limited ("GCA"). The agreements call for two outstanding notes due in
November of 2007 payable to Global and GCA to be extended to October 31,
2009. There were no other
material changes to the terms of the existing notes. The Company
issued 50,000 warrant options to purchase common stock to Global and GCA in
consideration for the extensions.
On
October 31, 2007, the Company entered
into an agreement, which modified its debt structure with Apex Acquisitions,
Inc. ("Apex”). The agreement calls for
the outstanding note due in November of 2007 payable to Apex to be extended
to
November 1,
2009. The note was also
modified to allow for the balance to be convertible to common stock at market
pricing. The Company
President and Chief Financial
Officer is the majority stockholder of Apex.
On
October 31, 2007, the Company entered
into an agreement, which modified its debt structure with the Company’s Chairman
and Chief Executive Officer, John Jenkins. The
agreement calls for the
outstanding note due in February of 2008 payable to John Jenkins to
be extended to November 1,
2009. There were no other
material changes to
the
existing
note.
Intellectual
Property
We
do not hold any patents or
trademarks. Our products and services are available to other
telecommunications companies.
Government
Regulation
Telecommunications
services are subject
to extensive government regulation at both the federal and state levels in
the
United States. Any
violations of these
regulations may subject us to enforcement penalties. The Federal
Communications Commission ("FCC") has jurisdiction over all telecommunications
common carriers to the extent they provide interstate or international
communications services, including the use of local networks to originate or
terminate such services. Each state regulatory commission has jurisdiction
over
the same carriers with respect to their provision of local and intrastate long
distance communications services. Significant changes to the applicable laws
or
regulations imposed by any of these regulators could have a material adverse
effect on our business, operating results and financial
condition.
The
following summary of regulatory
developments and legislation is intended to describe what we believe to be
the
most important, currently effective and proposed international, federal, state,
and local regulations and legislation that are likely to materially affect
us. Some of these and other existing federal and state regulations
are the subject of judicial proceedings and legislative and administrative
proposals that could change, in varying degrees, the manner in which this
industry operates. We cannot predict the outcome of any of these
proceedings or their impact on the telecommunications industry or us at this
time. Some of these future legislative, regulatory, or judicial
changes could have a material adverse impact on our
business.
Regulation
by the Federal Communications
Commission - Universal
Service
Funds
In
1997, the FCC issued an order,
referred to as the Universal Service Order, to implement the provisions of
the
Telecommunications Act of 1996 relating to the preservation and advancement
of
universal telephone service. The Universal Service Order requires all
telecommunications carriers providing interstate telecommunications services
to
periodically contribute to universal service support programs administered
by
the FCC (the "Universal Service Funds"). The periodic contribution requirements
to the Universal Service Funds under the Universal Service Order are currently
assessed based on a percentage of each contributor's interstate and
international end user telecommunications revenues reported to the FCC, which
we
measure and report in accordance with the legislative rules adopted by the
FCC. The contribution rate factors are determined quarterly and
carriers, including us, are billed for their contribution requirements each
month based on projected interstate and international end-user
telecommunications revenues, subject to periodic reconciliation. We,
and most of our competitors, pass through these Universal Service Fund
contributions in the price of our services, either as a separate surcharge
or as
part of the base rate. In addition to the FCC universal service
support mechanisms, state regulatory agencies also operate parallel universal
service support systems. As a result, we are subject to state, as
well as federal, universal service support contribution requirements, which
vary
from state to state. As with any regulatory obligation, if a federal
or state regulatory body determines that we have incorrectly calculated and/or
remitted any universal service fund contribution, we could be subject to the
assessment and collection of past due remittances as well as interest and
penalties thereon. Furthermore, if the FCC determines that we have
incorrectly calculated and overstated a separately invoiced line item identified
as a recovery of contributions to the Universal Service Funds we could be
required to repay any such over-collection and be subject to
penalty.
The
FCC is currently considering several
proposals that would fundamentally alter the basis upon which our Universal
Service Fund contributions are determined and the means by which such
contributions may be recovered from our customers, changing from a revenue
percentage measurement to a connection (capacity), or telephone number (access)
measurement. Because we pass through these contributions to
consumers, a change in the contribution methodology would not directly affect
our net revenues; however, a change in how contributions are assessed might
affect our customers differently than the customers of competing services,
and
therefore could either increase or decrease the attractiveness of our
services. The timing and effect of any FCC action on this proposal is
not yet known.
Access
Charges
As
a long distance provider, we remit
access fees directly to local exchange carriers or indirectly to our underlying
long distance carriers for the origination and termination of our long distance
telecommunications traffic. Generally, intrastate
access charges are higher than
interstate access
charges. Therefore, to
the degree access charges increase or a greater percentage of our long distance
traffic is intrastate, our costs of providing long distance services will
increase.
In
April 2001, the FCC released a Notice
of Proposed Rulemaking in which it proposed a "fundamental re-examination of
all
currently regulated forms of intercarrier compensation.” Several
different industry groups have submitted access charge reform proposals to
the
FCC. The FCC has not yet acted on these proposals and it is not yet
known when it will act. Therefore, at this time we cannot predict the
effect that the FCC's ultimate determinations regarding access charge reform
may
have upon our business.
Taxes
and Regulatory
Fees
We
are subject to numerous local, state,
and federal taxes and regulatory fees, including, but not limited to, the
Federal excise tax, FCC universal service fund contributions and regulatory
fees, and numerous public utility commission regulatory fees. We have
procedures in place to ensure that we properly collect taxes and fees from
our
customers and remit such taxes and fees to the appropriate entity pursuant
to
applicable law and/or regulation. If our collection procedures prove
to be insufficient or if a taxing or regulatory authority determines that our
remittances were inadequate, we could be required to make additional payments,
which could have a material adverse effect on our business.
International
Telecommunications
Services - Section 214. In the United States, to the extent that we
offer services as a carrier, we are required to obtain authority under Section
214 of the Communications Act of 1934 to provide telecommunications service
that
originates within the United States and terminates outside the United
States. We have obtained the required Section 214 authorization from
the FCC to provide U.S.
international
service. As a condition to our Section 214 authorization, we are
subject to various communications-oriented reporting and filing
requirements. Failure to comply with the FCC's rules could result in
fines, penalties, forfeitures, or revocation of our FCC authorization, each
of
which could have a material adverse effect on our business, financial condition,
and results of operation.
International
Telecommunications
Services - International Settlements
The
FCC's International Settlements
Policy ("Policy") restricts the terms on which U.S.-based carriers and certain
of their foreign correspondents settle the cost of terminating each other's
traffic over their respective networks. Under the International
Settlements Policy, absent approval from the FCC, international
telecommunications service agreements with dominant foreign carriers must be
non-discriminatory, provide for settlement rates usually equal to one-half
of
the accounting rate, and require proportionate share of return
traffic. This Policy, however, does not apply to arrangements with
any non-dominant foreign carrier or, since March 30, 2005, with any dominant
foreign carrier on routes where a demonstration has been made that at least
one
U.S. carrier
has a settlement arrangement
with the dominant foreign carrier that is compliant with the FCC's applicable
benchmark settlement rates. This action has greatly lessened the number of
instances in which the Policy applies, effectively granting U.S. and
foreign carriers greater freedom to
set rates and terms in their agreements. As a result, 164 countries
currently are exempt from the International Settlements Policy, representing
over 90% of all U.S.-originated international
traffic. Notwithstanding the foregoing, the FCC could find that we do
not meet certain International Settlements Policy requirements with respect
to
certain of our foreign carrier agreements. Although the FCC generally
has not issued penalties in this area, it has issued a Notice of Apparent
Liability to a U.S. company for violations of the International Settlements
Policy and it could, among other things, issue a cease and desist order, impose
fines or allow the collection of damages if it finds that we are not in
compliance with the International Settlements Policy. Any of these
events could have a material adverse effect on our business, financial
condition, or results of operation.
State
Regulations
Our
intrastate long distance operations
are subject to various state laws and regulations, including, in most
jurisdictions, certification, and tariff filing requirements. As a
certificated carrier, consumers may file complaints against us at the public
service commissions. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities. Fines and other
penalties also may be imposed for such violations. Public service
commissions also regulate access charges and other pricing for
telecommunications services within each state. The Regional Bell
Operating Companies and other local exchange carriers have been seeking
reduction of state regulatory requirements, including greater pricing
flexibility, which, if granted, could subject us to increased price
competition.
Regulation
of Internet Telephony and
Other IP-Enabled Services
The
use of the Internet to provide
telephone service is a fairly recent market development. At present,
we are not aware of any domestic, and are aware of only a few foreign, laws
or
regulations that prohibit voice communications over the
Internet.
United
States
We
believe that, under U.S. law,
the Internet-related services that
we provide constitute information services as opposed to regulated
telecommunications services and, as such, are not currently actively regulated
by the FCC or any state agencies charged with regulating telecommunications
carriers. We cannot provide assurances that our Internet-related
services will not be actively regulated in the future. Several
efforts have been made in the U.S. to
enact federal legislation that would
either regulate or exempt from regulation services provided over the
Internet. Increased regulation of the Internet may slow its growth,
particularly if other countries also impose regulations. Such
regulation may negatively impact the cost of doing business over the Internet
and materially adversely affect our business, operating results, financial
condition and future prospects.
The
advent of VoIP services being
provided by pure play VoIP providers, such as Vonage, cable television and
other
companies, and the increased number of traditional telephone companies entering
the retail VoIP space has heightened the need for U.S. regulators to determine
whether VoIP is subject to the same regulatory and financial constraints as
wire
line telephone service. On November 9, 2004, the FCC issued an order in response
to a petition from Vonage declaring that Vonage-style VoIP services were exempt
from state telecommunications regulations. The FCC order applies to all VoIP
offerings provided over broadband services. However, this order did not clarify
whether, or under what terms, VoIP traffic may be subject to intercarrier
compensation requirements; whether VoIP was subject to state tax or commercial
business regulations; or whether VoIP providers had to comply with obligations
related to 911 emergency calls, and the Universal Service Fund ("USF") of the
Communications Assistance for Law Enforcement Act ("CALEA"). The FCC
is addressing many of these issues through its "IP-Enabled Services Proceeding,”
which opened in February 2004.
Due
to perceived urgency, however, the
FCC did take some specific actions outside of the broad IP-Enabled Services
Proceeding to address emergency services and law enforcement
issues. On June 3, 2005, the FCC issued an order establishing rules
requiring interconnected VoIP service providers to incorporate 911 emergency
call capabilities for their customers as a standard feature of their services,
rather than an optional enhancement. And, on August 5, 2005, the FCC
announced the extension of CALEA to certain types of VoIP
providers. Any additional regulation of IP-based services concerns us
and we must therefore remain diligent with respect to evaluating the impact
of
FCC proposals and decisions. However, based on the nature of the
IP-enabled services we currently provide, we do not believe either FCC decision
will materially adversely affect our business, operating results, financial
condition, or future prospects.
The
FCC has also considered whether to
impose surcharges or other common carrier regulations upon certain providers
of
VoIP or Internet telephony. While the FCC has presently refrained
from such regulation, the regulatory classification of Internet telephony
remains unresolved. If the FCC were to determine that certain
Internet-related services including Internet telephony services are subject
to
FCC regulations as telecommunications services, the FCC could subject providers
of such services to traditional common carrier regulation, including
requirements to make universal service contributions, and pay access charges
to
local telephone companies. A decision to impose such charges
could also have a
retroactive effect,
which
could materially adversely affect
us. It is also possible that the FCC will adopt a regulatory
framework other than traditional common carrier regulation that would apply
to
Internet telephony providers. Any such determinations could
materially adversely affect our business, financial condition, operating results
and future prospects to the extent that any such determinations negatively
affect the cost of doing business over the Internet or otherwise slow the growth
of the Internet. Congressional dissatisfaction with FCC conclusions
could result in requirements that the FCC impose greater or lesser regulation,
which in turn could materially adversely affect our business, financial
condition, operating results and future prospects.
States
State
regulatory authorities may also
retain jurisdiction to regulate certain aspects of the provision of intrastate
Internet telephony services. Several state regulatory authorities
have initiated proceedings to examine the regulation of such
services. Others could initiate proceedings to do
so.
International
The
regulatory treatment of Internet
telephony outside of the U.S. varies
widely from country to
country. A number of countries that currently prohibit competition in
the provision of voice telephony also prohibit Internet
telephony. Other countries permit but regulate Internet
telephony. Some countries will evaluate proposed Internet telephony
service on a case-by-case basis and determine whether it should be regulated
as
a voice service or as another telecommunications service. Finally, in
many countries, Internet telephony has not yet been addressed by legislation
or
regulation. Increased regulation of the Internet and/or Internet
telephony providers or the prohibition of Internet telephony in one or more
countries could materially adversely affect our business, financial condition,
operating results and future prospects.
Other
General
Regulations
Although
we do not know of any other
specific new or proposed regulations that will affect our business directly,
the
regulatory scheme for competitive telecommunications market is still evolving,
and there could be unanticipated changes in the competitive environment for
communications in general. For example, the FCC is currently
considering rules that govern how Internet providers share telephone lines
with
local telephone companies and compensate local telephone
companies. These rules could affect the role that the Internet
ultimately plays in the telecommunications market.
Risk
Factors
Our
cash flow may not be sufficient to
satisfy our cost of operations. If not, we must obtain equity or debt
instruments.
For
the fiscal years ended October 31,
2007 and 2006, we recorded net losses from continuing operations of
approximately $2 million and $1.1 million, respectively, on revenues from
continuing operations of approximately $17.3 million and $13.4 million,
respectively. For fiscal year 2007,
our net loss from
continuing operations included approximately $2 million in non-cash expenses,
primarily depreciation expense and non-cash interest expense. In
addition, we generated approximately $659,000 of positive cash flow from
operations during fiscal year 2007. As a result of historical losses,
we currently have a substantial working capital deficit. To
be able to service our debt
obligations over the course of the 2008 fiscal year, we must generate
significant cash flow through additional
financing or an equity infusion. If
we are unable to do so or are
otherwise unable to obtain funds necessary to make required payments on our
trade debt and other indebtedness, our ability to continue
operations may
be jeopardized.
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, 2007, which states “The Company
has suffered recurring losses from continuing operations during each of the
last
two fiscal years. Additionally, at October 31, 2007, the Company's
current liabilities exceeded its current assets by $5.4
million and the Company had a
shareholders' deficit totaling $2.8 million. Although our financial
condition is
improving, particularly from a cash flow perspective, these conditions raise
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 broadband wireless internet
sector of the Diversified Communications Service industry and the effectiveness
of our business strategy. As of the date of this report, most of our
revenues are not derived from broadband internet services. Instead,
we generated most of our revenues from retail fixed-line and wholesale
communication services. 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 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 need an additional equity infusion. There is no assurance that
adequate levels of additional equity or financing will be available at all
or on
acceptable terms. If we are unable to obtain additional equity or
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 that our assets could be sold quickly enough, or for amounts sufficient,
to meet our obligations.
Potential
for substantial dilution to
our existing stockholders exists.
The
issuance of shares of common stock
upon conversion of secured convertible notes or upon exercise of outstanding
warrants and/or stock options may cause immediate and substantial dilution
to
our existing stockholders. In addition, any additional financing may
result in significant dilution to our existing stockholders.
We
face competition from numerous,
mostly well-capitalized sources.
The
market for our products and services
is highly competitive. We face competition from multiple sources,
many of which have greater financial resources and a substantial presence in
our
markets and offer products or services similar to our
services. Therefore, we may not be able to successfully compete in
our markets, which could result in a failure to implement our business strategy,
adversely affecting our ability to attract and retain new
customers. In addition, competition within the industries in which we
operate is characterized by, among other factors, price, and the ability to
offer enhanced services. Significant price competition would reduce
the margins realized by us in our telecommunications operations. Many
of our competitors have greater financial resources to devote to research,
development, and marketing, and may be able to respond more quickly to new
or
merging technologies and changes in customer requirements.
We
have pledged our assets to existing
creditors.
Our
secured convertible notes are
secured by a lien on substantially all of our assets. A default by us
under the secured convertible notes would enable the holders of the notes to
take control of substantially all of our assets. The holders of the
secured convertible notes have no operating experience in our industry and
if we
were to default and the note holders were to take over control of our Company,
they could force us to substantially curtail or cease our
operations. If this happens, you could lose your entire investment in
our common stock.
In
addition, the existence of our asset
pledges to the holders of the secured convertible notes will make it more
difficult for us to obtain additional financing required to repay monies
borrowed by us, continue our business operations, and pursue our growth
strategy.
The
regulatory environment in our
industry is very uncertain.
The
legal
and regulatory environment pertaining to the Internet and Diversified
Communication Services industry is uncertain and changing rapidly as the use
of
the Internet increases. For example, in the United States, the FCC
had been considering whether to impose surcharges or additional regulations
upon
certain providers of Internet telephony, and indeed the FCC has confirmed that
providers must begin charging Universal Service access charges of roughly
6.5%.
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 enacted
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 Broadband Wireless Internet 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.
We
rely heavily on our senior management
team of John
Jenkins, Christopher
Canfield and Michael Prachar, and our future success may depend, in large part,
upon our ability to retain our senior executives. In addition to the
industry experience and technical expertise they provide to the Company, senior
management has been the source of significant amounts of funding that have
helped to allow us to meet our financial obligations.
Any
natural disaster or other occurrence
that renders our operations center inoperable could significantly hinder the
delivery of our services to our customers because we lack an off-site back-up
communications system.
Currently,
our disaster recovery systems
focus on internal redundancy and diverse routing within our operations
center. We currently do not have an off-site communications system
that would enable us to continue to provide communications services to our
customers in the event of a natural disaster, terrorist attack or other
occurrence that rendered our operations center
inoperable. Accordingly, our business is subject to the risk that
such a disaster or other occurrence could hinder or prevent us from providing
services to some or all of our customers. The delay in the delivery
of our services could cause some of our customers to discontinue business with
us, which could have a material adverse effect financial condition, and results
of operations.
We
may be unable to manage our
growth.
We
intend to expand our Wireless
Broadband Internet network and the range of enhanced communication 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 revenues will suffer if we are
unable to manage this expansion properly.
Our
OTC Bulletin Board listing
negatively affects the liquidity of our common stock as compared with other
trading boards.
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 (the
“SEC”) 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.
Our
executive officers, directors and major shareholders have significant
shareholdings, which may lead to conflicts with other shareholders over
corporate governance matters.
Our
current directors, officers and more than 5% shareholders, as a group,
beneficially own approximately 75% of our outstanding common
stock. Acting together, these shareholders would be able to
significantly influence all matters that our shareholders vote upon, including
the election of directors and mergers or other business
combinations. As a result, they have the ability to control our
affairs and business, including the election of directors and subject to certain
limitations, approval or preclusion of fundamental corporate
transactions. This concentration of ownership of our common stock may
delay or prevent a change in the control, impede a merger, consolidation,
takeover or other transaction involving us, or discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of our
Company.
We
will be subject to the requirements of section 404 of the Sarbanes-Oxley Act.
If
we are unable to timely comply with section 404 or if the costs related to
compliance are significant, our profitability, stock price and results of
operations and financial condition could be materially adversely
affected.
We
will
be required to comply with the provisions of Section 404 of the Sarbanes-Oxley
Act of 2002, which requires that we document and test our internal controls
and
certify that we are responsible for maintaining an adequate system of internal
control procedures. This section also requires that our independent
registered public accounting firm opine on those internal controls and
management’s assessment of those controls. We are currently
evaluating our existing controls against the standards adopted by the Committee
of Sponsoring Organizations of the Treadway Commission. During the
course of our ongoing evaluation and integration of the internal controls of
our
business, we may identify areas requiring improvement, and we may have to design
enhanced processes and controls to address issues identified through this
review.
We
intend to implement the requisite
changes to become compliant with existing and new requirements that apply to
our
Company.
We
believe that the out-of-pocket costs, the diversion of management’s attention
from running the day-to-day operations and operational changes caused by the
need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act
could be significant. If the time and costs associated with such
compliance exceed our current expectations, our results of operations could
be
adversely affected. We cannot be certain at this time that we will be
able to successfully complete the procedures, certification and attestation
requirements of Section 404 or that our auditors will not have to report a
material weakness in connection with the presentation of our financial
statements. If we fail to comply with the requirements of Section 404
or if our auditors report such material weakness, the accuracy and timeliness
of
the filing of our annual report may be materially adversely affected and could
cause investors to lose confidence in our reported financial information, which
could have a negative effect on the trading price of our common
stock. In addition, a material weakness in the effectiveness of our
internal controls over financial reporting could result in an increased chance
of fraud and the loss of customers, reduce our ability to obtain financing
and
require additional expenditures to comply with these requirements, each of
which
could have a material adverse effect on our business, results of operations
and
financial condition.
Item
2. Description of
Property.
We
lease approximately 11,500 square
feet in Omaha,
Nebraska,
located at 5408 N. 99thStreet. Our
operations, information
systems, and executive headquarters are located in the Omaha facility. We
also have a
small sales and administrative office in Johannesburg,
South
Africa. We believe that our
facilities are sufficient for the operation of our business for the foreseeable
future. The expiration dates of the above-mentioned lease agreements
are as follows:
|
June
30,
2011
|
Omaha
–
Operational
and
Administrative Headquarters
|
|
Month
to
month
|
South
Africa Sales and
Administrative Office
|
Item
3. Legal
Proceedings.
The
Company, from time to time, may be
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of trademarks and other intellectual
property of third parties by the Company. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
Cygnus
Telecommunications Technology, LLC. On June 12, 2001, Cygnus
Telecommunications Technology, LLC ("Cygnus"), filed a patent infringement
suit
(case no. 01-6052) in the United States District Court, Central District of
California, with respect to the Company's "international re-origination"
technology. On March 29, 2007 the United States District Court in San
Jose, California ruled that all Cygnus “international re-origination” patents
are invalid, and dismissed all cases against Rapid Link (fka Dial Thru
International Corporation) and related parties. Cygnus is appealing to a
higher court.
State
of Texas. During
fiscal 2004, the
Company determined, based on final written communications with the State of
Texas (the
“State”),
that it 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 2003. During fiscal 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 for state and local sales tax. During fiscal 2005, the Company
accrued an additional $62,000. 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. On
January 8, 2008, the Attorney General
of Texas offered to settle all sales tax claims against the Company for a sum
total of $250,000, which must be paid by April 1, 2008 to relieve the Company
from any and all sales tax liabilities including penalties and
interest. The
Company is currently considering whether to accept the
offer.
The
Company will continue to
aggressively pursue the collection of unpaid sales taxes from former customers
of Canmax Retail Systems, primarily Southland Corporation, now 7-Eleven
Corporation ("7-Eleven"), as a majority of the amount owed to the State of
Texas is
the result of uncollected taxes from
the sale of software to 7-Eleven during the period under audit. However,
there can be no assurance that
the Company will be successful with respect to such
collections.
On
January 12, 2004, the Company filed a
suit against 7-Eleven in the 162nd District Court in Dallas,
Texas. The
Company's suit claims a
breach of contract on the part of 7-Eleven in failing to reimburse it for taxes
paid to the State as well as related taxes for which the Company is currently
being held responsible by the State. The Company's suit seeks
reimbursement for the taxes paid and a determination by the court that 7-Eleven
is responsible for paying the remaining tax liability to the
State.
Item
4. Submission of Matters
to a Vote of Security Holders.
No
matters were submitted to a vote of
security holders during the fourth quarter of fiscal 2007.
PART
II
Item
5. Market for Common
Equity and Related Stockholder Matters.
Market
for the Company’s Common
Stock
The
Company’s common stock, $0.001 par
value, is quoted on the OTC Bulletin Board under the trading symbol
“RPID”. Each share ranks equally as to dividends, voting rights,
participation in assets on winding-up and in all other respects. No
shares have been or will be issued subject to call or
assessment. There are no preemptive rights, provisions for redemption
or for either cancellation or surrender, or provisions for sinking or purchase
funds.
The
following table sets forth, for the
fiscal periods indicated, the high and low closing sales price per share of
our
common stock as reported on the OTC Bulletin Board:
| |
|
High
|
|
|
Low
|
|
|
Fiscal
Year Ended October 31, 2007
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
0.11 |
|
|
$ |
0.04 |
|
|
Third
|
|
$ |
0.08 |
|
|
$ |
0.03 |
|
|
Second
Quarter
|
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
First
Quarter
|
|
$ |
0.10 |
|
|
$ |
0.06 |
|
| |
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended October 31, 2006
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
0.14 |
|
|
$ |
0.06 |
|
|
Third
Quarter
|
|
$ |
0.22 |
|
|
$ |
0.09 |
|
|
Second
Quarter
|
|
$ |
0.40 |
|
|
$ |
0.12 |
|
|
First
Quarter
|
|
$ |
0.19 |
|
|
$ |
0.08 |
|
The
market quotations presented reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily reflect actual transactions.
The
closing price for our common stock on January 8, 2008, as reported on the OTC
Bulletin Board, was $0.08.
Dividends
We
have never declared or paid any cash
dividends on our common stock and do not presently intend to pay cash dividends
on our common stock in the foreseeable future. We intend to retain
future earnings for reinvestment in our business.
Holders
of Record
There
were 479 stockholders of record as of January 8, 2008.
Equity
Compensation
Plans
The
following table sets forth, as of
October 31, 2007, certain information related to the Company’s compensation
plans under which shares of our common stock are authorized for
issuance.
|
Plan
Category
|
|
Number
of Securities
to be
Issued
upon Exercise
of Outstanding
Options
Warrants
and Rights
column
(a)
|
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and
Rights
|
|
|
Number
of Securities
Remaining
Available
For
Future Issuance
Under
Equity Compensation
Plans
(Excluding
Securities
Reflected
in column
in
column
(a))
|
|
| |
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans
approved by
ecurity holders
|
|
|
1,190,000
(1) |
|
|
|
$
0.10 |
|
|
|
2,810,000
(2) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans
not approved by
security holders
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
Total
|
|
|
1,190,000 |
|
|
|
$
0.10 |
|
|
|
2,810,000 |
|
| |
(1)
|
Includes
outstanding options
granted pursuant to the Company’s 2002 Equity Incentive
Plan.
|
| |
(2)
|
Includes
shares remaining
available for future issuance under the Company’s 2002 Equity Incentive
Plan.
|
The
Company’s 2002 Equity Incentive Plan
(the "Equity Incentive Plan"), as amended, authorizes the Board of Directors
to
grant options to purchase up to 4,000,000 shares of the Company’s common
stock. On
October 31, 2002 at our stockholder’s annual meeting, our stockholders approved
the adoption of the Equity Incentive Plan. The
maximum number of shares of common
stock that may be issuable under the Equity Incentive Plan to any individual
plan participant is 1,000,000 shares. All options granted under the
Equity Incentive Plan have vesting periods up to a maximum of five
years. The exercise price of an option granted under the Equity
Incentive Plan shall not be less than 85% of the fair value of the common stock
on the date such option is granted.
The
Company’s 1990 Stock Option Plan
(the "Option Plan"), as amended, authorized the Board of Directors to grant
options to purchase up to 2,300,000 shares of the Company’s common
stock. No options were to be granted to any individual director or
employee, which when exercised, would exceed 5% of the issued and outstanding
shares of the Company. The term of any option granted under the 1990
Stock Option Plan was fixed by the Board of Directors at the time the options
were granted, provided that the exercise period was not to be longer than 10
years from the date of grant. All options granted under the 1990
Stock Option Plan have up to 10-year terms and have vesting periods that range
from 0 to three years from the grant date. The exercise price of any
options granted under the 1990 Stock Option Plan is the fair market value at
the
date of grant. On October 31, 1990 at
our stockholder’s
annual meeting, our stockholders approved the adoption of the Option
Plan. Subsequent
to the adoption of the
Incentive Plan, no further options will be granted under the Option
Plan.
Recent
Sales of Unregistered
Securities
During
the fiscal year ended October 31,
2007, we did not issue any securities that were not registered under the
Securities Act of 1933, as amended, except as disclosed in previous SEC
filings.
Purchases
of Equity Securities by the
Issuer and Affiliated Purchasers
There
were no repurchases of equity
securities by the issuer or affiliated purchasers during the fiscal year ended
October 31, 2007.
Item
6. Management’s
Discussion and Analysis or Plan of Operation.
This
Annual Report on Form 10-KSB
contains "forward-looking statements". These
statements relate to
expectations concerning matters that are not historical facts. Words
such as "projects," "believes," "anticipates," "estimates," "plans," "expects,"
"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 herein
including, without limitation, in the section entitled "Risk Factors" in PART
I,
Item 1. All forward-looking statements attributable to the Company
are expressly qualified in their entirety by such language and we do not
undertake any obligation to update any forward-looking
statements. You are also urged to carefully review and consider the
various disclosures we have made which describe certain factors that affect
our
business throughout this Report. The following discussion and
analysis of financial condition and results of operations covers the years
ended
October 31, 2007 and 2006 and should be read in conjunction with our Financial
Statements and the Notes thereto commencing at page F-1 included
hereof.
Overview
We
are a facilities-based, Diversified Communications
Services
company
providing various forms of
telephony and wireless
broadband internet services
to wholesale and retail customers around the world. We offer a
multitude of international communications services targeted to individual
customers, as well as small and medium sized enterprises. These
services include the transmission of voice and data traffic over public and
private networks, and communications services for both the foreign and domestic
termination of international long distance traffic into the wholesale
market. We have begun to utilize Voice over Internet Protocol
(“VoIP”) packetized voice technology.
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 wireless broadband internet
and other
diversified communication services.
On
October 31, 2007, the Company
acquired 100% of the assets of Communications Advantage, LLC (“Communications
Advantage”), and Web-Breeze Networks, LLC (“Web Breeze”). The assets
include a sizable wireless broadband network in a rural geographic area of
California that
fits into the Company’s niche
market business model, a base of customers and revenues that are immediately
accretive to our revenues and earnings, and a staff of tenured professionals
with vast knowledge and experience in the wireless broadband
sector.
On
May 5, 2006, we completed the
acquisition of all of the issued and outstanding shares of capital stock of
Telenational
Communications, Inc., who historically has serviced
a sizable base
of both retail and commercial customers, which very closely mirror those
customers Rapid Link has served prior to the acquisition. This
acquisition allowed
us
to take advantage of
several significant economies of scale, both in respect to direct cost
reductions, as well as operational efficiencies.
On
October 31, 2005, we completed the
acquisition of the customer base of Integrated Telecommunications, Inc., an
international long distance carrier providing VoIP services to retail customers
in the United
States, and wholesale
services to customers worldwide.
The
Diversified
Communication Services
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, Comcast 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
wireless broadband internet
and adding new products and
services that can be offered 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 IADs, 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 reducing 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 rural or underserved
areas within
the United
States. 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.
Critical
Accounting
Policies
This
disclosure is based upon the
Company’s consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The
preparation of these
financial statements requires that we make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our
estimates on historical experience and other assumptions that we believe
to be proper and reasonable
under the circumstances. We continually evaluate the appropriateness of
estimates and assumptions used in the preparation of its consolidated financial
statements. Actual results could differ from those
estimates. The following key accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation
of
the consolidated financial statements.
Revenue
Recognition
For
a majority of our products, our
revenues are generated at the time a customer uses our network to initiate
a
phone call. We sell our services to SMEs and end-users that utilize
our network for international re-origination and dial thru services, and to
other providers of long distance usage who utilize our network to deliver
domestic and international termination of minutes to their own
customers. At times, we receive payment from our customers in advance
of their usage, which we record as deferred revenue, recognizing revenue as
calls are made.
For
our newer VoIP product offerings,
specifically our Rapid Link service, we 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
We
regularly monitor credit risk
exposures in our accounts receivable and maintain a general allowance for
doubtful accounts based on historical experience. Our receivables are
due from commercial enterprises and residential users in both domestic and
international markets. In estimating the necessary level of our
allowance for doubtful accounts, we consider the aging of our customers’
accounts receivable and our estimation of each customer’s willingness and
ability to pay amounts due, among other factors. Should any of these
factors change, the estimates made by management would also change, which in
turn would impact the level of the Company's future provision for doubtful
accounts. Specifically, if the financial condition of the Company's
customers were to deteriorate, affecting their ability to make payments,
additional customer-specific provisions for doubtful accounts may be
required. We review our credit policies on a regular basis and
analyze the risk of each prospective customer individually in order to minimize
our risk.
Purchase
Price Allocations and
Impairment Testing
We
account for our acquisitions using
the purchase method of accounting. This method requires that the
acquisition cost be allocated to the assets and liabilities we acquired based
on
their fair values. We make estimates and judgments in determining the
fair value of the acquired assets and liabilities. We base our
determination on independent appraisal reports as well as our internal judgments
based on the existing facts and circumstances. We record goodwill when
the
consideration paid for an acquisition exceeds the fair value of net tangible
and
identifiable intangible assets acquired. If we were to use different
judgments or
assumptions, the amounts assigned to the individual assets or liabilities could
be materially different.
Long-lived
assets, including the
Company’s customer lists, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets might not
be
recoverable. We assess our goodwill for impairment annually or more
frequently if impairment indicators arise. In order to properly
complete these assessments, we rely on a number of factors, including operating
results, business plans, and anticipated future cash flows. Actual
results that vary from these factors could have an impact on the amount of
impairment, if any, which actually occurs.
Stock-Based
Compensation
We
have used stock grants and stock
options to attract and retain directors and key executives and intend to use
stock options in the future to attract, retain and reward employees for
long-term service.
We
account for these stock options under
SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”). In accordance
with SFAS 123R, compensation cost is recognized for all share-based payments
granted. We have used the Black-Scholes valuation model to estimate
fair value of our stock-based awards which requires various judgmental
assumptions including estimating stock price volatility, forfeiture rates and
expected life. Our computation of expected volatility is based on a
combination of historical and market-based implied volatility. If any
of the assumptions used in the Black-Scholes model change significantly,
stock-based compensation expense may differ materially in the future from that
recorded in the current period.
Recent
Accounting
Pronouncements
In
July 2006, the FASB issued FASB
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,”
which prescribes a recognition threshold and measurement process for recording
in the financial statements uncertain tax positions taken or expected to be
taken in a tax return. Additionally, FIN 48 provides guidance on
derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. We adopted FIN 48 on
November 1, 2007
and are in the process of
determining the effect, if any, that it will have
on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements”(“SFAS 157”). SFAS
157 defines fair
value, established a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The Company does
not expect the adoption of SFAS 157 to significantly affect our consolidated
financial
condition or consolidated results
of
operations.
In
February 2007, the FASB issued
SFAS No. 159, “The
Fair Value Option for Financial
Assets and Financial Liabilities”,
which allows companies the option to
measure financial assets or liabilities at fair value and include unrealized
gains and losses in net income rather than equity. This becomes available
when
the Company adopts SFAS 157, which will be fiscal year 2009. The
Company is analyzing the expected
impact from adopting this statement on its financial statements, but currently
does not believe its adoption will have a significant impact on the financial
position or results of operations of the Company.
In
December 2007, the FASB issued
SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141R”).
SFAS 141R
will significantly change
the accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
IPR&D and restructuring costs. In
addition, under SFAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income tax expense. SFAS 141R
is effective for fiscal
years beginning after December 15, 2008 and, as such, we will adopt this
standard in fiscal 2010. We
have not yet determined the impact,
if any, of SFAS 141R on our consolidated financial
statements.
Results
of
Operations
The
following table set forth certain
financial data and the percentage of total revenues of the Company for the
periods indicated:
| |
|
Year
Ended
October 31,
2007
|
|
|
%
Change
2006
to
|
|
|
Year
Ended
October 31,
2006
|
|
| |
|
Amount
|
|
|
%
of
Rev.
|
|
|
2007
Increase
(Decr.)
|
|
|
Amount
|
|
|
%
of
Rev.
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
17,326,035 |
|
|
|
100.0%
|
|
|
|
30%
|
|
|
$ |
13,351,030 |
|
|
|
100.0% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of
revenues
|
|
|
12,559,905 |
|
|
|
72.5%
|
|
|
|
30%
|
|
|
|
9,644,235 |
|
|
|
72.2% |
|
|
Sales
and
marketing
|
|
|
1,212,355 |
|
|
|
7.0%
|
|
|
|
42%
|
|
|
|
856,037 |
|
|
|
6.4% |
|
|
General
and
administrative
|
|
|
3,403,674 |
|
|
|
19.6% |
|
|
|
(5%)
|
|
|
|
3,596,171 |
|
|
|
26.9% |
|
|
Depreciation
and
amortization
|
|
|
928,427 |
|
|
|
5.4% |
|
|
|
24%
|
|
|
|
747,562 |
|
|
|
5.6% |
|
|
Loss
on disposal of property and
equipment
|
|
|
10,061 |
|
|
|
.1% |
|
|
|
(82%)
|
|
|
|
56,771 |
|
|
|
.4% |
|
|
Net
reductions of
liabilities
|
|
|
- |
|
|
|
- |
|
|
|
N/A
|
|
|
|
(2,300,929 |
)
|
|
|
(17.2% |
)
|
|
Gain
on legal
settlements
|
|
|
(415,213 |
)
|
|
|
(2.4% |
)
|
|
|
N/A
|
|
|
|
- |
|
|
|
- |
|
|
Total
costs and
expenses
|
|
|
17,699,209 |
|
|
|
102.0% |
|
|
|
40%
|
|
|
|
12,599,847 |
|
|
|
94.4% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
(loss)
|
|
|
(373,174 |
)
|
|
|
(2.2% |
)
|
|
|
(150%)
|
|
|
|
751,183 |
|
|
|
5.6% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
interest
expense
|
|
|
(1,043,261 |
)
|
|
|
(6.0% |
)
|
|
|
(25%)
|
|
|
|
(1,410,351 |
)
|
|
|
(10.6% |
)
|
|
Related
party non-cash interest
expense
|
|
|
(33,089 |
)
|
|
|
(.2% |
)
|
|
|
|
|
|
|
(33,089 |
)
|
|
|
(.2% |
)
|
|
Interest
expense
|
|
|
(284,414 |
)
|
|
|
(1.6% |
)
|
|
|
29%
|
|
|
|
(220,802 |
)
|
|
|
(1.7% |
)
|
|
Related
party interest
exp.
|
|
|
(269,836 |
)
|
|
|
(1.6% |
)
|
|
|
25%
|
|
|
|
(216,233 |
)
|
|
|
(1.6% |
)
|
|
Foreign
currency
exchange
gains
|
|
|
4,389 |
|
|
|
- |
|
|
|
(76%)
|
|
|
|
18,134 |
|
|
|
.1% |
|
|
Total
other income (expense)
|
|
|
(1,626,211 |
)
|
|
|
(9.4% |
)
|
|
|
13%
|
|
|
|
(1,862,341 |
)
|
|
|
(13.9% |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,999,384 |
)
|
|
|
(11.5% |
)
|
|
|
(80%)
|
|
|
|
(1,111,158 |
)
|
|
|
(8.3% |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per
share
|
|
$ |
(0.04 |
)
|
|
|
|
|
|
|
|
|
|
$ |
(0.03 |
)
|
|
|
|
|
Operating
Revenues
Our
revenues increased from $13.4
million for fiscal 2006 to $17.3 million for fiscal 2007, a 30% increase, which
is primarily attributable to the inclusion of Telenational revenues gained
in
the May 2006 acquisition of Telenational, which were included for only a portion
of the comparable twelve-month period of fiscal year 2006. In
addition, revenues increased, in part, due to the expected variable nature
of
the wholesale revenue and billing component.
Costs
of Revenues
Our
costs of revenues increased $2.9
million for fiscal year 2007 as compared to fiscal year 2006. The
increase in costs of revenues is primarily attributable to costs associated
with
the increase in sales revenue, and due to the inclusion of Telenational costs
that were included for only a portion of the comparable twelve-month period
of
fiscal year 2006.
Costs
of revenues as a percentage of
revenues were 72%
for fiscal year 2007, and remained
stable compared to fiscal year 2006, which was also 72%. As
a majority of our costs
of revenues is variable, based on per minute transportation costs, costs of
revenues as a percentage of revenues will fluctuate, from year to year,
depending on the traffic mix between our wholesale and retail products and
total
revenue for each year.
Sales
and Marketing
Expenses
A
significant component of our revenue
is generated by outside agents, a small in-house sales force, and marketing
through web portals and magazine advertising, which is managed by anin-house
sales and marketing
organization.
Our
sales and marketing costs increased
from 6% of revenues for fiscal 2006 to 7%
of revenues fiscal
2007. This increase is attributable to higher marketing costs and
agent commissions attributed to Telenational during the current fiscal
period. During fiscal 2007, we have focused our attention on
increasing revenues through the efforts of our agents, and the marketing
initiatives previously noted. We will continue to focus our sales and
marketing efforts on web portal and magazine 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
decreased $192,000, or 5%, for fiscal year 2007 as compared to fiscal 2006,
even
with the addition of personnel and other costs related to the Telenational
acquisition. The decrease was due to eliminating duplicate costs
between the combined entities, which included salaries, rent, telephone and
utility cost reductions resulting from the closure of a couple of office
locations. In addition, the reduction in general
and administrative
expenses was achieved by
improving our accounts receivable collection efforts resulting in a
corresponding reduction in bad debt expense, and a decrease in expenses
related to warrants issued for
services.
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 may be difficult to achieve
significant reductions in future periods due to the relatively fixed nature
of
our general and administrative expenses.
Net
Reductions of
Liabilities
During
fiscal 2006, the Company
determined, based on a review of applicable statute of limitations regulations
and/or current correspondence with vendors, that approximately $2,301,000 of
liabilities, including $1,435,000 in carrier costs that were previously accrued,
were no
longer due and
payable. Accordingly, this amount was recorded
as “Net reductions of
liabilities” during fiscal 2006.
Gain
on Legal Settlements
During
fiscal year 2007, the Company
reached executed settlement agreements and recorded a “Gain on legal
settlements”
of
$415,000, net of attorney fees
totaling
$322,000. On
September 13, 2007, the Company executed a settlement agreement with Yahoo!
settling a dispute over media credits purchased in a stock purchase agreement
dated July 7, 2001. Yahoo! paid the Company $475,000 in one lump sum
cash payment
to settle all disputes and the
Company agreed to dismiss its claims against Yahoo! in connection with such
dispute. This amount was received in fiscal 2007 and recorded as a
“Gain on legal settlements”.
On
September
3, 2007, the Company executed
a settlement agreement with Affluent Media, et al settling a dispute over media
credits purchased in a stock purchase agreement dated July 7,
2001. Affluent Media, et al paid the Company $35,000 in cash and transferred
300,000
barter credits, recorded at a fair
market value of
$225,000, over the
subsequent 3-month period to settle all disputes and the Company agreed to
dismiss its claims against Affluent Media, et al in connection with such
dispute. These amounts received were
recorded in fiscal 2007 as
a “Gain
on legal settlements”.
Noncash
Interest Expense, Related Party Non-Cash
Interest Expense,
Interest Expense and
Related Party Interest Expense
Noncash
interest expense, related party non-cash
interest
expense, interest
expense, and
related party interest expense
decreased $260,000, or 14% during fiscal 2007 as compared to fiscal
2006. The decrease was primarily attributable to certain debt
discounts becoming fully amortized during fiscal 2007. Noncash
interest expense results from the amortization of deferred financing fees and
debt discounts on our debts to third party lenders and related
parties. The decrease in noncash interest expense was partially
offset by increased interest expense and related party interest
expense.
Related
party interest expense for
fiscal 2007 increased $54,000, or 25%, as compared to fiscal 2006, and was
primarily due to additional interest expense incurred in conjunction with the
Telenational acquisition.
Liquidity
and Sources of
Capital
We
generated approximately $659,000 of
positive operating cash flow during fiscal 2007. Prior to fiscal
2007, we generally were unable to achieve positive cash flow on a quarterly
basis primarily due to the fact that our previous lines of business did not
generate a volume of business sufficient to cover our overhead
costs. Based on previous fiscal years, our current audit report
includes an explanatory paragraph indicating doubt about our ability to continue
as a going concern.
Our
major growth areas are anticipated
to include the establishment of additional wholesale points of termination
to
offer our existing wholesale and retail customers, the introduction of
wireless broadband internet
services, as well as new
retail VoIP products, primarily our new Rapid Link products both domestically
and internationally. Our future operating success is dependent on our
ability to generate positive cash flow from our wireless broadband internet
and
VoIP lines of products
and
services. We anticipate a positive cash flow during the fiscal year
ending October 31, 2008. We do not have any capital equipment
commitments during the next twelve 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, 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, there are no agreements
with any party
to raise money or for us to combine with another entity and we cannot assure
you
that we will be successful in our search for investors or lenders. 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 will be materially reduced, and any new equity securities sold
by
us may have rights,
preferences, or privileges senior to our current common
stockholders.
At
October 31, 2007, we had a cash and cash equivalents $496,000, an increase
in
cash and cash equivalents of $466,000 from the balance at October 31,
2006. We had working capital deficits at October 31, 2007 and 2006 of
$5.4 million and $4.7 million, respectively.
Net
cash
provided by (used in) operating activities was $659,000 and ($1,035,323) during
fiscal 2007 and 2006, respectively. Net cash provided by operating
activities during fiscal 2007 was primarily due to a net loss from continuing
operations of $1,999,000 adjusted for: non-cash interest expense of $1,076,000;
depreciation and amortization of $928,000; bad debt expense of $88,000; loss
on
disposal of fixed assets of $10,000; net changes in operating assets and
liabilities of $672,000; and share-based compensation expense of $18,000;
partially offset by net reduction of liabilities of $135,000. Net
cash used in operating activities during fiscal 2006 was primarily due to a
net
loss from continuing operations of $1,111,000 adjusted for: non-cash interest
expense of $1,447,000; depreciation and amortization of $748,000; bad debt
expense of $136,000; loss on disposal of fixed assets of $57,000; offset by
net
reduction of liabilities of $2,301,000 and net changes in operating assets
and
liabilities of $11,000.
Net
cash
used in investing activities was $7,000 and $50,000 during fiscal 2007 and
2006,
respectively. Net cash used in investing activities during fiscal
2007 resulted from the purchase of property and equipment of
$7,000. Net cash used in investing activities during fiscal 2006
resulted from property and equipment purchases of $208,000, offset by cash
acquired in the Telenational acquisition of $158,000.
Net
cash
provided by (used in) financing activities was ($186,000) during fiscal 2007
compared to $943,000 during fiscal 2006. Net cash used in financing
activities during fiscal 2007 resulted from reduction of bank overdrafts of
$101,000 and payment on related party convertible notes and shareholder advances
of $110,000; partially offset by the sale of common stock for
$25,000. Net cash provided by financing activities during fiscal 2006
resulted from additional convertible debentures of $1,000,000, bank overdrafts
of $101,000 and a net cash infusion of $50,000 from related parties, offset
by
debt and financing fee payments totaling $208,000.
We
have
an accumulated deficit of approximately $52.0 million as of October 31, 2007
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. Although to date we have been able to arrange the debt facilities
and equity financing described below, there can be no assurance that sufficient
debt or equity financing will continue to be available in the future or that
it
will be available on terms acceptable to us. Our
current capital expenditure
requirements are not significant, primarily due to the equipment acquired from
Telenational and the subsequent consolidation of operating facilities into
one
operational facility. We do not plan significant capital expenditures
during fiscal 2008.
Debt
Facilities and Equity
Financing
The
Company has various debt obligations
as of October 31, 2007 and 2006, including amounts due to independent
institutions and related parties. Descriptions of these debt
obligations are included below. The following tables summarize
outstanding
debt as of October 31, 2007
and October 31,
2006:
|
Information
as of October 31,
2007
|
|
|
Brief
Description of
Debt
|
|
Balance
|
|
|
Int.
Rate
|
|
Due
Date
|
|
Discount
|
|
|
Net
|
|
|
Convertible
notes, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GC-Conote
|
|
$ |
1,200,000 |
|
|
|
10.08 |
%
|
2/28/2008
|
|
$ |
151,515 |
|
|
$ |
1,048,485 |
|
|
Debenture
|
|
|
600,000 |
|
|
|
10 |
%
|
3/8/2008
|
|
|
- |
|
|
|
600,000 |
|
|
Other
|
|
|
42,500 |
|
|
|
10 |
%
|
2/28/2008
|
|
|
|
|
|
|
42,500 |
|
|
Related
party notes, current
|
|
|
50,000 |
|
|
|
10 |
%
|
4/30/2008
|
|
|
- |
|
|
|
50,000 |
|
|
Convertible
notes payable to related parties, current
|
|
|
1,000,000 |
|
|
|
8 |
%
|
On
Demand
|
|
|
- |
|
|
|
1,000,000 |
|
|
Convertible
notes, long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCA-Debenture
|
|
|
630,333 |
|
|
|
6 |
%
|
10/31/2009
|
|
|
- |
|
|
|
630,333 |
|
|
GCA-Debenture
|
|
|
570,944 |
|
|
|
6 |
%
|
10/31/2009
|
|
|
- |
|
|
|
570,944 |
|
|
Convertible
notes
payable
to related
parties,
long-term
|
|
|
2,240,000 |
|
|
|
8 |
%
|
11/01/2009
|
|
|
- |
|
|
|
2,240,000 |
|
Debt
obligations as of October 31, 2007
are due as follows:
| |
|
Within
1
year
|
|
|
1-2
years
|
|
|
Total
|
|
|
Debt
Obligations
|
|
$ |
2,892,500 |
|
|
$ |
3,441,277 |
|
|
$ |
6,333,777 |
|
|
Information
as of October 31,
2006
|
|
|
Brief
Description of
Debt
|
|
Balance
|
|
|
Int.
Rate
|
|
Due
Date
|
|
Discount
|
|
|
Net
|
|
|
Convertible
notes, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GC-Conote2
|
|
$ |
60,000 |
|
|
|
0 |
% |
3/31/2007
|
|
$ |
10,000 |
|
|
$ |
50,000 |
|
|
Debentures
|
|
|
1,000,000 |
|
|
|
10 |
% |
3/8/2007
|
|
|
333,333 |
|
|
|
666,667 |
|
|
Related
party notes, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Note
|
|
|
300,000 |
|
|
|
8 |
% |
On
demand
|
|
|
- |
|
|
|
300,000 |
|
|
Apex
Note 2
|
|
|
80,965 |
|
|
|
8 |
% |
7/15/2007
|
|
|
- |
|
|
|
80,965 |
|
|
Convertible
notes, long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCA-Debenture
|
|
|
430,000 |
|
|
|
6 |
% |
11/1/2007
|
|
|
- |
|
|
|
430,000 |
|
|
GCA-Debenture1
|
|
|
552,457 |
|
|
|
6 |
% |
11/1/2007
|
|
|
4,247 |
|
|
|
548,210 |
|
|
GC-Conote
|
|
|
1,250,000 |
|
|
|
10.08 |
% |
2/28/2008
|
|
|
606,061 |
|
|
|
643,939 |
|
|
Convertible
notes
payable
to related
parties,
long-term
|
|
|
1,905,078 |
|
|
|
10 |
% |
2/28/2008
|
|
|
44,120 |
|
|
|
1,860,958 |
|
|
Related
party note, long-term Apex
|
|
|
1,000,000 |
|
|
|
8 |
% |
11/5/2007
|
|
|
- |
|
|
|
1,000,000 |
|
GCA-Debentures
The
Company has two 6% convertible debentures (the "GCA-Debentures") with GCA
Strategic Investment Fund Limited ("GCA"). The GCA-Debentures are
secured by the Company’s VoIP technology and certain equipment. On
October 31, 2007, the Company entered into a series of agreements, which
materially modified its debt structure with Global Capital Funding Group Ltd.
("Global"), and with GCA Strategic Investment Fund Limited
("GCA"). The agreements call for two outstanding notes of $430,000
and $552,457 due in November of 2007, including accrued interest of $140,994
and
$77,876, respectively, to be converted into two long-term convertible debentures
of $570,944 and $630,333, respectively; both of which are due October 31,
2009. There were no other material changes to the terms of the
existing notes. In consideration of the extension, the Company issued
50,000 warrant options to purchase common stock to Global and GCA in
consideration for the extensions. The fair value of the warrants was
determined on the date of grant using the Black-Scholes pricing model with
the
following assumptions: applicable risk-free interest rate based on the current
treasury-bill interest rate of 5.4%; volatility factor of the expected market
price of the Company's common stock of 1.51; and an expected life of the
warrants of five years. The company recognized $8,281 of expense
associated with these warrants in fiscal year 2007.
GC-Conote
In
November 2002, the Company executed a 12% note payable secured by certain
compression equipment (the "GC-Note") with Global Capital Funding Group, L.P.,
("Global") The Company 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.
On
June
1, 2005, the Company and Global agreed to extend the maturity date of the
GC-Note to February 28, 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 and
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, which it is amortizing over the life of the
GC-Conote.
On
September 14, 2006, the Company and Global amended the GC-Conote to extend
the
maturity date of the GC-Conote to November 1, 2007, and stipulate that the
conversion price of the Company’s common stock is not to be lower than $0.10 and
not to exceed $0.25. In connection with the amendment, the Company
re-priced all warrants held by GCA to an exercise price of $0.05 and extended
the maturity of the warrants to June 1, 2010. Incremental debt
discount amounts associated with the fiscal 2006 amendments were not
material.
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-Conote2)
to
Global. 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-Conote2
in accordance with EITF 98-5 and EITF 00-27 and recorded approximately $350,000
as debt discount. This debt discount is being amortized over the life
of the GC-Conote2. The approximate $50,000 difference between the
accrued interest at May 31, 2005 and the value of the GC-Conote2 represents
a
financing fee, was recorded as debt discount, and is being amortized over the
life of the GC-Conote2. During fiscal 2006 and 2005, GCA elected to
convert $165,000 of the GC-Conote2 into approximately 2,303,000 shares of common
stock and $75,000 of the GC-Conote into approximately 656,000 shares of common
stock, respectively. During fiscal 2007, the Company made a $30,000
payment on the GC-Conote2, and GCA elected to convert $30,000 of the GC-Conote2
into approximately 622,000 shares of common stock and $50,000 of the GC-Conote
into 500,000 shares of common stock.
Debentures
Debentures
totaling $1,000,000 with an original March 8, 2007 maturity date were extended
during the second quarter of fiscal 2007 to March 8, 2008. The
Debentures are secured by a first priority security interest in all of the
assets of the Company other than those assets not already pledged to Global
Capital as security. The term of the original 2,000,000 warrants
issued related to these Debentures was extended by one year, which had an
insignificant financial impact. In connection with the extension, however,
2,000,000 additional warrants were issued, resulting in deferred financing
fees
of $139,000, of which $90,000 was expensed as noncash interest expense during
fiscal 2007. The fair value of the warrants was determined on the date of grant
using the Black-Scholes pricing model with the following assumptions: applicable
risk-free interest rate based on the current treasury-bill interest rate of
4.5%; volatility factor of the expected market price of the Company's common
stock of 287%; and an expected life of the warrants of four years. Remaining
deferred financing fees, classified as other current assets, will be amortized
through March 8, 2008. In connection with these Debentures, the lenders are
entitled to an additional 50,000 warrants monthly with exercise prices of $0.25
and $0.10, respectively. These warrants vest and are exercisable each fiscal
quarter until the Debentures are paid in full. The fair value of these
additional warrants is calculated on the date earned using the Black-Scholes
pricing model using applicable risk-free interest rates based on current
treasury-bill interest rates; volatility factors of the expected market price
of
the Company's common stock over the expected term; and an expected life of
the
warrants of four years. Under the terms of this agreement, the Company has
granted 400,000 warrants to the lenders as of October 31, 2007.
On
October 31, 2007 debentures totaling $350,000 were converted into 2,500,000
shares of common stock, reflecting a conversion price of $0.14 per
share. On October 31, 2007, $50,000 of debentures including $65,889
of accrued interest was transferred by the debenture holders to John Jenkins,
the Company’s Chairman and Chief Executive Officer.
Related
Party Notes
On
May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”) for $4,809,750, including acquisition
costs of $50,000. The purchase consideration included a contingent
cash payment in the amount of $500,000 and 19,175,000 shares of the Company’s
common stock valued at $3,259,750. On October 31, 2007, the
contingent purchase price consideration was converted to a convertible demand
note payable to Apex Acquisitions,
Inc. ("Apex”) Apex in the amount of $500,000. The Company President and
Chief Financial
Officer is the majority stockholder of Apex.
On
October 31, 2007, the Company entered
into an agreement, which modified its debt structure with Apex. The
agreement calls for the outstanding note due in November of 2007 payable to
Apex
to be extended to November 1, 2009. The note was also modified to
allow for the balance to be convertible to common stock at market
pricing. The outstanding balance of the Apex Notes, including
$120,000 of accrued interest that was rolled into the note, was $1,120,000
at
October 31, 2007.
On
October 31, 2007, $50,000 of debentures including $65,889 of accrued interest
was transferred by the debenture holders to John Jenkins, the Company’s Chairman
and Chief Executive Officer. These amounts, along with a $300,000
related party demand note including accrued interest of $84,111, were rolled
into a $500,000 convertible demand note payable to Mr. Jenkins.
On
October 31, 2007, the Company entered
into an agreement, which modified its debt structure with the Company’s Chairman
and Chief Executive Officer, John Jenkins. The agreement calls for
the outstanding note due in February of 2008 payable to John Jenkins to be
extended to November 1, 2009. The outstanding balance of these
notes payable to Mr. Jenkins, including $241,000 of accrued interest that was
rolled into the note, was $1,120,000 at October 31, 2007.
During
fiscal 2007, the Company made payments totaling $80,965 on the Apex Note 2
due
July 15, 2007.
Contractual
Obligations
The
Company leases office space under
operating leases that run through June 2011. In addition, we have numerous
debt
obligations outstanding. Contractual obligations as of October 31, 2007 are
as
follows:
| |
|
Payments
Due By
Period
|
|
|
|
|
| |
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5
years
|
|
|
Total
|
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Obligations
|
|
$ |
1,892,500 |
|
|
$ |
4,441,277 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,333,777 |
|
|
Operating
leases
|
|
|
134,860 |
|
|
|
359,627 |
|
|
|
- |
|
|
|
- |
|
|
|
494,487 |
|
|
Total
|
|
$ |
2,027,360 |
|
|
$ |
4,800,904 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,828,264 |
|
Item
7. Financial
Statements.
The
information required by Item 7 of
this Report is presented following Item 14, beginning on page
F-1.
Item
8. Changes in and
Disagreements with Accountants
on
Accounting and Financial
Disclosure.
None.
Item
8A. Controls and
Procedures.
We
carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of
our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, “Exchange Act” as
of the end of the period covered by
this report. Based on this evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms.
There
have been no changes, significant
or otherwise, in our internal controls over financial reporting, that occurred
during fiscal 2007
that
has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item
8B. Other
Information.
None.
PART
III
Item
9. Directors, Executive
Officers, Promoters, Control Persons and Corporate
Governance;
Compliance With Section
16(a) of the Exchange Act.
The
following table sets forth the names, ages, years elected and principal offices
and positions of our current directors and executive officers as of January
22,
2008.
|
Name
|
|
Age
|
|
Position
with the Company
|
|
Year
First
Elected
as
Officer
or
Director
|
|
John
A. Jenkins
|
|
46
|
|
Chairman,
Chief Executive Officer, Secretary and Director
|
|
2001
|
|
Christopher
J. Canfield
|
|
47
|
|
President,
Chief Financial Officer, Treasurer and Director
|
|
2006
|
|
Michael
P. Prachar
|
|
38
|
|
Chief
Operating Officer
|
|
2006
|
|
David
R. Hess
|
|
46
|
|
Director
|
|
2002
|
|
Lawrence
J. Vierra
|
|
62
|
|
Director
|
|
2000
|
JOHN
A.
JENKINS has served as our Chairman of the Board and Chief Executive Officer
since October 2001, served as our President from December 1999 until July 2005,
and has served as a director since December 1999. Mr. Jenkins has
also served as the President of DTI Com, Inc., one of our subsidiaries, since
November 1999. In May 1997, Mr. Jenkins founded Dial Thru
International Corporation (subsequently dissolved in November 2000), and served
as its President and Chief Executive Officer until joining us in November
1999. Prior to 1997, Mr. Jenkins served as the President and Chief
Financial Officer for Golden Line Technology, a French telecommunications
company. Prior to entering the telecommunications industry, Mr.
Jenkins owned and operated several software, technology and real estate
companies. Mr. Jenkins holds degrees in physics and business/economics from
UCLA.
CHRISTOPHER
J. CANFIELD was elected to our Board of Directors in May 2006, and has served
as
our Chief Financial Officer since May 2006 and President since November
2006. Mr. Canfield served as President and CEO of Telenational
Communications, Inc. from April 1998 until its acquisition by Rapid Link in
May
2006. Mr. Canfield has more than 15 years of experience working in
the telecommunications marketplace, and co-founded Resource Communications,
Inc.
and Intercontinental Exchange, Inc. in 1995 and 1998 respectively, both of
which
were subsequently acquired by major telecommunications companies. Mr.
Canfield holds a BS degree in Business Administration and Marketing from
California State University Hayward.
MICHAEL
P. PRACHAR has served as Chief Operating Officer since May 2006. Mr.
Prachar served as Vice President and Chief Operating Officer of Telenational
Communications, Inc. from April 1998 until its acquisition by Rapid Link in
May
2006. Mr. Prachar has been involved in the telecommunications
industry since 1992 and has practical experience in most related aspects,
including equipment service, sales, marketing, management, and information
technology.
DAVID
R.
HESS was elected to our Board of Directors in May 2002 and served as our
President from July 2005 until October 2006. Mr. Hess was
instrumental in orchestrating the Integrated and Telenational
acquisitions. Prior to joining us, Mr. Hess was the Managing Partner
of RKP Steering Group, a company he co-founded in August 2003. From
November 2001 until December 2002, Mr. Hess served as the Chief Executive
Officer and President, North America of Telia International Carrier, Inc. Prior
to joining Telia, Mr. Hess was part of a turnaround team hired by the board
of
directors of Rapid Link, Incorporated. He served as the Chief
Executive Officer and as a director of Rapid Link, Incorporated from August
2000
until September 2001. Mr. Hess received a BA in Communications with a Minor
in
Marketing from Bowling Green State University.
LAWRENCE
J. VIERRA has served as one of
our directors since January 2000, and from that time through October 2004,
served as our Executive Vice President. Currently, Mr. Vierra is a professor
at
the University of
Las
Vegas. From 1995 through 1999,
Mr. Vierra
served as the Executive Vice President of RSL Com USA, Inc., an international
telecommunications company, where he was primarily responsible for international
sales. Mr. Vierra has also served on the board of directors and executive
committees of various telecommunications companies and he has extensive
knowledge and experience in the international sales and marketing of
telecommunications products and services. Mr. Vierra holds degrees in marketing
and business administration.
Family
Relationships
There
are
no family relationships among our directors or executive officers.
Involvement
in Certain Legal Proceedings
None
of
our executive officers or directors has had any bankruptcy petition filed by
or
against any business of which such officer or director was a general partner
or
executive officer either at the time of the bankruptcy or within two years
prior
to that time. None of our executive officers or directors have been
convicted in a criminal proceeding or are subject to a pending criminal
proceeding, excluding traffic violations or similar misdemeanors, nor have
they
been a party to any judicial or administrative proceeding during the past five
years that resulted in a judgment, decree or final order prohibiting activities
subject to federal or state securities laws, or a finding of any violation
of
federal or state securities laws.
Meetings
of the Board of
Directors
Our
Board of Directors held four
meetings during the fiscal year ended October 31, 2007. The Board of
Directors has two standing committees: an Audit Committee and a Compensation
Committee. There is no standing nominating committee. Each
of the directors attended the meeting of the Board of Directors and all meetings
of any committee on which such director served.
Audit
Committee Financial
Expert
We
currently do not have an audit
committee financial expert as defined by Item 401(e) of Regulation S-B of the
Exchange Act. Our previous audit committee financial expert resigned
from our board of directors in September 2004. As our current board of directors
does not have anyone eligible to become our audit committee financial expert
and
be independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the
above-mentioned act, our board of directors is currently conducting a search
for
a new audit committee financial expert.
Audit
Committee
The
Audit
Committee is comprised of two non-employee directors, Lawrence J. Vierra and
David Hess. The Audit
Committee makes recommendations to our Board of Directors or management
concerning the engagement of our independent public accountants and matters
relating to our financial statements, our accounting principles and our system
of internal accounting controls. The Audit Committee also reports its
recommendations to the Board of Directors as to approval of financial
statements. The Audit Committee held four meetings during the fiscal
year ended October 31, 2007.
Compliance
with Section 16(a) of the
Securities Exchange Act of 1934
Section
16(a) of the Exchange Act
requires our directors, executive officers, and persons who own more than 10%
of
our common stock to file with the SEC initial reports of ownership and reports
of changes in ownership of our common stock and other equity securities of
our
Company. Officers, directors and greater than 10% stockholders are
required by regulations promulgated by the SEC to furnish us with copies of
all
Section 16(a) reports they file. Based solely on the review of such
reports furnished to us and written representations that no other reports were
required, we believe that during the fiscal year ended October 31, 2007, our
executive officers, directors and all persons who own more than 10% of our
common stock complied with all Section 16(a) requirements.
Code
of Business Conduct and
Ethics
We
have adopted a code of business
conduct and ethics for employees, executive officers and directors that is
designed to ensure that all of our directors, executive officers and employees
meet the highest standards of ethical conduct. The code requires that
our directors, executive officers, and employees avoid conflicts of interest,
comply with all laws and other legal requirements, and conduct business in
an
honest and ethical manner and otherwise act with integrity and in our best
interest. Under the terms of the code, directors, executive officers,
and employees are required to report any conduct that they believe in good
faith
to be an actual or apparent violation of the code.
As
a mechanism to encourage compliance
with the code, we have established procedures to receive, retain and treat
complaints received regarding accounting, internal accounting controls or
auditing matters. These procedures ensure that individuals may submit
concerns regarding questionable accounting or auditing matters in a confidential
and anonymous manner. The code also prohibits us from retaliating
against any director, executive officer, or employee who reports actual or
apparent violations of the code.
Item
10. Executive
Compensation.
Summary
Compensation
The
following table summarizes
compensation we paid for services rendered to our Company during the fiscal
years ended October 31, 2007 and 2006
to our chief executive officer, any
executive officer with a total salary and bonus exceeding $100,000 during fiscal
2007, and all other executive officers as of October 31, 2007 (the "Named
Executive Officers").
|
Summary
Compensation
Table
|
|
|
Name
and principal
position
(a)
|
|
Year
(b)
|
|
|
Salary(1)
($)
(c)
|
|
|
Bonus
($)
(d)
|
|
|
Stock
Awards
($)
(e)
|
|
|
Option
Awards
($)
(f)
|
|
|
Non-Equity
Incentive
Plan
($)
(g)
|
|
|
Non-qualified
Deferred
Compen-sation Earnings
($)
(h)
|
|
|
All
other
compen-sation
($)
(i)
|
|
|
Total
($)
(j)
|
|
|
John
A.
Jenkins
Chairman
and Chief Executive
Officer
|
|
|
2007
2006
|
|
|
|
150,000
150,000
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
150,000
150,000
|
|
|
David
R. Hess
President
|
|
|
2007
2006
|
|
|
|
-0-
135,000
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
15,000(2)
|
|
|
|
-0-
150,000
|
|
|
Christopher
J.
Canfield
President
and Chief Executive
Officer
|
|
|
2007
2006
|
|
|
|
150,000
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
-0-
-0-
|
|
|
|
150,000
-0-
|
|
(1)
Messers. Canfield and Prachar earn an annual salary of $150,000, but did not
receive this amount from Rapid Link during fiscal 2006, as they were executive
officers of Telenational, which was acquired in May 2006. No other
person that served as an executive officer during fiscal 2006 earned a total
salary and bonus exceeding $100,000 during fiscal 2006.
(2)
This
amount consists of an automobile allowance for Mr. Hess.
Outstanding
Equity Awards at Fiscal Year End
The
following table sets forth certain
information regarding stock options at October 31, 2007 by the named executive
officers.
OUTSTANDING
EQUITY AWARDS TABLE
(1)
| |
|
Option
Awards
|
|
| |
|
|
|
| |
|
|
|
|
Equity
Incentive Plan
Awards:
|
|
|
Name
and Principal
Position
|
|
Number
of Securities
Underlying
Unexercised
Options
|
|
|
Number
of securities underlying
unexercised unearned
options
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
| |
Exercisable
|
|
|
Unexercisable
|
|
|
John
A.
Jenkins
Chairman
and Chief Executive
Officer
|
|
|
100,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Christopher
J.
Canfield
President
and Chief Executive
Officer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Michael
Prachar
Chief
Operating
Officer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
(1)
No named executive has
any
stock awards outstanding at October 31, 2007.
Employment
Agreements
The
Company has not entered into any
employment agreements or arrangements, whether written or oral, with any of
its
named executive officers.
Compensation
of
Directors
The
members of our Board of Directors did not receive any type of compensation
from
us during the year ended December 31, 2007. Directors are not compensated
for
attending Board and committee meetings, though our directors are allowed to
participate in our Equity Incentive Plan for services rendered to the Company
as
a director.
Item
11. Security Ownership
of Certain Beneficial Owners
and
Management and Related Stockholder
Matters.
The
following table sets forth certain
information regarding the beneficial ownership of our common stock as of
December 31, 2007 by (i) each stockholder known by us to beneficially own five
percent (5%) or
more of the Company’s outstanding
common stock, (ii) each of our current directors, (iii) each of our officers and directors
and (iv) all of our
executive officers and directors as a group. Except as otherwise
indicated below, each of the entities or persons named in the table has sole
voting and investment power with respect to all shares of our common stock
beneficially owned. The percentages in this
table are based
on 104,973,170 shares outstanding, assuming exercise and conversion of all
options, warrants and other convertible securities beneficially owned by
officers and directors as a group. Beneficial ownership
is
determined in accordance with the rules of the SEC and generally includes voting
or investment power with respect to the securities. In computing the
number of shares beneficially owned by a person and the percentage ownership
of
that person, shares of our common stock underlying options or warrants or other
convertible securities held by that person that will be exercisable
within 60 days of December 31, 2007, are deemed to be
outstanding. Such shares, however, are not deemed to be outstanding
for the purpose of computing the percentage ownership of that person but are
not
treated as outstanding for the purpose of computing the percentage ownership
of
any other person.
|
Beneficial
Owner
|
|
Number
of
Shares
|
|
|
Percent
|
|
|
Apex
Acquisitions, Inc. (1)
P.O.
Box 8658
Breckenridge,
CO 80424
|
|
|
38,233,824 |
|
|
|
36.42 |
% |
|
John
A. Jenkins (2)
|
|
|
39,038,824 |
|
|
|
37.18 |
% |
|
David
R. Hess (3)
|
|
|
1,000,000 |
|
|
|
* |
|
|
Lawrence
J. Vierra (4)
|
|
|
825,000 |
|
|
|
* |
|
|
All
Executive Officers and Directors as a group (5 persons)
(5)
|
|
|
79,097,648 |
|
|
|
75.35 |
% |
*
Reflects less than one percent.
(1)
Includes (i) 17,966,420 shares held directly, (ii) 19,058,824 shares of common
stock which may be acquired through the conversion of convertible notes (shares
from conversion calculated using the closing bid share price at December 31,
2007 of $0.085), (iii) 1,208,580 shares held by dependent children; all of
which
are exercisable or convertible within 60 days of December 31,
2007. Apex is 70% owned by Mr. Canfield and 30% owned by Mr. Prachar,
for all shares of common stock.
(2)
Includes (i) 19,300,000 shares held directly, (ii) 100,000 shares of common
stock which may be acquired through the exercise of options, (iii) 580,000
shares of common stock which may be acquired through the exercise of warrants,
and (iv) 19,058,824 shares of common stock which may be acquired through the
conversion of a convertible note (shares from conversion calculated using the
closing bid share price at December 31, 2007 of $0.085); all of which are
exercisable or convertible within 60 days of December 31, 2007.
(3)
Includes (i) 1,000,000 shares of common stock, which may be acquired through
the
exercise of warrants, which are exercisable within 60 days of December 31,
2007.
(4)
Includes (i) 795,000 shares held directly, (ii) 30,000 shares of common stock
which may be acquired through the exercise of warrants, which are exercisable
within 60 days of December 31, 2007.
(5)
Calculations based on 104,973,170
shares outstanding, assuming exercise and conversion of all options, warrants
and other convertible securities beneficially owned by officers and directors
as
a group.
Changes
in Control
There
are no arrangements known to us
which may result of a change in control of the Company.
Item
12. Certain
Relationships and Related Transactions,
and
Director Independence.
In
October 2001, we issued 10% convertible notes (the "Notes") to two of our
executive officers and one director (the "Related Parties"), each of whom was
also a director, who provided financing to our Company in the aggregate
principal amount of $1,945,958. The Notes were issued as follows: (i)
a note in the principal amount of $1,745,958 to John Jenkins, our Chief
Executive Officer; (ii) a note in the principal amount of $100,000 to our former
Executive Vice President and Chief Financial Officer; and (iii) a note in the
principal amount of $100,000 to Lawrence Vierra, a director. With an
original maturity date of October 24, 2003, these Notes were amended to mature
on February 24, 2004. Each Note was originally convertible at
six-month intervals only, but was subsequently amended in November 2002 to
provide for conversion into shares of 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
$0.75 per share, which warrants expire on October 24, 2006.
In
January and July 2002, the Notes issued to Mr. Jenkins were amended to include
additional advances in the aggregate principal amount of $402,443. We
also issued to Mr. Jenkins two warrants to acquire an additional 102,443 and
300,000 shares of common stock, respectively, at an exercise price of $0.75,
which warrants expired on January 28, 2007 and July 8, 2007,
respectively.
On
July
21, 2005, our Company and the Related Parties agreed to extend the maturity
date
of the Notes to February 29, 2008. In connection with the extension,
we issued to the Related Parties warrants to acquire 640,000 shares of common
stock at an exercise price of $0.16. The warrants expire in July
2010. In September 2005 and 2004, respectively, the holders of the
Notes converted a total aggregate of $467,500 and $877,500, respectively, of
the
outstanding principal into an aggregate of 3,740,000 and 6,750,000,
respectively, of shares of common stock. On September 14, 2006, Mr.
Jenkins agreed to convert all unpaid interest on his Note in the amount of
$901,688 to the principal balance of his Note.
On
May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”) for $4,809,750, including acquisition
costs of $50,000. The purchase consideration included a contingent
cash payment in the amount of $500,000 and 19,175,000 shares of the Company’s
common stock valued at $3,259,750. On October 31, 2007, the
contingent purchase price consideration was converted to a convertible demand
note payable to Apex Acquisitions,
Inc. ("Apex”) Apex in the amount of $500,000. The Company President and
Chief Financial
Officer is the majority stockholder of Apex.
On
October 31, 2007, the Company entered
into an agreement, which modified its debt structure with Apex. The
agreement calls for the outstanding note due in November of 2007 payable to
Apex
to be extended to November 1, 2009. The note was also modified to
allow for the balance to be convertible to common stock at market
pricing. The outstanding balance of the Apex Notes, including
$120,000 of accrued interest that was rolled into the note, was $1,120,000
at
October 31, 2007.
On
October 31, 2007, $50,000 of debentures including $65,889 of accrued interest
was transferred by the debenture holders to John Jenkins, the Company’s Chairman
and Chief Executive Officer. These amounts, along with a $300,000
related party demand note including accrued interest of $84,111, were rolled
into a $500,000 convertible demand note payable to Mr. Jenkins.
On
October 31, 2007, the Company entered
into an agreement, which materially modified its debt structure with the
Company’s Chairman and Chief Executive Officer, John Jenkins. The
agreement calls for the outstanding note due in February of 2008 payable to
John
Jenkins to be extended to November 1, 2009. The note was also
modified to allow for the balance to be convertible to common stock at market
pricing. The outstanding balance of these notes payable to Mr.
Jenkins, including $241,000 of accrued interest that was rolled into the note,
was $1,120,000 at October 31, 2007.
Item
13. Exhibits.
Exhibits
The
following is a list of all exhibits
filed with this Report, including those incorporated by
reference.
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 the Company’s Current Report on
Form
8-K filed February
9, 1998 , 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 the Company’s Current
Report on Form 8-K dated
January 30,
1998, 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 Current Report on Form
8-K filed December
22,
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 filed November
17,
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 Current Report on
Form
8-K filed 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 Current Form
8-K filed 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 Current Report on Form
8-K filed 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 Current Report on Form
8-K filed 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 Current Report on Form
8-K filed 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
Current Report on
Form
8-K filed 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 and incorporated herein by
reference)
3.2
Amended and Restated Bylaws of Dial
Thru International Corporation (filed as Exhibit 3.2 to the Company’s Annual
Report on Form 10-K for the
fiscal year ended October 31, 1999 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 Company’s Annual Report on Form
10-K for the fiscal year ended October 31, 2004 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 (filed as Exhibit 3.4 to the Company’s Annual Report on Form
10-K for the fiscal year ended October 31, 2005 and incorporated herein by
reference)
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 Registration Statement
on 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 Registration Statement
on 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 Registration Statement
on 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 Registration Statement
on 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 Current Report on 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 Current Report on 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 Current Report on 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 Current Report on 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 Current Report on 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 Current Report on 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
Current Report on
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 Current Report on 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 Current Report on 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 Current Report on 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)
4.18
Securities Purchase Agreement dated
March 8, 2006 between Rapid Link, Incorporated and Trident Growth Fund, L.P.
(filed as Exhibit 4.1 to the Company's Current Report on Form
8-K filed on March 14, 2006, and
incorporated herein by reference)
4.19
10% Secured Convertible Debenture
dated March 8, 2006 between Rapid Link, Incorporated and Trident Growth Fund,
L.P. (filed as Exhibit 4.2 to the Company's Form 8-K filed on March 14, 2006,
and incorporated herein by reference)
4.20
Common Stock Purchase Warrant dated
March 8, 2006 between Rapid Link, Incorporated and Trident Growth Fund, L.P.
(filed as Exhibit 4.3 to the Company's Current Report on Form
8-K filed on March 14, 2006, and
incorporated herein by reference)
4.21
Security Agreement dated March 8,
2006 between Rapid Link, Incorporated and Trident Growth Fund, L.P. (filed
as
Exhibit 4.4 to the Company's Current Report on Form
8-K filed on March 14, 2006, and
incorporated herein by reference)
4.22
Subordination Agreement dated March
8, 2006 between Rapid Link, Incorporated Charger Investments, LLC and Trident
Growth Fund, L.P. (filed as Exhibit 4.5 to the Company's Form 8-K filed on
March
14, 2006, and incorporated herein by reference)
4.23
Securities Purchase Agreement dated
March 8, 2006 between Rapid Link, Incorporated and Charger Investments, LLC
(filed as Exhibit 4.6 to the Company's Current Report on Form
8-K filed on March 14, 2006, and
incorporated herein by reference)
4.24
10% Secured Convertible Debenture
dated March 8, 2006 between Rapid Link, Incorporated and Charger Investments,
LLC (filed as Exhibit 4.7 to the Company's Current Report on Form
8-K filed on March 14, 2006, and
incorporated herein by reference)
4.25
Common Stock Purchase Warrant dated
March 8, 2006 between Rapid Link, Incorporated and Charger Investments, LLC
(filed as Exhibit 4.8 to the Company's Current Report on Form
8-K filed on March 14, 2006, and
incorporated herein by reference)
4.26
Security Agreement dated March 8,
2006 between Rapid Link Incorporated and Charger Investments, LLC (filed as
Exhibit 4.9 to the Company's Current Report on Form
8-K filed on March 14, 2006, 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,
and incorporated herein by reference)
10.2
Commercial Lease Agreement between
Jackson--Shaw/JetstarDrive
Tri-star Limited Partnership and
the Company (filed as Exhibit 10.20 to the Company's Annual Report on Form
10-K
for the fiscal year ended
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 Company's
Annual Report on Form 10-K for the fiscal year ended
October
31,2000 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
Current Report on
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 Current Report on
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 Current Report on
Form
8-K filed on June 7,
2005, and incorporated herein by reference)
10.7
Amendment Number 2 to Securities
Purchase Agreement between Rapid Link, Incorporated and GCA Strategic Investment
Fund Limited dated November 2, 2005 (filed as Exhibit 10.1 to the Company's
Current Report on
Form
8-K filed on March 14,
2006, and incorporated herein by reference)
10.8
Stock Purchase Agreement by and
between Rapid Link, Incorporated and Apex Acquisitions, Inc. dated as of May
3,
2006 (filed as Exhibit 10.1 to the Company's Current Report on Form
8-K filed on May 9, 2006, and
incorporated herein by reference)
10.9
Amendment No. 1 to Stock Purchase
Agreement by and between Rapid Link, Incorporated and Apex Acquisitions, Inc.
dated as of May 5, 2006 (filed as Exhibit 10.2 to the Company's Current Report on Form
8-K filed on May 9, 2006, and
incorporated herein by reference)
10.10
Stock Pledge Agreement by and
between Rapid Link, Incorporated and Apex Acquisitions, Inc. dated as of May
5,
2006 (filed as Exhibit 10.3 to the Company's Current Report on Form
8-K filed on May 9, 2006, and
incorporated herein by reference)
10.11
Secured Recourse Promissory Note
dated as of May 5, 2006 made by Rapid Link, Incorporated in favor of Apex
Acquisitions, Inc. (filed as Exhibit 10.4 to the Company's Current Report on Form
8-K filed on May 9, 2006, and
incorporated herein by reference)
10.12
Fifth Allonge to 10% Convertible
Note of Dial Thru International Corporation in favor of John Jenkins,
dated September 14, 2006 (filed as
Exhibit 10.1 to the Company's Current Report on Form
8-K filed on June 7, 2005, and
incorporated herein by reference)
10.13
Amendment Number 2 to Securities
Purchase Agreement between Rapid Link, Inc., formerly known as Dial Thru
International Corporation, and GCA Strategic Investment Fund Limited dated
September 14, 2006 (filed as Exhibit 10.2 to the Company's Current Report on Form
8-K filed on September 20, 2006,
and incorporated herein by reference)
10.14
Amendment Number 2 to Securities
Purchase Agreement between Rapid Link, Inc., formerly known as Dial Thru
International Corporation, and Global Capital Funding Group, L.P. dated
September 14, 2006 (filed as Exhibit 10.3 to the Company's Current Report on Form
8-K filed on September 20, 2006,
and incorporated herein by reference)
10.15
Amendment Number 2 to Securities
Purchase Agreement between Rapid Link, Inc., formerly known as Dial Thru
International Corporation, and GCA Strategic Investment Fund Limited dated
August 15, 2006 (filed as Exhibit 10.4 to the Company's Current Report on Form
8-K filed on September 20, 2006,
and incorporated herein by reference)
10.16
Amendment Number 3 to 6%
Convertible Debenture between GCA Strategic Investment Fund Limited and Rapid
Link, Incorporated, formerly known as Dial Thru International Corporation dated
September 14, 2006 (filed as Exhibit 10.5 to the Company's Form Current Report on 8-K
filed on September 20, 2006, and
incorporated herein by reference)
10.17
Amendment Number 4 to 6%
Convertible Debenture between GCA Strategic Investment Fund Limited and Rapid
Link, Incorporated, formerly known as Dial Thru International Corporation dated
September 14, 2006 (filed as Exhibit 10.6 to the Company's Current Report on Form
8-K filed on September 20, 2006,
and incorporated herein by reference)
10.18
Amendment Number 1 to Secured
Promissory Note due February 28, 2008 between Global Capital Funding Group,
L.P.
and Rapid Link, Inc., formerly known as Dial Thru International Corporation
dated September 14, 2006 (filed as Exhibit 10.7 to the Company's Current Report on Form
8-K filed on September 20, 2006,
and incorporated herein by reference)
10.19
Amendment Number 1 to Secured
Promissory Note due March 30, 2007 between Global Capital Funding Group, L.P.
and Rapid Link, Inc., formerly known as Dial Thru International Corporation
dated September 14, 2006 (filed as Exhibit 10.8 to the Company's Current Report on Form
8-K filed on September 20, 2006,
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
Company’s report on Form
10-k for the fiscal year ended October 31, 2003 and incorporated herein
by
reference)
21.1
Subsidiaries of the Registrant
(filed herewith)
23.1
Consent of Independent Registered
Public Accounting Firm (filed herewith)
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 (filed herewith)
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 (filed herewith)
32.1
Certificate of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350 (furnished
herewith)
32.2
Certificate of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 (furnished
herewith)
Item
14. Principal Accountant
Fees and Services.
Audit
Fees
The
aggregate fees billed by KBA Group
LLP for professional services rendered for the audit of the Company's annual
financial statements and review of the interim financial statements included
in
the Company's Forms 10-QSBs, including services related thereto, were
$108,425 and
$108,640 for
fiscal 2007 and 2006,
respectively.
Audit-Related
Fees
The
aggregate audit-related fees billed
by KBA Group LLP for fiscal 2007 and 2006
were
$5,000
and $41,045, respectively, which
for
fiscal year 2007 related to
professional services rendered in connection with the review of a registration
statement and for fiscal year 2006 related to professional
services
rendered for the audit of Telenational Communications, Inc., reviews of interim
financial statements and review of the Form 8-K and pro forma related to the
Telenational Communications, Inc. acquisition.
Tax
Fees
The
aggregate fees billed by
Benham, Ichen & Knox
LLP for professional
services rendered for tax compliance, tax advice and tax planning were
$12,000 and
$12,000 for fiscal 2007 and 2006,
respectively. The services comprising the fees reported as "Tax Fees"
included tax return preparation and consultation regarding various tax
issues.
All
Other Fees
There
were no other fees billed by KBA
Group LLP during fiscal 2007 and 2006.
Policy
Related to Board of Directors
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Registered Public Accounting Firm.
The
Board of Directors will engage the
Auditor for the audit of the Company’s consolidated financial statements, and
other audit-related work as deemed necessary. The Auditor may only be
engaged for non-audit related work if those services enhance and support
the
attest function of the audit, or are an extension to the audit or audit related
services. Annually the Chief Financial Officer (“CFO”) will review
with the Board of Directors the services the Auditor expects to provide in
the
coming year and the related fees. The Auditor shall determine the
scope of work necessary to render an opinion on the consolidated financial
statements of the Company. This determination should include the
locations to visit, the scope of work to be performed at each location, and
the
timing of that work. The scope of work will be presented to the Board
of Directors for approval.
The
Auditor shall be considered the
preferred service provider of Audit Related Services if services are consistent
with the attest role of the Auditor and either:
| |
1.
|
services
can only be provided by
the Auditor, or
|
| |
2.
|
services
are an extension of the
work performed as part of the Audit, or rely on work performed
as part of
the Audit such that the quality and timeliness of the services
can most
effectively be provided by the Auditor,
or
|
| |
3.
|
services
enhance the effectiveness
of the Auditor’s examination of the Company’s consolidated financial
statements.
|
The
Board of Directors is responsible
for approving all Audit, Audit Related, and Other Non-Audit
Services. Each year as part of the Annual Audit Plan, the CFO will
provide the Board of Directors with a report of anticipated Audit, Audit
Related, Other Non-Audit Services, together with an estimate of
fees. The size of the fee and the scope of these services will be
carefully considered so as to avoid any real or perceived question as to
the
Auditor’s independence.
The
Company shall not hire an audit
engagement team member in a financial reporting oversight role where that
person
has prepared financial statements or exercised influence over the financial
statements during the two year period prior to the date of
employment. The CFO is responsible for the implementation of this
policy.
SIGNATURES
Pursuant
to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
| |
RAPID
LINK,
INCORPORATED
(Registrant)
|
| |
|
| |
/s/
John A.
Jenkins
|
| |
John
A.
Jenkins
Chief
Executive Officer and
Chairman of the Board
|
|
Date:
January 22, 2008
|
|
Pursuant
to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
NAME
|
|
TITLE
|
|
DATE
|
| |
|
|
|
|
|
/s/
JOHN A. JENKINS
|
|
Chairman
of the Board, Chief
Executive Officer, Secretary
and Director (principal
executive officer)
|
|
January
22, 2008
|
|
John
A. Jenkins
|
|
|
|
| |
|
|
|
|
|
/s/
CHRISTOPHER J. CANFIELD
|
|
President,
Chief Financial Officer,
Treasurer and Director
(principal financial and
principal accounting officer) |
|
January
22, 2008
|
|
Christopher
J. Canfield
|
|
|
|
| |
|
|
|
|
|
/s/
LAWRENCE J. VIERRA
|
|
Director
|
|
January
22, 2008
|
|
Lawrence
J. Vierra
|
|
|
|
|
| |
|
|
|
|
|
/s/
DAVID R. HESS
|
|
Director
|
|
January
22, 2008
|
|
David
R. Hess
|
|
|
|
|
RAPID
LINK, INCORPORATED AND
SUBSIDIARIES
INDEX
TO FINANCIAL
STATEMENTS
|
Consolidated
Financial Statements:
|
Page
|
| |
|
|
Report
of Independent Registered Public Accounting
Firm
|
F-2
|
| |
|
|
Consolidated
Balance Sheets at
October 31, 2007 and 2006
|
F-3
|
| |
|
|
Consolidated
Statements of
Operations for the fiscal years ended October 31, 2007 and
2006
|
F-4
|
| |
|
|
Consolidated
Statements of
Shareholders' Deficit for the fiscal years ended October 31, 2007
and
2006
|
F-5
|
| |
|
|
Consolidated
Statements of Cash
Flows for the fiscal years ended October 31, 2007 and
2006
|
F-6
|
| |
|
|
Notes
to Consolidated Financial
Statements
|
F-7
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Shareholders of
Rapid
Link,
Incorporated
We
have audited the accompanying
consolidated balance sheets of Rapid
Link,
Incorporated and subsidiaries as
of October 31, 2007 and 2006, and the related consolidated statements of
operations, shareholders' deficit, and cash flows for the years then
ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board
(United States). Those
standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes
examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing
the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In
our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Rapid Link, Incorporated and subsidiaries as of
October 31, 2007 and 2006, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a
going
concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from continuing operations
during each of the last two fiscal years. Additionally, at October
31, 2007, the Company's current liabilities exceeded its current assets by
$5.4 million and
the Company has a shareholders'
deficit totaling $2.8 million. These
conditions raise substantial doubt
about the Company's ability to continue as a going
concern. Management's plans as they relate to these issues are also
explained in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
As
discussed in Note 2 to the
consolidated financial statements, on November 1, 2006, the Company adopted
Statement of Financial Accounting Standards No.123(R), “Share-Based
Payment”.
/s/
KBA GROUP LLP
Dallas,
Texas
January
22, 2008
RAPID
LINK, INCORPORATED AND
SUBSIDIARIES
CONSOLIDATED
BALANCE
SHEETS
| |
|
October
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
496,306 |
|
|
$ |
30,136 |
|
|
Accounts
receivable, net of
allowance of $53,584 and $99,666, respectively
|
|
|
1,090,954 |
|
|
|
1,400,568 |
|
|
Prepaid
expenses
|
|
|
36,537 |
|
|
|
204,335 |
|
|
Other
current
assets
|
|
|
200,809 |
|
|
|
16,382 |
|
|
Total
current
assets
|
|
|
1,824,606 |
|
|
|
1,651,421 |
|
| |
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
273,390 |
|
|
|
379,027 |
|
|
Customer
lists,
net
|
|
|
2,536,400 |
|
|
|
3,222,142 |
|
|
Goodwill
|
|
|
3,107,062 |
|
|
|
2,688,461 |
|
|
Other
assets
|
|
|
98,032 |
|
|
|
121,286 |
|
| |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
7,839,490 |
|
|
$ |
8,242,337 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Bank
overdrafts
|
|
$ |
- |
|
|
$ |
101,097 |
|
|
Accounts
payable
|
|
|
2,319,099 |
|
|
|
2,303,072 |
|
|
Accrued
interest (including $0 and
$183,304, respectively, to related parties)
|
|
|
227,037 |
|
|
|
491,299 |
|
|
Other
accrued
liabilities
|
|
|
617,455 |
|
|
|
507,581 |
|
|
Deferred
revenue
|
|
|
66,113 |
|
|
|
183,510 |
|
|
Deposits
and other
payables
|
|
|
77,106 |
|
|
|
66,889 |
|
|
Contingent
purchase price
consideration
|
|
|
- |
|
|
|
500,000 |
|
|
Convertible
notes, current
portion, net of debt discount of $151,515 and $343,333,
respectively
|
|
|
1,690,985 |
|
|
|
716,667 |
|
|
Convertible
notes payable to
related parties, current
|
|
|
1,000,000 |
|
|
|
- |
|
|
Related
party notes,
current
|
|
|
50,000 |
|
|
|
380,965 |
|
|
Net
current liabilities from
discontinued operations
|
|
|
1,162,000 |
|
|
|
1,162,000 |
|
|
Total
current
liabilities
|
|
|
7,209,795 |
|
|
|
6,313,080 |
|
| |
|
|
|
|
|
|
|
|
|
Convertible
notes, long-term, net
of debt discount of $0 and $610,308,
respectively
|
|
|
1,201,277 |
|
|
|
1,622,149 |
|
|
Convertible
notes payable to
related parties, long-term, net of debt discount of $0 and
$44,120,
respectively
|
|
|
2,240,000 |
|
|
|
1,860,958 |
|
|
Related
party notes,
long-term
|
|
|
- |
|
|
|
1,000,000 |
|
|
Total
liabilities
|
|
|
10,651,072 |
|
|
|
10,796,187 |
|
| |
|
|
|
|
|
|
|
|
|
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; 65,161,544 and 51,181,994 shares issued
at October
31, 2007 and October 31,
2006, respectively
|
|
|
65,162 |
|
|
|
51,182 |
|
|
Additional
paid-in
capital
|
|
|
48,976,402 |
|
|
|
47,248,729 |
|
|
Accumulated
deficit
|
|
|
(51,798,275 |
)
|
|
|
(49,798,891 |
)
|
|
Treasury
stock, at cost; 12,022
shares
|
|
|
(54,870 |
)
|
|
|
(54,870 |
)
|
|
Total
shareholders'
deficit
|
|
|
(2,811,581 |
)
|
|
|
(2,553,850 |
)
|
| |
|
|
|
|
|
|
|
|
|
Total
liabilities and
shareholders' deficit
|
|
$ |
7,839,490 |
|
|
$ |
8,242,337 |
|
The
accompanying notes are an integral
part of these consolidated financial statements.
RAPID
LINK, INCORPORATED AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF
OPERATIONS
| |
|
Year
Ended October
31,
|
|
| |
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
Revenues
|
|
$ |
17,326,035 |
|
|
$ |
13,351,030 |
|
| |
|
|
|
|
|
|
|
|
|
Costs
and
expenses:
|
|
|
|
|
|
|
|
|
|
Costs
of
revenues
|
|
|
12,559,905 |
|
|
|
9,644,235 |
|
|
Sales
and
marketing
|
|
|
1,212,355 |
|
|
|
856,037 |
|
|
General
and
administrative
|
|
|
3,403,674 |
|
|
|
3,596,171 |
|
|
Depreciation
and
amortization
|
|
|
928,427 |
|
|
|
747,562 |
|
|
Loss
on disposal of
property and
equipment
|
|
|
10,061 |
|
|
|
56,771 |
|
|
Net
reduction of
liabilities
|
|
|
- |
|
|
|
(2,300,929 |
)
|
|
Gain
on legal
settlements
|
|
|
(415,213 |
)
|
|
|
- |
|
| |
|
|
17,699,209 |
|
|
|
12,599,847 |
|
| |
|
|
|
|
|
|
|
|
|
Operating
income
(loss)
|
|
|
(373,174 |
)
|
|
|
751,183 |
|
| |
|
|
|
|
|
|
|
|
|
Other
income
(expense):
|
|
|
|
|
|
|
|
|
|
Noncash
interest
expense
|
|
|
(1,043,261 |
)
|
|
|
(1,410,351 |
)
|
|
Related
party noncash interest
expense
|
|
|
(33,089 |
)
|
|
|
(33,089 |
)
|
|
Interest
expense
|
|
|
(284,414 |
)
|
|
|
(220,802 |
)
|
|
Related
party interest
expense
|
|
|
(269,836 |
)
|
|
|
(216,233 |
)
|
|
Foreign
currency exchange
gain(loss)
|
|
|
4,839 |
|
|
|
(18,134 |
)
|
| |
|
|
(1,626,211 |
)
|
|
|
(1,862,341 |
)
|
| |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,999,384 |
)
|
|
$ |
(1,111,158 |
)
|
| |
|
|
|
|
|
|
|
|
|
Loss
per
share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average
shares outstanding
|
|
|
53,618,865 |
|
|
|
39,000,486 |
|
|
Basic
and diluted loss per
share
|
|
$ |
(.04 |
)
|
|
$ |
(.03 |
)
|
The
accompanying notes are an integral
part of these consolidated financial statements.
RAPID
LINK, INCORPORATED AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’
DEFICIT
| |
|
Common
Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
| |
|
Shares
|
|
|
Amount
|
|
|
Treasury
Stock
|
|
|
Paid-in
Capital
|
|
|
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31,
2005
|
|
|
29,297,183 |
|
|
$ |
29,298 |
|
|
$ |
(54,870 |
)
|
|
$ |
42,858,862 |
|
|
$ |
(48,687,733 |
)
|
|
$ |
(5,854,443 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
in connection
with
conversion of convertible
notesand accrued
interest
|
|
|
2,709,811 |
|
|
|
2,709 |
|
|
|
- |
|
|
|
193,442 |
|
|
|
- |
|
|
|
196,151 |
|
|
Beneficial
conversion feature
related to issuance of convertible debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
628,674 |
|
|
|
- |
|
|
|
628,674 |
|
|
Issuance
of warrants in connection
with issuance of convertible debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
327,176 |
|
|
|
- |
|
|
|
327,176 |
|
|
Issuance
of common stock for
acquisition of Telenational Communications, Inc.
|
|
|
19,175,000 |
|
|
|
19,175 |
|
|
|
- |
|
|
|
3,240,575 |
|
|
|
- |
|
|
|
3,259,750 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,111,158 |
)
|
|
|
(1,111,158 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31,
2006
|
|
|
51,181,994 |
|
|
|
51,182 |
|
|
|
(54,870 |
)
|
|
|
47,248,729 |
|
|
|
(49,798,891 |
)
|
|
|
(2,553,850 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
in connection
with
conversion of convertible
notes
and accrued
interest
|
|
|
12,622,407 |
|
|
|
12,622 |
|
|
|
- |
|
|
|
1,317,378 |
|
|
|
- |
|
|
|
1,330,000 |
|
|
Issuance
of common stock
for
cash
|
|
|
357,143 |
|
|
|
358 |
|
|
|
- |
|
|
|
24,642 |
|
|
|
- |
|
|
|
25,000 |
|
|
Issuance
of warrants in connection
with extension of convertible debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
278,950 |
|
|
|
- |
|
|
|
278,950 |
|
|
Share-based
compensation
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17,703 |
|
|
|
|
|
|
|
17,703 |
|
|
Issuance
of common stock for
acquisition of Communications Advantage and Web
Breeze
|
|
|
1,000,000 |
|
|
|
1,000 |
|
|
|
- |
|
|
|
89,000 |
|
|
|
- |
|
|
|
90,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,999,384 |
)
|
|
|
(1,999,384 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31,
2007
|
|
|
65,161,544 |
|
|
$ |
65,162 |
|
|
$ |
(54,870 |
)
|
|
$ |
48,976,402 |
|
|
$ |
(51,798,275 |
)
|
|
$ |
(2,811,581 |
)
|
The
accompanying notes are an integral
part of these consolidated financial statements.
RAPID
LINK, INCORPORATED AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
| |
|
Year
Ended October
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating
activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,999,384 |
)
|
|
$ |
(1,111,158 |
)
|
|
Adjustments
to reconcile net loss
to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Noncash
interest
expense
|
|
|
1,076,350 |
|
|
|
1,447,400 |
|
|
Depreciation
and
amortization
|
|
|
928,427 |
|
|
|
747,562 |
|
|
Bad
debt
expense
|
|
|
88,812 |
|
|
|
136,391 |
|
|
Loss
on
disposal of property and
equipment
|
|
|
10,061 |
|
|
|
56,771 |
|
|
Share-based
compensation
expense
|
|
|
17,703 |
|
|
|
- |
|
|
Non-cash
gain on legal
settlements and
reduction
of
liabilities
|
|
|
(135,000 |
)
|
|
|
(2,300,929 |
)
|
|
Changes
in operating assets and
liabilities(net of
effect of acquisitions):
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
125,801 |
|
|
|
(39,042 |
)
|
|
Prepaid
expenses and other current
assets
|
|
|
167,209 |
|
|
|
11,198 |
|
|
Other
assets
|
|
|
19,925 |
|
|
|
(46,120 |
)
|
|
Accounts
payable
|
|
|
116,027 |
|
|
|
(269,074 |
)
|
|
Accrued
liabilities
|
|
|
351,018 |
|
|
|
444,134 |
|
|
Deferred
revenue
|
|
|
(117,397 |
)
|
|
|
18,870 |
|
|
Deposits
and other
payables
|
|
|
10,216 |
|
|
|
(131,326 |
)
|
|
Net
cash provided by (used in)
operating activities
|
|
|
659,136 |
|
|
|
(1,035,323 |
)
|
| |
|
|
|
|
|
|
|
|
|
Cash
flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of property and
equipment
|
|
|
(7,048 |
)
|
|
|
(207,860 |
)
|
|
Proceeds
from sale of property and
equipment
|
|
|
300 |
|
|
|
- |
|
|
Cash
acquired in Telenational
acquisition
|
|
|
- |
|
|
|
158,135 |
|
|
Net
cash used in investing
activities
|
|
|
(6,748 |
)
|
|
|
(49,725 |
)
|
| |
|
|
|
|
|
|
|
|
|
Cash
flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
Increase
(reduction)
of
bank
overdrafts
|
|
|
(101,097 |
)
|
|
|
101,097 |
|
|
Proceeds
from sale of common
stock
|
|
|
25,000 |
|
|
|
- |
|
|
Proceeds
from convertible
debentures
|
|
|
- |
|
|
|
1,000,000 |
|
|
Payment
on convertible
debentures
|
|
|
- |
|
|
|
(163,927 |
)
|
|
Payment
of financing
fees
|
|
|
- |
|
|
|
(44,150 |
)
|
|
Proceeds
from related party notes
and shareholder advances
|
|
|
- |
|
|
|
850,000 |
|
|
Payments
on related party notes
and shareholder advances
|
|
|
(110,121 |
)
|
|
|
(800,000 |
)
|
|
Net
cash provided by (used in)
financing activities
|
|
|
(186,218 |
)
|
|
|
943,020 |
|
| |
|
|
|
|
|
|
|
|
|
Net
increase(decrease)in
cash and cash
equivalents
|
|
|
466,170 |
|
|
|
(142,028 |
)
|
| |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents,
beginning of year
|
|
|
30,136 |
|
|
|
172,164 |
|
| |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of
year
|
|
$ |
496,306 |
|
|
$ |
30,136 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
165,500 |
|
|
$ |
15,000 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
in connection
with
conversion of convertible
notes and accrued
interest
|
|
$ |
430,000 |
|
|
$ |
196,151 |
|
|
Fair
value of common stock issued
in connection with Telenational Communications
acquisition
|
|
|
- |
|
|
|
3,259,750 |
|
|
Note
issued in connection with
Telenational Communications acquisition
|
|
|
- |
|
|
|
1,000,000 |
|
|
Contingent
liability issued in
connection with Telenational Communications
acquisition
|
|
|
- |
|
|
|
500,000 |
|
|
Accrued
interest to related party
converted to note payable to related party
|
|
|
426,953 |
|
|
|
901,688 |
|
|
Accrued
interest converted to note
payable
|
|
|
218,453 |
|
|
|
- |
|
|
Fair
value of common stock issued
in connection with Communications Advantage and Web Breeze
acquisition
|
|
|
90,000 |
|
|
|
- |
|
|
Beneficial
conversion feature of
convertible debentures recorded as debt discount
|
|
|
- |
|
|
|
628,674 |
|
|
Issuance
of common stock to
related party in
connection with conversion of convertible
notes and accrued
interest
|
|
|
900,000 |
|
|
|
- |
|
|
Note
issued in connection with
Communications Advantage and Web Breeze
acquisition
|
|
|
50,000 |
|
|
|
- |
|
|
Fair
value of warrants issued with
debt
|
|
|
278,950 |
|
|
|
327,176 |
|
The
accompanying notes are an integral
part of these consolidated financial statements.
RAPID
LINK, INCORPORATED AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1 - ORGANIZATION AND NATURE OF
BUSINESS
Nature
of Business
On
November 1, 2005 the Company changed
its name to “Rapid Link, Incorporated” from Dial Thru International
Corporation. Rapid Link, Incorporated, a Delaware corporation,
and its subsidiaries
(collectively referred to as “Rapid Link” or the “Company”), have served as
facilities-based, communication companies providing various forms of voice
and
data services to customers around the world. Rapid Link provides a
multitude of communication services targeted to individual customers, as well
as
small and medium sized enterprises. These services include the
transmission of voice and data traffic over public and private
networks. The Company also sells foreign and domestic termination of
voice traffic into the wholesale market. To insure optimal quality
and redundancy, the Company utilizes the Public Switched Telecommunications
Network, as well as the Internet, to transport communications
services.
The
Company has shifted its retail
product focus to broadband wireless. Broadband niche
markets include specific ethnic
demographics, targeted rural geographic locations, and others. The
Company’s strategy includes plans to offer broadband access via its own
facilities to insure reliable delivery of its current and future
services. Technology now allows for swift and cost efficient
deployment of broadband networks. Wi-MAX and other technologies can
bring fast, reliable, high-speed internet access to areas that have
traditionally been inaccessible or underserved. Through organic
growth and acquisitions in targeted rural areas, the Company believes it will
possess a strategic advantage over carriers that do not provide their own
network access. “Net Neutrality” is an issue, and Rapid Link believes
the potential for unfair and/or monopolistic behavior by incumbent providers,
necessitates their
strategy
to “own” the
customer by providing the service directly, rather than utilizing the networks
of others. This will allow the Company to provide its bundled
products and communication services without the threat of compromised service
quality.
Financial
Condition
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 its strategy due to unanticipated changes
in
the market, (v) various competitive factors that may prevent the Company from
competing successfully in the marketplace, and (vi) the Company's lack of
liquidity and its ability to raise additional capital. The Company has an
accumulated deficit of approximately $49 million as of October 31, 2007, as
well
as a working capital deficit of approximately $5.4
million. Funding
of the
Company's working capital deficit, its current and future anticipated operating
losses, and expansion of the Company will require continuing capital
investment. Historically, some of the Company’s funding has been
provided by 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 could materially affect
the Company's operations in the short term and hinder expansion
strategies. The Company continues to explore external financing
opportunities. At October 31, 2007, approximately 53% of
the Company’s debt is due to the
senior management and a Director of the Company, as well as an entity owned
by
senior management.
As
a result of the aforementioned
factors and related uncertainties, there is 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
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated. Certain amounts previously reported have been
reclassified to conform to the current year presentation.
Use
of
Estimates
The
preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States
requires
management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the consolidated financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition
Long
distance
revenue
Revenues
generated by international
re-origination, dial thru services and international wholesale termination,
which are the primary source of the Company’s revenues, are based on minutes of
customer usage. The Company records payments received in advance as
deferred revenue until such services are provided.
VoIP
service revenue
The
Company defers revenue recognition
of new subscriber revenue from its service offerings until the acceptance period
has expired. New customers may terminate their service within thirty
days of order placement and receive a full refund of fees previously
paid. The Company has been providing its VoIP services for a limited
period of time, has an insignificant amount of revenue to date, and therefore,
has not developed sufficient history to apply a cancellation rate to reserve
against new order revenue. Accordingly, the Company defers new
subscriber revenue for thirty days to ensure that the thirty-day trial period
has expired.
Emerging
Issues Task Force Consensus No.
00-21 ("EITF No. 00-21"), "Accounting for Revenue Arrangements with Multiple
Deliverables" 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 VoIP service with the
accompanying hardware that customers use to access the Internet constitutes
a
revenue arrangement with multiple deliverables. In accordance with
the guidance of EITF No. 00-21, the Company allocates VoIP revenues, including
activation fees, among the hardware and subscriber services. Revenues
allocated to the hardware are recognized as product revenues at the end of
thirty days after order placement, provided the customer does not cancel their
service. All other revenues are recognized as service revenues when
the related services are provided.
Cash
and
Cash Equivalents
The
Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be
cash equivalents. Cash and cash equivalent are at risk to the extent
that they exceed Federal Deposit Insurance Corporation insured
amounts. To minimize this risk, the Company places its cash and cash
equivalents with high credit quality financial institutions.
Accounts
Receivable
Trade
accounts receivable are stated at
the amount the Company expects to collect. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. Management
considers the following factors when determining the collectibility of specific
customer accounts: customer creditworthiness, past transaction history with
the
customer, current economic industry trends and changes in customer payment
terms. If the financial condition of the Company's customers were to
deteriorate, adversely affecting their ability to make payments, additional
allowances would be required. Based on management's assessment, the
Company provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Interest is typically
not charged on overdue accounts receivable. Balances that remain
outstanding after the Company has used reasonable collection efforts are written
off through a charge to the valuation allowance and a credit to accounts
receivable.
Property
and
Equipment
Property
and equipment are stated at
cost. Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets ranging
from
three to seven years. Equipment held under capital leases and
leasehold improvements are amortized on a straight-line basis over the shorter
of the remaining lease term or the estimated useful life of the related asset
ranging from five to seven years. Expenditures for repairs and
maintenance are charged to expense as incurred. Major renewals and
betterments are capitalized.
Goodwill
The
Company accounts for goodwill in
accordance with SFAS No.142, “Goodwill and Other Intangible Assets” (“SFAS
142”). In accordance with SFAS 142, goodwill is reviewed for
impairment
annually or more frequently if impairment indicators
arise. Impairment indicators include (i) a significant decrease in
the market value of an asset, (ii) a significant change in the extent or manner
in which an asset is used or a significant physical change in an asset, (iii)
a
significant adverse change in legal factors or in the business climate that
could affect the value of an asset or an adverse action by a regulator, and
(iv)
a current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with an asset used for the purpose of producing
revenue.
The
Company has one operating and
reporting segment and one reporting unit. For the purpose of
identifying the reporting units, the Company followed the guidance in paragraph
30 of SFAS 142, (i) an operating segment is a reporting unit if discrete
financial information is available (ii) management regularly reviews individual
operating results, and (iii) similar economic characteristics of components
within an operating segment result in a single reporting unit. The
Company's management regularly reviews one set of financial information, and
all
of the Company's products share similar economic
characteristics. Therefore, the Company has determined that it has
one single reporting unit.
The
Company performs its annual impairment test
of goodwill
in the fourth quarter
of
each year. The
valuation process appraised the Company's enterprise value using a combination
of market capitalization and multiples of earnings valuation
techniques. The valuation process indicated that the enterprise fair value
exceeded
the carrying value of
the
Company's net assets and liabilities. Accordingly, the Company
concluded that no impairment of goodwill existed at October 31, 2007 and
2006.
Long-Lived
Assets
Long-lived
assets, including the
Company’s customer lists, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets might not
be
recoverable. The Company does not perform a periodic assessment of
assets for impairment in the absence of such information or
indicators. Conditions that would necessitate an impairment include a
significant decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a significant
adverse change that would indicate that the carrying amount of an asset or
group
of assets is not recoverable. For long-lived assets to be held and
used, the Company recognizes an impairment loss only if an impairment is
indicated by its carrying value not being recoverable through undiscounted
cash
flows. The impairment loss is the difference between the carrying
amount and the fair value of the asset estimated using discounted cash
flows. Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell.
Fair
Market
Value of Financial Instruments
The
carrying amount for current assets
and liabilities, and long-term debt is not materially different from fair market
value because of the short maturity of the instruments and/or their respective
interest rate amounts and other terms have been negotiated
recently.
Convertible
Debt
Obligations
When
applicable, the Company calculates
the value of the
beneficial
conversion
feature embedded in its debt borrowings in accordance with EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features
or
Contingently Adjustable Conversion Ratios," and EITF 00-27, "Application of
Issue No. 98-5 to Certain Convertible Instruments," and records the calculated
amount as debt discount. Debt
discount is amortized over the term
of the corresponding debt obligation.
Net
Loss Per
Share
Basic
net loss per share is
computed using the weighted average number of shares of common stock outstanding
during the year. Diluted net loss per share is computed using the
weighted average number of shares of common stock outstanding during the year
and common equivalent shares consisting of stock options, warrants, and
convertible debentures (using the treasury stock method) to the extent they
are
dilutive.
Shares
issuable upon the exercise of stock options, warrants, and convertible
debentures are excluded from the calculation of net loss per share for the
years
ended October 31, 2007 and 2006, as their effect would be
antidilutive. Potentially issuable shares from outstanding stock
options, warrants and convertible debentures amounted to 70,128,410 and
54,388,861 shares, respectively, as of October 31, 2007 and 2006.
Income
Taxes
The
Company utilizes the asset and
liability approach to financial accounting and reporting for income
taxes. Deferred income taxes and liabilities are computed for
differences between the financial statement carrying amounts and tax
bases of
assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax
laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are recorded when
necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense or benefit is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
Foreign
Currency Translation and Foreign Currency Transactions
The
Company's functional currency is the
U.S. dollar. The Company's foreign operations are subject to exchange
rate fluctuations and foreign currency transaction costs. Monetary
assets and liabilities of subsidiaries domiciled outside the United States are
translated at rates of exchange
existing at the balance sheet date and non-monetary assets, liabilities and
equity are translated at historical rates. Revenues and expenses are
translated at average rates of exchange prevailing during the
period. The resulting translation adjustments, and foreign currency
transactions resulting in gains and losses, are recorded in the consolidated statements
of
operations.
Stock-Based
Compensation
The
Company adopted SFAS No. 123R
“Share-Based Payment” ("SFAS 123R") as of November 1, 2006. In
March 2005, the SEC issued Staff Accounting Bulletin ("SAB") 107, "Share-Based
Payment”, which does not modify any of SFAS 123R's conclusions or
requirements, but rather includes recognition, measurement and disclosure
guidance for companies as they implement SFAS 123R.
All
of the Company's existing
share-based compensation awards have been determined to be equity
awards. Under the modified prospective transition method, the Company
is required to recognize noncash compensation costs for the portion of
share-based awards that are outstanding as of November 1, 2006 for which the
requisite service has not been rendered (i.e. nonvested awards) as the requisite
service is rendered on or after that date. The compensation cost is
based on the grant date fair value of those awards, with grant date fair value
currently being estimated using the Black-Scholes option-pricing model, a
pricing model acceptable under SFAS 123R. The Company is
recognizing compensation cost relating to the nonvested portion of those awards
in the consolidated financial statements beginning with the date on which
SFAS 123R is adopted, through the end of the requisite service
period. SFAS 123R requires that forfeitures be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Under the modified
prospective transition method, the consolidated financial statements are
unchanged for periods prior to adoption and the pro forma disclosure previously
required for those prior periods will continue to be required to the extent
those amounts differ from the amounts in the consolidated statement of
operations.
Effective
November 1, 2006, the Company
accounts for equity instruments issued to non-employees in accordance with
the
provisions of SFAS 123R and Emerging Issues Task Force ("EITF") Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.” All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted
for
based on the fair value of the consideration received or the fair value of
the
equity instrument issued, whichever is more reliably measurable. The
measurement date of the fair value of the equity instrument issued is the
earlier of the date on which the counterparty's performance is complete or
the
date on which it is probable that performance will occur.
The
adoption of SFAS 123R had no
effect on cash flows or basic and diluted loss per share. No
share-based compensation costs were capitalized during fiscal 2007. Noncash
share-based compensation costs recorded in general and administrative expenses
during fiscal year 2007 were approximately $18,000.
Prior
to
November 1, 2006, the Company accounted for its stock-based employee
compensation arrangements under the intrinsic value method in accordance with
APB Opinion No. 25 and followed the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," (SFAS 123) as amended by SFAS No.
148
"Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS
148). 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, compensation
cost was not recognized related to stock options in the financial statements
as
the fair market value on the grant date approximated the exercise
price. Prior to the adoption of SFAS 123R, the Company
calculated stock-based compensation pursuant to the disclosure provisions of
SFAS 123 using the straight-line method over the vesting period of the
option. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS 123, as amended
by
SFAS 148, the Company's pro forma net loss for fiscal 2006 would not have been
materially different. The fair value of options for shares of the
Company's common stock issued to employees has been determined using the
Black-Scholes option-pricing model, a pricing model acceptable under SFAS No.
123.
Reclassifications
Certain
prior period amounts have been
reclassified to conform to current period presentation.
Recent
Accounting Pronouncements
In
July 2006, the FASB issued FASB
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,”
which prescribes a recognition threshold and measurement process for recording
in the financial statements uncertain tax positions taken or expected to be
taken in a tax return. Additionally, FIN 48 provides guidance on
derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The Company adopted the provisions
of FIN 48
effective November 1, 2007. The Company is in the process of
determining the effect, if any, the adoption of FIN 48 will have on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements”(SFAS 157). SFAS
157 defines fair
value, established a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
Company does not expect the adoption of SFAS No. 157 to significantly affect
its consolidated
financial
condition or consolidated results
of
operations.
In
February 2007, the FASB issued
SFAS No. 159, “The
Fair Value Option for Financial
Assets and Financial Liabilities”,
which allows companies the option to
measure financial assets or liabilities at fair value and include unrealized
gains and losses in net income rather than equity. This
becomes available when the Company
adopts SFAS 157, which will be fiscal year 2009. The
Company is analyzing the expected
impact from adopting this statement on its financial statements, but currently
does not believe its adoption will have a significant impact on the financial
position or results of operations of the Company.
In
December 2007, the FASB issued
SFAS No. 141 (revised
2007), “Business Combinations” (“SFAS 141R”).
SFAS 141R
will significantly change
the accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
IPR&D and restructuring costs. In
addition, under SFAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income tax expense. SFAS 141R
is effective for fiscal
years beginning after December 15, 2008 and, as such, we will adopt this
standard in fiscal 2010. The Company has not yet
determined the impact, if any, of
SFAS 141R on our
consolidated
financial
statements.
NOTE
3 - ACQUISITIONS
Communications
Advantage, LLCand
Web-Breeze Networks,
LLC.
On
October 31, 2007, the Company
acquired 100% of the assets of Communications Advantage, LLC (“Communications
Advantage”), and Web-Breeze Networks, LLC (“Web Breeze”)for $375,000. The purchase
consideration consisted of a cash payment of $75,000, a promissory note of
$50,000, issuance of common stock valued at $90,000, forgiveness of amounts
due
totaling $95,000 and an additional $65,000 to be paid during fiscal year
2008. The
common stock issued was valued at
$0.09 per share, which approximates the average trading value as quoted on
the
OTC Bulletin Board for the three days before and after the acquisition
date. The assets
include a sizable wireless broadband network in a rural geographic area of
California that
fits into the Company’s niche
market business model, a base of customers and revenues that are immediately
accretive to our revenues and earnings, and a staff of tenured professionals
with vast knowledge and experience in the wireless broadband
sector.
The
following table summarizes the assets acquired as of the closing
date:
|
Tangible
assets acquired
|
|
$ |
50,000 |
|
|
Customer
list
|
|
|
86,400 |
|
|
Goodwill
|
|
|
238,600 |
|
|
Total
assets acquired
|
|
$ |
375,000 |
|
The
acquisition was accounted for using the purchase method of
accounting. The purchase price allocated to customer list was
determined by management’s estimates of the value associated with each acquired
customer. The customer list is being amortized over its estimated
useful life of two years. Goodwill represents the excess of
consideration given over the fair value of assets acquired. The
goodwill is expected to be deductible for federal income tax
purposes.
Telenational
Communications, Inc.
On
May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”) for $4,809,750, including acquisition
costs of $50,000. The purchase consideration consisted of a
promissory note in the principal amount of $1,000,000, a contingent cash payment
in the amount of $500,000 and 19,175,000 shares of the Company’s common stock
valued at $3,259,750. The stock was issued on May 5, 2006 and June 5,
2006 (50% on each date) in conjunction with the acquisition. Under
the terms of the original purchase agreement, the second stock issuance was
a
contingent obligation. This was subsequently amended, resulting in
the June 5, 2006 stock issuance. The value of the issued stock was
determined by the average of $0.18 per share and $0.16 per share, which
approximates the average trading value as quoted on the OTC Bulletin Board
for
the three days before and three days after May 5, 2006, and the stock price
on
June 5, 2006, respectively. The contingent purchase price
consideration, which was recorded on the date of acquisition, was based on
the
attainment of a predetermined level of short-term gross profit, which did
occur. The contingent purchase price consideration was subsequently
converted to a related party convertible note payable to APEX in the amount
of
$500,000. The primary purpose of the acquisition was to enable the
Company to expand its market share in the telecommunications industry and
eliminate certain costs by gaining operational efficiencies.
The
following table summarizes the assets acquired and liabilities assumed as of
the
closing date:
|
Tangible
assets acquired
|
|
$ |
1,362,950 |
|
|
Customer
list
|
|
|
3,500,000 |
|
|
Goodwill
|
|
|
1,071,544 |
|
|
Total
assets acquired
|
|
|
5,934,494 |
|
|
Liabilities
assumed
|
|
|
(1,124,744 |
) |
|
Net
assets acquired
|
|
$ |
4,809,750 |
|
The
acquisition was accounted for using the purchase method of
accounting. The purchase price allocated to customer list was
determined by management’s estimates of the value associated with each acquired
customer. The customer list is being amortized over its estimated
useful life of five years. Goodwill represents the excess of
consideration given over the fair value of assets acquired. The
goodwill is expected to be deductible for federal income tax
purposes.
The
following represents unaudited pro
forma combined results of operations of the Company, Communications Advantage,
Web-Breeze
and Telenational as if the Communications Advantage, Web-Breeze and Telenational
acquisitions had occurred as of November 1, 2005:
| |
|
Year
Ended October
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Unaudited
pro forma information:
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
17,748,309 |
|
|
$ |
19,170,488 |
|
|
Net
loss
|
|
$ |
(1,854,770 |
)
|
|
$ |
(689,031 |
)
|
|
Basic
and diluted net loss per
share
|
|
$ |
(0.03 |
)
|
|
$ |
(0.01 |
) |
|
Weighted
average shares
outstanding
|
|
|
54,616,125 |
|
|
|
50,586,137 |
|
The
pro forma information includes
historical Telenational,
Communications Advantage and Web-Breeze revenues and expenses
after giving
effect to certain adjustments, including amortization of the acquired customer
lists and
interest expense on the promissory
notes. The
pro forma financial
information is shown for illustrative purposes and does not purport to be
indicative of the Company's future results of operations or the Company's
results of operations that would have actually occurred had the transaction
been
in effect for the periods presented.
NOTE
4-
PROPERTY AND
EQUIPMENT
Property
and equipment consists of the
following at October 31, 2007 and 2006:
| |
|
2007
|
|
|
2006
|
|
Est.
Life
|
|
Telephone
switch
equipment
|
|
$ |
675,151 |
|
|
$ |
625,151 |
|
3-5
yrs.
|
|
Computer
software
|
|
|
1,093,045 |
|
|
|
1,092,488 |
|
3-5
yrs.
|
|
Computer
equipment
|
|
|
186,706 |
|
|
|
181,496 |
|
3-5
yrs.
|
|
Furniture
and
fixtures
|
|
|
154,561 |
|
|
|
154,561 |
|
5-7
yrs.
|
|
Leasehold
improvements
|
|
|
41,494 |
|
|
|
53,941 |
|
5-7
yrs.
|
| |
|
|
2,150,957 |
|
|
|
2,107,637 |
|
|
|
Less:
accumulated
depreciation and
amortization
|
|
|
(1,877,567 |
)
|
|
|
(1,728,610 |
)
|
|
|
Property
and equipment,
net
|
|
$ |
273,390 |
|
|
$ |
379,027 |
|
|
Amortization
of assets held under
capital leases is included with depreciation expense. Property and equipment
depreciation and amortization expense totaled $152,325 and $325,419 in fiscal
2007 and 2006,
respectively.
NOTE
5–
CUSTOMER
LISTS
Customer
lists acquired from
Telenational, Integrated, and Communications Advantage, and corresponding
accumulated amortization at October 31, 2007 and 2006 were as
follows:
| |
|
2007
|
|
|
2006
|
|
|
Est.
Life
|
|
|
Customer
lists
|
|
$ |
3,730,685 |
|
|
$ |
3,644,285 |
|
|
2-5
yrs.
|
|
|
Less:
accumulated
amortization
|
|
|
(1,194,285 |
)
|
|
|
(422,143 |
)
|
|
- |
|
|
Customer
lists,
net
|
|
$ |
2,536,400 |
|
|
$ |
3,222,142 |
|
|
|
|
Amortization
expense totaled $772,142 in
fiscal 2007 and $422,143 in fiscal 2006. Based on capitalized
customer lists at October 31, 2007, and assuming no impairment of these customer
lists, estimated amortization expense amounts in future fiscal years are as
follows:
|
Year
Ending
October
31,
|
|
|
|
|
2008
|
|
$ |
743,200 |
|
|
2009
|
|
|
743,200 |
|
|
2010
|
|
|
700,000 |
|
|
2011
|
|
|
350,000 |
|
|
Total
|
|
$ |
2,536,400 |
|
At
October 31, 2007, the weighted
average remaining life of the customer lists is 3.45 years.
NOTE
6-
CONVERTIBLE DEBENTURES AND NOTES
PAYABLE, INCLUDING RELATED PARTY NOTES
The
Company has various debt obligations
as of October 31, 2007 including amounts due to independent institutions and
related parties. Descriptions of these debt obligations are included
below. The following tables summarize
outstanding debt as of October
31, 2007 and
2006:
|
Information
as of October 31,
2007
|
|
|
Brief
Description of
Debt
|
|
Balance
|
|
|
Int.
Rate
|
|
Due
Date
|
|
Discount
|
|
|
Net
|
|
|
Convertible
notes, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GC-Conote
|
|
$ |
1,200,000 |
|
|
|
10.08 |
%
|
2/28/2008
|
|
$ |
151,515 |
|
|
$ |
1,048,485 |
|
|
Debenture
|
|
|
600,000 |
|
|
|
10 |
%
|
3/8/2008
|
|
|
- |
|
|
|
600,000 |
|
|
Other
|
|
|
42,500 |
|
|
|
10 |
%
|
2/28/2008
|
|
|
|
|
|
|
42,500 |
|
|
Related
party notes, current
|
|
|
50,000 |
|
|
|
10 |
%
|
4/30/2008
|
|
|
- |
|
|
|
50,000 |
|
|
Convertible
notes payable to related parties, current
|
|
|
1,000,000 |
|
|
|
8 |
%
|
On
Demand
|
|
|
- |
|
|
|
1,000,000 |
|
|
Convertible
notes, long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCA-Debenture
|
|
|
630,333 |
|
|
|
6 |
%
|
10/31/2009
|
|
|
- |
|
|
|
630,333 |
|
|
GCA-Debenture
|
|
|
570,944 |
|
|
|
6 |
%
|
10/31/2009
|
|
|
- |
|
|
|
570,944 |
|
|
Convertible
notes
payable
to related
parties,
long-term
|
|
|
2,240,000 |
|
|
|
8 |
%
|
11/01/2009
|
|
|
- |
|
|
|
2,240,000 |
|
Debt
obligations as of October 31, 2007
are due as follows:
| |
|
Within
1
year
|
|
|
1-2
years
|
|
|
Total
|
|
|
Debt
Obligations
|
|
$ |
2,892,500 |
|
|
$ |
3,441,277 |
|
|
$ |
6,333,777 |
|
|
Information
as of October 31,
2006
|
|
|
Brief
Description of
Debt
|
|
Balance
|
|
|
Int.
Rate
|
|
Due
Date
|
|
Discount
|
|
|
Net
|
|
|
Convertible
notes, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GC-Conote2
|
|
$ |
60,000 |
|
|
|
0 |
%
|
3/31/2007
|
|
$ |
10,000 |
|
|
$ |
50,000 |
|
|
Debentures
|
|
|
1,000,000 |
|
|
|
10 |
%
|
3/8/2007
|
|
|
333,333 |
|
|
|
666,667 |
|
|
Related
party notes, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Note
|
|
|
300,000 |
|
|
|
8 |
%
|
On
demand
|
|
|
- |
|
|
|
300,000 |
|
|
Apex
Note 2
|
|
|
80,965 |
|
|
|
8 |
%
|
7/15/2007
|
|
|
- |
|
|
|
80,965 |
|
|
Convertible
notes, long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCA-Debenture
|
|
|
430,000 |
|
|
|
6 |
%
|
11/1/2007
|
|
|
- |
|
|
|
430,000 |
|
|
GCA-Debenture
|
|
|
552,457 |
|
|
|
6 |
%
|
11/1/2007
|
|
|
4,247 |
|
|
|
548,210 |
|
|
GC-Conote
|
|
|
1,250,000 |
|
|
|
10.08 |
%
|
2/28/2008
|
|
|
606,061 |
|
|
|
643,939 |
|
|
Convertible
notes
payable
to related
parties,
long-term
|
|
|
1,905,078 |
|
|
|
10 |
%
|
2/28/2008
|
|
|
44,120 |
|
|
|
1,860,958 |
|
|
Related
party note, long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apex
|
|
|
1,000,000 |
|
|
|
8 |
%
|
11/5/2007
|
|
|
- |
|
|
|
1,000,000 |
|
GCA-Debentures
The
Company has two 6% convertible debentures (the "GCA-Debentures") with GCA
Strategic Investment Fund Limited ("GCA"). The GCA-Debentures are
secured by the Company’s VoIP technology and certain equipment. On
October 31, 2007, the Company entered into a series of agreements, which
modified its debt structure with Global Capital Funding Group Ltd. ("Global"),
and with GCA Strategic Investment Fund Limited ("GCA"). The
agreements call for two outstanding notes of $430,000 and $552,457 due in
November of 2007, including accrued interest of $140,994 and $77,876,
respectively, to be converted into two long-term convertible debentures of
$570,944 and $630,333, respectively; both of which are due October 31,
2009. There were no other material changes to the terms of the
existing notes. In consideration for the extensions, the Company
issued 50,000 warrants each to Global and GCA to purchase common stock at $0.09
per share to Global and GCA. The fair value of the warrants was
determined to be $8,281 on the date of grant using the Black-Scholes pricing
model with the following assumptions: applicable risk-free interest rate based
on the current treasury-bill interest rate of 5.4%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock
of
1.51; and an expected life of the warrants of five years. The Company
recognized $8,281 of expense associated with these warrants in fiscal year
2007.
GC-Conote
In
November 2002, the Company executed a 12% note payable secured by certain
compression equipment (the "GC-Note") with Global Capital Funding Group, L.P.
("Global"). The Company 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 expired on November 8, 2007.
On
June
1, 2005, the Company and Global agreed to extend the maturity date of the
GC-Note to February 28, 2007. 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 and
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 per
share, 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 yield of 0%;
volatility factor 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, which it is amortizing over the life of the
GC-Conote. During fiscal year 2007 and 2006, the Company amortized
$454,545 and $454,545 of GC-Conote debt discount, respectively.
On
September 14, 2006, the Company and Global amended the GC-Conote to extend
the
maturity date of the GC-Conote to February 28, 2008, and stipulate that the
conversion price of the GC-Conote is not to be lower than $0.10 per share and
not to exceed $0.25 per share. In connection with the amendment, the
Company re-priced all warrants held by GCA to an exercise price of $0.05 and
extended the expiration date of the warrants to June 1,
2010. Incremental debt discount amounts associated with the fiscal
2006 amendments were not material.
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-Conote2)
to
Global. 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-Conote2
in accordance with EITF 98-5 and EITF 00-27 and recorded approximately $350,000
as debt discount. This debt discount is being amortized over the life
of the GC-Conote2. The approximate $50,000 difference between the
accrued interest at May 31, 2005 and the value of the GC-Conote2 represents
a
financing fee, which was recorded as debt discount and is being amortized over
the life of the GC-Conote2. During fiscal 2006 and 2005, GCA elected
to convert $165,000 of the GC-Conote2 into approximately 2,303,000 shares of
common stock and $75,000 of the GC-Conote into approximately 656,000 shares
of
common stock, respectively. During fiscal year 2007, the Company made
a $30,000 payment on the GC-Conote2, and GCA elected to convert $30,000 of
the
GC-Conote2 into approximately 622,000 shares of common stock and $50,000 of
the
GC-Conote into 500,000 shares of common stock.
Debentures
Debentures
totaling $1,000,000 with an original March 8, 2007 maturity date were extended
during the second quarter of fiscal 2007 to March 8, 2008. The
Debentures are secured by a first priority security interest in all of the
assets of the Company other than those assets not already pledged to Global
Capital as security. The term of the original 2,000,000 warrants issued
related to these Debentures was extended by one year, which had an insignificant
financial impact. In connection with the extension, 2,000,000
additional warrants were issued with an exercise price of $0.10 per share and
a
five year term, resulting in deferred financing fees of $139,000, of which
$90,000 was expensed as noncash interest expense during fiscal
2007. The fair value of the warrants was determined on the date of
grant using the Black-Scholes pricing model with the following assumptions:
applicable risk-free interest rate based on the current treasury-bill interest
rate of 4.5%; dividend yield of 0%; volatility factor of the expected market
price of the Company's common stock of 287%; and an expected life of the
warrants of four years. Remaining deferred financing fees, classified
as other current assets, will be amortized through March 8, 2008. In
connection with these Debentures, the two lenders are entitled to 30,000 and
20,000 additional warrants, respectively, with an exercise price of
$0.10. These warrants vest and are exercisable each fiscal quarter
until the Debentures are paid in full. The fair value of these additional
warrants is calculated on the date granted using the Black-Scholes pricing
model
using applicable risk-free interest rates based on current treasury-bill
interest rates; volatility factors of the expected market price of the Company's
common stock over the expected term; and an expected life of the warrants of
four years. Under the terms of this agreement, the Company has
granted 400,000 warrants valued at approximately $24,000 to the lenders as
of
October 31, 2007.
On
October 31, 2007 debentures totaling $350,000 were converted into 2,500,000
shares of common stock, reflecting a conversion price of $.14 per
share. On October 31, 2007, $50,000 of debentures including $65,889
of accrued interest was transferred by the debenture holders to John Jenkins,
the Company’s Chairman and Chief Executive Officer.
Related
Party Notes
On
May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”) for $4,809,750, including acquisition
costs of $50,000. The purchase consideration included a contingent
cash payment in the amount of $500,000 and 19,175,000 shares of the Company’s
common stock valued at $3,259,750. On October 31, 2007, the
contingent purchase price consideration was converted to a convertible demand
note payable to Apex Acquisitions,
Inc. ("Apex”) Apex in the amount of $500,000. The Company President and
Chief Financial
Officer is the majority stockholder of Apex.
On
October 31, 2007, the Company entered
into an agreement, which modified its debt structure with Apex. The
agreement calls for the outstanding note due in November of 2007 payable to
Apex
to be extended to November 1, 2009. The note was also modified to
allow for the balance to be convertible to common stock at market
pricing. The outstanding balance of the Apex Notes, including
$120,000 of accrued interest that was rolled into the note, was $1,120,000
at
October 31, 2007.
On
October 31, 2007, $50,000 of debentures including $65,889 of accrued interest
was transferred by the debenture holders to John Jenkins, the Company’s Chairman
and Chief Executive Officer. These amounts, along with a $300,000
related party demand note including accrued interest of $84,111, were rolled
into a $500,000 convertible demand note payable to Mr. Jenkins.
On
October 31, 2007, the Company entered
into an agreement, which modified its debt structure with the Company’s Chairman
and Chief Executive Officer, John Jenkins. The agreement calls for
the outstanding note due in February of 2008 payable to John Jenkins to be
extended to November 1, 2009. The outstanding balance of these
notes payable to Mr. Jenkins, including $241,000 of accrued interest that was
rolled into the note, was $1,120,000 at October 31, 2007.
During
fiscal 2007, the Company’s Chief Executive Officer elected to convert $900,000
of the 10% “related party convertible notes” due February 28, 2008 into
9,000,000 shares of common stock, reflecting a conversion price of $0.10 per
share.
During
fiscal 2007, the Company made payments totaling $80,965 on the Apex Note 2
due
July 15, 2007.
NOTE
7 - CAPITAL STOCK
During
fiscal 2007, the Company issued 1,000,000 shares of its common stock in
connection with the acquisition of Communications Advantage and Web-Breeze,
valued at $90,000.
During
fiscal 2007, the Company issued 2,500,000 shares of its common stock in
connection with the conversion of $350,000 of convertible
debentures.
During
fiscal 2007, GCA converted GCA-Conote debt of $50,000 into 500,000 shares of
common stock.
During
fiscal 2007, the Company’s Chief Executive Officer elected to convert $900,000
of the 10% “related party convertible notes” due February 28, 2008 into
9,000,000 shares of common stock, reflecting a conversion price of $0.10 per
share.
During
fiscal 2007, GCA elected to convert $30,000 of convertible debt into
approximately 622,000 shares of common stock.
During
fiscal 2007, the Company sold 357,143 shares of its common stock for $25,000
to
Westside Capital.
During
fiscal 2006, the Company issued 19,175,000 shares of its common stock in
connection with the acquisition of 100% of the outstanding stock of Telenational
Communications, Inc., valued at $3,259,750 at the date of issuance.
During
fiscal 2006, GCA converted GCA-Debenture debt and accrued interest of
approximately $31,000 into approximately 407,000 shares of common
stock.
During
fiscal 2006, Global converted GC-Conote2 debt of $165,000 into approximately
2,303,000 shares of common stock.
The
following table describes stock reserved for future issuances at October 31,
2007:
| |
|
Number
of Shares
|
|
|
Options
|
|
|
4,000,000 |
|
|
Warrants
|
|
|
11,835,000 |
|
|
Convertible
debt (1)
|
|
|
62,412,770 |
|
| |
|
|
78,247,770 |
|
(1)
Assumes conversion on October 31, 2007 under the terms of the related
agreements.
NOTE
8 - BUSINESS AND CREDIT CONCENTRATIONS
In
the
normal course of business, the Company extends unsecured credit to virtually
all
of its customers. Management has provided an allowance for doubtful
accounts, which reflects its estimate of amounts, which may become
uncollectible. In the event of complete non-performance by the
Company's customers, the maximum exposure to the Company is the outstanding
accounts receivable balance at the date of non-performance.
During
fiscal 2007, the Company did not provide wholesale services to any single
customer who accounted for more than 10% of revenues. During the same period,
three of the Company's suppliers accounted for approximately 31%, 22%, and
12%
of the Company's total costs of revenues. At
October
31, 2007, one customer accounted for 10% of the Company's trade accounts
receivable. During
fiscal 2006, the Company provided
wholesale services to a customer who accounted for 12% of revenues and another
customer who accounted for 10% of revenues. During the same period, one of
the
Company's suppliers accounted for approximately 26% of the Company's total
costs
of revenues. At October 31, 2006, one customer accounted for 13% of the
Company's trade accounts receivable.
Due
to
the highly competitive nature of the telecommunications business, the Company
believes that the loss of any carrier would not have a long-term material impact
on its business.
Information
regarding the Company's domestic and foreign revenues is as
follows:
| |
|
South
Africa
|
|
|
All
other
foreign
revenues
|
|
|
Domestic
|
|
|
Total
|
|
|
Fiscal
2007
|
|
$ |
1,334,620 |
|
|
$ |
5,028,530 |
|
|
$ |
10,962,885 |
|
|
$ |
17,326,035 |
|
|
Fiscal
2006
|
|
$ |
1,805,807 |
|
|
$ |
2,552,222 |
|
|
$ |
8,993,001 |
|
|
$ |
13,351,030 |
|
During
fiscal 2007, 8% of the Company's revenue was generated from customers in South
Africa. During fiscal 2006, 14% of the Company's revenue was
generated from customers in South Africa. No individual foreign
country held more than 10 percent of the Company’s long-lived assets as of
October 31, 2007 and 2006.
NOTE
9 – EMPLOYEE BENEFIT PLAN
The
Company’s 401(k) Plan (the “Plan”) is a defined contribution plan covering all
domestic employees of the Company. The Plan provides for voluntary
contributions by employees into the Plan subject to the limitations imposed
by
the Internal Revenue Code Section 401(k). The Company matches
participant contributions 50% on every dollar deferred to a maximum of 6% of
compensation. The Company's matching funds are subject to a six-year
vesting schedule from the date of original employment. Company
contributions charged to expense during fiscal 2007 and 2006 were $17,703 and
$19,704, respectively.
NOTE
10-
NET REDUCTIONS OF
LIABILITIES
During
fiscal 2006, the Company
determined, based on a review of applicable statute of limitations regulations
and/or current correspondence with vendors, that approximately $2,301,000 of
liabilities, including $1,435,000 in carrier costs that were previously accrued,
were no
longer due and
payable. Accordingly, this amount was recorded
as “Net reductions of
liabilities” during fiscal 2006.
NOTE
11 - GAIN ON LEGAL SETTLEMENTS
During
fiscal year 2007, the Company executed settlement agreements and recorded a
“Gain on legal settlements” of $415,000, net of attorney fees totaling
$322,000. On September 13, 2007, the Company executed a settlement
agreement with Yahoo! settling a dispute over media credits purchased in a
stock
purchase agreement dated July 7, 2001. Yahoo! paid the Company
$475,000 in one lump sum cash payment to settle all disputes and the Company
agreed to dismiss its claims against Yahoo! in connection with such
disputes. This amount was received in fiscal 2007 and recorded as a
“Gain on legal settlements”.
On
September 3, 2007, the Company executed a settlement agreement with Affluent
Media, et al settling a dispute over media credits purchased in a stock purchase
agreement dated July 7, 2001. Affluent Media, et al paid the Company
$35,000 in cash and transferred 300,000 barter credits, valued at $225,000
over
the subsequent 3-month period to settle all disputes and the Company agreed
to
dismiss its claims against Affluent Media, et al in connection with such
disputes. These cash and barter credits were received in fiscal 2007
and recorded as “Gain on legal settlements”. Fair market value of
these barter credits was based on a detailed analysis of relative prices for
general and operating goods and services used in the normal course of the
Company’s operations.
NOTE
12-
DISCONTINUED
OPERATIONS
The
Company has accrued $1,162,000
related to an assessment by the State of Texas for
sales taxes (including penalties and
interest). This amount is included in the October 31, 2007 and 2006
consolidated balance sheets as a liability from discontinued
operations. On
January 8, 2008, the Attorney General of Texas offered to settle all sales tax
claims against the Company for a sum total of $250,000, which must be paid
by
April 1, 2008 to relieve the Company from any and all sales tax liabilities
including penalties and interest. The Company is currently
considering
whether to accept the offer (See Note 15 – Commitments and Contingencies
for further discussion).
NOTE
13-
STOCK OPTIONS AND
WARRANTS
Stock
Options
2002
Equity Incentive
Plan
The
Company’s 2002 Equity Incentive Plan
(the "Equity Incentive Plan"), as amended, authorizes the Board of Directors
to
grant options to purchase up to 4,000,000 shares of the Company’s common
stock. The maximum number of shares of common stock that may be
issuable under the Equity Incentive Plan to any individual plan participant
is
1,000,000 shares. All options granted under the Equity Incentive Plan
have vesting periods up to a maximum of five years. The exercise
price of an option granted under the Equity Incentive Plan shall not be less
than 85% of the fair value of the common stock on the date such option is
granted.
1990
Stock Option
Plan
The
Company’s 1990 Stock Option Plan
(the "Option Plan"), as amended, authorized the Board of Directors to grant
options to purchase up to 2,300,000 shares of the Company’s common
stock. No options were to be granted to any individual director or
employee, which when exercised, would exceed 5% of the issued and outstanding
shares of the Company. The Board of Directors fixed the term of any
option granted under the 1990 Stock Option Plan at the time the options were
granted, provided that the exercise period was not to be longer than 10 years
from the date of grant. All options granted under the 1990 Stock
Option Plan have up to 10-year terms and have vesting periods that range from
0
to three years from the grant date. The exercise price of any options
granted under the 1990 Stock Option Plan is the fair market value at the date
of
grant. Subsequent to the adoption of the Equity Incentive
Plan, no further options will
be granted under the Option Plan.
The
Company's stock option activity for
the two years ended October 31, 2007 was as follows:
| |
|
Number
of
Shares
|
|
|
Option
Price
Per
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
outstanding at October 31,
2005
|
|
|
1,573,000 |
|
|
$ |
0.11 –
1.50 |
|
|
$ |
0.36 |
|
|
Options
granted
|
|
|
2,317,500 |
|
|
|
0.10 –
.13 |
|
|
|
.13 |
|
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Options
cancelled
|
|
|
(2,648,000 |
)
|
|
|
0.11
–
1.50 |
|
|
|
0.27 |
|
|
Options
outstanding at October 31,
2006
|
|
|
1,242,500 |
|
|
|
0.10
–
0.14 |
|
|
|
0.12 |
|
|
Options
granted
|
|
|
400,000 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
Options
exercised
|
|
|
- |
|
|
|
–
|
|
|
|
- |
|
|
Options
cancelled
|
|
|
(452,500 |
)
|
|
|
0.10
–
0.13 |
|
|
|
0.11 |
|
|
Options
outstanding at October 31,
2007
|
|
|
1,190,000 |
|
|
|
0.05
–
0.14 |
|
|
|
0.10 |
|
The
weighted average grant date fair value of options granted during fiscal 2007
was
$0.06 per share. All options granted during fiscal 2007 were to
employees. The aggregate intrinsic value of exercisable options
outstanding at October 31, 2007 was $0 based on the closing price of the
Company’s common stock of $.09 per share on October 31, 2007. The
weighted average remaining contractual term of exercisable options outstanding
at October 31, 2007 was 5.4 years, and the weighted average remaining
contractual term of exercisable and non-exercisable options outstanding at
10/31/2007 was 4.5 years. The total unrecognized cost related to
non-vested options at 10/31/2007 was $56,598, and the weighted average over
which it will be recognized is 4.2 years.
The
following table summarizes information about employee compensatory stock options
outstanding at October 31, 2007:
| |
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Range
of
Average
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
| |
$0.05
|
|
|
|
400,000 |
|
|
|
4.92
|
|
|
$ |
0.05 |
|
|
|
- |
|
|
|
- |
|
| |
$0.12
- $0.14
|
|
|
|
790,000 |
|
|
|
4.23
|
|
|
|
0.13 |
|
|
|
260,000 |
|
|
|
0.13 |
|
| |
|
|
|
|
1,190,000 |
|
|
|
4.47
|
|
|
$ |
0.10 |
|
|
|
260,000 |
|
|
$ |
0.13 |
|
Warrants
Warrant
Issuances to
Employees
Employee
warrant activity for the two
years ended October 31, 2007 was as follows:
| |
|
Number
of
Shares
|
|
|
Warrants
Price
Per
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
outstanding
at October 31,
2005
|
|
|
2,988,391 |
|
|
$ |
.16
- 1.44 |
|
|
$ |
.62 |
|
|
Warrants
granted
|
|
|
1,000,000 |
|
|
|
.13 |
|
|
|
.13 |
|
|
Warrants
exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Warrants
cancelled
|
|
|
(1,945,958 |
)
|
|
|
.78 |
|
|
|
.78 |
|
|
Warrants
outstanding
at October 31,
2006
|
|
|
2,042,433 |
|
|
$ |
.13
- .78 |
|
|
$ |
.62 |
|
|
Warrants
granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Warrants
exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Warrants
cancelled
|
|
|
(402,433 |
)
|
|
|
.75 |
|
|
|
.75 |
|
|
Warrants
outstanding
at October 31,
2007
|
|
|
1,640,000 |
|
|
$ |
.13
- .16 |
|
|
$ |
.14 |
|
Warrants
issued to employees that were
exercisable at October 31, 2007 and 2006 totaled 1,640,000 and 2,042,433,
respectively. The weighted average
remaining contractual term of employee warrants outstanding at October 31,
2007
was 3.5 years.
Warrant
Issuances to
Non-Employees
Non-employee
warrant activity for the
two years ended October 31, 2007 was as follows:
| |
|
Number
of
Shares
|
|
|
Warrants
Price
Per
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
outstanding at October
31, 2005
|
|
|
3,260,000 |
|
|
$ |
0.11
- 3.50 |
|
|
$ |
0.77 |
|
|
Warrants
granted
|
|
|
2,000,000 |
|
|
|
0.14
–
0.25 |
|
|
|
0.20 |
|
|
Warrants
exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Warrants
cancelled
|
|
|
(425,000 |
)
|
|
|
0.89
- 3.50 |
|
|
|
2.73 |
|
|
Warrants
outstanding at October
31, 2006
|
|
|
4,835,000 |
|
|
$ |
0.11
- 2.00 |
|
|
$ |
0.36 |
|
|
Warrants
granted
|
|
|
7,100,000 |
|
|
|
.09
- .10 |
|
|
|
0.10 |
|
|
Warrants
exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Warrants
cancelled
|
|
|
(100,000 |
)
|
|
|
0.40
–
2.00 |
|
|
|
1.20 |
|
|
Warrants
outstanding at October
31, 2007
|
|
|
11,835,000 |
|
|
$ |
0.10
- 0.78 |
|
|
$ |
0.20 |
|
The
majority of the warrants issued to
non-employees during fiscal 2007 and 2006 were issued in connection with debt
financing. Non-employee warrants that were exercisable at October 31,
2007 and 2006 totaled 11,835,000 and 4,835,000,
respectively. The weighted average remaining contractual term
of non-employee warrants outstanding at October 31, 2007 was 2.2
years.
On
June 15, 2007, the Company entered
into a series of agreements with Westside Capital, LLC whereby the Company
sold
357,143 shares of the Company's common stock to Westside Capital for a purchase
price of $25,000 and issued to Westside Capital Common Stock Purchase Warrants
(the "Warrants") to purchase up to an additional 50,000,000 shares of the
Registrant's common stock ("Warrant Shares") at exercise prices as follows:
20,000,000 Warrant Shares exercisable at $0.10 per share (Warrant "A");
15,000,000 Warrant Shares exercisable at $0.20 per share (Warrant "B"); and
15,000,000 Warrant Shares exercisable at $0.30 per share (Warrant "C"). The
Warrants vest in 4,000,000 share increments at such time as the previous
increment has been fully exercised. Should the Company not receive
cumulative gross proceeds of at least three million dollars ($3,000,000) in
the
form of equity, debt, any other injection of capital into the Company, or any
combination thereof from Westside Capital or from sources introduced by Westside
Capital by February 24, 2008, then all outstanding Warrants shall
expire. On June 15, 2007, 4,000,000 warrants vested resulting in the
recognition of approximately $71,000 of expense included in "other" on the
accompanying statement of operations for fiscal year 2007. The fair
value of the warrants was determined on the date of grant using the
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate of 5.38%;
volatility factor of the expected market price of the Company's common stock
of
1.38; and an expected life of the warrants of eight months.
NOTE
14-
INCOME TAXES
Deferred
income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets
and
liabilities for financial reporting purposes and the amounts reported for income
tax purposes. Significant components of the Company's deferred tax assets and
liabilities at October 31, 2007 and 2006 are as follows:
| |
|
2007
|
|
|
2006
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
Net
operating loss carryovers
|
|
$ |
16,292,411 |
|
|
$ |
15,856,634 |
|
|
Accounts
receivable
|
|
|
18,219 |
|
|
|
20,286 |
|
|
Advertising
credits
|
|
|
- |
|
|
|
977,185 |
|
|
Property
and equipment
|
|
|
30,586 |
|
|
|
194,903 |
|
|
Warrants
|
|
|
54,296 |
|
|
|
54,296 |
|
|
Accrued
liabilities
|
|
|
25,552 |
|
|
|
28,185 |
|
|
Total
gross deferred tax assets
|
|
|
16,421,064 |
|
|
|
17,130,489 |
|
| |
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(14,632 |
) |
|
|
(223,878 |
) |
|
Total
gross deferred tax liabilities
|
|
|
(14,632 |
) |
|
|
(223,878 |
) |
| |
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
16,406,432 |
|
|
|
16,906,611 |
|
|
Valuation
allowance
|
|
|
(16,406,432 |
) |
|
|
(16,906,611 |
) |
|
Net
deferred assets
|
|
$ |
- |
|
|
$ |
- |
|
The
following is a reconciliation of the Company’s income tax expense (benefit) at
the statutory rate to the income tax expense (benefit) at the effective tax
rate:
| |
|
2007
|
|
|
2006
|
|
|
Income
tax benefit at statutory rate
|
|
$ |
(679,791 |
) |
|
$ |
(377,794 |
) |
|
Permanent
differences
|
|
|
370,891 |
|
|
|
495,457 |
|
|
Net
operating loss expiration
|
|
|
751,994 |
|
|
|
10,038 |
|
|
Change
in valuation allowance
|
|
|
(500,179 |
) |
|
|
(129,677 |
) |
|
Other
|
|
|
57,085 |
|
|
|
1,976 |
|
| |
|
$ |
- |
|
|
$ |
- |
|
At
October 31, 2007, the Company has U.S. net operating loss carryforwards for
federal income tax purposes of approximately $45 million, which expire in 2008
through 2027. Utilization of U.S. net operating losses is subject to
annual limitations provided for by the Internal Revenue Code. The annual
limitation may also result in the expiration of net operating losses before
utilization.
Realization
of tax benefits depends on having sufficient taxable income within the carryback
and carryforward periods. The Company continually reviews the adequacy of the
valuation allowance and recognizes these benefits as reassessment indicates
that
it is more likely than not that the benefits will be realized. Based on pretax
losses incurred in prior years, management has established a valuation allowance
against the entire net deferred asset balance.
NOTE
15-
COMMITMENTS AND
CONTINGENCIES
Operating
Leases, including Related
Party Lease
The
Company leases its corporate office
and branch office facilities under various noncancelable operating leases with
terms expiring at various dates through 2011. The operational and
administrative headquarters facility is leased through June 2011 from
Apex Communications,
Inc., an entity owned by
executive officers of the Company. Rent
expense for operating leases was
$196,940 and $343,000 during fiscal 2007 and 2006, respectively. Rent
expense to Apex was $134,860 and $45,000 during fiscal 2007 and
2006, respectively. The Company has no capital
lease obligations as of October 31, 2007.
Future
minimum lease payments under noncancelable operating leases as of October 31,
2007 are as follows:
|
Year
Ending October 31,
|
|
|
|
|
2008
|
|
$ |
134,860 |
|
|
2009
|
|
|
134,860 |
|
|
2010
|
|
|
134,860 |
|
|
2011
|
|
|
89,907 |
|
|
Total
minimum lease payments
|
|
$ |
494,487 |
|
Future
minimum lease payments
relate to
the Apex operating
lease.
Legal
Proceedings
The
Company, from time to time, may be
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of trademarks and other intellectual
property of third parties by the Company. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
Cygnus
Telecommunications Technology, LLC. On June 12, 2001, Cygnus
Telecommunications Technology, LLC ("Cygnus"), filed a patent infringement
suit
(case no. 01-6052) in the United States District Court, Central District of
California, with respect to the Company's "international re-origination"
technology. On March 29, 2007 the United States District Court in San Jose,
California ruled that all Cygnus “international re-origination” patents are
invalid, and dismissed all cases against Rapid Link (fka Dial Thru International
Corporation) and related parties. Cygnus is appealing to a higher
court.
State
of Texas. During
fiscal 2004, the
Company determined, based on final written communications with the State of
Texas(the
“State”),
that it 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 2003. During fiscal 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 for state and local sales tax. During fiscal 2005, the Company
accrued an additional $62,000. 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. On
January 8, 2008, the Attorney General
of Texas offered to settle all sales tax claims against the Company for a sum
total of $250,000, which must be paid by April 1, 2008 to relieve the Company
from any and all sales tax liabilities including penalties and
interest. The
Company is currently considering whether to accept the
offer.
The
Company will continue to
aggressively pursue the collection of unpaid sales taxes from former customers
of Canmax Retail Systems, primarily Southland Corporation, now 7-Eleven
Corporation ("7-Eleven"), as a majority of the amount owed to the State of
Texas is
the result of uncollected taxes from
the sale of software to 7-Eleven during the period under
audit. However, there can be no assurance that the Company will be
successful with respect to such collections.
On
January 12, 2004, the Company filed a
suit against 7-Eleven in the 162nd District Court in Dallas,
Texas. The
Company's suit claims a
breach of contract on the part of 7-Eleven in failing to reimburse it for taxes
paid to the State as well as related taxes for which the Company is currently
being held responsible by the State. The Company's suit seeks
reimbursement for the taxes paid and a determination by the court that 7-Eleven
is responsible for paying the remaining tax liability to the
State.
NOTE
16 – SUBSEQUENT
EVENTS
On
January 8, 2008, the Attorney General
of Texas offered to settle all sales tax claims, as discussed in NOTE 15,
against the Company for a sum total of $250,000, which must be paid by April
1,
2008 to relieve the Company from any and all sales tax liabilities including
penalties and interest.
EXHIBIT
INDEX
|
NO.
|
|
DESCRIPTION
OF EXHIBIT
|
| |
|
|
|
|
|
Subsidiaries
of the Registrant
(filed herewith)
|
| |
|
|
|
|
|
Consent
of Independent Registered
Public Accounting Firm (filed herewith)
|
| |
|
|
|
|
|
Certification
of Chief Executive
Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934 (filed herewith)
|
| |
|
|
|
|
|
Certification
of Chief Financial
Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934 (filed herewith)
|
| |
|
|
|
|
|
Certification
of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350 (furnished
herewith)
|
| |
|
|
|
|
|
Certification
of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 (furnished
herewith)
|
45