United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended July 31, 2004
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to _____
Commission File Number 0-22636
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DIAL THRU INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-2461665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17383 Sunset Boulevard, Suite 350
Los Angeles, California 90272
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(Address of principal executive offices) (Zip Code)
(310) 566-1700
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of September 10, 2004, 16,272,129 shares of common stock, $.001 par value
per share, were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ July 31, October 31,
2004 2003
---------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 502,751 $ 505,256
Trade accounts receivable, net of allowance for
doubtful accounts of $188,745 at July 31, 2004
and $295,094 at October 31, 2003 1,010,699 872,610
Prepaid expenses and other current assets 238,149 230,997
---------- ----------
Total current assets 1,751,599 1,608,863
---------- ----------
PROPERTY AND EQUIPMENT, net 1,013,067 1,340,986
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 74,246 91,434
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS - 242,334
---------- ----------
TOTAL ASSETS $ 4,635,829 $ 5,080,534
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Current portion of capital leases $ 126,196 $ 146,140
Trade accounts payable 2,973,680 2,814,472
Accrued liabilities 1,550,227 1,377,307
Accrued interest (including $710,979 to related
parties at July 31, 2004 and $539,125 at
October 31, 2003) 1,052,468 721,632
Deferred revenue 405,691 356,999
Deposits and other payables 428,178 430,678
Convertible debentures, net of unamortized debt
discount of $37,309 at July 31, 2004 1,002,691 -
Note payable, net of unamortized debt discount
of $5,710 at July 31, 2004 and $2,847 at
October 31, 2003 1,244,290 547,153
Notes payable to related parties 2,348,401 2,348,401
Net current liabilities of discontinued operations 1,100,000 2,843,481
---------- ----------
Total current liabilities 12,231,822 11,586,263
---------- ----------
NOTE PAYABLE, net of unamortized debt discount
of $22,838 at October 31, 2003 - 1,227,162
CONVERTIBLE DEBENTURES, net of unamortized debt
discount of $10,756 at October 31, 2003 - 489,244
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, $.001 par value; 44,169,100
shares authorized; 16,284,151 shares issued
at July 31, 2004 and 16,201,803 shares issued
at October 31, 2003 16,284 16,202
Additional paid-in capital 39,184,969 39,070,237
Accumulated deficit (46,742,376) (47,253,704)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
---------- ----------
Total shareholders' deficit (7,595,993) (8,222,135)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,635,829 $ 5,080,534
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
REVENUES $ 2,940,023 $ 4,348,552 $10,627,607 $13,254,612
COSTS AND EXPENSES
Costs of revenues 2,223,331 3,115,464 8,144,577 9,643,748
Sales and marketing 112,969 183,845 327,300 541,874
General and administrative 781,958 860,591 2,458,395 2,888,585
Depreciation and amortization 153,994 355,284 462,034 1,168,812
Gain on settlement of liabilities - - (225,000) -
---------- ---------- ---------- ----------
Total costs and expenses 3,272,252 4,515,184 11,167,306 14,243,019
---------- ---------- ---------- ----------
Operating loss (332,229) (166,632) (539,699) (988,407)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (99,474) (61,859) (287,293) (374,344)
Related party interest expense and
financing costs (54,434) (164,533) (171,854) (493,598)
Foreign currency exchange
gains (losses) (2,136) (4,831) 9,025 4,664
---------- ---------- ---------- ----------
Total other income (expense), net (156,044) (231,223) (450,122) (863,278)
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (488,273) (397,855) (989,821) (1,851,685)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, net of income taxes of
$0 for all periods - (949,482) 1,501,147 (1,869,558)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (488,273) $(1,347,337) $ 511,326 $(3,721,243)
========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income
(loss) per share
Continuing operations $ (0.03) $ (0.02) $ (0.06) $ (0.11)
Discontinued operations 0.00 (0.06) 0.09 (0.12)
---------- ---------- ---------- ----------
$ (0.03) $ (0.08) $ 0.03 $ (0.23)
========== ========== ========== ==========
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic common shares 16,244,381 16,138,033 16,208,114 15,940,612
========== ========== ========== ==========
Diluted common shares 16,244,381 16,138,033 16,317,232 15,940,612
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
July 31,
------------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
OF CONTINUING OPERATIONS
Net loss from continuing operations $ (989,821) $(1,851,685)
Adjustments to reconcile net loss from
continuing operations to net cash provided
by (used in) operating activities:
Bad debt expense 20,000 28,268
Non-cash interest expense (including related
party interest of $0 and $317,468) 124,685 543,212
Gain on settlement of liabilities (225,000) -
Depreciation and amortization 462,034 1,168,812
Effects of changes in foreign exchange rates - 9,131
(Increase) decrease in:
Trade accounts receivable (158,089) 2,835
Prepaid expenses and other current assets (7,152) (46,727)
Other assets (9,989) (45,968)
Increase (decrease) in:
Trade accounts payable 173,662 (419,019)
Accrued liabilities 729,485 312,821
Deferred revenue 48,692 36,645
Deposits and other payables (2,500) (5,634)
---------- ----------
Net cash provided by (used in) operating
activities of continuing operations 166,007 (267,309)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
OF CONTINUING OPERATIONS
Purchase of property and equipment (134,115) (135,883)
---------- ----------
Net cash used in investing activities
of continuing operations (134,115) (135,883)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
OF CONTINUING OPERATIONS
Proceeds from notes payable - 1,800,000
Payments on capital leases (34,397) (111,994)
Deferred financing fees - (82,441)
Payments on convertible debentures - (443,000)
---------- ----------
Net cash provided by (used in) financing
activities of continuing operations (34,397) 1,162,565
---------- ----------
NET CASH USED IN DISCONTINUED OPERATIONS - (53,363)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,505) 706,010
Cash and cash equivalents at beginning of period 505,256 269,313
---------- ----------
Cash and cash equivalents at end of period $ 502,751 $ 975,323
========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Conversion of convertible debenture and accrued
interest to common stock $ 10,729 $ 109,197
Fair value of warrants issued with debt - 70,002
Beneficial conversion feature of convertible
debentures recorded as debt discount 104,085 -
Note payable exchanged for convertible debenture 550,000 -
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements of Dial Thru International Corporation
and its subsidiaries, "DTI" or "the Company", included in this Form 10-Q
are unaudited and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
of the financial position and operating results for the three and nine month
periods ended July 31, 2004 and 2003 have been included. Operating results
for the three and nine month periods ended July 31, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended October 31, 2003.
The Company is a full service, facility-based provider of communication
products to small and medium size businesses, both domestically and
internationally. The Company provides a variety of international and
domestic communication services including international dial thru, Internet
voice and facsimile services, e-commerce solutions and other value-added
communication services, using its Voice over Internet Protocol ("VoIP")
Network to effectively deliver these services to the end user.
In addition to helping customers achieve significant savings on long-
distance voice and facsimile calls by routing calls over the Internet, the
Company also offers new opportunities for existing Internet Service
Providers who want to expand into voice services, private corporate networks
seeking to lower long-distance costs, and Web-enabled corporate call centers
engaged in electronic commerce.
The Company has recently introduced Internet phones to the end user,
business or consumer. These phones allow the user to make calls from phone
to phone absolutely free and enjoy huge savings using these phones at their
home or office and traveling domestically or abroad as their phone and
number follow them everywhere. Not only does the customer enjoy huge
savings in local, long distance and international calling, they can save by
not having to pay for taxes and regulatory fees customary with normal phone
lines. In addition, bulk minute buying, such as unlimited calling to the US
from abroad for a single user has set a new standard for international
calling.
Estimates and Assumptions
-------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - GOING CONCERN
The Company has an accumulated deficit of approximately $46.7 million as
well as a working capital deficit of approximately $10.5 million as of July
31, 2004. Funding of the Company's working capital deficit, current and
future operating losses, and expansion will require continuing capital
investment. The Company expects to fund these cash requirements through
debt facilities, additional equity financing and potentially through cash
generated by operations. The Company currently has no commitments for
additional funding or credit facilities.
Although the Company has been able to arrange debt facilities and equity
financing to date, there can be no assurance that sufficient debt or equity
financing will continue to be available in the future or that it will be
available on terms acceptable to the Company. Failure to obtain sufficient
capital could materially affect the Company's operations and expansion
strategies. The Company will continue to explore external financing
opportunities and renegotiation of its short-term debt with its current
financing partners in order to extend the terms or retire these obligations.
At July 31, 2004, approximately 51% of the short-term debt is due to the
senior management of the Company. Management is committed to the growth and
success of the Company as is evidenced by the level of financing it has made
available to the Company.
The Company has been advised by two of its creditors that they may seek to
collect the full $2.3 million principal balance of the Company's note and
debentures that they hold on the November 2004 maturity dates of these
securities. The Company's management continues to seek additional financing
and will continue to renegotiate its debt with these creditors. It is
uncertain as to whether the Company's management will be able to obtain
additional financing or renegotiate its debt with these creditors.
As a result of the aforementioned factors and related uncertainties,
there is substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include
any adjustments to reflect the possible effects of recoverability and
classification of assets or classification of liabilities which may result
from the inability of the Company to continue as a going concern.
NOTE 3 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company provided wholesale services to a single customer who accounted
for 18% and 20% of the overall revenue of the Company for the three and nine
months ended July 31, 2004, respectively, and 24% of the Company's trade
accounts receivable at July 31, 2004. The Company also provided wholesale
services to another customer who accounted for 13% of the overall revenue of
the Company for the nine months ended July 31, 2004.
NOTE 4 - STOCK-BASED COMPENSATION
In accordance with 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"), the Company accounts
for its stock-based employee compensation plans using the intrinsic valued
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations. As
such, compensation expense is recorded on the date of grant to the extent
the current market price of the underlying stock exceeds the option exercise
price. The Company did not record any stock-based compensation expense
during the three and nine months ended July 31, 2004 and 2003.
Had the Company determined compensation based on the fair value at the grant
date for its stock options in accordance with SFAS 123, as amended by SFAS
148, net income (loss) and net income (loss) per share would have been as
follows:
Three Months Nine Months
Ended July 31, Ended July 31,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net loss from continuing
operations, as reported $ (488,273) $ (397,855) $ (989,821) $(1,851,685)
Deduct: Stock based
employee compensation
expense determined
under fair value
based method (35,352) (45,364) (108,463) (153,424)
---------- ---------- ---------- ----------
Pro forma net loss from
continuing operations $ (523,625) $ (443,219) $(1,098,284) $(2,005,109)
========== ========== ========== ==========
Net loss per share from
continuing operations
As reported
Basic and diluted $ (0.03) $ (0.02) $ (0.06) $ (0.11)
========== ========== ========== ==========
Proforma
Basic and diluted $ (0.03) $ (0.03) $ (0.07) $ (0.13)
========== ========== ========== ==========
The fair values under SFAS 123 for options granted were estimated at the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
2004 2003
------ ------
Expected life (years) 2 3
Interest rate 3% 4%
Volatility 100% 133%
Dividend yield 0% 0%
NOTE 5 - DISCONTINUED OPERATIONS
Rapid Link Telecommunications GMBH
----------------------------------
In the fourth quarter of fiscal year 2003, the Company's German Subsidiary,
Rapid Link Telecommunications GMBH ("Rapid Link Germany"), filed for
insolvency. The net liability of approximately $2.3 million was included in
the balance sheet and classified as Discontinued Operations at October 31,
2003. During the first quarter of fiscal year 2004, the Company determined
that it no longer controlled the operations of this subsidiary and that the
parent entity had no legal obligation to pay the liabilities of Rapid Link
Germany. Accordingly, the Company wrote off the remaining net liability of
$2,251,000 and included the gain in Discontinued Operations during the first
quarter of fiscal year 2004.
The following table presents selected unaudited financial information for
Rapid Link Germany for the three and nine months ended July 31, 2003:
Three Months Ended Nine Months Ended
July 31, 2003 July 31, 2003
------------- -------------
Revenue $ 884,057 $ 3,404,169
Net Loss $ (949,482) $ (1,519,558)
Canmax Retail Systems
---------------------
During the first quarter of fiscal year 2004, the Company determined based
on final written communications with the State of Texas that the Company has
a liability for sales taxes (including penalties and interest) totaling $1.1
million. The Company had previously accrued an estimated settlement amount
of $350,000. During the first quarter of fiscal year 2004, the Company
accrued an additional $750,000. The sales tax amount due is attributable to
audit findings associated with the Company's former parent, Canmax Retail
Systems, from the State of Texas for the years 1995 to 1999. These
operations were previously classified as discontinued after the Company
changed its business model from a focus on domestic prepaid phone cards to
international wholesale and retail business, operating as a facilities-based
global Internet protocol communications company providing connectivity to
international markets. The State of Texas determined that the Company did
not properly remit sales tax on certain transactions. The Company's current
and former managements believe that the amount due has not been properly
assessed and will continue to pursue a lesser settlement amount. Since this
sales tax liability represents an adjustment to amounts previously reported
in Discontinued Operations, the amount was classified as Discontinued
Operations. The amount that the State of Texas assessed of $1.1 million has
been accrued as a liability and is included in the Balance Sheet as
Discontinued Operations. (See Note 7.)
NOTE 6 - CONVERTIBLE DEBENTURE
In July 2003, the Company executed a 10% note payable (the "GCA-Note") with
GCA Strategic Investment Fund Limited, which provided financing of $550,000.
The GCA-Note provided for a maturity date of December 23, 2003 and is
unsecured. In the event the GCA-Note was not repaid in full within 10 days
of the maturity date, the GCA-Note shall be replaced by a 6% convertible
debenture. This convertible debenture would have a maturity date of
November 8, 2004 and be secured by certain property and equipment held for
resale. The conversion price would be equal to the lesser of (i) 100% of
the volume weighted average of sales price as reported by the Bloomberg L.P.
of the common stock on the last trading day immediately preceding the
Closing Date, which was $0.20, and (ii) 85% of the average of the three
lowest volume weighted average sales prices as reported by Bloomberg L.P.
during the twenty Trading Days immediately preceding but not including the
date of the related Notice of Conversion (the "Formula Conversion Price").
In an event of default, the amount declared due and payable on the Debenture
would be at the Formula Conversion Price. In the event the GCA-Note
was replaced by a convertible debenture, the GCA-Note would have a
beneficial conversion feature. In accordance with EITF 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("EITF-98-5") and EITF 00-27 "Application of
Issue No. 98-5 to Certain Convertible Instruments" ("EITF 00-27"), the
intrinsic value of the beneficial conversion feature was calculated as
approximately $104,000 at the commitment date using the stock price as of
that date, and would be recorded if the note was not repaid as noted above.
The GCA-Note matured during December 2003 and, accordingly, since the GCA-
Note remained unpaid as of January 2004, the Company exchanged the note for
a convertible debenture. Upon the replacement of the GCA-Note with a
convertible debenture, the Company recorded the debt discount of $104,000
and is amortizing this discount over the life of the new convertible
debenture. During the three and nine months ended July 31, 2004, the
Company recorded approximately $30,000 and $71,000, respectively, as
interest expense relating to the amortization of the debt discount. In
connection with the GCA-Note, the Company paid $35,000 as financing fees,
which were capitalized and amortized over the original life of the GCA-Note.
For the nine months ended July 31, 2004, the Company recorded approximately
$13,000 as interest expense relating to these deferred financing fees. The
Company also issued to the holder of the GCA-Note warrants to acquire an
aggregate of 100,000 shares of common stock at an exercise price of $0.14
per share, which expire on July 24, 2008. The Company recorded a debt
discount of approximately $7,000, the fair value of the warrants, relating
to the issuance of the warrants. For the nine months ended July 31, 2004,
the Company recorded approximately $3,000 as interest expense relating to
the warrants.
During the three months ended July 31, 2004, a holder of one of our
convertible debentures converted $10,000 of debt and $730 of accrued
interest into approximately 82,000 shares of the Company's common stock.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
On June 12, 2001, Cygnus Telecommunications Technology, LLC ("Cygnus"),
filed a patent infringement suit (case no. 01-6052) in the United States
District court, Central District of California, with respect to the
Company's "international reorigination" technology. The injunctive relief
that Cygnus sought in this suit has been denied, but Cygnus continues to
seek a license fee for the use of the technology. The Company believes that
no license fee is required as the technology described in the patent is
different from the technology used by the Company.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent the Company from providing "reorigination" services. The Company
filed a cross motion for summary judgment of non-infringement. Both motions
were denied. On August 22, 2003, the Company re-filed the motion for
summary judgment for non-infringement. In response to this filing, during
August 2004, the court narrowly defined the issue to relate to a certain
reorigination technology which the Company believes it does not now, nor has
it ever utilized to provide any of its telecommunications services. The
Company intends to continue defending this case vigorously, and though its
ultimate legal and financial liability with respect to such legal proceeding
is therefore expected to be minimal, it cannot be estimated with any
certainty at this time.
The State of Texas ("State") performed a sales tax audit of the Company's
former parent, Canmax Retail Systems ("Canmax"), for the years 1995 to 1999.
The State determined that the Company did not properly remit sales tax on
certain transactions, including asset purchases and software development
projects that Canmax performed for specific customers. The Company's
current and former managements filed exceptions, through its outside sales
tax consultant, to the State's audit findings, including the non-taxable
nature of certain transactions and the failure of the State to credit
the Company's account for sales tax remittances. In correspondence from
the State in June 2003, the State agreed to consider certain offsetting
remittances received by Canmax during the audit period. The State has
refused to consider other potential offsets. Based on this correspondence
with the State, Management's estimate of the potential liability was
originally recorded at $350,000 during the fiscal year ended October 31,
2003. Based on further correspondence with the State, this estimated
liability was increased to $1.1 million during the first quarter of fiscal
year 2004. Since this sales tax liability represents an adjustment to
amounts previously reported in discontinued operations, it was classified
separately during the first quarter of fiscal year 2004 in discontinued
operations, and is included in the July 31, 2004 consolidated balance sheet
in "Net current liabilities from discontinued operations". Management
believes that Canmax properly remitted an appropriate amount of sales tax to
Texas, and Management does not believe the State's position reflects the
appropriate amount of tax remitted during the audit period mentioned above
and will continue to pursue this issue with the State. The Company is also
aggressively pursuing the collection of unpaid sales taxes from former
customers of Canmax, though there can be no assurance that the Company will
be successful with respect to such collections.
On January 12, 2004, the Company filed a suit against Southland Corporation
("Southland") in the 162nd District Court in Dallas, Texas. The Company's
suit claims a breach of contract on the part of Southland in failing to
reimburse it for taxes paid to the State as well as related taxes for which
the Company is currently being held responsible by the State. The Company's
suit seeks reimbursement for the taxes paid and a determination by the court
that Southland is responsible for paying the remaining tax liability to the
State.
On July 20, 2004, the Company filed a suit against Q Comm International,
Inc. ("Q Comm") in Federal Court in the Central District of Utah. The
Company's suit claims damages of $4 million plus attorney's fees and costs
resulting from the breach of a purchase agreement on the part of Q Comm
relating to the sale of the Company's internally constructed equipment for
the prepaid telecommunications industry.
NOTE 8 - GAIN ON SETTLEMENT OF LIABILITIES
In connection with the acquisition of the assets and certain of the
liabilities of Rapid Link, Incorporated ("Rapid Link") during the fourth
quarter of the fiscal year ended October 31, 2001, the Company recorded
certain liabilities, relating in part to cash receipts from former Rapid
Link customers near the acquisition date, of $255,000, and continued to hold
those liabilities pending a final settlement with the Rapid Link trustee.
During the second quarter of fiscal year 2004, the Company agreed to pay
$30,000 in full and final settlement to the trustee and has recorded the
remaining $225,000 as Gain on Settlement of Liabilities during the second
quarter of fiscal year 2004.
NOTE 9 - RECLASSIFICATIONS
Certain reclassifications were made to the 2003 consolidated financial
statements to conform to current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations covers the three- and nine-month periods ended July 31, 2004 and
2003 and should be read in conjunction with our financial statements and the
notes thereto.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These statements relate to
expectations concerning matters that are not historical facts. Words such
as "projects", "believe", "anticipates", "estimate", "plans", "expect",
"intends", and similar words and expressions are intended to identify
forward-looking statements. Although we believe that such forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to be correct. Factors that could cause actual results to differ
materially from such expectations are disclosed in our annual report on Form
10-K for the year ended October 31, 2003 and throughout this report on Form
10-Q. All of our forward-looking statements are expressly qualified in
their entirety by such language and we do not undertake any obligation to
update any forward-looking statements.
General
On November 2, 1999, we acquired (the "DTI Acquisition") substantially all
of the business and assets of Dial Thru International Corporation, a
California corporation, and, on January 19, 2000, we changed our name from
ARDIS Telecom & Technologies, Inc. to "Dial Thru International Corporation."
Our common stock currently trades on the OTC Bulletin Board under the symbol
"DTIX." In the second quarter of fiscal 2000, we shifted focus toward our
global Voice over Internet Protocol, or VoIP, strategy. This strategy
allows us to form local partnerships with foreign postal, telephone
and telegraph companies (entities that are responsible for providing
telecommunications services in foreign markets and which are usually
government owned or controlled) and to provide IP enabled services based on
the in-country regulatory environment affecting telecommunications and data
providers.
During the fourth quarter of fiscal 2001, we acquired the assets and certain
of the liabilities of Rapid Link, Incorporated, ("Rapid Link") a provider of
integrated data and voice communications services to both wholesale and
retail customers around the world. Rapid Link's global VoIP network
reaches thousands of retail customers, primarily in Europe and Asia. This
acquisition has significantly enhanced our product lines, particularly our
dial thru and re-origination services, global roaming products, and
wholesale termination. Furthermore, the acquisition has allowed us to roll
out services to additional international markets and more rapidly expand our
VoIP strategy due to the engineering and operational expertise acquired in
the transaction.
On November 19, 2002 we entered into an agreement with Global Capital
Funding Group, L.P. that provided us with a two-year loan of $1.25 million.
A portion of the proceeds from this financing were used to pay off the
remaining balance of Dial Thru's April 2001 convertible debenture with
Global Capital while the remaining $807,000 has been used for our ongoing
working capital needs.
On January 27, 2003, we amended our 6% convertible debenture with GCA
Strategic Investment Fund Limited to change the debenture's maturity date
from January 28, 2003 to November 8, 2004. In addition, we adjusted the
exercise price of the existing warrants to purchase 50,000 shares of common
stock to $0.41 and issued warrants to purchase 100,000 shares of common
stock at an exercise price of $0.21 which expire on February 8, 2008.
On January 27, 2003, we amended our 10% convertible notes with three of our
executives to change the notes' maturity dates from October 24, 2003 to
February 24, 2004. As these amended Notes have subsequently matured, these
Notes are currently due on demand and continue to accrue interest at the
stated rate.
On July 24, 2003 we entered into an agreement with GCA Strategic Investment
Fund Limited that provided us with a loan of $550,000, which has been and
will be used for the Company's ongoing working capital needs. During
January 2004, as per the terms of the agreement, this loan became a
convertible debenture with a maturity date of November 8, 2004.
On August 1, 2003, our German Subsidiary, Rapid Link Telecommunications
GMBH, received approval for it's insolvency filing and has been turned over
to a trustee who is responsible for liquidating the operation. During the
first quarter of fiscal year 2004, we determined that we no longer
controlled the operations of this subsidiary and that the parent entity had
no legal obligation to pay the liabilities of Rapid Link Telecommunications
GMBH. Accordingly, we wrote off the remaining net liability of $2,251,000
and included the gain in Discontinued Operations during the first quarter of
fiscal year 2004.
Critical Accounting Policies
The consolidated financial statements include our accounts and those of our
majority-owned subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these consolidated
financial statements, we have made certain estimates and judgments of
amounts included in the consolidated financial statements, giving due
consideration to materiality. The application of these accounting policies
involves the exercise of judgment and use of available information,
historical results and other assumptions. As a result, actual results could
differ from these estimates.
Revenue Recognition
Our revenues are recognized at the time a customer uses our network to make
a phone call. We sell our services to small and medium-sized enterprises
("SMEs") and end-users who utilize our network for international re-
origination and dial thru services, and to other wholesale providers of long
distance usage who utilize our network to deliver domestic and international
termination of minutes to their own customers. At times, we receive payment
from our customers in advance of their usage, which we record as deferred
revenue, recognizing revenue as calls are made. The Securities and Exchange
Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition",
provides guidance on the application of generally accepted accounting
principles to selected revenue recognition issues. We have concluded that
our revenue recognition policy is appropriate and in accordance with
generally accepted accounting principles and SAB No. 104.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. All of our receivables are due from commercial
enterprises and residential users in both domestic and international
markets. The estimated allowance for uncollectible amounts is based
primarily on our evaluation of the financial condition of the customer, and
our estimation of the customer's willingness to pay amounts due. We review
our credit policies on a regular basis and analyze the risk of each
prospective customer individually in order to minimize our risk.
Goodwill and Other Long-Lived Assets
Property, plant and equipment and other long-lived assets are amortized over
their useful lives. Useful lives are based on our estimate of the period
that the assets will generate revenue. Goodwill is assessed for impairment
at least annually.
Financing, Warrants and Amortization of Warrants and Fair Value Determination
We have traditionally financed our operations through the issuance of debt
instruments that are convertible into our common stock, at conversion rates
at or below the fair market value of our common stock at the time of
conversion, and typically include the issuance of warrants. We have
recorded these financing transactions in accordance with Emerging Issues
Task Force Nos. 98-5 and 00-27. Accordingly, we recognize the beneficial
conversion feature imbedded in the financings and the fair value of the
related warrants on the balance sheet as debt discount. The debt discount
is amortized over the life of the respective debt instrument.
Carrier Disputes
We review our vendor bills on a monthly basis and periodically dispute
amounts invoiced by our carriers. We record cost of revenues excluding
these disputed amounts. We review our outstanding disputes on a quarterly
basis as part of the overall review of our accrued carrier costs, and adjust
our liability based on management's estimate of amounts owed.
Components of Statements of Operations
Revenues
Our primary source of revenue is the sale of voice and facsimile traffic
internationally over our VoIP network, which is measured in minutes,
primarily to SMEs, residential users, and wholesale customers. We charge
our customers a fee per minute of usage that is dependent on the destination
of the call and is recognized in the period in which the call is completed.
Costs of Revenues
Our costs of revenues are termination fees, purchased minutes and fixed
costs for specific international and domestic Internet circuits and private
lines used to transport our minutes. Termination fees are paid to local
service providers and other international and domestic carriers to terminate
calls received from our network. This traffic is measured in minutes, at a
negotiated contract cost per minute. Our fixed costs of revenues are
insignificant, consisting primarily of low cost Internet access.
General and Administrative Expenses
General and administrative expenses include salaries, payroll taxes, benefit
expenses and related costs for general corporate functions, including
executive management, finance and administration, legal and regulatory,
information technology and human resources. Sales and marketing expenses
include salaries, payroll taxes, benefits and commissions that we pay
for sales personnel and advertising and marketing programs, including
expenses relating to our outside public relations firms. Interest expense
and financing costs relate primarily to the amortization of deferred
financing fees and debt discounts on our various debt instruments.
RESULTS OF OPERATIONS
The following table presents our operating results as a percentage of
revenue for the three- and nine-month periods ended July 31, 2004 and 2003
as well as a comparison of the percentage change of our operating results
from the three- and nine-month periods ended July 31, 2003 to the
corresponding periods ended July 31, 2004:
% Change % Change
Quarter Three Quarters
Ended Ended
July 31, July 31,
2003 to 2003 to
% of % of Quarter Three Quarters
Revenue Revenue Ended Ended
Quarter Three Quarters July 31, July 31,
Ended Ended 2004 2004
July 31, July 31, Increase Increase
2004 2003 2004 2003 (Decrease) (Decrease)
---- ---- ---- ---- ---------- ----------
REVENUES 100% 100% 100% 100% (32%) (20%)
COSTS AND EXPENSES
Costs of revenues 76% 72% 77% 73% (29%) (16%)
Sales and marketing 4% 4% 3% 4% (39%) (40%)
General and administrative 27% 20% 23% 22% (9%) (15%)
Depreciation and
amortization 5% 8% 4% 9% (57%) (60%)
Gain on settlement of
liabilities - - (2%) - - -
---- ---- ---- ---- ---------- ----------
Total costs and expenses 111% 104% 105% 107% (28%) (22%)
---- ---- ---- ---- ---------- ----------
Operating loss (11%) (4%) (5%) (7%) 99% (45%)
OTHER INCOME (EXPENSE)
Interest expense and
financing costs (3%) (1%) (3%) (3%) 61% (23%)
Related party interest
expense and financing
costs (2%) (4%) (2%) (4%) (67%) (65%)
Foreign currency exchange
gains (losses) - - - - 56% 94%
---- ---- ---- ---- ---------- ----------
Total other income
(expense), net (5%) (5%) (4%) (7%) (33%) (48%)
---- ---- ---- ---- ---------- ----------
LOSS FROM CONTINUING
OPERATIONS (17%) (9%) (9%) (14%) 23% (47%)
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS,
net of income taxes of
$0 for all periods - (22%) 14% (14%) (100%) 180%
---- ---- ---- ---- ---------- ----------
NET INCOME (LOSS) (17%) (31%) 5% (28%) (64%) 114%
==== ==== ==== ==== ========== ==========
RESULTS OF OPERATIONS - COMPARISON OF THE THREE- AND NINE-MONTH PERIODS
ENDED JULY 31, 2004 AND 2003
REVENUES
For the three-month period ended July 31, 2004, 72% and 28% of our revenues
were derived from our wholesale and retail customers, respectively, compared
to 74% and 26%, respectively, for the three-month period ended July 31,
2003. Our wholesale revenues have decreased by 37% from the three-month
period ended July 31, 2003 compared to the three-month period ended July 31,
2004, while our retail revenues have decreased by 32% over the comparable
period.
For the nine-month period ended July 31, 2004, 75% and 25% of our revenues
were derived from our wholesale and retail customers, respectively, compared
to 68% and 32%, respectively, for the nine-month period ended July 31, 2003.
Our wholesale revenues have decreased by 13% from the nine-month period
ended July 31, 2003 compared to the nine-month period ended July 31, 2004,
while our retail revenues have decreased by 39% over the comparable period.
The decrease in wholesale revenues for the three- and nine-month periods
ended July 31, 2004 compared to the same periods in fiscal 2003 is
attributable to a decrease in the number of termination opportunities
available to us to offer our customers. Due to the competitive nature of
the wholesale telecommunications business, our customers frequently request
a reduction in the per minute termination rates that we offer them. At
times, our suppliers are not able to offer us lower rates in order to
maintain the minutes we are terminating to them. As a result, our wholesale
revenues fluctuate depending on the number of termination opportunities
available to us at any one time. We are working with new providers in an
effort to recapture our lost revenue, though the results of these
discussions are not presently known.
The decrease in retail revenues for the three- and nine-month periods ended
July 31, 2004 compared to the same periods in fiscal 2003 is primarily
attributable to increased competition in our largest foreign markets,
including competition from the incumbent phone company in each market.
Furthermore, a significant portion of our retail business comes from
members of the United States military stationed in foreign markets. The
redeployment of troops into Iraq, where we have not historically provided
long distance service, in March 2003, resulted in a decline in our retail
sales to these military customers in other foreign markets. We currently
offer services to these troops in Iraq on a limited basis, and anticipate
increasing these services later in 2004. We are exploring opportunities to
grow our retail business, utilizing our in-house sales group and our outside
agents, through the introduction of new products and services, focusing our
efforts principally on the sale of Internet phones that allow users to
connect specialized Internet phones to their existing Dial-Up or DSL
Internet connections.
OPERATING EXPENSES
Costs of Revenues: Our costs of revenues as a percentage of revenues have
increased for each of the three- and nine-month periods ended July 31, 2004
compared to the corresponding periods ended July 31, 2003 due to a decline
in our retail traffic (see "Revenues" directly above) which realizes higher
margins than our wholesale traffic. As a majority of our costs of revenues
are variable, based on per minute transportation costs, costs of revenues as
a percentage of revenues will fluctuate, from period to period, depending on
the traffic mix between our wholesale and retail products.
Sales and Marketing Expenses: A significant component of our revenue is
generated by outside agents or through periodic newspaper advertising, which
is managed by a small in-house sales and marketing organization.
The reduction in our sales and marketing costs for the three- and nine-month
periods ended July 31, 2004 compared to the corresponding periods ended July
31, 2003 is primarily due to lower agent commission costs which are paid as
a percentage of our revenue, as well as a reduction in our advertising
costs. During the three- and nine-month periods ended July 31, 2003, a
significant portion of our advertising costs related to the introduction of
new product lines. During the three- and nine-month periods ended July 31,
2004, we have focused our attention on increasing revenues through the
efforts of our agents. We will continue to focus our sales and marketing
efforts on periodic newspaper advertising, the establishment of distribution
networks to facilitate the introduction and growth of new products and
services, and agent related expenses to generate additional revenues.
General and Administrative Expenses: We have significantly reduced our
general and administrative costs for the three- and nine-month periods ended
July 31, 2004 compared to the corresponding periods ended July 31, 2003
through the elimination of personnel and personnel related costs. However,
due to the overall decline in revenue and the fixed nature of our
general and administrative expenses, as a percentage of revenue, our
general and administrative expenses have increased. We review our general
and administrative expenses regularly and continue to manage the costs
accordingly to support the current and anticipated future business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization has decreased as a larger portion of our
assets still in use have become fully depreciated, including a majority of
the assets acquired from Rapid Link. A majority of our depreciation and
amortization expense relates to the equipment utilized in our VoIP network.
In accordance with Statement of Accounting Standards No. 142, effective
November 1, 2001, we no longer amortize goodwill.
GAIN ON SETTLEMENT OF LIABILITIES
In connection with the acquisition of the assets and certain of the
liabilities of Rapid Link, Incorporated ("Rapid Link") during the fourth
quarter of the fiscal year ended October 31, 2001, we recorded certain
liabilities, relating in part to cash receipts from former Rapid Link
customers near the acquisition date, of $255,000, and continued to hold
those liabilities pending a final settlement with the Rapid Link trustee.
During the second quarter of fiscal year 2004, we agreed to pay $30,000 to
the trustee, and recorded the remaining $225,000 to gain on settlement of
liabilities during the second quarter of fiscal year 2004.
INTEREST EXPENSE AND FINANCING COSTS
Interest expense and financing costs were due primarily to the amortization
of deferred financing fees and debt discount on our convertible debentures,
notes payable and notes payable to related parties. The decrease in
interest expense and financing costs from the three- and nine-month periods
ended July 31, 2003 to the three- and nine-month periods ended July 31, 2004
primarily relates to the reduction in such amortization due to our related
party notes payable reaching their maturity date during the fourth quarter
of fiscal year 2003 as well as the early repayment of one of our convertible
debentures through the issuance of a note payable during the first quarter
of fiscal year 2003. All unamortized debt discount associated with this
convertible debenture was expensed at the time of repayment. A further
explanation of these changes can be found in the Liquidity and Capital
Resources section.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Income (loss) from discontinued operations for the nine-month period ended
July 31, 2004 relates to an increase in the Company's estimated sales tax
liability of $750,000, offset by the write-off of the remaining net
liability of our German subsidiary, Rapid Link Telecommunications GMBH,
totaling $2,250,000. Income (loss) from discontinued operations for the
three- and nine-month periods ended July 31, 2003 relates to the losses of
Rapid Link Telecommunications GMBH, in the amounts of $949,000 and
$1,520,000, respectively, and an original estimate of the Company's sales
tax liability of $350,000 during the nine-month period ended July 31, 2003.
In the fourth quarter of fiscal 2003, Rapid Link Telecommunications GMBH
filed for insolvency. The net liability associated with the disposal of
the assets and liabilities of Rapid Link Telecommunications GMBH of
approximately $2.3 million was included in the balance sheet and classified
as Discontinued Operations. During the first quarter of fiscal year 2004,
we determined that we no longer controlled the operations of this subsidiary
and that the parent entity had no legal obligation to pay the liabilities of
Rapid Link Telecommunications GMBH. Accordingly, we wrote off the remaining
net liability of $2,251,000 and included the gain in Discontinued Operations
during the first quarter of fiscal year 2004.
During the first quarter of fiscal year 2004, we determined based on final
written communications with the State of Texas that the liability for sales
taxes (including penalties and interest) totaled $1.1 million. We had
previously accrued an estimated settlement amount of $350,000. Accordingly,
we accrued an additional $750,000. The sales tax amount due is attributable
to audit findings of our former parent, Canmax Retail Systems, from the
State of Texas for the years 1995 to 1999. These operations were previously
classified as discontinued after we changed our business model from a focus
on domestic prepaid phone cards to international wholesale and retail
business. The State of Texas determined that we did not properly remit
sales tax on certain transactions. Management believes that the amount due
has not been properly assessed and will continue to pursue a lesser
settlement amount, though we cannot assure you that this matter will be
resolved in the Company's favor. Since this sales tax liability represents
an adjustment to amounts previously reported in Discontinued Operations,
this amount was classified during the first quarter of fiscal year 2004 as
Discontinued Operations. (See Note 7 to the Consolidated Financial
Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The growth model for our business provides for a rapid expansion of our
network infrastructure through the addition of new VoIP hardware, which can
be purchased and entered into service in a matter of days. This allows us
to add customers and additional points of termination on an as-needed basis,
avoiding significant network build out well in advance of anticipated
growth; however, the rate of growth is dependent on the availability of
future financing for capital resources. Presently, our continuing losses
from operations do not allow for us to finance these expansion efforts.
Thus, our funding of additional infrastructure development must be provided
externally through debt and/or equity offerings. We plan to obtain vendor
financing for any equipment needs associated with expansion. We believe
that, with sufficient capital, we can significantly accelerate our
growth plan. Our failure to obtain additional financing could delay the
implementation of our business plan and have a material adverse effect on
our business, financial condition and operating results. Further, we have
been advised by two of our creditors that they may seek to collect the full
$2.3 million principal balance of our note and debentures that they hold on
the November 2004 maturity dates of these securities. Management continues
to seek additional financing and will continue to renegotiate its debt with
these creditors. It is uncertain as to whether management will be able to
obtain additional financing or renegotiate its debt with these creditors.
At July 31, 2004, we had cash and cash equivalents of $503,000, a decrease
of $3,000 from the balance at October 31, 2003. We had significant working
capital deficits at both July 31, 2004 and 2003.
Net cash provided by operating activities of continuing operations was
$166,000 for the nine-month period ended July 31, 2004, compared to net cash
used in operating activities of continuing operations of $267,000 for the
nine-month period ended July 31, 2003. The net cash provided by operating
activities of continuing operations for the nine-month period ended July 31,
2004 was primarily due to a net loss of $990,000 adjusted for: non-cash
interest expense of $125,000; depreciation and amortization of $462,000; net
changes in operating assets and liabilities of $774,000; offset by gain on
settlement of liabilities of $225,000. For the nine-month period ended July
31, 2003, the net cash used in operating activities of continuing operations
of $267,000 was primarily due to a net loss of $1,852,000 adjusted for: non-
cash interest expense of $543,000; depreciation and amortization of
$1,169,000; and net changes in operating assets and liabilities of
($165,000).
During the nine-month period ended July 31, 2004, net cash used in investing
activities of continuing operations was $134,000, compared to $136,000
for the nine-month period ended July 31, 2003. This is due to capital
expenditures for both periods.
Net cash used in financing activities of continuing operations for the nine-
month period ended July 31, 2004, totaled $34,000, compared to net cash
provided by financing activities of continuing operations of $1,163,000 for
the nine-month period ended July 31, 2003. For the nine-month period ended
July 31, 2004, net cash used in financing activities from continuing
operations is due to payments on capital leases. For the nine-month period
ended July 31, 2003, the components of net cash provided by financing
activities of continuing operations included $1,800,000 in proceeds from the
issuances of notes payable; offset by $112,000 in payments on capital
leases; $82,000 of deferred financing fees; and $443,000 in payments on
convertible debentures.
We are subject to various risks in connection with the operation of our
business including, among other things, (i) changes in external competitive
market factors, (ii) inability to satisfy anticipated working capital or
other cash requirements, (iii) changes in the availability of transmission
facilities, (iv) changes in our business strategy or an inability to
execute our strategy due to unanticipated changes in the market, (v) various
competitive factors that may prevent us from competing successfully in the
marketplace, (vi) our lack of liquidity, and (vii) our ability to raise
additional capital. We have an accumulated deficit of approximately $46.7
million as of July 31, 2004, 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 we have been able to arrange the debt facilities and equity
financing described below to date, there can be no assurance that sufficient
debt or equity financing will continue to be available in the future or that
it will be available on terms acceptable to us. As of July 31, 2004, we had
$4.6 million of notes payable and convertible debentures which have matured
or mature within the next year as well as a significant amount of trade
payables and accrued liabilities which are past due. We will continue to
explore external financing opportunities and renegotiation of our short-term
debt with our current financing partners in order to extend the terms or
retire these obligations. Approximately 51% of the short-term debt is due
to our senior management. Our management is committed to the success of our
Company as is evidenced by the level of financing it has made available to
our Company. Failure to obtain sufficient capital will materially affect
our Company's operations and financial condition. As a result of the
aforementioned factors and related uncertainties, there is significant doubt
about our Company's ability to continue as a going concern.
Our current capital expenditure requirements are not significant, primarily
due to the equipment acquired from Rapid Link. Our capital expenditures for
the nine months ended July 31, 2004, were $134,000 and we do not anticipate
significant spending for the remainder of fiscal 2004.
In October 2001, we executed 10% convertible notes (the "Notes") with three
of our executives, which provided financing of $1,945,958. The Notes were
amended, and as these amended Notes have subsequently matured, these Notes
are currently due on demand. These Notes are secured by selected Company
assets and are convertible into our common stock at the option of the holder
at any time prior to maturity. The conversion price is equal to the closing
bid price of our common stock on the last trading day immediately preceding
the conversion. We also issued to the holders of the Notes warrants to
acquire an aggregate of 1,945,958 shares of common stock at an exercise
price of $0.78 per share, which warrants expire on October 24, 2006. For
the year ended October 31, 2002, an additional $402,433 was added to the
Notes and an additional 402,433 warrants to acquire our common stock were
issued in connection with the financing.
In January 2002, we executed a 6% convertible debenture (the "Second
Debenture") with GCA Strategic Investment Fund Limited, which provided
financing of $550,000. With an original maturity date of January 28, 2003,
the Second Debenture was amended during fiscal year 2003 and now matures on
November 8, 2004. The conversion price is equal to the lesser of (i) 100%
of the volume weighted average of sales price as reported by the Bloomberg
L.P. of the common stock on the last trading day immediately preceding the
closing date ("Fixed Conversion Price") and (ii) 85% of the average of the
three (3) lowest volume weighted average sales prices as reported by
Bloomberg L.P. during the twenty (20) Trading Days immediately preceding but
not including the date of the related notice of conversion (the "Formula
Conversion Price"). In an event of default the amount declared due and
payable on the Second Debenture shall be at the Formula Conversion Price.
In November 2002, we executed a 12% note payable (the "GC-Note") with Global
Capital Funding Group, L.P., which provided financing of $1,250,000. The GC-
Note's maturity date is November 8, 2004. The Company also issued to the
holder of the GC-Note warrants to acquire an aggregate of 500,000 shares of
common stock at an exercise price of $0.14 per share, which expire on
November 8, 2007.
In July 2003, we executed a note payable (the "GCA-Note") with GCA Strategic
Investment Fund Limited, which provided financing of $550,000. The GCA-
Note's terms are the same as those of the Second Debenture and also matures
on November 8, 2004. We also issued to the holder of the GCA-Note warrants
to acquire an aggregate of 100,000 shares of common stock at an exercise
price of $0.14 per share, which expire on July 24, 2008.
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations
For the nine-month period ended July 31, 2004, we recorded a net profit of
$500,000, which included discontinued operations non-cash income of $1.5
million, and for the years ended October 31, 2003 and 2002, we recorded net
losses of approximately $6.6 million and $4.7 million, respectively, on
revenues of approximately $10.6 million, $17.7 million and $18.4 million,
respectively. As a result, we currently have a significant working capital
deficit. In addition, we have a significant amount of trade payables and
accrued liabilities, of which approximately 34% is past due. To be able to
service our debt obligations over the course of the 2004 fiscal year we must
generate significant cash flow and obtain additional financing. If we are
unable to do so or otherwise to obtain funds necessary to make required
payments on our trade debt and other indebtedness, we may not be able to
continue our operations.
Our independent auditors have included a going concern modification in their
audit opinion on our consolidated financial statements for the fiscal year
ended October 31, 2003, which states that "The Company has suffered
recurring losses and has used significant cash flows in operations during
each of the last three fiscal years. Additionally, at October 31, 2003, the
Company's current liabilities exceeded its current assets by $9.9 million
and the Company has a shareholders' deficit totaling $8.1 million. These
conditions raise substantial doubt about the Company's ability to continue
as a going concern."
Our operating history makes it difficult to accurately assess our general
prospects in the VoIP portion of the telecommunications industry and the
effectiveness of our business strategy. In addition, we have limited
meaningful historical financial data upon which to forecast our future sales
and operating expenses. Our future performance will also be subject to
prevailing economic conditions and to financial, business and other factors.
Accordingly, we cannot assure you that we will successfully implement our
business strategy or that our actual future cash flows from operations will
be sufficient to satisfy our debt obligations and working capital needs.
To implement our business strategy, we will also need to seek additional
financing. There is no assurance that adequate levels of additional
financing will be available at all or on acceptable terms. In addition, any
additional financing will likely result in significant dilution to our
existing stockholders. If we are unable to obtain additional financing on
terms that are acceptable to us, we could be forced to dispose of assets to
make up for any shortfall in the payments due on our debt under
circumstances that might not be favorable to realizing the highest price for
those assets. A portion of our assets consist of intangible assets, the
value of which will depend upon a variety of factors, including the success
of our business. As a result, if we do need to sell any of our assets, we
cannot assure you that our assets could be sold quickly enough, or for
amounts sufficient, to meet our obligations.
We face competition from numerous, mostly well-capitalized sources
The market for our products and services is highly competitive. We face
competition from multiple sources, many of which have greater financial
resources and a substantial presence in our markets and offer products or
services similar to our services. Therefore, we may not be able to
successfully compete in our markets, which could result in a failure to
implement our business strategy, adversely affecting our ability to attract
and retain new customers. In addition, competition within the industries in
which we operate is characterized by, among other factors, price and the
ability to offer enhanced services. Significant price competition would
reduce the margins realized by us in our telecommunications operations.
Many of our competitors have greater financial resources to devote to
research, development and marketing, and may be able to respond more quickly
to new or merging technologies and changes in customer requirements. If we
are unable to provide value-added Internet products and services then we
will be unable to compete in certain segments of the market, which could
have an adverse impact on our business.
The regulatory environment in our industry is very uncertain
The legal and regulatory environment pertaining to the Internet is uncertain
and changing rapidly as the use of the Internet increases. For example, in
the United States, the FCC is considering whether to impose surcharges or
additional regulations upon certain providers of Internet telephony.
In addition, the regulatory treatment of Internet telephony outside of the
United States varies from country to country. There can be no assurance
that there will not be legally imposed interruptions in Internet telephony
in these and other foreign countries. Interruptions or restrictions on the
provision of Internet telephony in foreign countries may adversely affect
our ability to continue to offer services in those countries, resulting in a
loss of customers and revenues.
New regulations could increase the cost of doing business over the Internet
or restrict or prohibit the delivery of our products or services using the
Internet. In addition to new regulations being adopted, existing laws may be
applied to the Internet. Newly existing laws may cover issues that include
sales and other taxes, access charges, user privacy, pricing controls,
characteristics and quality of products and services, consumer protection,
contributions to the Universal Service Fund, an FCC-administered fund for
the support of local telephone service in rural and high-cost areas, cross-
border commerce, copyright, trademark and patent infringement, and other
claims based on the nature and content of Internet materials.
Changes in the technology relating to Internet telephony could threaten our
operations
The industries in which we compete are characterized, in part, by rapid
growth, evolving industry standards, significant technological changes and
frequent product enhancements. These characteristics could render existing
systems and strategies obsolete and require us to continue to develop and
implement new products and services, anticipate changing consumer demands
and respond to emerging industry standards and technological changes. No
assurance can be given that we will be able to keep pace with the rapidly
changing consumer demands, technological trends and evolving industry
standards.
We need to develop and maintain strategic relationships around the world to
be successful
Our international business, in part, is dependent upon relationships with
distributors, governments or providers of telecommunications services in
foreign markets. The failure to develop or maintain these relationships
could have an adverse impact on our business.
We derive significant revenue from two customers
We provided wholesale services to a single customer who accounted for 18%
and 20% of our overall revenue for the three and nine months ended July 31,
2004, respectively. We also provided wholesale services to another customer
who accounted for 13% of our overall revenue for the nine months ended July
31, 2004. The loss of either of these customers could have an adverse
effect on our financial position.
We rely on two key senior executives
Our success is dependent on our senior management team of John Jenkins and
Allen Sciarillo and our future success will depend, in large part, upon our
ability to retain these two individuals.
The expansion of our VoIP product offerings is essential to our survival
We intend to expand our VoIP network and the range of enhanced
telecommunications services that we provide. Our expansion prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets.
Our common stock price may fluctuate substantially and our stockholders'
investment could suffer a decline in value.
The market price of our common stock may be volatile and could fluctuate
substantially from quarter to quarter and year to year due to a number of
factors, many of which are beyond our control and some of which are only
indirectly related to our business, including:
* actual or anticipated fluctuations in our net revenue or operating
results;
* our failure to meet the expectations of market analysts or investors
with respect to our financial performance;
* actual or anticipated changes in our growth rate;
* actual or anticipated fluctuations in our competitors' operating
results or change in their growth rate;
* the sale of our common stock or other securities in the future;
* our ability to raise additional capital;
* the trading volume of our common stock; and
* changed market conditions in our industry, the industries of our
customers, the financial markets and the economy as a whole.
Several of our outstanding notes are convertible into our common stock at a
price that fluctuates based on the market price of our common stock. A
material decrease in the market price of our common stock could result in
the issuance of a significant number of additional shares of our common
stock upon the conversion of these notes. This, in turn, may result in
significant dilution to our stockholders and could further depress the
market price of your investment.
In addition, the stock market in general, and stocks quoted on the OTC
Bulletin Board in particular, have experienced extreme price and volume
fluctuations in recent years that have often been unrelated or
disproportionate to the operating performance of the quoted companies. These
broad market factors may materially harm the market price of our common
stock, regardless of our operating performance.
Our OTC Bulletin Board listing negatively affects the liquidity of our
common stock
Our common stock currently trades on the OTC Bulletin Board. Therefore, no
assurances can be given that a liquid trading market will exist at the time
any stockholder desires to dispose of any shares of the our common stock. In
addition, our common stock is subject to the so-called "penny stock" rules
that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and
accredited investors (generally defined as an investor with a net worth in
excess of $1 million or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by the penny stock rules,
a broker-dealer must make a suitability determination for the purchaser and
must have received the purchaser's written consent to the transaction prior
to sale. Consequently, both the ability of a broker-dealer to sell
our common stock and the ability of holders of our common stock to sell
their securities in the secondary market may be adversely affected. The
Securities and Exchange Commission has adopted regulations that define a
"penny stock" to be an equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require the delivery,
prior to the transaction, of a disclosure schedule relating to the penny
stock market. The broker-dealer must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is to sell the securities as a
market maker, the broker-dealer must disclose this fact and the broker-
dealer's presumed control over the market. Finally, monthly statements must
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our retail services are provided primarily to customers located outside of
the U.S., thus, our financial results could be impacted by foreign currency
exchange rates and market conditions abroad. However, the aggregate impact
of any likely exchange rate fluctuations would be immaterial as most of our
services are paid for in U.S. dollars. A strong dollar could make the cost
of our services more expensive than the services of non-U.S. based providers
in foreign markets. We have not used derivative instruments to hedge our
foreign exchange risks though we may choose to do so in the future.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management
carried out an evaluation, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of the end of the period covered by this report, our
disclosure controls and procedures were effective. Disclosure controls and
procedures mean our controls and other procedures that are designed to
ensure that information required to be disclosed by us in our reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our reports that we file or submit under
the Securities Exchange Act of 1934 is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls. There have been no changes in our
internal control over financial reporting that occurred during the period
covered by this report that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 our
"international reorigination" technology. The injunctive relief that Cygnus
sought in this suit has been denied, but Cygnus continues to seek a license
fee for the use of the technology. We believe that no license fee is
required as the technology described in the patent is different from the
technology used by us.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent us from providing "reorigination" services. We filed a cross motion
for summary judgment of non-infringement. Both motions were denied. On
August 22, 2003, we re-filed the motion for summary judgment for non-
infringement. In response to this filing, during August 2004, the court
narrowly defined the issue to relate to a certain reorigination technology
which we believe we do not now, nor have ever utilized to provide any of our
telecommunications services. We intend to continue defending this case
vigorously, and though our ultimate legal and financial liability with
respect to such legal proceeding is therefore expected to be minimal, it
cannot be estimated with any certainty at this time.
The State of Texas ("State") performed a sales tax audit of our former
parent, Canmax Retail Systems ("Canmax"), for the years 1995 to 1999. The
State determined that we did not properly remit sales tax on certain
transactions, including asset purchases and software development projects
that Canmax performed for specific customers. Our current and former
managements filed exceptions, through our outside sales tax consultant, to
the State's audit findings, including the non-taxable nature of certain
transactions and the failure of the State to credit our account for sales
tax remittances. In correspondence from the State in June 2003, the State
agreed to consider certain offsetting remittances received by Canmax during
the audit period. The State has refused to consider other potential offsets.
Based on this correspondence with the State, our estimate of the potential
liability was originally recorded at $350,000 during the fiscal year ended
October 31, 2003. Based on further correspondence with the State, this
estimated liability was increased to $1.1 million during the first
quarter offiscal year 2004. Since this sales tax liability represents an
adjustment to amounts previously reported in discontinued operations, it was
classified separately during the first quarter of fiscal year 2004 in
discontinued operations, and is included in the July 31, 2004 consolidated
balance sheet in "Net current liabilities from discontinued operations". We
believe that Canmax properly remitted an appropriate amount of sales tax to
Texas, and we do not believe that the State's position reflects the
appropriate amount of tax remitted during the audit period mentioned above
and will continue to pursue this issue with the State. We are also
aggressively pursuing the collection of unpaid sales taxes from former
customers of Canmax, though there can be no assurance that we will be
successful with respect to such collections.
On January 12, 2004, we filed a suit against Southland Corporation
("Southland") in the 162nd District Court in Dallas, Texas. Our suit claims
a breach of contract on the part of Southland in failing to reimburse us
for taxes paid to the State as well as related taxes for which we are
currently being held responsible by the State. Our suit seeks reimbursement
for the taxes paid and a determination by the court that Southland is
responsible for paying the remaining tax liability to the State.
On July 20, 2004, we filed a suit against Q Comm International, Inc. ("Q
Comm") in Federal Court in the Central District of Utah. Our suit claims
damages of $4 million plus attorney's fees and costs resulting from the
breach of a purchase agreement on the part of Q Comm relating to the sale of
our internally constructed equipment for the prepaid telecommunications
industry.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among Canmax
Inc., CNMX MergerSub, Inc. and US Communications Services, Inc. (filed as
Exhibit 2.1 to Form 8-K dated January 30, 1998 (the "USC 8-K"), and
incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated January
15, 1998 (the "USC Rescission 8-K"), and incorporated herein by reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3, 1998 (filed
as Exhibit 10.1 to the Company's Form 8-K dated December 7, 1998 and
incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS Telecom &
Technologies, Inc., Dial Thru International Corporation, a Delaware
corporation, Dial Thru International Corporation, a California corporation,
and John Jenkins (filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated November 2, 1999 and incorporated herein by reference)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001, by
and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru International
Corporation. (filed as Exhibit 2.1 to the Company's Form 8-K dated October
29, 2001 and incorporated herein by reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.2 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as of
October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.3 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as of
October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.4 to the Company's
Form 8-K dated December 28, 2001 and incorporated herein by reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as of
November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.5 to the Company's
Form 8-K dated December 28, 2001 and incorporated herein by reference)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1999 (the "1999 Form 10-K") and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Dial Thru International Corporation
(filed as Exhibit 3.2 to the 1999 Form 10-K and incorporated herein by
reference)
4.1 Registration Rights Agreement between Canmax and the Dodge Jones
Foundation (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form 10-Q
for the period ended April 30, 1997 and incorporated herein by reference)
4.2 Registration Rights Agreement between Canmax and Founders Equity Group,
Inc. (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form 10-Q for
the period ended April 30, 1997 and incorporated herein by reference)
4.3 Amended and Restated Stock Option Plan of Dial Thru International
Corporation (filed as Exhibit 4.3 to the 1999 Form 10-K and incorporated
herein by reference)
4.4 Securities Purchase Agreement dated April 11, 2001 (filed as Exhibit
4.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended
April 30, 2001 and incorporated herein by reference)
4.5 Registration Rights Agreement dated April 6, 2001 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed as
Exhibit 4.2 to the Company's Form S-3, File #333-71406, filed on October 11,
2001 and incorporated herein by reference)
4.6 6% Convertible Debenture of Dial Thru International Corporation and
Global Capital Funding Group, L.P. (filed as Exhibit 4.3 to the Company's
Form S-3, File 333-71406, filed on October 11, 2001 and incorporated herein
by reference)
4.7 Form of Common Stock Purchase Warrant dated April 11, 2001 between
Global Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 4.4 to the Company's Form S-3, File 333-71406, filed
October 11, 2001 and incorporated herein by reference)
4.8 Form of Common Stock Purchase Warrant dated April 6, 2001 between D.P.
Securities, Inc. and Dial Thru International Corporation (filed as Exhibit
4.5 to the Company's Form S-3, File 333-71406, filed on October 11, 2001 and
incorporated herein by reference)
4.9 Securities Purchase Agreement issued January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed
as Exhibit 4.1 to the Company's Form S-3, File 333-82622, filed on February
12, 2002 and incorporated herein by reference)
4.10 Registration Rights Agreement dated January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed
as Exhibit 4.2 to the Company's Form S-3, File 333-82622, filed on February
12, 2002 and incorporated herein by reference)
4.11 6% Convertible Debenture of Dial Thru International Corporation and GCA
Strategic Investment Fund Limited (filed as Exhibit 4.3 to the Company's
Form S-3, File 333-82622, filed on February 12, 2002 and incorporated herein
by reference)
4.12 Common Stock Purchase Warrant dated January 28, 2002 between GCA
Strategic Investment Fund Limited and Dial Thru International Corporation
(filed as Exhibit 4.4 to the Company's Form S-3, File 333-82622, filed on
February 12, 2002 and incorporated herein by reference)
10.1 Employment Agreement, dated June 30, 1997 between Canmax Retail
Systems, Inc. and Roger Bryant (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-3, File No. 333-33523 (the "Form S-3"), and
incorporated herein by reference)
10.2 Commercial Lease Agreement between Jackson--Shaw/Jetstar Drive Tri-star
Limited Partnership and the Company (filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K dated October 31, 1998, and incorporated herein
by reference)
10.3 Employment Agreement, dated November 2, 1999 between ARDIS Telecom &
Technologies, Inc. and John Jenkins (filed as Exhibit 4.3 to the 2000 Form
10-K and incorporated herein by reference)
14.1 Code of Business Conduct and Ethics for Employees, Executive Officers
and Directors (filed as Exhibit 14.1 to the 2003 Form 10-K and incorporated
herein by reference)
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934*
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934*
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section
1350*
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section
1350*
* Filed herewith.
(b) The following reports on Form 8-K were filed or required to be filed for
the last quarter.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAL THRU INTERNATIONAL CORPORATION
By: /s/ Allen Sciarillo
--------------------------------------------
Allen Sciarillo
Chief Financial Officer and Executive Vice
President (Principal Financial and Principal
Accounting Officer)
Dated September 14, 2004