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 January 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 March 12, 2004, 16,189,781 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
------ January 31, October 31,
2004 2003
---------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 573,279 $ 505,256
Trade accounts receivable, net of allowance for
doubtful accounts of $294,265 at January 31,
2004 and $295,094 at October 31, 2003 835,962 872,610
Prepaid expenses and other current assets 248,866 230,997
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Total current assets 1,658,107 1,608,863
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PROPERTY AND EQUIPMENT, net 1,215,933 1,340,986
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 73,168 91,434
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS - 242,334
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TOTAL ASSETS $ 4,744,125 $ 5,080,534
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Current portion of capital leases $ 134,291 $ 146,140
Trade accounts payable 2,729,822 2,814,472
Accrued liabilities 2,370,952 2,098,939
Deferred revenue 330,596 356,999
Deposits and other payables 428,178 430,678
Convertible debentures, net of debt discount
of $102,535 at January 31, 2004 947,465 -
Notes payable, net of debt discount of $17,129 at
January 31, 2004 and $2,847 at October 31, 2003 1,232,871 547,153
Notes payable to related parties 2,348,401 2,348,401
Net current liabilities of discontinued operations 1,100,000 2,843,481
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Total current liabilities 11,622,576 11,586,263
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NOTE PAYABLE, net of debt discount of $22,838
at October 31, 2003 - 1,227,162
CONVERTIBLE DEBENTURES, net of 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; 16,201,803 shares issued at January
31, 2004 and October 31, 2003 16,202 16,202
Additional paid-in capital 39,174,322 39,070,237
Accumulated deficit (46,014,105) (47,253,704)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
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Total shareholders' deficit (6,878,451) (8,222,135)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,744,125 $ 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
January 31,
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2004 2003
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REVENUES $ 4,344,692 $ 4,275,580
COSTS AND EXPENSES
Costs of revenues 3,327,061 3,032,303
Sales and marketing 181,809 199,240
General and administrative 803,059 1,054,802
Depreciation and amortization 154,754 426,033
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Total costs and expenses 4,466,683 4,712,378
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Operating loss (121,991) (436,798)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (95,595) (254,417)
Related party interest expense and financing costs (58,710) (140,657)
Foreign currency exchange gains 14,748 3,486
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Total other income (expense), net (139,557) (391,588)
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LOSS FROM CONTINUING OPERATIONS (261,548) (828,386)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes of $0 for all periods 1,501,147 (253,727)
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NET INCOME (LOSS) $ 1,239,599 $(1,082,113
========== ==========
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income (loss) per share
Continuing operations $ (0.01) $ (0.05)
Discontinued operations 0.09 (0.02)
---------- ----------
$ 0.08 $ (0.07)
========== ==========
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted common shares 16,189,781 15,720,053
========== ==========
The accompanying notes are an integral part of these consolidated financial
statement
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
January 31,
-----------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
OF CONTINUING OPERATIONS
Net loss from continuing operations $ (261,548) $ (828,386)
Adjustments to reconcile net loss from
continuing operations to net cash provided
by (used in) operating activities:
Bad debt expense - 10,000
Non-cash interest expense (including related
party interest of $0 and $81,947) 41,128 260,396
Depreciation and amortization 154,754 426,033
Effects of changes in foreign exchange rates - 12,399
(Increase) decrease in:
Trade accounts receivable 36,648 138,331
Prepaid expenses and other current assets (17,869) (49,394)
Other assets (2,000) 23,283
Increase (decrease) in:
Trade accounts payable (74,541) (629,038)
Accrued liabilities 272,013 177,440
Deferred revenue (26,403) 57,780
Deposits and other payables (2,500) -
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Net cash provided by (used in) operating
activities of continuing operations 119,682 (401,156)
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CASH FLOWS FROM INVESTING ACTIVITIES
OF CONTINUING OPERATIONS
Purchase of property and equipment (29,701) (21,207)
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Net cash used in investing activities
of continuing operations (29,701) (21,207)
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CASH FLOWS FROM FINANCING ACTIVITIES
OF CONTINUING OPERATIONS
Proceeds from note payable - 1,250,000
Payments on capital leases (21,958) (46,317)
Deferred financing fees - (47,441)
Payments on convertible debentures - (443,000)
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Net cash provided by (used in) financing
activities of continuing operations (21,958) 713,242
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NET CASH USED IN DISCONTINUED OPERATIONS - (71,851)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 68,023 219,028
Cash and cash equivalents at beginning of period 505,256 269,313
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Cash and cash equivalents at end of period $ 573,279 $ 488,341
========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Conversion of convertible debenture and accrued
interest to common stock $ - $ 55,734
Fair value of warrants issued with debt - 45,677
Beneficial conversion feature of convertible
debentures recorded as debt discount 104,085 -
Note payable replaced by 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 month periods
ended January 31, 2004 and 2003 have been included. Operating results for
the three month period ended January 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 fax 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 fax 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 $46.0 million as
well as a working capital deficit of approximately $10.0 million as of
January 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.
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. Approximately 52% 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.
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 3 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company provided wholesale services to a single customer who accounted
for 20% of the overall revenue of the Company for the three months ended
January 31, 2004 and 11% of the Company's trade accounts receivable at
January 31, 2004. The Company also provided wholesale services to another
customer who accounted for 16% of the overall revenue of the Company for the
three months ended January 31, 2004 and 26% of the Company's trade accounts
receivable at January 31, 2004.
NOTE 4 - STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), 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 in the three months ended January 31, 2004
and 2003.
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"), which amends SFAS 123. SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The Company anticipates that it will
continue to apply APB 25. Accordingly, the Company believes that the
adoption of this standard will have no material impact on its financial
position, results of operations or cash flows.
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
Ended January 31,
--------------------------
2004 2003
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Net income (loss), as reported $ 1,239,599 $ (1,082,113)
Add: Stock-based employee compensation
included in reported net income (loss) - -
Deduct: Stock-based employee compensation
expense determined under fair value
based method (44,553) (61,463)
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$ 1,195,046 $ (1,143,576)
=========== ===========
Net income (loss) per share
As reported
Basic and diluted $ 0.08 $ (0.07)
=========== ===========
Pro forma
Basic and diluted $ 0.07 $ (0.07)
=========== ===========
The fair values under FAS 123 for options granted were estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
Three Months
Ended January 31,
-----------------
2004 2003
------ ------
Expected life (years) 2 3
Interest rate 3% 4%
Volatilty 215% 221%
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. During the
quarter ended January 31, 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 has written 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 quarter ended January 31, 2003:
Three Months Ended
January 31, 2003
----------------
Revenue $ 1,379,121
Net Loss $ (253,727)
Canmax Retail Systems
---------------------
During the quarter ended January 31, 2004, the Company 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. The
Company had previously accrued an estimated settlement amount of $350,000.
During the quarter ended January 31, 2004, the Company accrued an additional
$750,000. The sales tax amount due is attributable to audit findings of the
Company's former parent, Canmax Retail Systems, from the State of Texas for
the years 1995 to 1999. These operations were previously classified as
discontinued after the Company changed its business model from a focus on
domestic prepaid phone cards to international wholesale and retail business,
operating as a facilities-based global Internet protocol communications
company providing connectivity to international markets. The State of Texas
determined that the Company did not properly remit sales tax on certain
transactions. The Company's current and former management 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 is classified in the current period as Discontinued Operations. The
Company's estimated liability at January 31, 2004 is $1.1 million and is
included in the Balance Sheet as Discontinued Operations. (See Note 7.)
NOTE 6 - NOTE PAYABLE
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 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"), 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 replaced the note with
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 months ended January 31, 2004, the Company
recorded approximately $10,000 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 three months ended January
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 three months ended January 31, 2004, the Company recorded approximately
$3,000 as interest expense relating to the warrants.
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. The Company has not received a
decision regarding this filing. The Company intends to continue defending
this case vigorously, though its ultimate legal and financial liability with
respect to such legal proceeding 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 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 2004. Since this
sales tax liability represents an adjustment to amounts previously reported
in discontinued operations, it is classified separately in the current
period in discontinued operations, and is included in the January 31, 2004
consolidated balance sheet in "Net current liabilities from discontinued
operations". 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.
NOTE 8 - 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-month periods ended January 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. 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.
You are also urged to carefully review and consider the various disclosures
we have made throughout this report on Form 10-Q which describe certain
factors which affect our business.
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 VoIP strategy. This strategy allows us to form local partnerships
with foreign Postal, Telephone and Telegraph companies (those entities
responsible for providing telecommunications services in foreign markets
and 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. The notes are currently due on demand.
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
quarter ended January 31, 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 have written 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 generated 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 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", which
superceded SAB 101, "Revenue Recognition in Financial Statements", 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 fax 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 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
Our operating results for the quarters ended January 31, 2004 and 2003 are
as follows:
% Change
% of Revenue Q1 2004 to Q1 % of Revenue
Quarter Ended Quarter Ended 2003 Increase Quarter Ended Quarter Ended
Jan 31, 2004 Jan 31, 2004 (Decrease) Jan 31, 2003 Jan 31, 2003
------------ ------------ --------------- ------------ ------------
REVENUES $ 4,344,692 100% 2% $ 4,275,580 100%
COSTS AND EXPENSES
Costs of revenues 3,327,061 77% 10% 3,032,303 71%
Sales and marketing 181,809 4% (9%) 199,240 5%
General and administrative 803,059 18% (24%) 1,054,802 25%
Depreciation and amortization 154,754 4% (64%) 426,033 10%
------------ ------------ --------------- ------------ ------------
Total costs and expenses 4,466,683 103% (5%) 4,712,378 110%
------------ ------------ --------------- ------------ ------------
Operating loss (121,991) (3%) (72%) (436,798) (10%)
OTHER INCOME (EXPENSE)
Interest expense and
financing costs (154,305) (4%) (61%) (395,074) (9%)
Foreign exchange 14,748 - 323% 3,486 -
------------ ------------ --------------- ------------ ------------
Total other income
(expense), net (139,557) (3%) (64%) (391,588) (9%)
------------ ------------ --------------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS (261,548) (6%) (68%) (828,386) (19%)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS
NET OF INCOME TAXES OF $0
FOR ALL PERIODS 1,501,147 35% (692%) (253,727) (6%)
------------ ------------ --------------- ------------ ------------
NET INCOME (LOSS) $ 1,239,599 29% (215%) $ (1,082,113) (25%)
============ ============ =============== ============ ============
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income
(loss) per share
Continuing operations $ (0.01) $ (0.05)
Discontinued operations 0.09 (0.02)
------------ ------------
$ 0.08 $ (0.07)
============ ============
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted
common shares 16,189,781 15,720,053
============ ============
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED JANUARY 31,
2004 AND 2003
REVENUES
For the three months ended January 31, 2004, 78% and 22% of our revenues
were derived from our wholesale and retail customers, respectively, compared
to 60% and 40%, respectively, for the three months ended January 31, 2003.
Our wholesale revenues have increased by 32% from the three months ended
January 31, 2003 compared to the three months ended January 31, 2004, while
our retail revenues have decreased by 44% over the comparable period.
The increase in wholesale revenues for the three months ended January 31,
2004 is attributable to additions to our wholesale sales force during fiscal
year 2002, which focuses on developing greater wholesale opportunities both
in customer growth and the development of additional points of termination.
We have successfully added new customers and increased our termination
points. The decrease in retail revenues for the three months ended January
31, 2004 is primarily attributable to increased competition in our largest
foreign markets, including competition from the incumbent phone company in
each market. Furthermore, a significant portion of our retail business
comes from members of the United States military stationed in foreign
markets. The redeployment of troops into Iraq, where the Company has not
historically provided long distance service, in March 2003 resulted in a
decline in retail customers. We anticipate being able to offer services to
these same troops in Iraq sometime in the first half of 2004 and we are
exploring opportunities to grow our retail business through advertising and
the introduction of new products and services.
OPERATING EXPENSES
Costs of revenues: Our costs of revenues as a percentage of revenues has
increased due to a decline in our retail traffic 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 revenues is
generated by outside agents or through newspaper and periodical advertising,
which is managed by a small in-house sales and marketing organization. We
will continue to focus our sales and marketing efforts on newspaper and
periodical 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 months ended January 31, 2004
through the elimination of personnel and personnel related costs. 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 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.
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
and our related party notes payable. The decrease in interest expense and
financing costs from the quarter ended January 31, 2003 to the quarter ended
January 31, 2004 is primarily due to our related party notes payable
reaching their maturity date during the fourth quarter of 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 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 relates to our Germany subsidiary
and a sales tax settlement.
In the fourth quarter of fiscal 2003, our German Subsidiary, 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 quarter
ended January 31, 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 have written 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 quarter ended January 31, 2004, we determined based on final
written communications with the State of Texas that the liability for sales
taxes (including penalties and interest) totaled $1.1 million. We had
previously accrued an estimated settlement amount of $350,000. Accordingly,
we accrued an additional $750,000. The sales tax amount due is attributable
to audit findings of our former parent, Canmax Retail Systems, from the
State of Texas for the years 1995 to 1999. These operations were previously
classified as discontinued after we changed our business model from a focus
on domestic prepaid phone cards to international wholesale and retail
business, operating as a facilities-based global Internet protocol
communications company providing connectivity to international markets. The
State of Texas determined that we did not properly remit sales tax on
certain transactions. Our current and former management 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 is classified in the current period as Discontinued Operations. (See
Note 7 to the Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The growth model for our business provides for 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. Our funding of additional
infrastructure development will be provided through the operations of our
telecommunications business and 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.
At January 31, 2004, we had cash and cash equivalents of $573,000, an
increase of $68,000 from the balance at October 31, 2003. We had
significant working capital deficits at both January 31, 2004 and 2003.
Net cash provided by operating activities of continuing operations was
$120,000 for the three months ended January 31, 2004, compared to net cash
used in operating activities of continuing operations of $401,000 for the
three months ended January 31, 2003. The net cash provided by operating
activities of continuing operations for the three months ended January 31,
2004 was due to a net loss of $262,000 adjusted for: non-cash interest
expense of $41,000; depreciation and amortization of $155,000; and net
changes in operating assets and liabilities of $185,000. For the three
months ended January 31, 2003, the net cash used in operating activities of
continuing operations of $401,000 was primarily due to a net loss of
$828,000 adjusted for: non-cash interest expense of $260,000; depreciation
and amortization of $426,000; and net changes in operating assets and
liabilities of ($282,000).
During the three months ended January 31, 2004, net cash used in investing
activities of continuing operations was $30,000, compared to $21,000 for the
three months ended January 31, 2003. This is due to capital expenditures
for both periods.
Net cash used in financing activities of continuing operations for the three
months ended January 31, 2004, totaled $22,000, compared to net cash
provided by financing activities of continuing operations of $713,000 for
the three months ended January 31, 2003. For the three months ended January
31, 2004, net cash used in financing activities from continuing operations
is due to payments on capital leases. For the three months ended January
31, 2003, the significant components of net cash provided by financing
activities of continuing operations included $1,250,000 in proceeds from the
issuance of a note payable; offset by $46,000 in payments on capital leases;
$47,000 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 $46.0
million as of January 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.
Our strategy is to fund these cash requirements through operations, debt
facilities and additional equity financing.
Although we have 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 us. As of January 31, 2004, we had $4.6 million of
notes payable and convertible debentures which 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 52% of the short-term debt is due to our senior management.
Our management is committed to the growth and success of our Company as is
evidenced by the level of financing it has made available to our Company.
Failure to obtain sufficient capital could materially affect our Company's
operations and expansion strategies. As a result of the aforementioned
factors and related uncertainties, there is doubt about our Company's
ability to continue as a going concern.
Our current capital expenditure requirements are not significant, primarily
due to the equipment acquired from Rapid Link. Our capital expenditures for
the three months ended January 31, 2004 were $30,000 and we do not
anticipate significant spending for the remainder of fiscal 2004.
In April 2001, we executed a 6% convertible debenture with Global Capital
Funding Group L.P, which provided financing of $1,000,000. During November
2002, the Debenture's outstanding balance of $443,000 was paid in full
pursuant to an issuance of a note payable with Global Capital Funding Group
L.P.
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 are now 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. 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 three months ended January 31, 2004, we recorded a net profit of
$1.2 million, 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 $4.3 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 29% 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 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 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 your 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 investor 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 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 March 16, 2004