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 Period Ended July 31, 2001
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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.)
700 South Flower, Suite 2950
Los Angeles, California 90017
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(Address of principal executive offices) (Zip Code)
(213) 627-7599
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(Registrant's telephone number, including area code)
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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 [ ]
As of September 12, 2001, 11,547,925 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,
2001 2000
----------- ----------
(unaudited) (Restated)
CURRENT ASSETS
Cash and cash equivalents $ 315,528 $ 73,867
Trade accounts receivable, net of allowance for
doubtful accounts of $88,561 at July 31, 2001
and $930,766 at October 31, 2000 896,993 455,819
Prepaid expenses and other 67,162 116,785
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Total current assets 1,279,683 646,471
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PROPERTY AND EQUIPMENT, net 1,235,526 1,539,544
PROPERTY AND EQUIPMENT NOT IN USE, SECURING
CONVERTIBLE DEBENTURES 320,307 320,307
ADVERTISING CREDITS, net 2,453,027 2,453,027
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF
COMPANY ACQUIRED, net of amortization
of $220,809 at July 31, 2001 and $104,148
at October 31, 2000 1,851,866 937,327
OTHER ASSETS 235,896 205,473
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TOTAL ASSETS $ 7,376,305 $ 6,102,149
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of convertible debentures, net of
debt discount of none and $315,988 at July 31,
2001 and October 31, 2000, respectively $ - $ 684,012
Note payable to shareholder 755,958 346,000
Current portion of capital lease obligation 118,582 102,472
Trade accounts payable 3,515,346 3,930,315
Accrued liabilities 197,910 365,765
Deferred revenue 86,156 47,190
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Total current liabilities 4,673,952 5,475,754
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CONVERTIBLE DEBENTURES, net of debt of
$72,395 at July 31, 2001 927,605 -
CAPITAL LEASE OBLIGATION, net of current portion 71,549 118,615
SHAREHOLDERS' EQUITY
Common stock, 44,169,100 shares authorized;
$0.001 par value; 11,535,425 shares issued and
11,523,403 shares outstanding at July 31, 2001
and 9,895,090 shares issued and 9,883,068
outstanding at October 31, 2000 11,535 9,895
Additional paid-in capital 35,988,936 33,838,158
Accumulated deficit (34,219,906) (33,262,907)
Accumulated other comprehensive income (loss) (5,416) (5,416)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
Notes receivable - common stock (17,080) (17,080)
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Total shareholders' equity 1,703,199 507,780
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,376,305 $ 6,102,149
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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,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
REVENUES (Restated) (Restated)
Revenues $ 1,654,079 $ 952,667 $ 3,448,338 $ 7,583,138
COSTS AND EXPENSES
Cost of revenues 1,081,179 463,057 2,357,552 7,935,782
Sales & marketing 202,818 54,668 499,641 841,451
Non cash marketing expense for warrants issued - - - 1,937,184
General & administrative 702,317 1,142,366 2,042,678 3,824,400
Depreciation and amortization 165,527 141,202 468,029 415,649
---------- ---------- ---------- ----------
Total costs and expenses 2,151,841 1,801,293 5,367,900 14,954,466
---------- ---------- ---------- ----------
Operating loss (497,762) (848,626) (1,919,562) (7,371,328)
OTHER INCOME (EXPENSE)
Amortization of debt discount (10,860) (123,010) (330,468) (363,270)
Interest income (expense), net (34,008) 6,565 (49,522) 26,617
Write off of investment in marketable
securities (11,000) - (446,820) -
Other income related to settlement
of disputes - - 1,009,373 -
---------- ---------- ---------- ----------
Total other income (expense) (55,868) (116,445) 182,563 (336,653)
---------- ---------- ---------- ----------
NET LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (553,630) (965,071) (1,736,999) (7,707,981)
PROVISION FOR INCOME TAXES - - - -
---------- ---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEM (553,630) (965,071) (1,736,999) (7,707,981)
---------- ---------- ---------- ----------
EXTRAORDINARY ITEM - forgiveness of debt - - 780,000 -
---------- ---------- ---------- ----------
NET LOSS $ (553,630) $ (965,071) $ (956,999) $(7,707,981)
========== ========== ========== ==========
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item $ (0.05) $ (0.11) $ (0.16) $ (0.93)
Extraordinary item - - 0.07 -
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Basic and diluted loss per share $ (0.05) $ (0.11) $ (0.09) $ (0.93)
SHARES USED IN THE CALCULATION OF PER
SHARE AMOUNTS:
---------- ---------- ---------- ----------
Basic and diluted common shares 11,523,403 8,616,383 10,677,487 8,289,012
========== ========== ========== ==========
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,
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2001 2000
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(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (956,999) $(7,707,981)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of debt discount 330,468 363,270
Write off of investment in marketable securities 446,820 -
Other income related to settlement of disputes (1,009,373) -
Warrants issued for services - 1,937,184
Forgiveness of debt (780,000) -
Depreciation and amortization 468,029 415,649
(Increase) decrease in:
Trade accounts receivable (441,174) 282,790
Accounts receivable - other - (20,075)
Inventory - 82,491
Prepaid expenses and other 49,623 113,078
Other assets (30,423) (143,628)
Increase (decrease) in:
Trade accounts payable 927,584 1,812,988
Accrued liabilities (167,855) (99,411)
Deferred revenue 38,966 (193,261)
Other payable - (100,000)
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Net cash used in operating activities (1,124,334) (3,256,906)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (47,350) (249,574)
Payments on note receivable - 300,000
Cash in DTI at acquisition date - 69,137
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Net cash provided by (used in) investing activities (47,350) 119,563
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CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable - (724,000)
Payments on shareholder note payable (189,619) (54,000)
Proceeds from convertible debentures 1,000,000 1,000,000
Proceeds from shareholder note payable 599,577 -
Payments on capital leases (30,956) (48,455)
Change in restricted cash - 1,137,733
Issuance of common shares for cash - 512,322
Proceeds from common stock subscription - 1,000,000
Proceeds from exercise of stock options 34,343 -
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Net cash provided by financing activities 1,413,345 2,823,600
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 241,661 (313,743)
Cash and cash equivalents at beginning of period 73,867 846,141
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Cash and cash equivalents at end of period $ 315,528 $ 532,398
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements of Dial-Thru International
Corporation and its subsidiaries included in this Form 10-Q are unaudited.
Accordingly, they 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, 2001 and 2000 have been included. Operating results
for the nine month period ended July 31, 2001 are not necessarily indicative
of the results that may be expected for the year ending October 31, 2001.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K/A for
the year ended October 31, 2000.
On November 2, 1999, the Company acquired substantially all of the business
and assets of Dial-Thru International Corporation ("Dial Thru"), a
California corporation, now known as DTI-LIQCO, Inc., along with the rights
to the name "Dial-Thru International Corporation." On January 19, 2000,
the Company changed its name from ARDIS Telecom & Technologies, Inc. to
Dial-Thru International Corporation ("DTI").
During fiscal 1998 and 1999, the Company's operations included mainly sales
and distribution of prepaid domestic and international calling cards to
wholesale and retail customers. Starting January 2000, following the
acquisition of Dial Thru, the Company changed its focus from prepaid calling
cards to becoming a full service, facility-based provider of communication
products to small and medium size businesses, both domestically and
internationally. The Company now 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 the products to the end user.
In addition to helping companies achieve significant savings on long-
distance voice and fax calls by routing calls over the Internet, or the
Company's private network, 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.
DTI is also introducing "VoIP" to a new segment of customers by delivering a
high quality, reliable and scaleable solution that uniquely addresses the
needs of the rapidly growing "VoIP" industry.
NOTE B - REVENUE RECOGNITION
Revenues from prepaid services sold are recognized from customer usage. The
Company sells products to retailers and distributors at a fixed price. When
the retailer or distributor is invoiced, deferred revenue is recognized. The
Company recognizes revenue, and reduces the deferred revenue account as the
customer utilizes calling time or upon expiration of cards containing unused
calling time.
Revenues generated by international re-origination and dial-thru services
are based on minutes of customer usage. The Company records payments
received in advance as deferred revenue until such services are provided.
NOTE C - STATEMENTS OF CASH FLOWS
During the nine months ended July 31, 2001 and 2000, the Company paid $0 and
$21,099, respectively, for interest. For the same periods, no cash was paid
for income taxes.
Non-cash investing and financing activities are as follows for the nine
months ended July 31, 2001 and 2000:
2001 2000
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Conversion of debt to equity $1,000,000 $ -
Stock issued in connection with acquisition $1,031,200 $ -
Warrants issued to debtor recorded as debt
discount $ 86,875 $ 492,000
Convertible debt issued with below market
conversion feature $ - $ 117,000
NOTE D - ACQUISITION
On November 2, 1999, the Company consummated the acquisition of
substantially all of the assets and business of Dial-Thru International
Corporation (the "Seller"), a California corporation. The acquisition was
effected pursuant to the terms of an Asset Purchase Agreement between the
Company, a wholly owned subsidiary of the Company, the Seller and John
Jenkins, the sole shareholder of the Seller. The Company issued to the
Seller an aggregate of 1,000,000 shares of common stock, recorded a total
purchase price of $937,500 using the Company's common stock price at the
time the acquisition was announced, and agreed to issue an additional
1,000,000 shares of its common stock upon the acquired business achieving
specified goals. In March 2001, the additional 1,000,000 shares of common
stock were issued to the Seller in accordance with the terms of the Asset
Purchase Agreement, and the Company recorded additional purchase price of
$1,031,200 using the Company's common stock price at the time of approval of
the issuance. The acquisition was accounted for as a purchase. Goodwill
initially recorded in the acquisition is being amortized over a period of 10
years beginning November 1999. Incremental goodwill is being amortized over
its remaining life, approximately 8.5 years (See Note L). The results of
operations of the acquired entity are included in the consolidated
operations of the Company from November 1, 1999.
NOTE E - CONVERTIBLE DEBENTURES
In February 2000, the Company executed non-interest bearing convertible note
agreements (the "Notes") with nine accredited investors, which provided
financing of $1,000,000. The Notes were payable on the earlier of one year
from the date of issuance or the Company's consummation of a debt or equity
financing in excess of $5,000,000. If the Notes were not repaid within 90
days of issuance, they were convertible into shares of common stock at $4.00
per share while remaining outstanding. The Company recorded debt discount
of approximately $117,000 in February 2000 related to these Notes for
the difference in the conversion price of $4.00 and the market price of
$4.47 on the date the Notes were approved by the Board of Directors. The
Company also issued to the holders of the Notes warrants to acquire an
aggregate of 125,000 shares of common stock at an exercise price of $3.00
per share, which expire five years from the date of issuance. In February
2000, the Company recorded debt discount of approximately $492,000.
This amount represents the Company's estimate of the fair value of
these warrants at the date of grant using the Black-Scholes pricing model
with the following assumptions: applicable risk-free interest rate based on
the current treasury-bill interest rate at the grant date of 6%; dividend
yield of 0%; volatility factors of the expected market price of the
Company's common stock of 1.62; and an expected life of the warrants of
three years. The Company is amortizing this discount over the initial
maturity of these Notes of one year. The amount was fully amortized as of
April 30, 2001. Under the terms of the agreement, additional warrants to
acquire up to an aggregate of 125,000 shares of common stock at an exercise
price of $2.75 per share were issued to the holders of the Notes upon
conversion of the debt to equity as discussed below. During March 2001,
terms of the Notes were modified and the debt was converted into 400,000
common shares. Additionally, in connection with the conversion, the
warrants to purchase 250,000 shares of common stock were modified to allow
for an exercise price of $0.01 per share and 150,000 additional warrants
with an exercise price of $3.00 per share were issued to the note holders.
On April 11, 2001, the Company executed a 6% convertible debenture (the
"Debenture") with Global Capital Funding Group L.P, which provided financing
of $1,000,000. The Debenture maturity date is April 11, 2003. The
Debenture is secured by $320,307 of property and equipment. 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) 80% of the average of the five (5) 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 Debenture shall be at the
Formula Conversion Price. The Company also issued to the holder of the
debenture warrants to acquire an aggregate of 100,000 shares of common stock
at an exercise price of $0.89 per share, which expire on April 11, 2006. In
April 2001, the Company recorded debt discount of $86,875. This amount
represents the Company's estimate of the fair value of these warrants
at the date of grant using the Black-Scholes pricing model with the
following assumptions: applicable risk-free interest rate based on the
current treasury-bill interest rate at the grant date of 6%; dividend yield
of 0%; volatility factors of the expected market price of the Company's
common stock of 1.53; and an expected life of the warrants of five years.
The Company is amortizing this discount over the initial maturity of the
debenture of two years. The amount charged to expense and accumulated
amortization for the three months ended July 31, 2001 totaled approximately
$11,000.
NOTE F - NOTE PAYABLE TO SHAREHOLDER
In connection with the acquisition of Dial-Thru International Corporation on
November 2, 1999, the Company assumed a related party note payable to the
sole owner of the acquired entity of approximately $400,000. The note bears
interest at 6% per annum, is payable in quarterly installments of $50,000
plus interest beginning November 1, 1999, and is currently due upon demand.
The Company is currently in arrears of quarterly payments to the note
holder. During the three month period ended July 31, 2001 there was no
change in the balance due on the note. The outstanding balance at July 31,
2001 was $755,958, and is classified as a current liability.
NOTE G - COMMON STOCK ISSUANCES
During the nine months ended July 31, 2001, the Company issued an additional
121,000 shares in connection with the exercise of options for $34,343.
NOTE H - MARKETABLE SECURITIES
Marketable securities included one investment in a common stock and was
classified as available-for-sale and carried at market value. Unrealized
holding gains and losses are reported as a separate component of
Stockholders' equity until realized. Realized gains and losses on the sale
of investments are based upon the specific identification method and are
included in the statement of operations. During the nine months ended July
31, 2001, a reduction in market value which was considered other than
temporary resulted in recording a loss of $446,820, an amount equal to the
full value of the investment (see Note K).
NOTE I - SETTLEMENT OF LEGAL/CARRIER DISPUTES AND FORGIVENESS OF DEBT
During the quarter ended January 31, 2001, the Company settled a pending
lawsuit with Star Telecommunications, Inc. In conjunction with the
settlement the Company received a carrier usage credit in the amount of
$780,000 for previous services and future services comprised of one year of
no charge domestic carrier services for transporting traffic between Los
Angeles, New York and Miami. The $780,000 credit for past services is
recorded as forgiveness of debt in the accompanying statement of operations.
The Company also received 1,100,000 shares of common stock of Star
Telecommunications, which were recorded at fair value totaling $446,820,
which were subsequently written off (See Note H). On March 13, 2001, Star
Telecommunications filed for Chapter 11 reorganization. It is uncertain
whether the Company will be able to utilize its carrier services agreement
with Star Telecommunications. Given this uncertainty, the Company has
placed no value on the future services.
The Company also recorded income of $465,000 in connection with the
settlement of disputes with RSL Communications, Inc. ("RSL") during the nine
months ended July 31, 2001. This amount was originally credited to the
Company by RSL during the year ended October 31, 2000. Subsequently, the
credit was rescinded and as the outcome was unclear no benefit was recorded
during fiscal 2000. During the first quarter 2001, RSL management
acknowledged the credit. The vendor is in the process of liquidating its
United States operations. Accordingly, the Company has applied the credit
to amounts owed to the vendor and recorded the effect as income in other
income(expense) during the three months ended January 31, 2001.
During the nine months ended July 31, 2001, the Company settled other
disputes in connection with carrier services resulting in other income of
$97,186.
NOTE J - SEGMENT INFORMATION
The Company is organized by line of business. Historically, the two major
lines of business operating segments are prepaid calling cards and dial thru
services. The accounting policies of the line of business operating
segments are the same as those described in the summary of significant
accounting policies. Revenue represents revenue from external customers.
During the nine months ended July 31, 2001 substantially all revenue and
expenses related to dial thru services. At July 31, 2001, all assets other
than property and equipment not in use securing debt are now used in the
dial thru business operations. Revenue and net loss for the prepaid card
business and dial thru business for the nine months ended July 31, 2000 were
$2,749,000, $6,425,000 and $4,834,000 and $1,283,000 respectively. Total
assets of the prepaid business and dial thru business at July 31, 2000 were
$2,247,000 and $2,428,000, respectively.
NOTE K - RESTATEMENT
The Company has restated the Form 10-Q for the three months ended
April 30, 2001 to include the write off of marketable securities available
for sale. The Company had previously reflected this decrease in value as a
temporary decline within shareholders' equity. In addition, the prior
comparative Form 10-Q for the three months ended April 30, 2000 has been
restated to include a charge for compensatory warrants issued to
distributors (in the prepaid calling card business) totaling $1,937,184.
Both of these adjustments were non-cash charges to operations. The
adjustment increased net losses or decreased net income in each period
respectively. These adjustments are reflected in the nine month results
ended July 31, 2000 and 2001.
The consolidated balance sheet as of July 31, 2001 includes the effect of
certain restatements applied to the October 31, 2000 Form 10-K/A. These
restatements and the April 30, 2001 restatement have the effect of
increasing additional paid in capital by $2,512,726; increasing the
accumulated deficit by $ 2,948,546; decreasing other comprehensive loss by
$435,820; with no change to net equity.
NOTE L - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" which
requires the purchase method of accounting for business combination
transactions initiated after June 30, 2001.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets". The statement requires that goodwill recorded on acquisitions
completed prior to July 1, 2001 be amortized through December 31, 2001.
Goodwill amortization is precluded on acquisitions completed after June 30,
2001. Effective January 1, 2002, goodwill will no longer be amortized but
will be tested for impairment as set forth in the statement. We are
currently reviewing the new standard and evaluating the effects of this
standard on our future financial condition, results of operations, and
accounting policies and practices
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
quarterly Report on Form 10-Q include "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"expects", "should", "will", "anticipates", "estimates", "believes," "plans"
and words of similar meaning. These forward-looking statements relate to
business plans, programs, trends, results of future operations, satisfaction
of future cash requirements, funding of future growth, acquisition plans and
other matters. In light of the risks and uncertainties inherent in all such
projected matters, the inclusion of forward-looking statements in this Form
10-Q should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved or that
operating expectations will be realized. Revenues and results of operations
are difficult to forecast and could differ materially from those projects in
forward-looking statements contained herein, including without limitation
statements regarding the Company's belief of the sufficiency of capital
resources and its ability to compete in the telecommunications industry.
Actual results could differ from those projected in any forward-looking
statements for, among others, the following reasons: (a) increased
competition from existing and new competitors using Voice over Internet
Protocol ("VoIP") to provide telecommunications services, (b) the relatively
low barriers to entry for start-up companies using VoIP to provide
telecommunications services, (c) the price-sensitive nature of consumer
demand, (d) the Company's dependence upon favorable pricing from its
suppliers to compete in the telecommunications industry, (e) increased
consolidation in the telecommunication industry, which may result in larger
competitors being able to compete more effectively, (f) the failure to
attract or retain key employees, (g) continuing changes in governmental
regulations affecting the telecommunications industry and the Internet, (h)
changing consumer demand, technological development and industry standards
that characterize the industry, and (i) the "Certain Business Factors"
identified in the Company's Annual Report on Form 10-K/A for the year
ended October 31, 2000. In light of the significant uncertainties inherent
in the forward-looking statements included in this Form 10-Q, you should not
consider the inclusion of such information as a representation by the
Company or anyone else that we will achieve our objectives and plans. The
Company does not undertake to update any forward-looking statements
contained herein. Readers are cautioned not to place undue reliance on the
forward-looking statements made in, or incorporated by reference into, this
Quarterly Report on Form 10-Q or in any document or statement referring to
this Quarterly Report on Form 10-Q.
GENERAL
Dial-Thru International Corporation is a facilities-based, global Internet
Protocol ("IP") communications company providing connectivity to
international markets experiencing significant demand for IP enabled
services. The Company provides a variety of international telecommunications
services targeted to small and medium sized enterprises ("SME's") that
include the transmission of voice and data traffic and the provision of Web-
based and other communications products and services. The Company utilizes
Voice over Internet Protocol ("VoIP") packetized voice technology (and other
compression techniques) to improve both cost and efficiencies of
telecommunication transmission mechanisms, and is developing a private IP
Telephony network.
IP Telephony, or VoIP, is voice communication that has been converted into
digital packets and is then addressed, prioritized, and transmitted over any
form of broadband network, utilizing the same technology that makes the
Internet possible. These technologies allow the Company to transport voice
communications with the same high-density compression as networks initially
designed for data transmission, and at the same time utilize a common
network for providing customers with enhanced Web-based products and
services.
The Company's primary focus is in niche markets where competition is not as
keen, thereby giving it opportunities for greater profit margins and market
share. These markets include regions of the world where the deregulation of
telecommunications services has begun, or is in early development. The
Company also targets smaller markets that have not attracted large multi-
national providers. Africa, Asia, and parts of South America offer the
greatest abundance of these target markets.
Cooperating with overseas carriers and the incumbent operator, usually
government owned telephone companies, gives the Company a high degree of
leverage to engage in the co-branding of jointly marketed products,
including IP based enhancements that it has developed, rather than simply
basing a strategy on pricing arbitrage. As a result, the Company is
proactively invited to participate rather than reactively prevented from
entering these new markets.
Unlike many other wholesale VoIP carriers in the market, the Company is
focused on retail telecommunications sales to business customers, which
allows the Company to provide a complete package of communication services,
not just wholesale voice traffic. A portfolio of enhanced offerings provides
the Company with the opportunity for higher profit margins and better
customer loyalty, thus making the Company less susceptible to competitive
forces and market churn.
In tandem with overseas partners, the Company is deploying a "book-end"
strategy by targeting markets at both ends of international circuits. As an
example, while cooperating with partners to target the SME market in a
selected foreign region, the Company also targets corresponding expatriates
and foreign owned businesses back in the U.S. By providing these services
in cooperation with the carrier that will ultimately terminate the calls in
the caller's "home" country, the Company enjoys reduced facilities costs,
increased economies of scale, lower customer acquisition costs, and higher
customer retention.
Focusing on cooperation in emerging markets also gives the Company added
benefit of being able to develop and exploit labor cost advantages not found
in industrial markets. For example, the Company plans to develop new and
extremely low-cost call center applications that will tie into and enhance
its new Web and VoIP applications. By relying on VoIP and IP, rather than
traditional voice technology, the Company ensures that its network
infrastructure is extremely cost-effective and state-of-the-art.
The following discussion should be read in conjunction with the Company's
Form 10-K/A and the consolidated financial statements for the year ended
October 31, 2000, and the Form 10-K and the consolidated financial
statements for the years ended 1999, and 1998; the Company's Form 10-Q for
the quarter ending July 31, 2000; and the consolidated financial statements
and related notes for the quarter ended July 31, 2001 found elsewhere in
this report.
RESULTS OF OPERATIONS
THREE MONTH COMPARISON
REVENUES
The Company's primary source of revenue is the sale of voice and fax traffic
internationally over its VoIP network, which is measured in minutes,
primarily to small and medium sized enterprises ("SME's"). The Company
charges its customers fees per minute of usage that are dependent on the
destination of the call and is recognized in the period in which the call is
completed.
Revenues were $1,654,000 for the quarter ended July 31, 2001, compared to
$953,000 for the quarter ended July 31, 2000, representing an increase of
74% from the prior period. All of the Company's revenues for the three
months ended July 31, 2001 were from the Company's international long
distance business described above, compared to 96% for the same period of
2000. The remaining 4% of revenue for 2000 was generated from existing
prepaid long distance. The increase in revenues for this quarter compared
to the prior year resulted primarily from growth in the Company's customer
base as it continues to expand its market presence internationally. The
Company expects revenues to increase as it continues to develop
opportunities in new markets and expand existing relationships.
EXPENSES
The Company's costs of revenues are termination fees, purchased minutes and
fixed cost for specific international and domestic private lines used to
transport the Company's minutes. Termination fees are paid to local service
providers and other international and domestic carriers to terminate calls
received from the Company's network. This traffic is measured in minutes, at
a negotiated contract cost per minute.
Costs of revenues were $1,081,000, or 65% of revenues, for the quarter ended
July 31, 2001, compared to $463,000, or 49% of revenues, for the quarter
ended July 31, 2000. The cost of revenues for the three months ended July
31, 2000 included credits of approximately $390,000 related to settlements
of disputed carrier overcharges. Without this credit, cost of revenues
would have been $853,000, or 90% of revenues. Costs of revenues for the
three months ended July 31, 2001 and 2000 are primarily from the Company's
international long distance business. By focusing its business away from low
margin prepaid calling cards to delivering higher margin international
communication services to SME's in niche markets utilizing its VoIP network,
the Company has been able to demonstrate the ability to realize higher
margins on revenues across its product lines.
Sales and marketing expenses include expenses relating to the salaries,
payroll taxes, benefits and commissions that the Company pays for sales
personnel and the expenses associated with advertising and marketing
programs, including expenses relating to the Company's outside public
relations firms.
Sales and marketing expenses were $203,000, or 15% of revenues for the
quarter ended July 31, 2001, compared to $55,000, or 6% of revenues, for the
quarter ended July 31, 2000. Sales and marketing expenses for both periods
are attributable to the Company's international long distance business. The
increase in sales and marketing expenses in absolute dollars and as a
percentage of revenue is the result of the Company's costs incurred in
startup operations in Latin America. In the short term, the Company expects
that sales and marketing expenses will increase in absolute dollars and as a
percentage of revenues as the Company begins to utilize its advertising
credits to promote its products and services. In the long term, the Company
expects a decrease in sales and marketing expenses as a percentage of
revenues as it realizes increasing revenues from its advertising programs as
well as its costs incurred in Latin America.
General and administrative expenses include salary, payroll tax, benefit
expenses and related costs for general corporate functions, including
executive management, finance and administration, legal and regulatory,
information technology and human resources.
General and administrative expenses were $702,000, or 42% of revenue, for
the quarter ended July 31, 2001, compared to $1,142,000, or 120% of revenue,
for the quarter ended July 31, 2000. For the three months ended July 31,
2001, general and administrative expenses relate to the Company's
international long distance business, compared to $519,000 for the three
months ended July 31, 2000. The remaining general and administrative
expenses for the three months ended July 31, 2000 of $623,000 are
attributable to the prepaid long distance business. The change in the
Company's business away from prepaid calling cards, which requires a large
infrastructure to support and control a large volume of transactions, as
well as management's decision to consolidate its US operations into one
location, has resulted in an overall drop of its general and administrative
expenses. As the Company's revenues continue to grow, it does not
anticipate a significant increase in general and administrative expenses in
absolute dollars to support this growth. As a result, in future periods the
Company anticipates a further reduction of these expenses as a percentage of
revenue.
During the quarter ended July 31, 2001, the Company incurred $11,000 of
debt discount and $34,000 of net interest expense compared with $123,000 of
debt discount and $7,000 of net interest income for the quarter ended July
31, 2000. The decrease in debt discount is attributable to the conversion
of the Company's $1.0 million convertible notes to equity in March 2001,
which had an original debt discount of $492,000 and was being amortized over
three years.
As a result of the foregoing, the Company incurred a net loss of $554,000,
or $.05 per share for the quarter ended July 31, 2001, as compared to a net
loss of $965,000, or $0.11 per share, for the quarter ended July 31, 2000.
NINE MONTH COMPARISON
REVENUES
Revenues were $3,448,000 for the nine months ended July 31, 2001, compared
to $7,583,000 for the nine months ended July 31, 2000, representing a
decrease of 55% from the prior period. Revenues for the nine months ended
July 31, 2001 were from the Company's international long distance business
as described above, compared to $4,834,000 for the nine months ended July
31, 2000. The remaining revenue for 2000 of $2,749,000 was derived from the
prepaid long distance business. Costs associated with the discontinuation
of the prepaid business, as well as, a shift in the Company's strategic
focus have prevented the Company from fully developing and marketing its
redirected business, resulting in a decline in revenues from international
long distance services. The Company now devotes all of its resources to
providing international communication services in niche markets to SME's
either through direct sales efforts or resellers in each market. Now that
costs have been eliminated and new markets have been reached, the Company
anticipates significant revenue growth in future periods.
EXPENSES
Costs of revenues were $2,358,000, or 68% of revenues, for the nine months
ended July 31, 2001, compared to $7,936,000, or 105% of revenues, for the
nine months ended July 31, 2000. Costs of revenues for the nine months
ended July 31, 2001 were from the international long distance business. For
the nine months ended July 31, 2000, $4,088,000 of cost of revenues related
to the international long distance business, with the remainder related to
the prepaid long distance business. By focusing its business away from low
margin prepaid calling cards to delivering higher margin international
communication services to SME's in niche markets utilizing its VoIP network,
the Company has been able to demonstrate the ability to realize higher
margins on sales across its product lines.
Sales and marketing expenses were $500,000, or 15% of revenues for the nine
months ended July 31, 2001, compared to $841,000, (excluding a non-cash
charge of $1,937,184 for stock warrants issued to distributors, previously
employees, of the Company's prepaid products) or 11% of revenues, for the
nine months ended July 31, 2000. The sales and marketing expenses for the
nine months ended July 31, 2001 relate to the international long distance
business, while a majority of the expense for 2000 related to the prepaid
long distance business. The increase in sales and marketing as a percentage
of revenues is the result of the Company's costs incurred in startup
operations in Latin America. In the short term, the Company expects that
sales and marketing costs will increase in absolute dollars and as a
percentage of revenues as the Company begins to utilize its advertising
credit asset to promote its products and services. In the long term, the
Company expects a decrease in sales and marketing expenses as a percentage
of revenues as it realizes increasing revenues from its advertising programs
as well as its costs incurred in Latin America.
General and administrative expenses were $2,043,000, or 59% of revenues, for
the nine months ended July 31, 2001, compared to $3,824,000, or 50% of
revenues, for the nine months ended July 31, 2000. For the nine months
ended July 31, 2001, the general and administrative expenses are
attributable to the international long distance business, compared to
approximately $1,306,000 for the nine months ended July 31, 2000. The
remaining general and administrative expenses of $2,518,000 are attributable
to the prepaid long distance business. The change in the Company's business
away from prepaid calling cards, which requires a larger infrastructure to
support and control a large volume of transactions, as well as management's
decision to consolidate its US operations into one location has resulted in
an overall drop of its general and administrative expenses in absolute
dollars. Although general and administrative expenses for the international
business have increased to support the Company's initial growth, the Company
believes its current infrastructure is positioned to handle future growth.
As a result, the Company anticipates a reduction of these expenses as a
percentage of revenue in future periods.
During the nine months ended July 31, 2001, the Company incurred $331,000 of
debt discount and $50,000 of net interest expense compared with $364,000 of
debt discount and $27,000 of net interest income for the nine months ended
July 31, 2000. The 2000 and 2001 debt discount are attributable to the
Company's $1.0 million convertible notes, which had original debt discount
totaling $609,000, which were being amortized over a three year period.
The convertible notes were converted to equity in March 2001, and the
remaining unamortized debt discount was charged to expense. In addition,
during the current 2001 period the Company is amortizing debt discount
in connection with additional debt financing obtained in April 2001.
Settlements with two major carriers over charges in prior periods amounted
to a total credit to the statements of operations of $1,790,000 for the nine
months ended July 31, 2001. Of this amount $780,000 is reflected as
forgiveness of debt with the balance being included in other income on the
Consolidated Statements of Operations for the period.
As a result of the foregoing, the Company generated a net loss of $957,000
or $0.09 per share, for the nine months ended July 31, 2001, as compared to
a net loss of $7,708,000, or $0.93 per share, for the nine months ended July
31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2001, the Company had cash and cash equivalents of $316,000, an
increase of $243,000 from the balance at October 31, 2000. As of July 31,
2001, the Company had a working capital deficit of $3,394,000, compared to a
working capital deficit of $2,932,000 at July 31, 2000. As of July 31,
2001, the Company's current assets of $1,280,000 included net accounts
receivable of $897,000, which has increased as a result of the growth in the
Company's revenues.
During the nine months ended July 31, 2001, net cash used in operating
activities was $1,124,000, compared to net cash used in operating activities
of $3,257,000 for the nine months ended July 31, 2000. The decrease in net
cash used in operating activities for the nine months ended July 31, 2001
was primarily due to a net loss of $957,000 versus a net loss of $7,708,000
from the comparable period in the prior year offset partially by other
changes in current assets and liabilities and other non-cash items.
Cash used in investing activities was $47,000 for the nine months ended July
31, 2001, compared to cash provided by investing activities of $120,000 for
the nine months ended July 31, 2000. For the nine months ended July 31,
2000, the Company had receipts of $300,000 from notes receivable, offset by
$250,000 of capital expenditures. The investing activities for the nine
months ended July 31, 2001 are attributable to capital expenditures.
Cash provided by financing activities for the nine months ended July 31,
2001, totaled $1,413,000, compared to cash provided by financing activities
of $2,824,000 for the nine months ended July 31, 2000. During the nine
months ended July 31, 2001, significant components of cash provided by
financing activities include $1,000,000 in proceeds from a convertible
debenture and net proceeds from shareholder of $410,000. During the nine
months ended July 31, 2000, cash provided by financing activities included
payments of $724,000 on a note payable and the resulting release of
restricted cash of $1,138,000, the raising of $1,000,000 through the sale
of a convertible debenture and $1,000,000 through the issuance of a common
stock subscription agreement, and $512,000 in proceeds received upon the
exercise of stock options.
Because the Company is in a growth mode and at the same time refocused its
operations during fiscal 2000, cash flow was constrained and resulted in
slow payment to vendors and growth in payables. The Company's cash flow
commitments entering fiscal 2001 included operating overhead, outstanding
debt of $1 million, and settling a significant portion of its trade payables
of $3.9 million (as of Oct. 31, 2000). The Company has made a significant
reduction in monthly overhead expenses and the Company has converted the
debt to equity. Although the Company has been able to reduce certain
payables though settlements with carriers, it continues to pay certain
vendors slowly, resulting in a moderate decline in its accounts payable from
October 31, 2000.
The Company believes that it will be able to significantly improve its cash
flows in the next twelve months for the following reasons:
1. The Company has lowered operating expenses by reorganization of
operating staff and changing channels of distribution over the past
twelve months. This has resulted in reduced expenses in excess of
$250,000 per month. The Company will continue to closely monitor these
expenses and make adjustments as necessary.
2. The Company converted $1 million of debt into equity. The Company
anticipates converting an additional $1 million of its Convertible
Debentures to equity. (See additional discussion further).
3. The Company expects to be able to bring in additional financing of $1
to $3 million during fiscal year 2001, with $1 million of convertible
debt financing having already been completed in the second quarter.
(See additional discussion further).
4. The Company is in negotiations to convert the Note Payable to
Shareholder to long-term.
5. The Company expects an increase in recurring revenues and improvements
in profit margin due to changes in product focus sufficient to produce
positive monthly operating cash flow by fiscal year end.
6. Additionally, during the next twelve month period the Company believes
it will need approximately $1 million through improved operating cash
flow or additional financing transactions.
In February 2000 the Company consummated a private placement of $1,000,000
in principal amount of convertible debentures. During the second quarter of
2001, the notes were converted into 400,000 shares of the Company's common
stock at a conversion price of $2.50 per share. The holders of the notes
were also issued warrants to acquire an aggregate of 250,000 shares of the
Company's common stock at an exercise price of one half at $3.00 per share
and one half at $2.75 per share. As a condition of the conversion of the
notes into common stock, the exercise price of these warrants were repriced
to $0.01, and an additional 125,000 warrants were issued with an exercise
price of $3.00.
On April 11, 2001, the Company executed a 6% convertible debenture (the
"Debenture"") with Global Capital Funding Group L.P, which provided
financing of $1,000,000. The Debenture maturity date is April 11, 2003.
The conversion price equals 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 ay immediately preceding the Closing Date ("Fixed
Conversion Price") and (ii) 80% of the average of the five (5) 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 Debenture
shall be at the Formula Conversion Price.
The Company also issued to the holders of the Debenture warrants to acquire
an aggregate of 100,000 shares of common stock at an exercise price of
$0.89 per share, which expire on April 11, 2006. In April 2001, the Company
recorded debt discount of approximately $86,875. This amount represents
the Company's estimate of the fair value of these warrants at the
date of grant using the Black-Scholes pricing model with the following
assumptions: applicable risk-free interest rate based on the current
treasury-bill interest rate at the grant date of 6%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common
stock of 1.53; and an expected life of the warrants of five years. The
Company is amortizing this discount over the initial maturity of these notes
of two years. The amount charged to expense and accumulated amortization
for the three months ended July 31, 2001 totaled approximately $11,000.
The Company's growth models for its business are scaleable, but the rate of
growth is dependent on the availability of future financing for capital
resources. The Company plans to commit at least $1.0 million for capital
investment in the next twelve month period, and plans to finance additional
infrastructure development externally through debt and/or equity offerings
and internally through the operations of its Telecommunications Business.
The Company plans to obtain vendor financing for a major portion of its
equipment needs associated with expansion. The Company believes that, with
sufficient capital, it can significantly accelerate its growth plan. The
Company's failure to obtain additional financing could significantly delay
the Company's implementation of its business plan and have a material
adverse effect on its business, financial condition and operating results.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are required to be filed with this quarterly
report on Form 10-Q:
None.
(b) Reports on Form 8-Ks
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
(Registrant)
DATE: September 14, 2001 /s/ John Jenkins
-------------------------- --------------------------------------
John Jenkins
President, and Chief Operating Officer
(Principal Financial Officer)