United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended April 30, 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 June 12, 2001, 11,416,590 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 (Restated) (Restated)
------ April 30, October 31,
2001 2000
----------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 565,103 $ 73,867
Trade accounts receivable, net of allowance for
doubtful accounts of $930,766 at April 30, 2001
and October 31, 2000 467,768 455,819
Prepaid expenses and other 97,243 116,785
Investment in available for sale
marketable securities 11,000 -
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Total current assets 1,141,114 646,471
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PROPERTY AND EQUIPMENT, net 1,319,633 1,539,544
PROPERTY AND EQUIPMENT HELD FOR SALE 320,307 320,307
ADVERTISING CREDITS, net 2,453,027 2,453,027
OTHER ASSETS 193,493 205,473
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF
COMPANY ACQUIRED, net of accumulated amortization
of $165,859 at April 30, 2001 and $104,148 at
October 31, 2000 1,906,816 937,327
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TOTAL ASSETS $ 7,334,390 $ 6,102,149
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt, net of debt
discount of none and $315,988 at April 30,
2001 and October 31, 2000, respectively $ - $ 684,012
Note payable to shareholder 755,958 346,000
Current portion of capital lease obligation 79,293 102,472
Trade accounts payable 2,980,687 3,930,315
Accrued liabilities 149,257 365,765
Deferred revenue 77,005 47,190
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Total current liabilities 4,042,200 5,475,754
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LONG-TERM DEBT, net of debt discount of $399,439 600,561 -
at April 30, 2001
CAPITAL LEASE OBLIGATION, net of current portion 118,616 118,615
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, 44,169,100 shares authorized;
$.001 par value; 11,506,590 shares issued and
11,494,568 shares outstanding at April 30, 2001
and 9,895,090 shares issued and 9,883,068
outstanding at October 31, 2000 11,506 9,895
Additional paid-in capital 36,719,352 33,838,158
Accumulated deficit (34,080,479) (33,262,907)
Accumulated other comprehensive income (loss) (5,416) (5,416)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
Note receivable - common stock (17,080) (17,080)
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Total shareholders' equity 2,573,013 507,780
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,334,390 $ 6,102,149
=========== ==========
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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Restated) (Restated) (Restated) (Restated)
REVENUES
Revenues $ 903,639 $ 2,823,704 $ 1,794,258 $ 6,630,471
---------- ---------- ---------- ----------
Total revenues 903,639 2,823,704 1,794,258 6,630,471
COSTS AND EXPENSES
Cost of revenue 609,367 3,109,052 1,276,373 7,472,725
Sales & marketing 223,001 278,569 425,575 786,783
Non-cash sales and marketing expense - 1,937,184 258,616 1,937,184
General & administrative 598,259 1,741,938 1,211,609 2,682,034
Depreciation and amortization 155,612 159,342 302,502 274,447
---------- ---------- ---------- ----------
Total costs and expenses 1,586,239 7,226,085 3,474,675 13,153,173
---------- ---------- ---------- ----------
Operating income (loss) (682,600) (4,402,381) (1,680,417) (6,522,702)
OTHER INCOME (EXPENSES)
Financing fees (159,207) (240,260) (475,195) (240,260)
Interest income (expense), net (12,730) (16,899) (15,514) 20,052
Write off of investment in marketable
securities (435,820) - (435,820) -
Other income related to settlement
of disputes 97,186 - 1,789,373 -
---------- ---------- ---------- ----------
Total other income (expense) (510,571) (257,159) 862,844 (220,208)
---------- ---------- ---------- ----------
NET LOSS BEFORE INCOME TAXES (1,193,171) (4,659,540) (817,573) (6,742,910)
PROVISION FOR INCOME TAXES - - - -
---------- ---------- --------- ----------
NET INCOME (LOSS) $(1,193,171)$(4,659,540) $ (817,573) $(6,742,910)
========== ========== ========= ==========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share $ (0.11) $ (0.55) $ (0.08) $ (0.83)
Dilutive impact of stock options,
warrants and convertible debentures - - - -
---------- --------- --------- ----------
Diluted earnings (loss) per share $ (0.11) $ (0.55) $ (0.08) $ (0.83)
========== ========= ========= ==========
SHARES USED IN THE CALCULATION OF PER
SHARE AMOUNTS:
Basic common shares 10,571,756 8,353,496 10,230,024 8,120,228
Dilutive impact of stock options,
warrants and convertible debentures - - - -
---------- --------- ---------- ----------
Dilutive common shares 10,571,756 8,353,496 10,230,024 8,120,228
========== ========= ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
APRIL 30,
------------------------
2001 2000
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(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (817,573) $(6,742,910)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Stock and warrants issued for services 258,616 -
Financing fees and amortization of
debt discount 333,355 240,260
Non cash interest expense 141,840 -
Write off of investment in marketable
securities 435,820 -
Other income related to settlement
of disputes (1,789,373) -
Compensation related to issuance of
stock warrants - 1,937,184
Depreciation and amortization 302,502 274,447
(Increase) decrease in:
Trade accounts receivable (11,949) 11,147
Accounts receivable - other - (19,393)
Inventory - 82,539
Prepaid expenses and other 28,341 89,630
Other assets 10,000 (84,344)
Increase (decrease) in:
Trade accounts payable 386,441 2,851,966
Accrued liabilities (216,508) 29,764
Deferred revenue 29,815 (173,834)
Other payable - (80,000)
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Net cash provided by (used in) operating
activities (908,673) (1,583,544)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (21,215) (198,630)
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 (21,215) 170,507
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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 notes payable 1,000,000 1,000,000
Proceeds from shareholder note payable 599,577 -
Payments on capital leases (23,178) (47,991)
Change in restricted cash - 937,733
Issuance of common shares for cash - 490,970
Proceeds from exercise of stock options 34,344 -
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Net cash provided by (used in) financing
activities 1,421,124 1,602,712
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 491,236 189,675
Cash and cash equivalents at beginning of period 73,867 846,141
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Cash and cash equivalents at end of period $ 565,103 $ 1,035,816
========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Cash paid for interest $ - $ 20,894
Conversion of debt to equity 1,000,000 -
Additional shares issued as
purchase consideration 1,031,200 -
Convertible debt issued with below market
conversion feature 329,931 -
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 six month
periods ended April 30, 2001 and 2000 have been included. Operating results
for the six month period ended April 30, 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
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, 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
acquistion 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 "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 - EARNINGS (LOSS) PER SHARE
The shares issuable upon the exercise of stock options and warrants, and
convertible debentures are included in earnings (loss) per share to the
extent that they are dilutive.
NOTE C - REVENUE RECOGNITION AND COSTS OF REVENUES
Revenues from prepaid services sold where the Company operates its own
switch are recognized from customer usage. The Company sells products to
retailers and distributors at a fixed price. When the retailer or
distributor is invoiced, referred 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 D - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company has an outstanding receivable from a customer of approximately
$435,000, all of which has been reserved.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. Accounts are guaranteed by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000. At April 30, 2001
the Company had approximately $350,000 in excess of FDIC insured limits.
NOTE E - 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 recorded an addition to the 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 will be amortized over a period of 10
years beginning November 1999. Incremental goodwill is being amortized over
its remaining life, approximately 8.5 years. The results of operations of
the acquired entity are included in the consolidated operations of the
Company from November 1, 1999.
NOTE F - CONVERTIBLE DEBENTURES
In February 2000, the Company executed non-interest bearing convertible
note agreements (the "Agreements") 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 financing fees 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 deferred financing fees 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 yields 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 these fees over the
initial maturity of these notes of one year. The amount is 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 convertible 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 as exercise price of $3.00 per share were issued to the note
holders. In connection with the grant of the additional 150,000 warrants to
the note holders, the Company recorded additional debt discount of
approximately $142,000 which was immediately expensed as financing fees as
the warrants were exercisable at the date of grant. This amount was
calculated using the Black-Scholes pricing model with the following
assumptions: applicable risk-free interest rate based on the current
treasury-bill interest rate at the grant date of 5%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common
stock of 1.47; and an expected life of the warrants of three years.
On April 11, 2001, the Company executed a 6% Convertible Debenture (the
"Convertible Debenture") with Global Capital Funding Group L.P, which
provided financing of $1,000,000. Note maturity date is April 11, 2003. The
conversion price equals 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 price as reported by Bloomberg L.P. during the twenty
(20) Trading Days immediately preceding but not including the date of the
related Notice on Conversion ("the "Formula Conversion Price"). In an event
of default the amount declared due and payable on the Convertible Debenture
shall be at the Formula Conversion Price. The Company has calculated the
beneficial conversion feature embedded in the Convertible Debenture in
accordance with Emerging Issues Task Force (EITF) #00-27 and recorded
$329,931 as a deferred financing fee. This fee is being amortized over the
two-year life of the Convertible Debenture. During the six months ended
April 30, 2001, the Company recorded approximately $14,000 as interest
expense. The Company also issued to the holder of the Convertible 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. The
Company recorded deferred financing fees of approximately $80,000 related to
the issuance of the warrants. This amount represents the relative fair value
of the warrants in accordance with EITF #00-27, 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 yields 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 warrant is being amortized over the two-year life of the
Convertible Debenture. For the year six months ended April 30, 2001, the
Company has recorded financing fees of $3,600 relating to the warrants.
</R
NOTE G - RELATED PARTY PAYABLE
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 matures on August 1, 2001.
The Company is currently in arrears of quarterly payments to the noteholder
and during the three month period ended April 30, 2001 an additional
net loan in the amount of $109,958 was provided by the note holder. The
outstanding balance at April 30, 2001 was $755,958, and is classified as
a current liability.
NOTE H - SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES
For the six months ended April 30, 2001, the Company issued an additional
121,500 shares in connection with the exercise of options for $34,344.
On December 15, 2000, we issued 90,000 shares of common stock to an
accredited investor, Scotty Cook, a former Director, at no cost as
compensation for consulting services.
Note I - MARKETABLE SECURITIES
Marketable securities include one investment in a common stock and are
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 specific identification method and are
included in the statement of operations. During the six months ended April
30, 2001, a reduction in market value which was considered other than
temporary resulted in recording a loss of $435,820 (see Note L).
NOTE J - SETTLEMENT OF LEGAL/CARRIER DISPUTES
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 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 down by $435,820. The
credit for future services is contingent on the Company using these
services and at the time of settlement there is no basis for valuing these
services. Fair value of these services will be credited to other income
and charged to operations as utilized. The Company has recorded the carrier
usage credit, the fair value of the shares received and subsequent write
down as other income and expense.
The Company also recorded income of $465,000 in connection with the
settlement of disputes with RSL Communications, Inc. ("RSL") during the six
months ended April 30, 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 the credit was
acknowledged by RSL management. 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 and expense.
During the quarter ended April 30, 2001, the Company settled other disputes
in connection with carrier services resulting in other income of $97,186.
NOTE K - SEGMENT INFORMATION
The Company is organized by line of business. Historically, the two major
lines of business operating segments are prepaid phone 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 six months ended April 30, 2001 substantially all revenue and
expenses related to dial thru services. At April 30, 2001, substantially
all assets other than property and equipment held for sale are now used in
the dial thru business operations. Revenue and net loss for the prepaid
card business and dial thru business for the six months ended April 30, 2000
were $2,713,933, $5,821,996 and $3,916,538 and $920,914, respectively.
Total assets of the prepaid business and dial thru business at April 30,
2000 were $2,805,474 and $2,476,010, respectively.
NOTE L - RESTATEMENTS
The Company is restating its Form 10-Q/A Amendment No. 1 for the quarter
ended April 30, 2001, to record additional debt discount of approximately
$142,000 in connection with the grant of an additional 150,000 warrants to
holders of the Company's Convertible Notes (Note F). This adjustment was a
non-cash charge to operations and increased the net loss for the period.
Also during the quarter ended April 30, 2001 the Company recorded
approximately $330,000 of deferred financing fees to recognize a beneficial
conversion feature embedded in the 6% Convertible Debenture with Global
Capital Funding Group L.P. (Note F). The related amortization of
approximately $14,000 was a non-cash charge to interest expense for the
period, which increased the net loss.
The consolidated balance sheet as of April 30, 2001 also includes the effect
of certain restatements applied to the January 31, 2001 Form 10-Q/A
Amendment No. 1. These restatements and the restatements noted above had the
effect of reducing long-term liabilities and net equity by $316,000,
increasing additional paid-in capital by $730,000, and increasing
accumulated deficit by $414,000.
August 3, 2001 Restatements
On August 3, 2001, the Company restated the Form 10-Q for the three and six
months ended April 30, 2001, originally filed on June 15, 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 was
restated to include a charge for compensatory warrants issued to
distributors (in the prepaid phone card business) totaling $1,937,184. Both
of these adjustments were non-cash charges to operations. The adjustments
increased net losses or decreased net income in each period respectively.
The consolidated balance sheet as of April 30, 2001 includes the effect of
certain restatements applied to the October 31, 2000 Form 10-K, as well as
the August 3, 2001 restatements noted above. These restatements had the
effect of increasing additional paid in capital by $2,513,000; increasing
the accumulated deficit by $2,949,000; decreasing other comprehensive loss
by $436,000; with no change to net equity.
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 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 Voice over Internet Protocol (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 margin and market
share. These markets include regions of the world where 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 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 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. These are
assets that not only help to build the Company's business, but also make the
Company more attractive as a potential partner to overseas carriers and
incumbent telephone companies.
The following discussion should be read in conjunction with the Company's
Form 10-K and the consolidated financial statements for the years ended
October 31, 2000, 1999, and 1998; the Company's Form 10-Q for the quarter
ending April 30, 2000; and the consolidated financial statements and related
notes for the quarter ended April 30, 2001 found elsewhere in this report.
RESULTS OF OPERATIONS
THREE MONTH COMPARISON
REVENUES
Revenues were $904,000 for the quarter ended April 30, 2001, compared to
$2,824,000 for the quarter ended April 30, 2000, representing a decrease of
68% from the prior period. The decrease in revenues for this quarter
compared to the prior year resulted primarily from the Company's change in
business focus away from the prepaid long distance market and toward
providing international communication services for small to medium-size
businesses. Costs associated with the discontinuation of certain
distribution channels have prevented the Company from fully marketing
according to its plans for the redirected business. Now that these costs
have been eliminated and new markets have been opened, the Company
anticipates experiencing substantial revenue growth in future periods.
EXPENSES
Costs of revenues were $609,000, or 67% of revenues, for the quarter ended
April 30, 2001, compared to $3,109,000, or 110% of revenues, for the quarter
ended April 30, 2000. By focusing its business on providing international
communication services the Company has been able to demonstrate the ability
to produce positive margins on sales across its product line.
Settlement of a dispute with a carrier over charges in prior periods
resulted in income of $97,000 to the Company. This is reflected as a
credit to Other Income on the Consolidated Statements of Operations for the
period.
Sales and marketing costs were $223,000, or 25% of revenues for the quarter
ended April 30, 2001, compared to $279,000, or 10% of revenues, for the
quarter ended April 30, 2000. Sales and marketing costs incurred during the
prior period were primarily associated with the operation of the
distribution channel for the prepaid products. Sales and marketing costs
for the three months ended April 30, 2000 exclude a non-cash charge of
$1,937,184 for stock warrants issued to distributors (previous employees) of
the Company's prepaid products. Excluding these charges, the change in the
focus of the Company's operations has reduced its sales and marketing costs
in absolute terms, as the prepaid calling card business required a large
sales and marketing staff. In the short term, while the Company is opening
a number of new international markets just beginning to produce revenues,
sales and marketing costs as a percentage of revenues have increased. In
the long term, however, when these markets are fully developed, the Company
expects that sales and marketing costs will decline as a percentage of
revenue.
General and administrative costs were $598,000, or 66% of revenue, for the
quarter ended April 30, 2001, compared to $1,742,000, or 62% of revenue, for
the quarter ended April 30, 2000. This represents in dollar terms a 65%
decrease from the prior period. The change in the focus of the Company's
business has resulted in an overall drop of its general and administrative
expenses, and the Company anticipates a reduction of these costs as a
percentage of revenue in future periods.
During the quarter ended April 30, 2001, the Company incurred net interest
expense of $13,000 and financing fees of $159,000 compared with net interest
expense of $17,000 and financing fees of $240,000 for the quarter ended
April 30, 2000. The fees for 2001 include $142,000 for the fair value of
warrants issued to the holders of the Company's Convertible Notes which were
fully vested at the time of issuance. Additionally during the quarter ended
April 30, 2001, the Company recorded a charge of $435,820 in connection with
the decline in fair value of marketable securities previously received in a
settlement transaction with Star Telecommunications.
During the quarter ended April 30, 2001, the Company settled other disputes
in connection with carrier services resulting in other income of $97,000.
As a result of the foregoing, the Company incurred a net loss of $1,193,000,
or $0.11 per share, for the quarter ended April 30, 2001, as compared to a
net loss of $4,660,000, or $0.55 per share, for the quarter ended April 30,
2000.
SIX MONTH COMPARISON
REVENUES
Revenues were $1,794,000 for the six months ended April 30,2001, compared to
$6,630,000 for the six months ended April 30, 2000, representing a decrease
of 73% from the prior period. The decrease in revenues for this period
compared to the prior year resulted primarily from the Company's change in
business focus away from the prepaid long distance market and toward
providing international communication services for small- to medium-size
businesses. Costs associated with the discontinuation of certain
distribution channels have prevented the Company from fully marketing
according to its plans for the redirected business. Now that these costs
have been eliminated and new markets have been opened, the Company
anticipates experiencing substantial revenue growth in future periods.
EXPENSES
Costs of revenues were $1,276,000, or 71% of revenues, for the six months
ended April 30, 2001, compared to $7,473,000, or 113% of revenues, for the
six months ended April 30, 2000. By focusing its business on providing
international communication services the Company has been able to
demonstrate the ability to produce positive margins on sales across its
product line.
Sales and marketing costs were $426,000, or 24% of revenues for the six
months ended April 30, 2001, compared to $787,000, or 12% of revenues, for
the six months ended April 30, 2000. Sales and marketing costs incurred
during the prior period were primarily associated with the operation of the
distribution channel for the prepaid products. Sales and marketing costs
for the six months ended April 30, 2000 exclude a non-cash charge of
$258,616 for common stock and stock warrants issued for services, and for
the six months ended April 30, 2000 exclude $1,937,184 for stock warrants
issued to distributors (previous employees) of the Company's prepaid
products. Sales and marketing expense for the six months ended April 30,
2000 includes a non-cash charge of $1,937,184 for stock warrants issued to
distributors (previous employees) of the Company's prepaid products.
Excluding this charge, the change in the focus of the Company's operations
has reduced its sales and marketing costs in absolute terms, as the prepaid
calling card business required a large sales and marketing staff. In the
short term, while the Company is opening a number of new international
markets just beginning to produce revenues, sales and marketing costs as
a percentage of revenues have increased. In the long term, however, when
these markets are fully developed, the Company expects that sales and
marketing costs will decline as a percentage of revenue.
General and administrative costs were $1,212,000, or 68% of revenue, for the
six months ended April 30, 2001, compared to $2,682,000, or 40% of revenue,
for the six months ended April 30, 2000. However this represents in dollar
terms a 55% decrease from the prior period. The change in the focus of the
Company's business has resulted in an overall drop of its general and
administrative expenses, and the Company anticipates a reduction of these
costs as a percentage of revenue in future periods.
During the six months ended April 30, 2001, the Company issued 390,000
shares of its common stock in exchange for marketing services of $259,000.
During the six months ended April 30, 2001, the Company incurred net
interest expense of $16,000 and financing fees of $475,000 compared with net
interest income of $20,000 and financing fees of $240,000 for the six months
ended April 30, 2000. Additionally during the six months ended April 30,
2001, the Company recorded a charge of $435,820 in connection with the
decline in fair value of marketable securities previously received in a
settlement transaction with Star Telecommunications.
Settlements with two major carriers over charges in prior periods amounted
to a total credit to the statements of operations of $1,800,000 for the six
months ended April 30, 2001. Of this amount, $780,000 is the result of our
settlement with Star Telecommunications ("Star"). Also included is $446,820
representing common stock received from Star in connection with our dispute
settlement.
As a result of the foregoing, the Company generated a net loss of $818,000
or $0.08 per share, for the six months ended April 30, 2001, as compared to
a net loss of $6,743,000, or $0.83 per share, for the six months ended April
30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2001, the Company had cash and cash equivalents of $565,000, an
increase of $491,000 from the balance at October 31, 2000. As of April 30,
2001, the Company had a working capital deficit of $2,901,000, compared to a
working capital deficit of $2,869,000 at April 30, 2000. As of April 30,
2001, the Company's current assets of $1,141,000 included cash and cash
equivalents of $565,000 and net accounts receivable of $468,000.
During the six months ended April 30, 2001, net cash used in operating
activities was $909,000, compared to net cash used in operating activities
of $1,584,000 for the six months ended April 30, 2000. The decrease in net
cash used in operating activities for the six months ended April 30, 2001
was primarily due to a net loss of $818,000 versus a net loss of $6,743,000
from the comparable period in the prior year offset partially by other
changes in current assets and liabilities and other non-cash charges and
income. Deferred revenue increased to $77,000 for the period ending April
30, 2001 from $47,000 in the prior period due to an increase in prepaid
customer amounts.
Cash used in investing activities was $21,000 for the six months ended April
30, 2001, compared to cash provided by investing activities of $171,000
for the six months ended April 30, 2000. The net change was primarily
attributable to capital equipment purchases of $199,000 offset by receipts
of $300,000 in notes receivable, during the six months ended April 30, 2000.
Cash provided by financing activities for the six months ended April 30,
2001 totaled $1,421,000, compared to cash provided by financing activities
of $1,603,000 for the six months ended April 30, 2000. During the six months
ended April 30, 2001, significant components of cash provided by financing
activities includes $1,000,000 in proceeds from notes payable and net
proceeds from shareholder of $410,000. During the six months ended April
30, 2000, significant components of cash provided by financing activities
includes net proceeds from notes payable of $276,000, cash released from
restricted cash of $938,000 and proceeds from the exercise of stock options
of $491,000.
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, the debt has been converted to
equity, and the Company has made significant reductions of payables through
settlements with carriers and expects to make additional reductions through
use of trade credits. There are no other commitments or uncertainties that
management is currently aware of.
The Company believes that it will be able to significantly improve its
cash flows in the coming year for the following reasons:
1. The Company has lowered operating expenses by reorganization of
operating staff and changing channels of distribution. This has
resulted in reduced expenses in excess of $250,000 per month.
2. The Company reached a favorable settlement with Star
Telecommunications that reduced payables and future cash requirements.
The Company eliminated a payable of $780,000, received approximately
one million shares of common stock in Star, and received carrier usage
credits for one year for domestic services which value will be
determined as use occurs.
3. The Company converted $1 million of debt into equity. (See additional
discussion further).
4. The Company expects to be able to bring in additional financing
of 1 to 3 million dollars during fiscal year 2001, with $1 million
of debt financing having already been completed in the second quarter.
(See additional discussion further).
5. The Company expects to be able to convert at least $1.5 million of its
prepaid media credits into cash or services.
6. 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.
7. 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 notes. During the second quarter, 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 note agreement (the
"Agreement") with Global Capital Funding Group L.P, which provided financing
of $1,000,000. Note maturity date is April 11, 2003. Conversion price
equals 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 price as reported by Bloomberg L.P. during the twenty (20)
Trading Days immediately preceding but not including the date of the related
Notice on Conversion ("the "Formula Conversion Price"). In an event of
default the amount declared due and payable on the Conversion Debentures
shall be at the Formula Price.
The Company also issued to the holders of the notes warrants to acquire
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 deferred financing fees 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 yields 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 these fees over the initial maturity of these notes of
two years. The amount charged to expense and accumulated amortization for
the three months ended April 30, 2001 totaled approximately $3,600.
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 also plans to
exchange a portion of its prepaid media credits to reduce accounts payable,
and to liquidate an additional portion of its prepaid media credits
for cash. The Company believes that, with sufficient capital, it can
significantly accelerate its growth plan. The Company's failure to obtain
additional financing or to exchange or liquidate media credits, 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:
4.1 Securities Purchase Agreement (incorporated herein by reference
to Exhibit 4.1 to Company's quarterly report on Form 10-Q for
the quarter ended April 30, 2001).
(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: February 5, 2002 /s/ John Jenkins
-------------------------- ----------------------------------
John Jenkins
President, Chief Financial Officer
(Principal Financial Officer)