April 29, 2005
Mr. Larry Spirgel
United States Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Dial Thru International Corporation (the "Company")
Form 10-K for the fiscal year ended October 31, 2004
(the "Annual Report")
Securities and Exchange Commission Comment Letter
Dated April 11, 2005
Dear Mr. Spirgel,
We are in receipt of your letter dated April 11, 2005 (the "Letter"),
which sets forth a number of Securities and Exchange Commission (the
"Commission") comments to our Company's Annual Report. Our responses are
keyed to the comments set forth in the Letter.
Item 1. Business - Customers
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1. In describing your primary customers, you disclose that the Company
provided wholesale services to one customer who accounted for 17% of
the Company's revenues and another customer who accounted for 13% of
the Company's revenues. Revise your disclosure to fully comply with
Item 101 (c)(vii) of Regulation S-K, which requires the disclosure of
'Dependence on one or a few customers, with the name and relationship
of any customer accounting for 10% or more of consolidated revenues
under certain conditions'.
We note the Commission's comment. However, it is our position that we
are not required to disclose the name and relationship of any customer
accounting for 10% or more of consolidated revenues as we do not
believe that the "the loss of such customer would have a material
adverse effect on the registrant and its subsidiaries taken as a whole"
as noted in Item 101 (c)(vii). However, we will amend our disclosure
under the heading "Customers" to add the following language at the end
of the paragraph:
"We generally do business with approximately 20 wholesale customers,
any of which either collectively, or in most cases individually, could
compensate for the loss of a major customer. Typically, we have
limited capacity, imposed by our suppliers, in which to transmit our
telecommunications traffic. We frequently offer this capacity to our
larger customers, however it is possible to offer these opportunities
to all, or a few, of our wholesale customers at any time, thus reducing
our reliance on any one customer and providing a relatively quick
transition between customers if we should lose a customer."
Item 7. Managements Discussion and Analysis of Financial Condition and
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Results of Operations for the Fiscal Years Ended October 31, 2004, 2003 and
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2002 - Liquidity and Sources of Capital
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2. Revise your disclosures regarding liquidity and sources of capital to
include tabular disclosure of contractual obligations, as required by
Item 303 (a)(V) of Regulation S-K.
The Commission's comment is duly noted and we will revise our
disclosure to include the following table, as required by Item
303(a)(V) of Regulation S-K.
Payments Due By Period
Less More
than 1 1-3 3-5 than 5
year years years years Total
--------- ------- ----- ----- ---------
Contractual Obligations:
Long term debt $3,760,890 $ - $ - $ - $3,760,890
Capital leases 126,196 - - - 126,196
Operating leases 203,251 223,449 - - 426,700
--------- ------- ----- ----- ---------
Total $4,090,337 $223,449 $ - $ - $4,313,786
========= ======= ===== ===== =========
3. Expand the disclosure in the liquidity and capital resources section
to discuss the issuance of a going concern opinion by the auditors.
Include a detailed discussion of management's viable plan for
overcoming your financial difficulties. Discuss in detail your cash
requirements during the next twelve months and your ability to generate
sufficient cash to support operations. Expand this discussion to
specifically include the manner in which you intend to generate future
revenues. Update this disclosure in each subsequent Form 10-Q. Refer
to Section 607.02 of the Financial Reporting Codification.
The Commission's comment is duly noted and we will expand our
disclosure regarding liquidity and capital resources to include the
following discussion.
"Although we have significantly reduced our operating loss, to date we
have been generally unable to achieve positive cash flow on a quarterly
basis primarily due to the fact that our present lines of business do
not generate a volume of business sufficient to cover our overhead
costs. Our audit report includes an explanatory paragraph indicating
substantial doubt about our ability to continue as a going concern.
We have violated certain requirements of our debt agreements relating
to failure to register the underlying securities, and timely payment of
principal and interest, including payment in full on the maturity date
of the notes, either through the issuance of common stock, or payment
in cash. Our lenders have not declared us in default and have allowed
us to continue to operate. A capital infusion of $4.9 million is
necessary to cure these defaults. Of this amount, approximately $2.2
million is due to two of our executives and a director.
Furthermore, we frequently are not able to make timely payment to
our trade creditors. As of our fiscal year ended October 31, 2004,
approximately $2.0 million, representing approximately 50% of our trade
accounts payable and accrued liabilities, were past due. Although
formal payment terms have not been negotiated with most of these
vendors, we continue to make regular payments, or provide opportunities
for the vendors to send us telecommunications traffic in return for
a reduction in our debt to them. These vendors have not stopped
providing services to us. If these vendors were to stop providing
services to us, our ability to continue to operate would be
jeopardized. We continue to seek sources of working capital sufficient
to fund delinquent balances and meet ongoing obligations, though our
success on that front has been limited.
Our future operating success is dependent on our ability to quickly
generate positive cash flow from our VoIP lines of products and
services. Our major growth areas are anticipated to include the
establishment of additional wholesale points of termination to offer
our existing wholesale and retail customers, and the introduction of
new retail VoIP products, primarily our new Executel and Rapidlink
products (see "Our Products and Services") both domestically and
internationally. We anticipate a cash shortfall from operations of
approximately $300,000 during the next twelve months. We do not have
any capital equipment commitments during the next twelve months. We
anticipate funding this shortfall through available cash on hand,
further reduction of our overhead expenses, including personnel, and
consolidation of operations as necessary. In addition, we are actively
pursuing debt or equity financing opportunities to continue our
business. Any failure of our business plan, including the risk and
timing involved in rolling out retail products to end users, to
generate positive cash flow could result in a significant cash flow
crisis and could force us to seek alternative sources of financing as
discussed, or to greatly reduce or discontinue operations. Although
various possibilities for obtaining financing or effecting a business
combination have been discussed from time to time, there are no
agreements with any party to raise money or for us to combine with
another entity and we cannot assure you that we will be successful in
our search for investors or lenders. Further, negotiations with our
existing lenders have not resulted in any extension of past due
obligations, which could therefore be declared due and accelerated at
any time. Any additional financing we may obtain will involve material
and substantial dilution to existing stockholders. In such event, the
percentage ownership of our current stockholders will be materially
reduced, and any new equity securities sold by us may have rights,
preferences or privileges senior to our current common stockholders.
If we are unable to obtain additional financing, our operations in the
short term will be materially affected and we may not be able to remain
in business. These circumstances raise substantial doubt as to the
ability of our Company to continue as a going concern."
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations for the Fiscal Years Ended October 31, 2004, 2003 and
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2002 - Critical Accounting Policies, Goodwill
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4. Specifically describe in your goodwill policy the manner in which you
conduct annual impairment testing. For example, explain that the first
step in the process is to identify potential goodwill impairment by
comparing the estimated fair value of the reporting unit to its
carrying amount. The second step measures the amount of the impairment
based on a comparison of the 'implied fair value' of goodwill with its
carrying amount. Revise your disclosures to include this detail in you
critical accounting policies.
The Commission's comment is duly noted and we will revise our
disclosure to add the following information:
"We record goodwill when the consideration paid for an acquisition
exceeds the fair value of net tangible and identifiable intangible
assets acquired. We measure and test goodwill for impairment on an
annual basis or more frequently if we believe indicators of impairment
exists. Performance of the impairment test involves a two-step process.
The first step compares the fair value of our single reporting unit to
its carrying amount. The fair value of the reporting unit is determined
by calculating the market capitalization of the reporting unit as
derived from quoted market prices, and further substantiated through
the use of other generally accepted valuation methods. A potential
impairment exists if the fair value of the reporting unit is lower than
its carrying amount. Historically, the impairment test has shown that
the carrying value is less than fair value. The second step of the
process is only performed if a potential impairment exists, as
indicated by step one, and involves determining the difference between
the fair values of the reporting unit's net assets, other than
goodwill, as compared to the fair value of the reporting unit. If the
difference is less than the net book value of goodwill, impairment
exists and is recorded. We determine our reporting units, for purposes
of testing for impairment, by determining (i) how we manage our
operations, (ii) if a component of an operating unit constitutes a
business for which discrete financial information is available and our
management regularly review such financial information, and (iii) how
the acquired entity is integrated with our operations. Based on these
criteria, we determined that we have a single reporting unit.
5. Disclose the significant assumptions and estimates you use to estimate
the fair value of your reporting units under SFAS 142. Also, provide
quantitative information to the sensitivity of these assumptions
on the estimated fair value of reporting units if these could
have a material impact on the financial statements. See Interpretive
Release No. 33-8350 on our website for further guidance (http:
//www.sec.gov/rules/interp/33-8350.htm).
In order to determine the fair value of our reporting unit under SFAF
142, we consider the following two approaches:
* Market Approach - Under the market approach, recent sales of
comparable companies or securities are analyzed to determine
the value for a particular asset under study. Adjustments are
made to the sales data to account for differences between the
subject asset and the comparables. The market approach is most
applicable to assets that are homegenous in nature and are
actively traded. Relative to other approaches to value, the
key strength of the market approach is that it provides
objective indications of value while requiring relatively few
assumptions be made.
* Income Approach - This approach measures the present worth of
anticipated future net cash flows generated by the business.
Net cash flows are forecast for an appropriate period and then
discounted to present value using an appropriate discount rate.
Net cash flow forecasts require analysis of the significant
variables influencing revenues, expenses, working capital,
and capital investment. An income approach methodology is
generally useful because it accounts for the specific
contribution of fundamental factors impacting those variables
that affect the value of the business.
According to SFAS 142, quoted market prices in active markets are the
best evidence of fair value and shall be used as the basis for the
measurement of fair value, if available. As of October 31, 2004, our
market capitalization was $2,303,415, determined by taking the shares
outstanding as of that date multiplied by our stock price of $0.10. We
added interest bearing debt and operating liabilities (excluding net
current liabilities of discontinued operations), adjusted downward to a
fair value estimate of 25%, resulting in a fair value of assets of
approximately $4.75 million. This amount exceeds the carrying value
of our assets (the value of our assets as reported in our financial
statements), including goodwill, of $4,361,408. While our market
capitalization renders a minority interest valuation, because shares of
the Company represent minority interests, the fair value of assets
exceeds its carrying value even without the application of a control
premium as recommended by SFAS 142. Subsequent to the valuation date,
our stock price increased to a high of $0.75 on December 1, 2004, and
at no time was less than $0.32 during the period of our evaluation.
The market capitalization of the Company, at a stock price of $0.32, is
approximately $7,400,000, an amount significantly higher than the
carrying value of our assets. However, we believe that the application
of the market approach necessitates additional analysis for three
reasons (i) we have generated no analyst coverage to provide
information about the stock to the public, suggesting that the market
price may not reflect available information, (ii) our stock price
demonstrated volatility as of the valuation date, and (iii) our stock
is thinly traded with no organization making an active market in the
stock. These factors suggest that our stock price, when taken in
isolation, may not be sufficient evidence of fair value. In estimating
the fair value of a reporting unit, a valuation technique based on
multiples of earnings or revenues or a similar performance measure may
be used if that technique is consistent with the objective of measuring
fair value. As further support for our market approach, we calculated
the Business Enterprise Value (BEV) for five other telecommunications
companies which provide services similar to those that we provide. The
BEV is determined by taking the market capitalization of a public
enterprise, adding their debt and subtracting any cash equivalents.
The resulting value is divided by annual revenue in order to determine
a reasonable multiple that can be applied to us. We averaged the
multiple of these five companies, trading on average at 2.1 times their
annual revenue obtained from their most recent published financials,
and applied the result to our 2004 fiscal year revenues. The resulting
BEV for us was well in excess of the fair value of our assets
calculated above. As a result, we determined that the fair value of
our Company exceeds its carrying amount, and therefore that goodwill is
not impaired.
Footnote 2 - Summary of Significant Accounting Policies - Goodwill
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6. Tell us how you identified your reporting units in determining the
appropriate level to perform the annual impairment test for goodwill.
Discuss how you applied the guidance in paragraph 30 of SFAS 142 and
EITF D-101. Additionally, tell us how you have determined the amount
of goodwill to be assigned to reporting units.
We have provided the following in response to the Commission's request
for further information.
Effective November 1, 2001, our Company adopted SFAS No. 141, "Business
Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001, and also specifies the criteria for the
recognition of intangible assets separately from goodwill. Under SFAS
142, goodwill is no longer amortized but is subject to an impairment
test at least annually or more frequently if impairment indicators
arise. We have one operating and reporting segment and one reporting
unit.
For the purpose of identifying our reporting units, we followed the
guidance in paragraph 30 of SFAS 142, (i) an operating segment is a
reporting unit if discrete financial information is available (ii)
management regularly reviews individual operating results, and (iii)
similar economic characteristics of components within an operating
segment result in a single reporting unit. Our Company's management
regularly reviews one set of financial information, and all of the
Company's products share similar economic characteristics. Therefore,
we have determined that we have one single reporting unit.
In accordance with SFAS 142, an annual impairment test of goodwill was
performed by an independent valuation firm in the fourth quarters of
fiscal years 2004 and 2003. The valuation process appraised our
Company's assets and liabilities using a combination of market
capitalization and multiples of earnings valuation techniques. The
results of both impairment tests indicated that goodwill was not
impaired.
Item 9a. Controls and Procedures.
---------------------------------
7. In your response letter, please confirm, if true, that your CEO and CFO
concluded that the disclosure controls and procedures were effective in
ensuring that information required to be disclosed in your Exchange Act
filings is accumulated and communicated to management, including your
CEO and CFO (or persons performing similar functions), to allow timely
decisions regarding required disclosures. See Rule 13a-15(e).
We hereby confirm, as requested by the Commission, that our CEO and CFO
have concluded that the disclosure controls and procedures were
effective in ensuring that information required to be disclosed in our
Exchange Act filings is properly accumulated and communicated to our
Company's management to allow timely decisions regarding required
disclosures.
8. We note that your CEO's and CFO's conclusions regarding the
effectiveness of the disclosure controls and procedures were as of the
date "within the 90 days prior to the filing date of [the] Annual
Report." Please note that Item 307 of Regulation S-K now requires the
conclusions to be as of the end of the period covered by the filing.
Refer to Release No. 33-8238 for additional guidance. In your response
letter, please confirm that their evaluation was as of the end of the
period being reported.
As requested by the Commission, we hereby confirm that the review of
our disclosure controls and procedures was performed at the end of the
period being reported. We will ensure that our certifications are
corrected to reflect this in our subsequent Securities Exchange Act
filings.
9. Please note that Item 308 (c) of Regulation S-K provides the current
requirements for the disclosure of any changes in your internal
controls over financial reporting. See Release No. 33-8238. For
example, Item 308 (c) requires disclosure of any changes, not just
"significant changes" in internal controls over financial reporting.
Item 308 (c) also requires the disclosure to be as of the end of the
period covered by the filing, not "subsequent to the date of [the CEO's
and CFO's] evaluation." In your response letter, please confirm that
there were no changes in the company's internal control over financial
reporting, that occurred during the fiscal year that has materially
affected, or is reasonably likely to materially affect, the company's
internal control over financial reporting.
The Commission's comment is duly noted, and we hereby confirm that
there have been no changes, significant or otherwise, that occurred
during the fiscal year ended October 31, 2004 that have materially
affected, or are reasonable likely to materially affect, our internal
control over financial reporting.
Sincerely,
/s/ Allen Sciarillo
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Allen Sciarillo
Chief Financial Officer
Dial Thru International Corporation