U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30,
2003.
Transition Report Pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 0-24962
iDial Networks, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 75-2863583
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
2204 Timberloch Place Suite 140, The Woodlands, TX 77380
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 281-465-3100
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period 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 30, 2003, the registrant had 268,186,976 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No _X__
===========================================================================
IDIAL NETWORKS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
Item 1. Financial statements
(unaudited)
Balance sheets as of June 30, 2003 (unaudited), and December, 31, 2002 3
Unaudited Statements of operations for the three months ended
June 30, 2003 and 2002 5
Unaudited Statements of cash flows for the three months ended
June 30, 2003 and 2002 6
Notes to Unaudited financial statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Change in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements.
Consolidated Balance Sheet
June 30, 2003 31-Dec-02
(unaudited) (audited)
Assets
Current assets
Cash $ 104,724 $ 21,767
Accounts receivable - net 191,909 145,200
Employee Advances 400 -
Note Receivable 50,000 50,000
Loan acquisition costs, net 113,558 -
Deposits 29,658 -
------------------- -------------------
Total current assets 490,249 216,967
------------------- -------------------
Non-current assets
Deposit on letter of intent 331,300 -
Property and equipment, net 573,866 794,523
Intangibles, net 64,500 86,000
Other long-term assets 82,914 59,878
------------------- -------------------
Total non-current assets 1,052,580 940,401
------------------- -------------------
Total assets $ 1,542,829 $ 1,157,368
=================== ===================
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable - trade 1,202,305 1,099,347
Accrued liabilities 806,367 654,552
Notes payable to related parties 169,424 149,568
Deferred revenue 108,788 191,753
Current portion of notes payable, net of discount of $725,165 154,915 8,259
Capital lease obligation 1,568 32,149
------------------- -------------------
Total current liabilities 2,443,367 2,135,628
------------------- -------------------
Non-current liabilities
Note payable, less current portion 3,094 4,999
Note payable - stockholder 1,416,751 1,419,777
------------------- -------------------
Total non-current liabilities 1,419,845 1,424,776
------------------- -------------------
Total liabilities 3,863,212 3,560,404
------------------- -------------------
Commitments and contingencies
Stockholders' deficit
Preferred stock, no par value, 30,000,000 shares authorized, no shares
issued and outstanding
Common stock, $.005 par value, 500,000,000 shares authorized and
268,186,976(2003) and 106,442,055(2002) shares issued 1,340,936 532,211
3
Additional paid in capital 19,352,160 18,060,063
Accumulated deficit (23,013,479) (20,995,310)
------------------- -------------------
Total stockholders' deficit (2,320,383) (2,403,036)
------------------- -------------------
Total liabilities and stockholders' deficit $ 1,542,829 $ 1,157,368
=================== ===================
4
Unaudited Consolidated Statements of Operations
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 1,733,798 $ 3,308,779 $ 3,359,192 $ 4,498,255
Cost of goods sold
Cost of sales 1,716,560 2,556,895 3,238,269 3,625,498
Depreciation 42,732 35,003 99,908 91,013
------------------ ----------------- ------------------ ------------------
Total cost of goods sold 1,759,292 2,591,898 3,338,177 3,716,511
------------------ ----------------- ------------------ ------------------
Gross Profit (Loss) (25,494) 716,881 21,015 781,744
Selling, general and administrative expenses
General and administrative expenses 661,317 836,705 1,291,498 1,306,254
Depreciation and amortization 61,387 33,685 104,322 60,018
------------------ ----------------- ------------------ ------------------
Total selling, general and administrative expenses 722,704 870,390 1,395,820 1,366,272
------------------ ----------------- ------------------ ------------------
Other expense
Interest expense/income (440,375) (134,266) (617,182) (261,150)
Gain/Loss on Sale of Assets (26,182) 1,816 (26,182) 1,816
------------------ ----------------- ------------------ ------------------
Total other expense (466,557) (132,450) (643,364) (259,334)
------------------ ----------------- ------------------ ------------------
Loss from continuing operations (1,214,755) (285,959) (2,018,169) (843,862)
------------------ ----------------- ------------------ ------------------
Loss from discontinued operations - - - (1,448,472)
================== ================= ================== ==================
Net Loss
$ (1,214,755) $ (285,959) $ (2,018,169) $ (2,292,334)
================== ================= ================== ==================
Basic and diluted loss from continuing operations
per common share $ (0.00) $ (0.00) $ (0.01) $ (0.01)
Basic and diluted loss from discontinued operations
per common share $ (0.00) $ (0.00) $ (0.00) $ (0.01)
Basic and diluted loss per share from accounting change
Basic and diluted loss per share $ (0.00) $ (0.00) $ (0.01) $ (0.02)
Basic and diluted weighted average common shares outstanding 203,399,346 113,890,360 162,382,488 103,797,868
5
Unaudited Consolidated Statements of Cash Flows
For the six months ended
June 30,
2003 2002
---- ----
Cash flows from operating activities
Net loss $ (2,018,169) $ (2,292,334)
---------------------- -------------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Stock issued for services 60,525 546,310
Stock issued for salaries 31,200
Depreciation 145,065 129,361
Loss on sale of equipment 26,182
Amortization of discount on convertible debt 524,835 163,511
Amortization of intangible assets 21,500 21,500
Amortization of loan acquisition costs 37,665
Cumulative effect of accounting change - 1,448,472
Gain on sale of equipment - 1,816
---------------------- --------------------
Changes in assets and liabilities
Accounts receivable - net (47,109) (571,958)
Deposits and other long term assets (52,694) (25,197)
Accounts payable and accrued liabilities 308,773 1,285,123
Deposits from customers - (70,950)
Deferred revenue (82,965) 29,781
---------------------- --------------------
972,977 2,957,769
---------------------- --------------------
Net cash provided by (used in) operating activities (1,045,192) 665,435
---------------------- --------------------
Cash flows from investing activities
Purchase of property and equipment (9,980) (552,367)
Proceeds from sale of equipment 59,390 50,184
---------------------- --------------------
Net cash provided by (used in) investing activities 49,410 (502,183)
---------------------- --------------------
Cash flows from financing activities
Net payments on line-of-credit - (14,704)
Proceeds from issuance of debt, net of issuance costs of $151,223 1,116,277 -
Payment on long-term debt (21,287) (6,012)
Payment on stockholder loans (3,026) (22,454)
Proceeds from related party notes payable 38,500 -
Payments on related party notes payable (18,644) -
Payments on long-term capital leases (30,581) 1,447
Repurchase and cancellation of stock (2,500) -
---------------------- --------------------
Net cash provided by (used in) financing activities 1,078,739 (41,723)
---------------------- --------------------
Net increase in cash 82,957 121,529
Cash - beginning of period 21,767 381,803
---------------------- --------------------
Cash - end of period $ 104,724 $ 503,332
====================== ====================
6
Supplemental disclosure of cash activity:
Cash paid for interest was $6,572 (2003) and $15,778 (2002).
Supplemental disclosure of non-cash activity:
During the second quarter of 2003, the Company issued 17,000,000 shares of
common stock in the amount of $89,500 for salaries and bonuses, of which
$58,300 was recorded as accrued liabilities as of December 31, 2002.
During the first six months of 2003, the Company converted principal on
notes payable of $403,297, into 106,379,921 shares of common stock.
During the first quarter of 2003 the Company issued 30,000,000 shares of
common stock valued at $300,000 and assumed $31,300 of liabilities in
conjunction with a good faith deposit on acquisition of new products and
technology.
During the first six months of 2003, the Company issued 9,615,000 shares of
common stock in the amount of $60,525 for professional services rendered.
During the first quarter of 2003, the Company cancelled 500,000 shares of
common stock with a value of $2,500 from a former employee as part of a
separation agreement.
During the first six months of 2002, the Company converted notes payable of
$138,646 and accrued interest of $8,673 into 11,335,500 shares of common
stock.
During the first six months of 2002, the Company issued 19,377,000 shares
of common stock in the amount of $546,310 for professional services
rendered.
During the first six months of 2002, the Company impaired goodwill and
recognized a loss related to the impairment of goodwill.
Note 1 - Organization And Summary Of Significant Accounting Policies
Organization and Business
The Company's administrative offices are located at 2204 Timberloch Place, Suite
140, The Woodlands, Texas 77380, and the telephone number is (281) 465-3100. The
Company's website can be found at www.idnw.com. The information on the website
is not part of this Form 10-QSB.
In November 2000, the Company acquired 100% of the stock of 2sendit.com, Inc.
("2sendit.com"), a Colorado corporation, in exchange for the issuance of
8,399,994 new investment shares of the common stock of the Company. In the third
quarter of 2002, the Company decided to discontinue the operations of
2sendit.com .
7
In April of 2002, the Company incorporated a new wholly owned subsidiary, Dibz,
Inc. Dibz produced and marketed the "Dibz card", which is a prepaid "stored
value" card that was used to purchase online digital content and to make
discount phone calls. In April of 2003, management decided to discontinue the
operations of Dibz. Principals of Consolidation
The consolidated financial statements for 2003 include the accounts of Idial
Networks, Inc., ("Idial") and its wholly owned subsidiary Dibz, Inc. ("Dibz"),
(collectively the "Company"). The operations of 2Sendit are included as
discontinued operations for the quarter ended June 30, 2002 as this segment was
discontinued in the third quarter of 2002. All significant inter-company
transactions and balances have been eliminated.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003. For further information, refer to the consolidated financial statements
and footnotes included in the Company's annual report on Form 10-KSB.
Results of Operations
The following table sets forth statement of operations data as a percentage of
revenues for the periods indicated:
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 99.0% 77.3% 96.4% 80.6%
-------------- ------------------- ------------- ----------------
Gross margin 1.0% 22.7% 3.6% 19.4%
-------------- ------------------- ------------- ----------------
Selling, general and administrative 38.1% 25.3% 38.4% 29.0%
-------------- ------------------- ------------- ----------------
EBITDA -37.1% -2.6% -34.8% -9.6%
-------------- ------------------- ------------- ----------------
Depreciation and amortization 6.0% 2.1% 6.1% 3.4%
-------------- ------------------- ------------- ----------------
Net operating loss -43.2% -4.6% -4.6% -13.0%
-------------- ------------------- ------------- ----------------
Interest expense 25.4% 4.1% 18.4% 5.8%
-------------- ------------------- ------------- ----------------
Net loss from continuing operations -68.6% -8.7% -60.1% -18.8%
============== =================== ============= ================
8
Reclassifications
Certain amounts in the 2002 financial statements have been reclassified to
present discontinued operations.
Note 2 - Stockholder's Equity
During the three months ended June 30, 2003, the Company issued common stock for
services rendered, for payment on its convertible note payable, and as a good
faith deposit on a letter of intent to purchase new technology and products.
A total of 8,715,000 shares were issued for services at a value of $51,525.
A total of 17,000,000 shares were issued for accrued bonuses and salaries at a
value of $89,500.
A total of 89,468,633 shares were issued in payment of the convertible note
payable. The value of the shares of $303,297 was in payment of principal (see
Note 3)
Note. 3 - Convertible Note Payable
On February 6, 2003, the Company executed a securities purchase agreement for
the sale of a principal amount of $750,000 in secured convertible debentures.
Net proceeds of $661,590 were received in three traunches in February 2003. The
note is convertible into approximately 104,500,000 shares of the Company's
common stock at the date of the note. The note bears interest at 12% and matures
February 6, 2004.
The note contains a beneficial conversions feature which is accounted for in
accordance with EITF 98-5 and will result in future charges to the statement of
operations in 2003. For the 3 months ended June 30, 2003 a charge of $350,000
was taken to interest expense for the amortization of the discount which limits
the holder to holding a maximum of 4.9% of the Company's shares at any time. The
note is recorded net of amortized discount of $265,000 relating to the intrinsic
value of the in-the-money conversion feature.
During the three months ended June 30, 2003, the Company converted 89,468,633
shares of common stock as payment of $303,297 of note principal. For the six
months ended June 30, 2003, a total of 106,379,921 shares and $403,297 of note
principal had been converted. Interest on the note of $14,233 has been accrued
for the three months ended June 30, 2003 for a total accrual of $23,813 as of
June 30, 2003.
9
During the second quarter of 2003, the Company executed a second securities
purchase agreement providing for the issuance of secured convertible debentures
at the investors election of up to $3,000,000. On May 9, 2003 and June 23, 2003,
the Company issued $250,000 in notes on each date for an aggregate principal
amount of $500,000. Net proceeds in the aggregate amount of $437,187 were
received in connection with the May 2003 and June 2003 financings. These notes
are convertible into approximately 208,000,000 shares of the Company's common
stock at the date of the note. The notes bears interest at 12% and mature on May
9, 2004 and June 23, 2004. These notes are recorded net of discount of $461,065
as of June 30, 2003.
During the three months ended June 30, 2003, the Company took a charge of
$39,835 related to the amortization on the discount of this note. For the six
months ended June 30, 2003, $524,835 was charged to interest expense related
to the amortization on both notes.
Warrants
In conjunction with the issuance of the secured convertible debentures in
February 2003, the Company issued warrants to the purchaser to acquire an
additional 2,250,000 shares of the Company's common stock. The warrants have a 5
year term and vest on the date of execution of the agreement. A total of
2,250,000 shares of common stock are authorized for issuance under the plan. The
fair value of the warrants was estimated to be approximately $29,186 on the date
of grant utilizing the Black-Scholes model with the following assumptions: 100%
volatility, risk free rate of 4.5% and a 0.00% yield.
In conjunction with the issuance of the secured convertible debentures under the
May 2003 securities purchase agreement,, the Company issued warrants to the
purchaser to acquire an additional 1,500,000 shares of the Company's common
stock. The warrants have a 5 year term and vest on the date of execution of the
agreement. A total of 1,500,000 shares of common stock are authorized for
issuance under the plan. The fair value of the warrants was estimated to be
approximately $11,472 on the date of grant utilizing the Black-Scholes model
with the following assumptions: 100% volatility, risk free rate of 4.5% and a
0.00% yield.
Loan acquisition costs
In conjunction with the Convertible Note Payable, the Company incurred $88,410
of fees related to the acquisition of the loan consisting of fees paid to the
lender. These fees have been recorded as an asset and will be amortized over the
life of the loan. Amortization of Acquisition costs for the three months ended
June 30, 2003 totaled $22,103 for a total amortization of $32,867 as of June 30,
2003.
In conjunction with the second Convertible Note Payable, the Company incurred
$62,813 of fees related to the acquisition of the loan consisting of fees paid
to the lender. These fees have been recorded as an asset and will be amortized
over the life of the loan. Amortization of Acquisition costs for the three
months ended June 30, 2003 totaled $4,798.
Note 4 - Due to Related Party
During the three months ended June 30, 2003, the Company received no additional
short-term loans, but was able to repay $2,144 of the outstanding loan. The
loans bear interest at 12% and are due upon demand.
Note 5 - Subsequent events
10
During July and August 2003, the Company issued 61,081,868 shares of common
stock for the conversion of principal of $95,000 of the convertible note.
During July 2003, the Company issued 2,222,222 shares of common stock for the
conversion of interest of $4,000 of the convertible note.
On August 7, 2003, the Company completed the purchase of the assets of GBLK
Communications, Inc. including its new broadband phone products and technology.
The Company issued stock and assumed liabilities as a good faith deposit and for
the right to use and develop the technology until the final terms of the deal
were negotiated. GBLK communications had no significant operating activities
since inception. Stock issued and liabilities assumed are as follows:
Deposit Booked as of June 30, 2003
30,000,000 shares issued on March 1, 2003 at
the market price of $.01 $ 300,000
Note payable assumed 27,000
Accounts payable assumed 4,300
----------
Total Deposit and Assumed Liabilities $ 331,300
----------
The final terms of the agreement included the issuance of stock and assumed
liabilities as follows:
Final Agreement as of August 7, 2003
25,168,212 shares issued on March 1, 2003 at the
market price of $.01 $ 251,682
$118,000 Note Payable 118,000
Note payable assumed 27,000
Accounts payable assumed 4,300
----------
Total Deposit and Assumed Liabilities $ 400,982
----------
On August 11, 2003, by written consent, stockholder's holding a majority of the
outstanding shares of common stock, authorized to increase the authorized shares
to 1,000,000,000 and authorized to complete a reverse split of its common stock
on a basis of 1 (one) for 150 (one hundred fifty) shares of common stock.
During August 2003, the Company converted $309,082 of the shareholders loan for
96,588,250 shares of common stock.
During August 2003, the Company converted $94,200 of the Accrued Bonuses for
29,437,750 shares of common stock.
During August 2003, the Company converted $135,916 of Accrued Payroll due to
employees for 42,474,000 shares of common stock.
11
During August 2003, the Company entered into negotiations regarding the
potential acquisition of a company. As of August 18, 2003, there is no
definitive plan, agreement or understanding regarding this potential
acquisition. If consumated, the Company will be required to seek additional
funding that may cause further dilution of existing shareholders.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
This Form 10-QSB contains certain "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"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company's financial
position, business strategy and plans and objectives of the Company's management
for future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intend," and words or phrases of similar import, as they
relate to the Company or Company management, are intended to identify
forward-looking statements. Such statements (the "cautionary statements")
reflect the current view of the Company's management with respect to future
events and are subject to risks, uncertainties, and assumptions related to
various factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
product introductions and acceptance, technological change, changes in industry
practices, and one-time events. Although the Company believes that expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements. The Company does not assume any responsibility to
publicly update any of its forward-looking statements regardless whether factors
change as a result of new information, future events, or for any other reason.
The Company advises you to review any additional disclosures made in its 10-QSB,
8-K, and 10-KSB reports filed with the Commission.
OVERVIEW
iDial Networks, Inc. (the "Company" or "iDial") is an established Application
Service Provider (ASP) of Internet Protocol and Wireless Application Protocol
(WAP) technologies.
Telephone Service Products
We sell virtual prepaid calling cards over the Internet and physical prepaid
cards through traditional retail outlets. We consider our Internet Phone Cards
"virtual" because we do not issue a physical card. Once sold, the calling card
can be used immediately to make international and domestic long distance calls.
12
Our web system functions as follows:
o A potential customer accesses our website;
o the customer follows the prompt to enter the credit card information
to purchase the virtual calling card;
o we verify the credit card within seconds and the confidential PIN and
display a toll free number for the customer to record; and
o the virtual calling card can be used immediately to place a call via
the Internet or traditional phones. We then store the customer
information on our database for future reference.
Our Internet calling cards give us the flexibility of promptly changing the
rates and features to respond to changing consumer demand, rather than having an
inventory of physical cards with set features that cannot be changed until all
are recalled or used. This also allows us to offer and test several different
types of virtual calling cards with varying pricing features, thus providing a
greater selection to our customers.
Our website is accessible 24 hours per day, seven days a week, so we are not
constrained by the hours that a traditional retail store would be open for
business. Our website may also be reached from the customer's home or office.
This means the customer is not required to physically travel to another location
to make a purchase and receive delivery. Our online purchasing and delivery also
allows us to deliver a broad selection of products to customers worldwide in
rural or other locations that do not have convenient access to physical stores.
We have integrated the economics of Voice-Over-Internet-Protocol technology, the
conversion of voice data into digital data for transmission over the Internet,
with the convenience of conventional telephone services to enable Internet
initiated telephone services. With this iDial technology, we are able to offer
consumers and businesses telephone services at costs approaching the wholesale
rates of carriers. Unlike some competitors who offer personal computer to phone
services, iDial's web based services are provisioned via the Internet but all
calls are currently made phone to phone. The majority of PC owners do not have
microphones and telephony services. iDial delivers high quality, traditional and
Voice-Over-Internet-Protocol telephony services to consumers and businesses.
Wireless Application Protocol (WAP) is an industry term for the standard
technology used to provide Internet communications and advanced telephony
services on digital mobile phones, pagers, personal digital assistants, and
other wireless terminals. Management believes that the wireless market is
embracing Wireless Application Protocol technology, and that there will be a
predicted 600 million phones using Wireless Application Protocol by the end of
2003.
Additionally we are currently offering traditional prepaid phone cards and
Voice-Over-Internet-Protocol services based on iDial technology under the
following brand names for which various trade and service marks are registered.
o NETPHONECARD www.netphonecard.com Web initiated worldwide phone calls with US
dial tone and low tariffs.
13
Technology
We use a combination of our own proprietary software applications and
commercially available licensed technology to conduct our Internet and telephone
routing operations.
Proprietary Technology. We have developed proprietary customer software which
permits a customer to purchase and receive our virtual calling cards on our
website by using a credit card. We have also developed proprietary customer
software to allow our world access virtual calling cards and phone collect PINs
to initiate calls through regular telephone lines using our website and enhanced
services platform. We have also developed various proprietary credit and fraud
management applications, which aid us in checking credit and limiting fraudulent
transactions.
Our engineering staff consists of software development engineers and consultants
employed by our wholly owned subsidiary in Sri Lanka. We historically have
developed and expect to continue to develop proprietary software internally. Our
engineering strategy focuses on the development of our website, which includes
the enhancement of features and functionally of our existing software
components, the development of additional new software components, and the
integration of off-the-shelf components into our systems.
Commercially Available Licensed Technology. Our strategy has also been to
license commercially available technology whenever possible rather than seek a
custom-made or internally-developed solution. We believe that this strategy
enables us to reduce our operating costs and to respond to changing demands due
to growth and technological shifts. This strategy also allows us to focus our
development efforts on creating and enhancing the specialized, proprietary
software applications that are unique to our business. Listed below are some of
our key architectural components:
o Multiple High speed links (10 megabits per second or greater each) to
the Internet;
o Clustered Servers for web and data base applications running Windows
2000 Server, Linux and Microsoft SQL Server 2000;
o Microsoft Internet Information Server 5.0 has been chosen for its
ability to secure sensitive customer information through SSL
encryption; and
o Microsoft SQL Server 2000 is a relational database. All customer names
and addresses, PINs, number of purchases and call records are secured
and stored within this database.
We depend on Internet service providers to provide Internet access to us and our
customers. The parties responsible for completing the transmission of our calls
in foreign countries also rely on local Internet service providers for access to
the Internet in their countries. If we lost our connection with our Internet
service providers, we could not sell our virtual calling cards through our
website, and web initiated calls could not be made by our customers, until the
connection was reestablished. If a local party responsible for completing the
transmission of our calls in a foreign country loses its Internet connection, we
could not route calls over the Internet to that destination until the connection
was reestablished. These failures could cause us to lose customers and our
ability to sell virtual calling cards and telephone services would be affected.
Our customers also rely on Internet service providers for access to the
Internet. If our customers cannot access Internet, they cannot access our
website to purchase virtual calling cards or make web initiated calls.
Future Products
14
The market for broadband access services is projected to grow significantly over
the next several years. Broadband access alone, however, is not a complete
solution. As infrastructure pipes become commodities, maintaining margin and
profitability on them is becoming increasingly difficult for service providers.
We believe that broadband market success will be determined by the ability to
layer high-margin enhanced services and applications over the infrastructure.
Market leaders will need innovative, value-added solutions to maintain
customers, reduce churn and grow their customer base.
We have been developing a suite of next-generation Broadband Phone products that
we believe will encompass a rich sub-set of the voice-related services broadband
providers will seek to deploy in the near-term. These products will build on our
current service offerings, and include a more diverse set of devices (both
hardware devices as well as "soft-phones") along with additional value-added
functionality and features that will appeal to a wide potential customer-base
such as voice mail and conference calling.
Growth Strategy
While a large number of companies specializing in the conversion of voice data
to digital data for transmission over the internet, or
Voice-Over-Internet-Protocol, have been formed in recent years, most focus on
the build out and development of international networks in the effort to capture
a high margin revenue base. We believe that in this very competitive landscape,
offering many voice and data transmission options, leasing time (or purchasing
minutes) on Voice-Over-Internet-Protocol networks will quickly become a
commodity business, as the various competitors whittle margins to gain growth
and market share.
We intend to leverage our position in the Internet telephone communications
market to make communications services readily available worldwide. Our strategy
includes the following key elements:
o Promote our services through direct sales and marketing and, through
relationships with resellers and leading Internet hardware, software
and content companies.
o Strengthen and enhance our brand recognition by cooperatively marketing
our Internet telephone communications services with leading companies
in other market segments.
Many e-commerce sites have discovered the necessity of having a customer service
representative talk with potential buyers. However, traditional 800 numbers are
still relatively expensive, and require some effort on the part of the customer
to initiate the call. With our "Phone-me-now" technology, a simple click of a
button will connect the customer with the seller's representative at very low
rates. To further lower operating costs, we are exploring joint ventures with
customer service centers in English speaking countries where wages are lower to
make customer service more affordable for e-commerce companies.
15
Possible Growth Through Acquisitions
We will seek to grow our business through acquisitions of other companies in our
business or a related business. We review acquisition candidates from time to
time. If a candidate meets our criteria, we may elect to acquire it using cash,
common stock, or combination of both.
Employees
As of June 30, 2003, we had 14 full-time employees, eight part time employees,
and two parties that provide services as independent contractors. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
Our future performance depends in significant part upon the continued service of
our key technical and senior management personnel, none of who are bound by an
employee agreement requiring service for any defined period of time. The loss of
services of one or more of our key employees could have a material adverse
effect on our business, financial condition and operating results. Our future
success also depends in part upon our continued ability to attract, hire, train
and retain highly qualified technical and managerial personnel. Competition for
such personnel is intense and there can be no assurance that we can retain our
key personnel in the future.
Results of operations for the three months ended June 30, 2003 and 2002.
Revenue decreased $1,574,981 (-48%) from $3,308,779 to $1,733,798 for the three
months ended June 30, 2002 and 2003, respectively. Our retail revenue grew
approximately $314,238 (23%) from $1,370,199 to $1,684,437 for the three months
ended June 30, 2003 over 2002. This increase is due to the addition of new phone
cards to serve a new market, and further penetration into current markets in our
retail segment. Our wholesale revenue decreased approximately ($1,889,219)
(-97%) from $1,938,580 to $49,361 for the three months ended June 30, 2002 and
2003, respectively. This decrease is due to the termination of a significant
contract with a provider of telecommunications services that the Company has not
been able to replace.
Cost of sales consists primarily of the costs of providing termination of long
distance traffic over our networks and the wholesale cost of products purchased
for resale by us. Cost of sales decreased $832,606 (32%) from $2,591,898
(including $35,003 of depreciation) to $1,759,292 (including $42,732 of
depreciation) for the three months ended June 30, 2002 and 2003, respectively.
The decrease was primarily attributable to our decreased sales volume in our
wholesale segment. Gross profit(loss) (including depreciation) decreased from
22% at June 30, 2002 to (1%) at June 30, 2003. This decrease was primarily
attributable to our decreased sales volume in our wholesale segment. These low
margins are indicative of increasing competition in the markets that the Company
serves. The Company is continuously negotiating and renegotiating contracts in
its current and new markets. As a result, existing margins may not necessarily
be indicative of future margins.
16
Selling, general and administrative expenses consist of advertising and
promotional expenditures, payroll and related expenses for executive and
administrative personnel, facilities expenses, professional services expenses,
travel and other general corporate expense. Selling, general and administrative
expenses net of depreciation decreased $175,388 (21%) from $836,705 to $661,317
for the three months ended June 30, 2002 and 2003, respectively. The decrease is
primarily due to an decrease in employee expenses. The remainder is primarily
due to furnishing of office space in the corporate offices in The Woodlands
during 2002.
Depreciation expense included in cost of sales and selling, general and
administrative expenses increased $35,431 (52%) from $68,688 to $104,119 for the
three months ended June 30, 2002 and 2003, respectively. This increase resulted
from the purchase of approximately $630,000 of network equipment in the second
half of 2002.
Interest expense increased $306,109 (228%), from $134,266 to $440,375 for the
three months ended June 30, 2002 and 2003, respectively. This non-cash increase
is due to the amortization of the discount of the convertible note payables in
2003. The Company expects interest expense to remain constant or increase in
2003, due to the convertible notes issued in February of 2003 and May 2003.
Net loss from continuing operations increased $928,796 (324%), from $(285,959)
to $(1,214,755) for the three months ended June 30, 2002 and 2003, respectively.
The increase was primarily attributable to our decreased sales volume in our
wholesale segment. This increase in loss is also related to an increase in our
overhead to support our increased staff, and the time involved in the
development and generation of new sources of potentially higher margin revenue.
For the three months ended June 30, 2003, the Company had a loss of $26,182 from
the sale of Company assets.
Results of operations for the six months ended June 30, 2003 and 2002.
Revenue decreased $1,139,063 (25%) from $4,498,255 to $3,359,192 for the six
months ended June 30, 2002 and 2003, respectively. Our retail revenue grew
approximately $1,125,238 (55%) from $2,052,199 to $3,177,437 for the six months
ended June 30, 2003 over 2002. This increase is due to the addition of new phone
cards to serve a new market, and further penetration into current markets in our
retail segment. Our wholesale revenue decreased approximately ($2,264,301) (93%)
from $2,446,056 to $181,755 for the six months ended June 30, 2002 and 2003,
respectively. This decrease is due to the termination of a significant contract
with a provider of telecommunications services that the Company has not been
able to replace.
17
Cost of sales consists primarily of the costs of providing termination of long
distance traffic over our networks and the wholesale cost of products purchased
for resale by us. Cost of sales decreased $378,334 (10%) from $3,716,511
(including $91,013 of depreciation) to $3,338,177 (including $99,908 of
depreciation) for the six months ended June 30, 2002 and 2003, respectively. The
decrease was primarily attributable to our decreased sales volume in our retail
segment. Gross profit (including depreciation) decreased from 17% at June 30,
2002 to 1% at June 30, 2003. This decrease was primarily attributable to our
decreased sales volume in our wholesale segment. These low margins are
indicative of increasing competition in the markets that the Company serves. The
Company is continuously negotiating and renegotiating contracts in its current
and new markets. As a result, existing margins may not necessarily be indicative
of future margins.
Selling, general and administrative expenses consist of advertising and
promotional expenditures, payroll and related expenses for executive and
administrative personnel, facilities expenses, professional services expenses,
travel and other general corporate expense. Selling, general and administrative
expenses net of depreciation decreased $14,756 (1%) from $1,291,498 to
$1,314,536 for the six months ended June 30, 2002 and 2003, respectively. The
decrease is primarily due to an increase in general expenses
Depreciation expense included in cost of sales and selling, general and
administrative expenses increased $53,199 (35%) from $151,031 to $204,230 for
the six months ended June 30, 2002 and 2003, respectively. This increase
resulted from the purchase of approximately $630,000 of network equipment in the
second half of 2002.
Interest expense increased $356,032 (136%), from $261,150 to $617,182 for the
six months ended June 30, 2002 and 2003, respectively. This non-cash increase is
due to the amortization of the discount of the convertible note payables in
2003. The Company expects interest expense to remain constant or increase in
2003, due to the convertible notes issued in February of 2003 and May 2003.
Net loss from continuing operations increased $1,174,307 (139%), from $(843,862)
to $(2,018,169) for the six months ended June 30, 2002 and 2003, respectively.
The increase was primarily attributable to our decreased sales volume in our
wholesale segment. This increase in loss is also related to an increase in our
overhead to support our increased staff, and the time involved in the
development and generation of new sources of potentially higher margin revenue.
For the six months ended June 30, 2003, the Company had a loss of $1,448,472
from the discontinuation of the operations of 2Sendit. This segment was
discontinued in 2002 due to market conditions of the broadcast fax industry and
the loss of a significant customer.
Liquidity and Capital Resources
18
As of June 30, 2003, we had $104,724 cash on hand and $191,909 of accounts
receivable currently due. As of that date, our principal cash requirements
consisted of obligations for long distance transmissions, and other payables
incurred in the normal course of business. As of the six months ended June 30,
2003, iDial's cash generated from operations has not been sufficient to meet all
of our operating obligations.
Net cash provided by (used in) operating activities was ($1,045,192) and
$665,435 for the six months ended June 30, 2003 and 2002, respectively. This
decrease in funds used in operations was primarily due to decreased sales and
attributed increase in operating losses. iDial is actively working on expanding
its prepaid phone card business to increase cash flow. In April 2003, the
Company added a sales agent to distribute a new phone card to new international
markets in addition to the agent added in December of 2002. The Company is
continuing to seek new agents to market phone cards as well as exploring
potentially higher margin revenue sources over its existing network.
Net cash provided by (used in) investing activities was $49,410 and ($502,183)
for the six months ended June 30, 2003 and 2002, respectively. The Company had
minimal asset additions in the second quarter of 2003, but also sold several
assets during the second quarter of 2003. During 2002, the Company made a large
purchase of assets at the end of second quarter.
Net cash provided by (used in) financing activities was $1,078,739 and ($41,723)
for the six months ended June 30, 2003 and 2002, respectively. The increase was
mainly due to the convertible note payable issued in February 2003 and May 2003.
The Company expects to obtain additional financing to fund growth and to develop
new potential products and technologies.
The Company believes that the current cash on hand is sufficient to allow the
company to sustain its current operations for a finite period of time. However,
without additional funding of at least $1,000,000, the Company believes that it
will not be able to generate net income during fiscal year 2003.
We do not have existing capital resources or credit lines available that are
sufficient to fund our operations and capital requirements as presently planned
over the next twelve months. We are actively pursuing additional funds through
the issuance of debt and/or equity instruments.
Item 3. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
our management, including the chief executive officer, or CEO, and chief
financial officer, or CFO, of the effectiveness of the design and operation of
our disclosure procedures. Based on that evaluation, our management, including
the CEO and CFO, concluded that our disclosure controls and procedures were
effective as of June 30, 2003. There have been no significant changes in our
internal control over financial reporting in the second quarter of 2003 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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Part II: OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Change in Securities
Due to our continued need for funding, on May 9, 2003, we entered into a
Securities Purchase Agreement with unrelated investors, which provides the
investors with the ability to invest up to $3,000,000 in the Company. In
exchange for such investment, the investors receive a convertible debenture and
three warrants for every dollar invested. All future investments under the
Securities Purchase Agreement are within the sole discretion of the investor. As
of the date hereof, we have issued convertible debentures in the amount of
$500,000 and have received $197,688 (net of fees of $52,312) on May 9, 2003 and
$193,182.94 (net fees of $56,817.06) on June 23, 2003.
The debentures issued pursuant to the May 2003 Securities Purchase Agreements
bear interest at 12%, mature one year from the date of issuance, and are
convertible into our common stock, at the investors' option, at the lower of the
following:
o $0.01; or
o 40% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before but
not including the conversion date.
The full principal amount of the convertible debentures are due upon default
under the terms of convertible debentures. The warrants are exercisable until
five years from the date of issuance at a purchase price of $0.01 per share. In
addition, we have granted the investors a security interest in substantially all
of our assets and intellectual property and registration rights. In addition,
upon termination of this private placement, we are obligated to file a
registration statement covering the resale of the shares of common stock
underlying the debentures and obtain effectiveness of such registration
statement within 90 days from the date of filing. If we are unable to obtain
such effectiveness, the debentures will be considered to be in default.
During the quarter ended June 30, 2003, the Company issued an aggregate of
15,000,000 shares of common stock to employees of the Company in lieu of salary
and bonuses valued at $79,500.
During the quarter ended June 30, 2003, the Company issued an aggregate of
315,000 shares of common stock to consultants for services valued at $1,575.
* All of the above offerings and sales were deemed to be exempt under Rule
506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of the Company or
executive officers of the Company, and transfer was restricted by the Company in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, the Company made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange
19
Commission filings.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Description
31.1 Certification of the Principal Executive Officer of iDial Networks,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer of iDial Networks, Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Principal Executive Officer of iDial Networks,
Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer of iDial Networks, Inc.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-QSB Report, for the Quarter ended June 30, 2003 has been signed below by
the following person on behalf of the Registrant and in the capacity and on the
date indicated.
August 19, 2003
IDIAL NETWORKS, INC.
By /s/Mark Wood
------------
Mark Wood
Chairman of the Board
21