<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended April 30, 2000
-----------
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 75-2801677
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 Jetstar Drive, Suite 100
Irving, Texas 75063
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(Address of principal executive offices) (Zip Code)
(972) 929-1920
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(Registrant's telephone number, including area code)
________________________________________________________________________________
(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 7, 2000, 8,563,131 shares of common stock, $.001 par value per share,
were outstanding.
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
(Formerly Ardis Telecom & Technologies, Inc., Formerly Canmax, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,035,816 $ 846,141
Restricted cash 300,000 613,634
Trade accounts receivable, net of allowance of doubtful accounts of
$536,613 and $181,675 at April 30, 2000 and October 31, 1999,
respectively 870,372 297,914
Accounts receivable - other 36,714 --
Inventory 58,478 141,017
Prepaid expenses and other 40,135 92,074
Deferred financing fees 369,030 --
Current portion of long-term receivable, net of allowance for doubtful
accounts of $20,000 at April 30, 2000 and October 31, 1999 -- 300,000
------------ ------------
Total current assets 2,710,545 2,290,780
------------ ------------
PROPERTY AND EQUIPMENT, net 1,906,147 1,421,328
RESTRICTED CASH -- 624,099
LONG-TERM RECEIVABLE, net of current portion, net of allowance for doubtful
accounts of $30,000 at April 30, 2000 and October 31, 1999 50,000 50,000
OTHER ASSETS 170,946 80,582
GOODWILL, net of amortization of $ 52,074 at April 30, 2000 989,401 --
------------ ------------
TOTAL ASSETS $ 5,827,039 $ 4,466,789
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Convertible debentures - current $ 1,000,000 $ --
Current portion of long-term debt -- 162,000
Current portion of capital lease obligation 464 --
Trade accounts payable 3,928,199 336,053
Accrued liabilities 338,179 306,239
Deferred revenue 61,270 235,104
Other payable 55,500 --
Related party note payable - current 196,000 --
------------ ------------
Total current liabilities 5,579,612 1,039,396
------------ ------------
Long-term debt, net of current portion -- 562,000
Related party note payable, net of current portion 150,000 --
------------ ------------
Total long-term liabilities 150,000 562,000
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SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value, 10,000,000 shares authorized, none
issued and outstanding at April 30, 2000 and October 31, 1999 -- --
Common stock, 44,169,000 shares authorized; $.001 par value;
8,493,655 shares issued and 8,481,633 shares outstanding at April
30, 2000 and 6,881,005 shares issued and outstanding at October 30, 1999 8,494 6,881
Additional paid-in capital 27,040,513 24,940,093
Accumulated deficit (26,881,894) (22,076,165)
Accumulated other comprehensive income (5,416) (5,416)
Treasury stock (54,870) --
Notes receivable for common stock (9,400) --
------------ ------------
Total shareholders' equity 97,427 2,865,393
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,827,039 $ 4,466,789
============ ============
</TABLE>
See accompanying notes.
2
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DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
(Formerly Ardis Telecom & Technologies, Inc., Formerly Canmax, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C>
REVENUES $ 2,823,704 $ 846,020 $ 6,630,471 $ 2,388,739
----------- ----------- ------------ -----------
COSTS AND EXPENSES
Costs of revenues 3,109,052 738,648 7,472,725 2,155,869
Sales & marketing 278,569 259,692 786,783 479,791
General & administrative 1,741,938 525,632 2,682,034 946,352
Depreciation and amortization 159,342 11,534 274,447 21,897
----------- ----------- ------------ -----------
Total costs and expenses 5,288,901 1,535,506 11,215,989 3,603,909
----------- ----------- ------------ -----------
OTHER INCOME (EXPENSES)
Financing fees (240,260) -- (240,260) --
Interest income (expense), net (16,899) 16,805 20,052 15,915
----------- ----------- ----------- -----------
Total other income (expenses) (257,159) 16,805 (220,208) 15,915
----------- ----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (2,722,356) (672,681) (4,805,726) (1,199,255)
DISCONTINUED OPERATIONS
Income (loss) from operation of software
business,
net of income taxes of $0 -- -- -- 218,376
Gain on sale of software business, net
of income
taxes of $0 -- 1,366,518 -- 3,382,012
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,722,356) $ 693,837 $(4,805,726) $ 2,401,133
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.33) $ (0.10) (0.59) $ (0.18)
Discontinued operations -- 0.20 -- 0.54
----------- ----------- ----------- -----------
Net earnings (loss) $ (0.33) $ 0.10 (0.59) $ 0.36
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.33) $ (0.10) (0.59) $ (0.18)
Discontinued operations -- 0.20 -- 0.54
----------- ----------- ----------- -----------
Net earnings (loss) $ (0.33) $ 0.10 (0.59) $ 0.36
=========== =========== =========== ===========
SHARES USED IN THE CALCULATION OF PER SHARE
AMOUNTS:
Basic common shares 8,353,496 6,861,005 8,120,228 6,733,933
Dilutive impact of stock options and
warrants -- -- -- --
----------- ----------- ----------- -----------
Diluted common shares 8,353,496 6,861,005 8,120,228 6,733,933
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
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DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
(Formerly Ardis Telecom & Technologies, Inc., Formerly Canmax, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
April 30,
---------------------------
2000 1999
--------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(4,805,726) $ 2,401,133
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operating activities:
Income from discontinued operations -- (218,376)
Gain on disposal of software business -- (3,382,012)
Stock issued for services -- 74,225
Warrants issued for services -- 5,942
Depreciation and amortization 274,447 21,897
Financing fees 240,260 --
Changes in operating assets and liabilities, net of effects of acquisition
Trade accounts receivable 11,147 (53,532)
Accounts receivable - other (19,393) --
Inventory 82,539 (51,947)
Prepaid expenses and other 89,630 (149,240)
Other assets (84,344) 9,107
Trade accounts payable 2,851,966 (406,749)
Accrued liabilities 29,764 (66,062)
Other payable (80,000) --
Deferred revenue (173,834) (46,033)
----------- -----------
Net cash used in operating activities from
continuing operations (1,583,544) (1,861,647)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of software business -- 3,769,917
Purchase of property and equipment (198,630) (91,550)
Payments on note receivable 300,000 35,610
Deposit on future asset acquisition -- (200,000)
Cash in DTI at acquisition date 69,137 --
----------- -----------
Net cash provided by investing activities from continuing operations 170,507 3,513,977
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of convertible debenture - due to shareholder -- (1,000,000)
Proceeds from notes payable 1,000,000 805,000
Payments on notes payable (724,000) (51,212)
Payments on related party note payable (54,000) --
Change in restricted funds 937,733 --
Issuance of common shares for cash 490,970 --
Payments on capital leases (47,991) --
----------- -----------
Net cash provided by (used in) financing activities from continuing operations 1,602,712 (246,212)
----------- -----------
Cash provided by discontinued operations -- 1,931,391
----------- -----------
NET INCREASE IN CASH 189,675 3,337,509
Cash at beginning of period 846,141 207,609
----------- -----------
Cash at end of period $ 1,035,816 $ 3,545,118
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 20,894 $ 18,181
=========== ===========
SUPPLEMENTAL NON-CASH ACTIVITIES
Offset of accounts payable against notes receivable $ -- $ 21,554
=========== ===========
</TABLE>
See accompanying notes.
4
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DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
(Formerly Ardis Telecom & Technologies, Inc., Formerly Canmax, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. 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 have been included. Operating results for
the six month period ended April 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending October 31, 2000.
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, 1999.
Prior to December 7, 1998, the Company operated in the software and
telecommunication industries. On December 7, 1998, the Company sold its
retail automation software business (the "Software Business") to
Affiliated Computer Services, Inc. ("ACS"). Therefore, the Company no
longer engages in the Software Business, and is now operating only in the
telecommunications industry (the "Telecommunications Business"). Results
of operations in prior periods have been restated to reclassify the Software
Business as discontinued operations. The measurement date for the sale is
December 7, 1998, the date the shareholders approved the transaction.
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 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, 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 that 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 opening "VoIP" to a new segment of customers by delivering a high
quality, reliable and scaleable solution that addresses the needs of the rapidly
growing "VoIP" industry.
5
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NOTE B - EARNINGS (LOSS) PER SHARE
The shares issuable upon the exercise of stock options and warrants, and
convertible debentures are excluded from the calculation of net earnings (loss)
per share as their effect on continuing operations net loss would be
antidilutive.
NOTE C - REVENUE RECOGNITION
Prepaid services sold while the Company operates its own switch (This policy
applies to all prepaid revenue generated during the six months ended April 30,
2000.)--Revenue recognition originates from customer usage. The Company sells
products to retailers and distributors at a fixed price. When the retailer or
distributor is invoiced, deferred revenue is recognized. The Company recognizes
revenue, and reduces the deferred revenue account as the customer utilizes
calling time or upon expiration of cards containing unused calling time.
Revenues generated by international re-origination and dial-thru services are
based on minutes of customer usage. The Company records payments received
in advance as deferred revenue until such services are provided.
Prepaid services sold through the PT-1 Agreement (This applies to all
revenue generated during the six months ended April 30, 1999.)--Revenue was
recognized when the prepaid phone cards were invoiced and shipped. The
Company performed no other services after the cards were shipped.
NOTE D - RESTRICTED CASH
At April 30, 2000, $300,000 of cash was pledged as collateral on a building
lease and an international carrier contract and is classified as restricted cash
on the balance sheet.
NOTE E - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company has an outstanding receivable from a customer of approximately
$435,000 which is overdue by approximately one year, of which $235,000 has
been reserved as of April 30, 2000. Management believes the remaining
$200,000 is fully collectible. The Company had a note receivable and
accrued interest from USCommunications Services, Inc., its former subsidiary,
under which approximately $300,000 (net of reserve of $160,000) in principal was
outstanding at October 31, 1999. On August 17, 1999, USC commenced voluntary
bankruptcy proceedings under Chapter 11 of the Bankruptcy Code. The Company
collected $300,000 of this balance as a final settlement in January 2000. The
remaining balance due of $160,000 was charged to operations during the fiscal
year ended October 31, 1999.
NOTE F - 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 revenue and
earnings goals. As of April 30, 2000, no additional shares were earned by
the Seller based on revenue and earnings goals. The acquisition was
accounted for as a purchase. Goodwill recorded in the acquisition will be
amortized over a period of 10 years. The results of operations of the
acquired entity are included in the consolidated operations of the Company
from November 1, 1999.
6
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The fair value of assets and liabilities acquired consisted of:
<TABLE>
<S> <C>
Cash $ 69,137
Accounts receivable, net 583,605
Fixed assets 505,082
Other assets 64,512
Liabilities (1,326,311)
Goodwill 1,041,475
------------
$ 937,500
============
</TABLE>
Unaudited pro-forma financial information for the six month period
ended April 30, 1999, as though the acquisition had occurred on November 1,
1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenues $ 6,062,271
===========
Net loss from continuing operations $(1,198,778)
===========
Discontinued operations income $ 3,600,388
===========
Net income $ 2,401,610
===========
Net loss per common share from continuing
operations (basic and diluted) $ (0.15)
===========
Net income per common share (basic and diluted) $ 0.31
===========
Weighted average common shares outstanding
(basic and diluted) $ 7,742,220
===========
</TABLE>
NOTE G - RECLASSIFICATIONS
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the 2000 presentation.
NOTE H - CONVERTIBLE DEBENTURES
On February 4, 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 are 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 are not repaid within 90 days, they are
convertible into shares of common stock at $4.00 per share while remaining
outstanding. The Company recorded financing fees of approximately $117,000
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 charged to
expense and accumulated amortization for the three months ended April 30, 2000
totaled approximately $123,000.
7
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Additional warrants to acquire up to an aggregate of 125,000 shares of common
stock at an exercise price of $2.75 per share will be issued to the holders of
the notes if the convertible notes have not been repaid within six months
following the date of issuance.
At April 30, 2000, the outstanding convertible debt balance was $1,000,000.
NOTE I - 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 outstanding balance at April 30, 2000 was $346,000.
NOTE J - DISCONTINUED OPERATIONS
On December 7, 1998, the Company sold substantially all of the assets of the
Software Business. Pursuant to the terms of the Purchase Agreement, the
Company sold the assets and received $4,000,000 at closing and transferred
certain liabilities arising from the Software Business. On January 21, 1999,
the purchaser and the Company calculated the net working capital (generally
current assets other than cash minus current liabilities) as of the closing
date, and the purchaser received an amount equal to the negative difference
between the net working capital as of the closing date of $230,083. The Company
recorded an initial gain on the sale of the Software Business of $2,015,494.
The gain was calculated as net proceeds of $3,769,917 less net assets of
$1,693,259 less legal and accounting fees related to the sale of $61,164.
The Company was entitled, upon the sale of the Software Business, to receive
additional deferred payments of up to an additional $3,625,000 calculated at
the end of each calendar quarter during the twelve month period commencing on
January 1, 1999. Each deferred payment was calculated based upon the
cumulative level of revenue attributable to the Software Business from
January 1, 1999 through the end of each three month period through
December 31, 1999, and equaled (a) the sum of (i) 75% of all such revenues
greater than $4 million and less than or equal to $7 million plus (ii) 13.75%
of all such revenues greater than $7 million or less than or equal to $17
million, minus (b) the sum of any deferred payments previously made.
During the year ended October 31, 1999, the Company had received total payments
relating to the additional consideration of $3,625,000. These payments had been
recorded as additional gain on the sale of the Software Business, reduced by
costs associated with the sale. The total net gain resulting from disposition of
the Software Business was $5,309,927.
NOTE K - SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES
In connection with the acquisition of Dial-Thru International Corporation on
November 2, 1999, the Company issued 1,000,000 shares of common stock to the
Seller's sole owner. The Company also issued 193,900 shares in connection with
the exercise of options for $248,003 in cash proceeds during the three months
ended January 31, 2000. For the three months ending April 30, 2000, the Company
issued an additional 418,750 shares in connection with the exercise of options
for
$242,970 in cash proceeds, of which $9,400 was received subsequent to April 30,
2000.
WARRANT ISSUANCES
During the three months ended January 31, 2000, the Company issued 870,000
options and warrants. The options and warrants were issued at the closing
8
<PAGE>
trading prices on the date preceding the date of grant, have exercise prices
ranging from $0.81 to $1.44, and expire over 2 to 3 years. The options have
various vesting terms.
In conjunction with the convertible notes (see Note H above) executed on
February 4, 2000, the Company issued warrants to the holders of the notes to
acquire an aggregate of 125,000 shares of common stock at an exercise price of
$3.00 per share, expiring five years from the date of issuance.
On March 1, 2000, the Company amended the terms of eight outstanding common
stock purchase warrants held by seven distributors of the Company's prepaid
telecommunications products. The amendments modified the vesting terms of the
warrants, but did not change exercise prices of the warrants, which range from
$0.45 to $0.88, the closing price of the Company's common stock on the date
preceding the original grant of each warrant.
NOTE L - SUBSEQUENT EVENTS
On May 2, 2000, Star Telecommunications, Inc. ("Star") filed suit against the
Company in the Superior Court of the State of California in Santa Barbara,
California, alleging a breach of contract by the Company in failing to pay
amounts due under a Carrier Service Agreement, and seeks damages of
approximately $780,000. The Company disputes the amounts alleged to be owed to
Star, and has filed a counter-claim for damages against Star for wrongful acts
of Star under the Carrier Service Agreement. Amounts alleged to be owed to Star
are reflected in the Company's financial statements. The Company intends to
vigorously defend this lawsuit and further believes that the Company's damages
resulting from Star's actions exceed the claims by Star.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Through December 7, 1998, the Company operated two distinct businesses, its
software business conducted through its subsidiary Canmax Retail Systems, Inc.
(the "Software Business") and its telecommunications business (the
"Telecommunications Business"). On December 7, 1998, the Company consummated the
sale of the Software Business (the "Software Business Sale") to Affiliated
Computer Services, Inc. As a result of the Software Business Sale, the Company
no longer engages in the Software Business and its business is focused solely on
its Telecommunications Business. Therefore, historical financial information
attributable to the Software Business is reported as discontinued operations.
Because the Software Business was discontinued in the first quarter of fiscal
1999, management has not discussed the results of operations for the Software
Business for the first six months of fiscal 2000 as compared to 1999.
On November 2, 1999, the Company consummated the acquisition (the "DTI
Acquisition") of substantially all of the assets and business of Dial-Thru
International Corporation, a California corporation now known as DTI-LIQCO,
Inc., including the rights to the name "Dial-Thru International Corporation." On
January 14, 2000, the stockholders of the Company approved the Company's
proposed change of its name from "ARDIS Telecom & Technologies, Inc." to "Dial-
Thru International Corporation" and on January 19, 2000, the Company officially
changed its name to Dial-Thru International Corporation ("DTI").
In the second quarter of fiscal 2000, the Company moved its focus toward its
global Internet Service Provider ("ISP") communications strategy; providing
connectivity to international markets experiencing significant demand for ISP
enabled services and then targeting that same ethnic segment in the U.S. This
change in focus by the Company has lead to a shift from its prepaid long
distance operations and toward higher margin international opportunities. This
strategy allows the Company to form local partnerships with foreign PTT's, the
entity responsible for regulating telecommunications in foreign markets, and
ISP's, and to provide ISP enabled services based on the in-country regulatory
environment affecting telecommunications and data providers. Through these
relationships, the Company is able to acquire a direct equity interest or
partnership/joint venture interest in the local business and expects its
interest to increase as foreign ownership regulations of telecommunications
companies diminish. As an early market entrant building "super-regional"
networks, management believes the Company is positioned for long-term growth and
the provision of high margin, value-added services.
In addition to helping customers achieve significant savings on long-distance
voice and fax calls by routing calls over the Internet or DTI's private network,
the Company's customers benefit by utilizing non-traditional (Voice over
Internet Protocol, "VoIP") methods to call into international locations, thus
receiving significant discounts on their monthly bills. The Company will also
offer new opportunities to existing ISP's and Web-enabled corporate call centers
engaged in electronic commerce that want to expand into voice services and are
seeking to lower long-distance costs. The benefits delivered by virtue of the
worldwide market include a wide selection of products, competitive pricing, ease
of access to vast volumes of consumers, and convenient methods of purchase.
Management believes the Company's PTT partners receive the benefits of global
marketing exposure, reduced cost of sale, reduced cost of advertising, and
access to technology that otherwise would not be readily available.
DTI's Internet gateway product has the potential to help access the marketplace
for "VoIP" without requiring higher-cost digital connections and large
infrastructure investments. The Company offers solutions that bring together
voice quality, scalability, ease of use, and price points needed to bring "VoIP"
to the wider marketplace, which management believes allows the Company to play
an important role in the growth of the "VoIP" gateway services.
10
<PAGE>
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,
1999, 1998 and 1997; the Company's Form 10-Q for the quarter ended April 30,
1999; and the consolidated financial statements and related notes for the
quarter ended April 30, 2000 found elsewhere in this report.
RESULTS OF OPERATIONS
THREE MONTH COMPARISON
REVENUES
Revenues were $2,823,704 for the quarter ended April 30, 2000, compared to
$846,020 for the quarter ended April 30, 1999, representing a 234% increase from
the prior period. This increase is primarily attributable to revenues of
approximately $2,154,638 arising from the business acquired in the DTI
Acquisition, and changing the Company's focus away from the prepaid long
distance market towards the higher margin international communication services
for small to medium size businesses that require comprehensive communication
products. Management believes the shift of business from the prepaid market to
international communications for small to medium size enterprises will not only
increase and sustain higher margins, but will ultimately increase customer
retention, and EBITDA growth in the years to come.
EXPENSES
Cost of revenues were $3,109,052, or 110% of revenue, for the quarter ended
April 30, 2000, compared to $738,648, or 87% of revenues for the quarter ended
April 30, 1999, representing a 321% increase in cost of revenues from the prior
period. Of this increase, approximately $1,850,936 relates to the business
acquired in the DTI Acquisition. The remaining increases in cost of revenues are
primarily attributable to costs associated with the prepaid telecommunications
services provided during the period, and costs associated with the operation of
the distribution channel established for the prepaid product. By interconnecting
the Company's switch with the facilities acquired in the DTI Acquisition, the
Company was able to reduce its overall carrier costs and gained access to
additional carriers with lower prices and better quality. Management expects
that the full interconnection will be completed by the end of the third fiscal
quarter, which should lower overall carrier costs and raise profit margins.
Sales and marketing costs were $278,569, or 10% of revenue, for the quarter
ended April 30, 2000, compared to $259,692, or 31% of revenue, for the quarter
ended April 30, 1999. This represents a 7% increase in costs from the prior
period. Sales and marketing expenses for the current period were primarily
associated with the operation of the distribution channel for the prepaid
products. By re-focusing the Company's business to the international markets and
ethnic segments in the U.S., the Company reduced its sales and marketing costs
as a percentage of revenue as the prepaid business required a large sales and
marketing staff. In addition, the Company has moved most of its sales and
marketing into the foreign sector, where labor costs are significantly less.
Therefore, the Company expects to lower sales and marketing costs substantially
in the upcoming months, resulting in increased EBITDA.
General and administrative costs were $1,741,938, or 62% of revenue for the
quarter ended April 30, 2000, compared to $525,632, or 62% of revenue, for the
quarter ended April 30, 1999, representing a 231% increase from the prior
period. These costs are comprised primarily of management, accounting, legal and
overhead expenses and have increased as a result of the Company's increase in
its business operations and increases in personnel and overhead resulting from
the DTI Acquisition. Of this
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increase, approximately $480,883 relates to the DTI Acquisition. Although an
increase in the current period, the Company was able to reduce its general and
administrative expenses significantly during this change in focus as the overall
administrative costs for the prepaid market were extensive. In addition, as the
Company was able to open facilities in foreign markets, it was able to shift a
portion of the general and administrative costs to the foreign sector as labor
and overhead costs are significantly less.
During the three month period ended April 30, 2000, the Company reported net
interest expense of $16,899, compared with a net interest income of $16,805 for
the three month period ended April 30, 1999.
As a result of the foregoing, the Company incurred a net loss from continuing
operations of $2,722,356 or $0.33 per share, for the three month period ended
April 30, 2000, as compared to a net loss from continuing operations of
$672,681, or $0.10 per share for the quarter ended April 30, 1999. During the
three month period ending April 30, 1999, the Company recorded a gain on sale of
the Software Business of $1,366,518, or $0.20 per share, resulting in net income
of $693,837, or $0.10 per share. As a result of the changes described
throughout, the Company has been able to implement its "Bookend" strategy which
captures high margin traffic with small to medium size enterprises, and
increases customer retention, and significantly reduces the Company's overhead.
With this new strategy and new partners in the foreign sector, along with
reduced costs, management believes the Company is positioned to be the
significant entrant in "VoIP", and the "Next Gen" products and services provider
for the business sector, both in foreign and domestic markets.
SIX MONTH COMPARISON
REVENUES
Revenues from continuing operations were $6,630,471 for the six months ended
April 30, 2000, compared to $2,388,739 for the six months ended April 30, 1999,
representing a 178% increase from the prior period. This increase is primarily
attributable to revenues of approximately $3,916,538 arising from the business
acquired in the DTI Acquisition, and the Company changed its focus away from the
prepaid long distance market towards the higher margin international
communication services for small to medium size businesses that require
comprehensive communication products. Management believes the shift of business
from the prepaid market to VoIP international communications for small to medium
size enterprises will not only increase and sustain higher margins, but will
ultimately increase customer retention, and EBITDA growth in the years to come.
EXPENSES
Cost of revenues were $7,472,725, or 113% of revenue for the six months ended
April 30, 2000, compared to $2,155,869, or 90% of revenue for the six months
ended April 30, 1999, representing a 247% increase in cost of revenues from the
prior period. Of this increase, approximately $3,399,884 related to the
acquisition of DTI. The remaining increases in cost of revenues are primarily
attributable to costs associated with the prepaid telecommunications services
provided during the period, and costs associated with the operation of the
distribution channel established for the prepaid products. By interconnecting
the switch with the facilities acquired in the DTI Acquisition, the Company was
able to reduce its overall carrier costs and enjoyed access to additional
carriers with lower prices and better quality. Management expects that the full
interconnection will be completed by the end of the third fiscal quarter, thus,
lowering its overall carrier costs and raising profit margins.
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Sales and marketing costs were $786,783, or 12% of revenue, for the six months
ended April 30, 2000, compared to $479,791, or 20% of revenue, for the six
months ended April 30, 1999. This represents a 64.0% increase in costs from the
prior period. Sales and marketing expenses for the current period were primarily
associated with the operation of the distribution channel for the prepaid
products. By re-focusing the Company's business to VoIP international markets
and ethnic segments in the U.S., the Company has been able to reduce sales and
marketing costs significantly as the prepaid markets required a large sales and
marketing staff. In addition, the Company has transitioned most of its sales and
marketing into the foreign sector, where labor costs are significantly less.
Therefore, management believes the Company will be able to lower its sales and
marketing costs substantially in the upcoming months, thus increasing EBITDA.
General and administrative costs were $2,682,034, or 40% of revenue, for the six
months ended April 30, 2000, compared to $946,352, or 40% of revenue, for the
six months ended April 30, 1999, representing a 183% increase from the prior
period. These costs are comprised primarily of management, accounting, legal and
overhead expenses and have increased as a result of the Company's increase in
its business operations and increases in personnel and overhead resulting from
the DTI Acquisition. Although an increase in the current period, the Company was
able to reduce its general and administrative expenses significantly during its
change in focus as the overall administrative costs for the prepaid business
were extensive. In addition, as the Company was able to open facilities in
foreign markets, it was able to shift a portion of the general and
administrative costs to the foreign sector where labor and overhead costs are
significantly less.
During the six month period ended April 30, 2000, the Company reported net
interest income of $20,052 compared with a net interest income of $15,915 for
the six month period ended April 30, 1999.
As a result of the foregoing, the Company incurred a net loss from continuing
operations of $4,805,726 or $0.59 per share, for the six month period ended
April 30, 2000, as compared to a net loss from continuing operations of
$1,199,255, or $0.18 per share for the six months ended April 30, 1999. During
the six-month period ending April 30, 1999, the Company recorded a gain on sale
of the software business of $3,382,012, or $0.54 per share, resulting in net
income of $2,401,133, or $0.36 per share. As a result of the changes described
throughout, the Company has been able to implement its "Bookend" strategy which
captures high margin traffic with small to medium size enterprises, thus
increasing customer retention, and significantly reducing the Company's
overhead. With the Company's new strategy and new partners in the foreign
sector, along with reduced costs, management believes the Company is positioned
to be the front runner in "VoIP", and the "Next Gen" products and services
provider for the business sector, both in the foreign and domestic markets.
LIQUIDITY AND CAPITAL RESOURCES
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 $2.0 million for capital
investments for fiscal 2000, 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 believes
that, if provided with sufficient capital, it can significantly accelerate its
growth plan, and consequently plans to raise between $5.0 million and $15.0
million in either debt or equity financing during the fiscal year 2000. The
Company is also contemplating an additional funding of a larger nature, possibly
in the latter part of fiscal 2000. The Company believes that it will be able to
accomplish these financings on acceptable terms in order to support
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its growth plans. The Company's failure to obtain any such financing could
significantly delay the Company's implementation of its business plan and have a
material adverse effect on its business, financial condition and operating
results.
At April 30, 2000, the Company had cash and cash equivalents of $1,036,000, an
increase of $190,000 from the balance at October 31, 1999.
During the six months ended April 30, 2000, net cash used in operating
activities of $1,584,000 was primarily due to the net loss for the six months of
$4,806,000 and net decreases in deferred revenues of $174,000 as offset by the
decrease in inventory of $83,000, and increases in trade accounts payables and
other accrued liabilities of $2,802,000. During the six months ended April 30,
1999, cash used in operating activities totaled $1,862,000 and was comprised of
the Company's net income $2,401,000, net changes in operating assets and
liabilities of $764,000, gain on disposal of the Software Business of $3,382,000
and the related income of $218,000.
Cash provided by investing activities was $171,000 for the six months ended
April 30, 2000 and was primarily comprised of a $300,000 repayment of a note
receivable and $69,000 of cash acquired in the DTI Acquisition, reduced by
$199,000 of purchased property and equipment. Cash provided by investment
activities for the first six months of 1999 totaled $3,514,000 and was primarily
comprised of proceeds from the sale of the Software Business of $3,770,000,
reduced by the purchase of property and equipment of $92,000 and a deposit on a
future asset acquisition of $200,000.
Cash used in financing activities for the six months ended April 30, 2000
totaled $1,603,000, and was comprised of payments of $724,000 on a note payable
and the resulting release of restricted cash of $938,000, $54,000 on a related
party note payable and $48,000 under capital leases, as offset by $1,000,000 of
proceeds received from the issuance of convertible debentures, and $491,000 of
proceeds received upon the exercise of stock options. Cash used in financing
activities for the six months ended April 30, 1999, was $246,000, reflecting the
repayment of borrowings of $1,051,000 netted against the proceeds from an
equipment financing of $805,000.
Current liabilities as of April 30, 2000 were $5,580,000, while current assets
as of that date totaled $2,711,000. Current assets include $1,407,000 of trade
accounts receivable, of which 31% were comprised of a past due account from an
international customer. At April 30, 2000, the Company had a net working capital
deficiency of $2,869,000 compared to a net working capital surplus of $3,756,000
at April 30, 1999.
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CAUTIONARY STATEMENT ON 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, 1999. 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 2000, the Company consummated the private placement of $1,000,000
of convertible notes and warrants to nine accredited investors. The notes are
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
are not repaid within 90 days, they are convertible into shares of common stock
at $4.00 per share while remaining outstanding. The Company also issued to the
purchasers 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. Pursuant to the terms of the notes, the Company is
also obligated to issue to the holders of the notes warrants to acquire up to an
aggregate of 125,000 shares of common stock at an exercise price of $2.75 per
share if the convertible notes have not been repaid within six months following
the date of issuance.
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On March 1, 2000, the Company amended the terms of eight outstanding common
stock purchase warrants held by seven distributors of the Company's prepaid
telecommunications products. Six of the distributors held warrants to acquire
50,000 shares of the Company's common stock and one distributor held warrants
to acquire 100,000 shares of the Company's common stock. The amendments modified
the vesting of the warrants so that the right to acquire 50% of the shares
underlying each warrant was immediately exercisable upon the satisfaction of all
outstanding payables to the Company, and the right to acquire the remaining 50%
of the shares underlying each warrant would not vest until the distributors as a
group obtained consolidated revenues from sales of the Company's prepaid
telecommunication products in excess of $10 million for three consecutive months
during the period ending February 28, 2002. The amendments did not change
exercise prices of the warrants, which range from $0.45 to $0.88, the closing
price of the Company's common stock on the date preceding the original grant of
each warrant.
ITEM 5. OTHER INFORMATION
On May 2, 2000, Star Telecommunications, Inc. filed suit against the Company in
the Superior Court of the State of California in Santa Barbara, California. The
complaint alleges a breach of contract by the Company in failing to pay amounts
due under a Carrier Service Agreement, and seeks damages of approximately
$780,000. The Company disputes the amounts alleged to be owed to Star
Telecommunications and has filed a counter-claim for damages against Star
Telecommunications for wrongful acts of Star under the Carrier Service
Agreement. Amounts alleged to be owed to Star are reflected in the Company's
financial statements. The Company intends to vigorously defend this lawsuit and
further believes that the Company's damages resulting from Star's actions exceed
the claims by Star.
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 Form of Convertible Notes issued February 4, 2000 (filed herewith)
4.2 Form of Common Stock Purchase Warrants issued February 4, 2000 (filed
herewith)
4.3 Form of Amended and Restated Common Stock Purchase Warrants issued
March 1, 2000 (filed herewith)
11 Statement re Computation of Per Share Earnings (filed herewith).
27 Financial Data Schedule (filed herewith).
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(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: June 14, 2000 /s/ John Jenkins
-------------------------- ----------------------------------
John Jenkins
President, Chief Financial Officer
(Principal Financial Officer)
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