United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 2006
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or
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to _____
Commission File Number 0-22636
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RAPID LINK, INCORPORATED
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(Exact name of small business issuer as specified in its charter)
Delaware 75-2461665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17383 Sunset Boulevard, Suite 350
Los Angeles, California, 90272
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(Address of principal executive offices) (Zip Code)
(310) 566-1700
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(Issuer's Telephone number)
N/A
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(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 [ ]
Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of September 14, 2006, 51,181,994 shares of common stock, $.001 par value
per share, were outstanding.
Transitional small business disclosure format (Check One): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RAPID LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ July 31, October 31,
2006 2005
---------- ----------
(unaudited) (Restated)
CURRENT ASSETS
Cash and cash equivalents $ 288,588 $ 172,164
Trade accounts receivable, net of allowance
for doubtful accounts of $175,014 at July
31, 2006 and $427,099 at October 31, 2005 1,561,869 564,039
Prepaid expenses and other current assets 142,395 164,978
---------- ----------
Total current assets 1,992,852 901,181
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PROPERTY AND EQUIPMENT, net 407,803 353,726
GOODWILL, net 2,868,461 1,796,917
CUSTOMER LIST, net 3,415,178 144,000
OTHER ASSETS, net 124,377 75,043
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TOTAL ASSETS $ 8,808,671 $ 3,270,867
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Capital lease obligation $ 126,196 $ 126,196
Trade accounts payable 3,641,601 3,451,801
Accrued liabilities 493,311 463,594
Accrued interest (including $104,146 to
related parties at July 31, 2006 and $901,849
at October 31, 2005) 359,110 1,007,322
Deferred revenue 387,756 401,640
Deposits and other payables 451,705 418,109
Contingent purchase consideration 500,000 -
Convertible notes, current portion, net of debt
discount of $703,333 at July 31, 2006 and
$223,167 at October 31, 2005 466,667 481,833
Related party note, current 436,560 -
Net current liabilities from
discontinued operations 1,162,000 1,162,000
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Total current liabilities 8,024,906 7,512,495
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CONVERTIBLE NOTES, net of current portion and
net of debt discount of $736,688 at July 31,
2006 and $1,140,824 at October 31, 2005 1,495,769 686,633
CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES, net
of debt discount of $52,392 at July 31, 2006 and
$77,208 at October 31, 2005 1,852,686 926,182
RELATED PARTY NOTES, non-current 1,000,000 -
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, $.001 par value; 175,000,000
shares authorized; 50,156,443 shares issued
at July 31, 2006 and 29,297,183 shares issued
at October 31, 2005 50,157 29,298
Additional paid-in capital 47,189,755 42,858,862
Accumulated deficit (50,749,732) (48,687,733)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
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Total shareholders' deficit (3,564,690) (5,854,443)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 8,808,671 $ 3,270,867
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
RAPID LINK INCORPORATED AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------ ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
REVENUES $ 4,842,904 $ 2,347,374 $ 8,950,034 $ 7,996,586
COSTS AND EXPENSES
Costs of revenues 3,441,046 1,872,577 6,582,121 6,255,156
Sales and marketing 334,836 50,277 577,045 163,156
General and administrative 1,034,036 965,216 2,424,455 2,549,883
Depreciation and amortization 283,620 142,046 487,799 438,695
Loss (gain) on disposal of
property and equipment - - 34,229 (8,800)
Gain on reduction of liabilities (308,879) - (308,879) -
---------- ---------- ---------- ----------
Total costs and expenses 4,784,659 3,030,116 9,796,770 9,398,090
---------- ---------- ---------- ----------
Operating income (loss) 58,245 (682,742) (846,736) (1,401,504)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (501,703) (261,253) (1,105,454) (369,434)
Related party interest expense and
financing costs (62,088) (39,029) (128,502) (112,573)
Foreign currency exchange
gains (loss) (4,948) (4,118) 18,693 3,241
---------- ---------- ---------- ----------
Total other expense, net (568,739) (304,400) (1,215,263) (478,766)
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (510,494) (987,142) (2,061,999) (1,880,270)
LOSS FROM DISCONTINUED OPERATIONS, net
of income taxes of $0 for all periods - (62,000) - (62,000)
---------- ---------- ---------- ----------
NET LOSS $ (510,494) $(1,049,142) $(2,061,999) $(1,942,270)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE:
Basic and diluted net loss per share
Continuing operations $ (0.01) $ (0.04) $ (0.06) $ (0.08)
Discontinued operations $ 0.00 $ (0.00) $ 0.00 $ (0.00)
---------- ---------- ---------- ----------
$ (0.01) $ (0.04) $ (0.06) $ (0.08)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES USED IN
THE CALCULATION OF PER SHARE AMOUNTS:
Basic and diluted 45,345,456 23,201,563 35,012,074 23,082,377
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
RAPID LINK INCORPORATED AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
July 31,
------------------------
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,061,999) $(1,880,270)
Adjustments to reconcile net loss to net
cash used in operating activities:
(Gain) loss from disposal of property
and equipment 34,229 (8,800)
Bad debt expense 106,509 357,976
Non-cash interest expense 951,757 214,879
Depreciation and amortization 487,799 438,695
Warrants issued for legal services - 159,695
Gain on reduction of liabilities (308,879) -
(Increase) decrease (net of effect of
acquisition) in:
Trade accounts receivable (170,461) 71,778
Prepaid expenses and other current assets 89,520 28,968
Other assets (48,221) (5,168)
(Increase) decrease (net of effect of
acquisition) in:
Trade accounts payable (78,361) 558,141
Accrued liabilities 293,343 (88,991)
Deferred revenue (13,884) 10,776
Deposits and other payables (131,549) (10,000)
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Net cash used in operating activities (850,197) (152,321)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (147,367) (24,702)
Proceeds from sale of property and equipment - 10,000
Cash acquired in Telenational acquisition 158,135 -
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Net cash provided by (used in) investing activities 10,768 (14,702)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debenture 1,000,000 -
Payment on convertible debenture - (47,543)
Payment of financing fees (44,150) -
Proceeds from shareholder advances 550,000 -
Payment of shareholder advances (550,000) -
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Net cash provided by (used in) financing activities 955,850 (47,543)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 116,421 (214,566)
Cash and cash equivalents at beginning of period 172,164 586,389
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Cash and cash equivalents at end of period $ 288,585 $ 371,823
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 15,000 $ 79,803
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Conversion of convertible debenture
to common stock $ 130,000 $ 25,000
Conversion of accrued interest into common stock $ 6,150 $ -
Fair market value of warrants issued with debt $ 327,176 $ -
Beneficial conversion feature recorded
in connection with debt issuances $ 628,674 $ 1,362,649
Note payable exchanged for convertible debenture $ - $ 1,250,000
Accrued interest converted to convertible
debenture $ - $ 349,617
Fair value of common stock issued in connection
with amendments to debt agreements $ - $ 99,469
Fair value of common stock issued in connection
with Telenational acquisition $ 3,259,750 $ -
Note issued in connection with Telenational
acquisition $ 1,000,000 $ -
Contingent liability recorded in connection
with Telenational acquisition $ 500,000 $ -
Accrued interest to related party converted to
note payable to related party $ 901,688 $ -
Fair value of warrants issued in connection
with ammendments to debt agreements $ - $ 451,887
Convertible debenture issued for financing fees $ - $ 50,383
The accompanying notes are an integral part of these consolidated financial
statements.
RAPID LINK, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements of Rapid Link, Incorporated and its
subsidiaries, "Rapid Link" or "the Company", included in this Form 10-QSB
are unaudited and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
of the financial position and operating results for the three and nine month
periods ended July 31, 2006 and 2005 have been included. Operating results
for the three and nine month periods ended July 31, 2006 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 2006. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended October 31, 2005.
Historically, Rapid Link has served as a facilities-based, communications
company providing various forms of telephony services to wholesale and
retail customers around the world. Rapid Link provides a multitude of
international telecommunications services targeted to individual customers,
as well as small and medium sized enterprises ("SMEs".) These services
include the transmission of voice and data traffic over public and private
networks. The Company also sells telecommunications services for both the
foreign and domestic termination of international long distance traffic into
the wholesale market. Rapid Link utilizes Voice over Internet Protocol
("VoIP") packetized voice technology (and other compression techniques) to
improve both cost and efficiencies of telecommunication transmissions. Rapid
Link utilizes the Public Switched Telecommunications Network ("PSTN") as
well as the Internet to transport the Company's communications services.
Beginning in the fourth quarter of fiscal 2005, the Company shifted its
retail product focus to value-added VoIP communication services to
customers, both domestically and internationally, although to date the
Company has not derived significant revenues from this offering. Rapid Link
focuses on the US military and other key niche markets. The Company offers
PC-to-PC, PC-to- phone, and phone-to-phone calling using a mixture of
software and/or hardware depending on the end-users' specific needs. Rapid
Link offers VoIP service plans to conventional residential and business
customers in addition to serving the military and other niches. The
Company's sells both flat-rate and cost-per-minute ("CPM") calling plans in
order to directly address the customers' requirements. These plans include
free features such as voice mail, call forwarding, three way calling and
others. Rapid Link's VoIP Internet Access Devices (IADs) for residential
and business customers include single and multi-line adaptors. These
adaptors enable customers to convert their traditional phone into a VoIP
phone and access the Rapid Link network. Rapid Link also offers a headset
that plugs directly into the customer's computer, eliminating the need for
any additional hardware. All of these VoIP services connect through the
Internet. The customer can then make and receive calls through their new or
existing phone number using VoIP.
Estimates and Assumptions
-------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform to current
period presentation.
NOTE 2 - GOING CONCERN
The Company is subject to various risks in connection with the operation of
its business including, among other things, (i) changes in external
competitive market factors, (ii) inability to satisfy anticipated working
capital or other cash requirements, (iii) changes in the availability of
transmission facilities, (iv) changes in the Company's business strategy or
an inability to execute its strategy due to unanticipated changes in the
market, (v) various competitive factors that may prevent the Company from
competing successfully in the marketplace, and (vi) the Company's lack of
liquidity and its ability to raise additional capital. As of July 31, 2006
the Company has an accumulated deficit of $50,749,732 as well as a working
capital deficit of $6,032,054. In addition, approximately 66% of the
Company's trade accounts payable and accrued liabilities are past due.
Funding of the Company's working capital deficit, its current and future
anticipated operating losses, and growth of the Company's retail revenues
will require continuing capital investment. Historically, the Company has
received significant funding from a major shareholder. The Company's
strategy is to fund these cash requirements through debt facilities and
additional equity financing. Through the acquisition of Telenational and
subsequent consolidation of the operations the Company has reduced its need
for outside funding significantly.
The Company has been able to arrange debt facilities and equity financing to
date, there can be no assurance that sufficient debt or equity financing
will continue to be available in the future or that it will be available on
terms acceptable to the Company. Failure to obtain sufficient capital would
materially affect the Company's operations in the short term and expansion
strategies. The Company will continue to explore external financing
opportunities and renegotiation of its short-term debt with its current
financing partners in order to extend the terms or retire these obligations.
Currently, the Company is in negotiations with multiple parties to obtain
additional financing, and the Company will continue to explore financing
opportunities with additional parties. At July 31, 2006, approximately 45%
of the gross debt is due to the senior management and Directors of the
Company.
As a result of the aforementioned factors and related uncertainties,
there is substantial doubt of the Company's ability to continue as a
going concern. The consolidated financial statements do not include
any adjustments to reflect the possible effects of recoverability and
classification of assets or classification of liabilities, which may result
from the inability of the Company to continue as a going concern.
NOTE 3 - ACQUISITION
On May 5, 2006 the Company acquired 100% of the outstanding stock of
Telenational Communications, Inc. ("Telenational") for $4,809,750, including
acquisition costs of $50,000. The purchase consideration consisted of a
promissory note in the principal amount of $1,000,000, a contingent cash
payment in the amount of $500,000 and 19,175,000 shares of the Company's
common stock valued at $3,259,750. The stock was issued on May 5, 2006 and
June 5, 2006 in conjunction with the acquisition. The value of the issued
stock was determined by the average of $0.18 per share and $0.16 per share,
which approximates the average trading value as quoted on the OTC Bulletin
Board for the three days before and three days after May 5, 2006 and June 5,
2006, respectively. The contingent consideration of $500,000 has been
recorded on the date of acquisition as the future payment is considered
likely. The contingent consideration is based on the attainment of a
minimum of $900,000 in gross profit for Telenational for the three month
period ending July 31, 2006 for payment on September 15, 2006. A shortfall
in this amount will result in a proportional shortfall in the contingent
consideration. The primary purpose of the acquisition was to enable the
Company to expand its market share in the telecommunications industry and
eliminate certain costs by gaining operational efficiencies. The following
table summarizes the assets acquired and liabilities assumed as of the
closing date:
Tangible assets acquired $ 1,362,950
Customer list 3,500,000
Goodwill 1,071,544
----------
Total assets acquired $ 5,934,494
Liabilities assumed (1,124,744)
----------
Net assets acquired $ 4,809,750
==========
The acquisition was accounted for using the purchase method of accounting.
The customer list will be amortized over its useful life of five years. The
purchase price allocated to customer list was determined by management's
estimates of the value associated with each acquired customer. Goodwill
represents the excess of consideration given over the fair value of assets
acquired. The goodwill acquired may not be amortized for federal income tax
purposes.
Unaudited Pro Forma Summary Information
---------------------------------------
The following unaudited pro forma summary approximates the consolidated
results of operations as if the Telenational acquisition had occurred as of
November 1, 2004, after giving effect to certain adjustments, including
amortization of specifically identifiable intangibles and interest expense.
The pro forma financial information does not purport to be indicative of the
results of operations that would have occurred had the transactions taken
place at the beginning of the period presented or of future results of
operations.
Nine Months Three Months Nine Months
Ended Ended Ended
July 31, July 31, July 31,
2006 2005 2005
----------- ----------- -----------
Revenue from services $ 14,347,218 $ 4,900,883 $ 15,819,696
Net loss attributable
to common stockholders $ (2,231,410) $ (1,243,888) $ 2,575,795
Basic and diluted net loss per
common share attributable to
common stockholders $ (0.04) $ (0.03) $ (0.06)
Weighted-average shares of
common stock outstanding
(basic and diluted) 49,165,050 42,376,563 42,257,377
NOTE 4 - REDUCTION OF LIABILITIES AND RESTATEMENT OF PRIOR FINANCIAL
STATEMENTS
The Company has determined based on current correspondence with vendors that
$308,879 of accrued liabilities, including approximately $252,000 previously
accrued for estimated carrier costs, are no longer due and payable.
Accordingly, this amount has been recorded as a gain from reduction of
liabilities for the three months ending July 31, 2006.
Through communication with the Universal Service Administration Company
("USAC") and review of statements received during the three months ending
July 31, 2006, the Company determined that accrued USAC fees totaling
$424,381 should have been reversed based on credits that were issued by USAC
during prior periods. Accordingly, the Company has reduced its estimated
liability for USAC fees by $434,381 and restated the balance sheet at
October 31, 2005 to reflect the reduction of this liability.
NOTE 5 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company provided wholesale services to one customer that accounted for
11% of the Company's trade accounts receivable at July 31, 2006. The Company
provided wholesale services to one customer that accounted for 17% of the
overall revenue for the three month period ending July 31, 2006. No
customers comprised greater than 10% of revenues for the nine months ended
July 31, 2006. For the three months ended July 31, 2006, one of the
Company's suppliers accounted for approximately 31% of the Company's total
costs of revenues.
The Company provided wholesale services to three customers, each of which
accounted for 19%, 17% and 13%, respectively, of the overall revenue of the
Company for the three months ended July 31, 2005. For the nine months ended
July 31, 2005, the Company provided wholesale services to two customers,
each of which accounted for 12% of the overall revenue of the Company.
NOTE 6 - STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the
date of grant, of the fair value of the Company's stock over the exercise
price. No compensation expense has been recognized for its employee stock
options in the financial statements during the three and nine months ended
July 31, 2006 and 2005 as the fair market value on the grant date
approximates the exercise price. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No.123, as amended by SFAS No. 148, the Company's pro forma net loss
for the three and nine months ended July 31, 2006 and 2005 would have been
as follows:
Three Months Nine Months
Ended July 31, Ended July 31,
------------------------ ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net loss $ (510,494) $(1,049,142) $(2,061,999) $(1,942,270)
Deduct: Stock-based
employee compensation
expense determined
under fair value
based method (20,407) (1,777) (25,851) (8,965)
---------- ---------- ---------- ----------
Pro forma net loss $ (530,901) $(1,050,919) $(2,087,850) $(1,951,235)
========== ========== ========== ==========
Net loss per share
As reported
Basic and diluted $ (0.00) $ (0.04) $ (0.05) $ (0.08)
========== ========== ========== ==========
Pro forma
Basic and diluted $ (0.00) $ (0.04) $ (0.05) $ (0.08)
========== ========== ========== ==========
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Because
options vest over a period of several years and additional awards are
generally made each year, the pro forma information presented above is not
necessarily indicative of the effects on reported or pro forma net earnings
or losses for future periods.
The Company granted 1,987,500 options during the three months ended July 31,
2006. No additinal options were granted during the nine months ended July
31, 2006 or 2005.
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004) ("Statement
123(R)"), "Share-Based Payment", which revised SFAS No. 123 and supercedes
APB Opinion No. 25. The revised statement addresses the accounting for
share-based payment transactions with employees and other third parties,
eliminates the ability to account for share-based compensation transactions
with employees using APB Opinion No. 25 and requires that the fair value of
such share based payments be recognized in the consolidated statement of
operations. The revised statement is effective as of the first annual
financial reporting period beginning after December 15, 2005. The Company
will adopt the statement on November 1, 2006 as required. The impact of
adoption of Statement 123(R) cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future.
However, had the Company adopted Statement 123(R) in prior periods, the
impact of that standard would have approximated the impact of SFAS No. 123
as described in the disclosure of pro forma net loss and net loss per share
above.
NOTE 7 - CONVERTIBLE DEBENTURES AND CONVERTIBLE NOTES PAYABLE TO RELATED
PARTIES
On June 1, 2005, the Company and GCA Strategic Investment Fund ("GCA")
agreed to extend the maturity dates of the Company's two 6% convertible
debentures, each convertible debenture providing financing of $550,000 in
January 2002 and July 2003, respectively. For the convertible debenture
originally issued in January 2002, the maturity date was extended to
November 26, 2006. The gross balance of this debenture was $430,000 at
July 31, 2006. In connection with the extension, the Company issued GCA
warrants to acquire 110,000 shares of common stock at an exercise price of
$0.11 and warrants to acquire 150,000 shares of our common stock at an
exercise price of $0.38. Both warrants expire in June 2010. The Company
recorded $104,693 as debt discount, representing the relative fair value of
the warrants on June 1, 2005. This amount was calculated using the Black-
Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate at the grant
date of 4%; dividend yield of 0%; volatility factor of the expected market
price of the Company's common stock of 1.64; and an expected life of
the warrants of three years. The debt discount was amortized over the
extension period of the convertible debenture and is fully amortized at
July 31, 2006. In addition, the Company issued to GCA 100,000 shares of
common stock valued at $0.45 per share, the Company's closing stock price
on June 1, 2005, the date of issuance. In connection with the stock
issuance, the Company recorded $45,000 as debt discount, and amortized the
debt discount over the extension period of the convertible debenture which
ended in the first quarter of fiscal year 2006. For the convertible
debenture originally issued in July 2003, the maturity date was extended to
November 26, 2006. The gross balance of this debenture was $552,457 at July
31, 2006. In connection with the extension, the Company issued GCA
warrants to acquire 150,000 shares of common stock at an exercise price of
$0.38, which expire in June 2010. The Company recorded $38,229 as debt
discount, representing the fair value of the warrants on June 1, 2005.
This amount was calculated using the Black-Scholes pricing model with
the following assumptions: applicable risk-free interest rate based
on the current treasury-bill interest rate at the grant date of 4%;
dividend yield of 0%; volatility factor of the expected market price of
the Company's common stock of 1.64; and an expected life of the
warrants of three years. The debt discount is being amortized over the
extension period of the convertible debenture. In addition, the Company
issued to GCA 40,000 shares of common stock valued at $0.45 per share, the
Company's closing stock price on June 1, 2005, the date of issuance. In
connection with the stock issuance, the Company recorded $18,000 as debt
discount and is amortizing the debt discount over the extension period of
the convertible debenture. For the nine months ended July 31, 2006,
approximately $38,000 of deferred financing fees and debt discount
amortization has been recorded as interest expense. The remaining
unamortized discount is $16,991 at July 31, 2006.
On June 1, 2005, the Company and Global Capital Funding Group, LP ("Global")
agreed to extend the maturity date of the Company's 12% note payable (the
"GC-Note"), which provided financing of $1,250,000 in November 2002. The
maturity date was extended to February 29, 2008. In connection with the
extension, the GC-Note was converted to a 10.08% Convertible Note ("GC-
Conote"). The Company calculated the beneficial conversion feature embedded
in the GC-Conote in accordance with EITF 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" ("EITF-98-5") and EITF 00-27 "Application of Issue No.
98-5 to Certain Convertible Instruments" ("EITF 00-27") and recorded
$1,013,032 as debt discount. This debt discount is being amortized over the
life of the GC-Conote. The Company also issued to the holder of the GC-
Conote warrants to acquire an aggregate of 500,000 shares of common stock at
an exercise price of $0.38, and 125,000 warrants to purchase common stock at
$0.11 per share, both warrants expiring in June 2010. The Company recorded
$200,498 as debt discount, the relative fair value of the warrants on June
1, 2005. This amount was calculated using the Black-Scholes pricing model
with the following assumptions: applicable risk-free interest rate based on
the current treasury-bill interest rate at the grant date of 4%; dividend
yield of 0%; volatility factor of the expected market price of the
Company's common stock of 1.64; and an expected life of the warrants
of three years. The debt discount is being amortized over the life of the
GC-Conote. In addition, the Company issued to Global 100,000 shares of
common stock valued at $0.45 per share, the Company's closing stock price on
June 1, 2005, the date of issuance. The Company recorded $36,469 as debt
discount, the relative fair value of the stock issued, and is amortizing the
debt discount over the life of the GC-Conote. For the nine months ended
July 31, 2006, approximately $341,000 of debt discount amortization has been
recorded as interest expense. The remaining unamortized discount is $719,697
at July 31, 2006.
In connection with the extension of the maturity date of the GC-Note, the
interest due on the GC-Note of approximately $350,000 as of May 31, 2005 was
converted to a $400,000 non-interest bearing convertible Note Payable (the
"GC-Note2) to Global Capital Funding Group, LP. The GC-Conote2 requires
quarterly payments of $50,000 on the last day of March, June, September and
December of each year until the March 31, 2007 maturity date, commencing on
June 30, 2005. In addition, the GC-Conote2 provides for conversion based on
a conversion price equal to 80% of the average of the three lowest volume
weighted average sales prices as reported by Bloomberg L.P. during the
twenty trading days immediately preceding the related Notice of Conversion
(the "Formula Conversion Price"). The Company calculated the beneficial
conversion feature embedded in the GC-Note2 in accordance with EITF 98-5 and
recorded approximately $350,000 as debt discount. This debt discount is
being amortized over the life of the GC-Note2. The approximate $50,000
difference between the accrued interest at May 31, 2005 and the value of the
GC-Note2 represents a financing fee and was recorded as debt discount and is
being amortized over the life of the GC-Note2. For the nine months ended
July 31, 2006, $105,000 of debt discount amortization has been recorded
as interest expense. The gross balance of the GC-Note2 was $170,000 at July
31, 2006. The remaining unamortized discount was $120,000 at July 31, 2006.
During fiscal year 2006 GCA elected to convert $105,000 of the GC-Note2 into
approximately 1,277,071 shares of common stock. Although the Company has not
made its scheduled December 2005 payment, and March and June 2006 payments,
Global has not declared the note to be in default, and continues to convert
the balance into shares of common stock.
On July 21, 2005, the Company and executives that hold a 10% convertible
debenture (the "Notes") with an outstanding balance of $1,470,891 at July
31, 2005, agreed to extend the maturity date of the Notes to February 29,
2008. The original maturity date was October 24, 2003. In connection with
the extension, the Company issued to the executives warrants to acquire
640,000 shares of common stock at an exercise price of $0.16. The warrants
expire in July 2010. The Company recorded $88,238 as debt discount, the fair
value of the warrants on June 1, 2005. This amount was calculated using the
Black-Scholes pricing model with the following assumptions: applicable
risk-free interest rate based on the current treasury-bill interest
rate at the grant date of 4%; dividend yield of 0%; volatility factor of
the expected market price of the Company's common stock of 1.65; and an
expected life of the warrants of three years. The debt discount is
being amortized over the extension period of the Notes. For the nine months
ended July 31, 2006, approximately $25,000 of debt discount amortization has
been recorded as interest expense. The gross balance of the Notes was
$1,003,390 at July 31, 2006. The remaining unamortized discount was $52,391
at July 31, 2006.
During September 2006 the Company's Chief Executive Officer and significant
shareholder converted $901,688 of accrued interest, representing accrued
interest through July 31, 2006 on his 10% convertible debenture to a
long term note payable due in February 28, 2008. Accordingly, the accrued
interest has been reclassified to a non current related party note at July
31, 2006.
On March 8, 2006, the Company completed a private placement of two one-year
10% convertible debentures ("Debentures"), for gross proceeds of $1,000,000
maturing March 8, 2007. In connection with the Debentures, the Company
agreed to issue the investors a total of 2,000,000 immediately exercisable
five-year warrants to purchase the Company's common stock at an exercise
price of $0.14 for 1,000,000 warrants, and $0.25 for an additional 1,000,000
warrants. The Company paid $44,150 in financing fees in connection with
the debentures which were recorded as a discount on the debentures.
Additionally in connection with these Debentures the Company recorded a debt
discount of $955,850 related to the fair value of warrants issued and the
related beneficial conversion feature that it will amortize over the life of
the loan. The fair value of the warrants was calculated using the Black-
Scholes pricing model with the following assumptions: applicable risk-
free interest rate based on the current treasury-bill interest rate at
the grant date of 4%; dividend yield of 0%; volatility factor of the
expected market price of the Company's common stock of 1.65; and an
expected life of the warrants of three years.
During the nine months ended July 31, 2006 the Company recorded expense of
approximately $416,670 in relation to the amortization of the financing fees
and the debt discount. The remaining unamortized debt discount was $583,333
at July 31, 2006.
Note 8 - ADVANCES FROM SHAREHOLDER
During the nine months ended July 31, 2006, the Company's chief executive
officer, and significant shareholder, John Jenkins, advanced funds to the
Company in the aggregate amount of $550,000. During the nine month period
ended July 31, 2006 the Company has re-paid this amount in full with
proceeds received from financing.
NOTE 9 - OTHER RELATED PARTY NOTES
On May 5, 2006 the Company acquired the stock of Telenational. As a
component of the total purchase price, an 18 month note payable in the
amount of $1,000,000 bearing 8% interest annually, was issued to the seller,
Apex Acquisitions, Inc (APEX). The Company's Chief Financial Officer, Chris
Canfield, is the majority shareholder of Apex. This Note is secured by 100%
of the Telenational common stock.
On July 15, 2006, in conjunction with, but unrelated to the total purchase
consideration paid for Telenational, the Company issued a note payable to
APEX in the amount of $436,560. This note bears interest at 8% annually.
This Note is repayable in 12 equal monthly payments of principal and
interest, until fully satisfied in July 2007.
NOTE 10 - DISCONTINUED OPERATIONS
During the first quarter of fiscal year 2004, the Company determined based
on final written communications with the State of Texas that the Company had
a liability for sales taxes (including penalties and interest) totaling $1.1
million. The Company had previously accrued an estimated settlement amount
of $350,000 during fiscal year 2003. During the first quarter of fiscal
year 2004, the Company accrued an additional $750,000. On August 5, 2005,
the State of Texas filed a lawsuit in the 53rd Judicial District Court of
Travis County, Austin, Texas against the Company. The lawsuit requests
payment of approximately $1.162 million including penalties and interest for
state and local sales tax. During the fiscal year 2005, the Company accrued
an additional $62,000 in amounts due. The sales tax amount due is
attributable to audit findings of the State of Texas for the years 1995 to
1999 associated with Canmax Retail Systems, a current subsidiary of ours,
and former operating subsidiary providing retail automation software and
related services to the retail petroleum and convenience store industries.
The State of Texas determined that Canmax Retail Systems did not properly
remit sales tax on certain transactions. Management believes that it will
be able to negotiate a reduced settlement amount with the state, although
there can be no assurance that the Company will be successful with respect
to such negotiations. These operations were previously classified as
discontinued after the Company sold its retail automation software business
in December 1998 and changed its business model to international wholesale
and retail business, operating as a facilities-based global Internet
protocol communications company providing connectivity to international
markets. Since this sales tax liability represents an adjustment to amounts
previously reported in discontinued operations, the amount was classified as
Discontinued Operations. The amount that the State of Texas assessed of
$1.162 million has been accrued as a liability and is included in the
accompanying balance sheets as net current liabilities from discontinued
operations.
NOTE 11 - SUBSEQUENT EVENTS
On September 13, 2006, the Company entered into a series of agreements which
materially modified it's debt structure with Global Capital Funding Group
Ltd. ("Global"), and with GCA Strategic Investment Fund Limited ("GCA").
The agreements call for two outstanding notes due in November of 2006
payable to Global and GCA to be extended to November 1, 2007. In addition
any and all defaults incurred prior to September 13, 2006 have been cured or
waived. In addition, a conversion floor of $0.10 and a conversion ceiling
of $0.25 were put into place for all convertible debentures outstanding with
both Global and GCA.
On September 13, 2006, the Company entered into an agreement with it's Chief
Executive Officer and significant shareholder John Jenkins, amending the
current note payable to add the outstanding interest due to the existing
note. The revised note is due February 28, 2008.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis of financial condition and results of
operations covers the three and nine months ended July 31, 2006 and 2005 and
should be read in conjunction with our financial statements and the notes
thereto.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These statements relate to
expectations concerning matters that are not historical facts. Words such as
"projects", "believe", "anticipates", "estimate", "plans", "expect",
"intends", and similar words and expressions are intended to identify
forward-looking statements. Although we believe that such forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to be correct. Factors that could cause actual results to differ
materially from such expectations are disclosed in our annual report on Form
10-KSB for the year ended October 31, 2005 and throughout this report on
Form 10-QSB. All of our forward-looking statements are expressly qualified
in their entirety by such language and we do not undertake any obligation to
update any forward-looking statements.
General
We are a facilities-based, communications company providing various forms of
telephony services to wholesale and retail customers around the world. We
offer a multitude of international telecommunications services targeted to
individual customers, as well as small and medium sized enterprises. These
services include the transmission of voice and data traffic over public and
private networks, and telecommunications services for both the foreign and
domestic termination of international long distance traffic into the
wholesale market. We have begun to utilize Voice over Internet Protocol
("VoIP") packetized voice technology.
On October 25, 2005, at our annual shareholders meeting, our shareholders
approved a change in the Company's name to Rapid Link, Incorporated. The
Company believes that the name "Rapid Link, Incorporated" better reflects
the Company's business strategies and opportunities, and will receive better
market recognition and acceptance than its previous name, especially as the
Company continues to roll out VoIP related services. In addition, the
Company also believes that the name, which was the name of the Company we
acquired in October 2001, is a recognized brand name with members of the
United States Military around the world, a significant source of retail
revenue for the Company since the acquisition. The name change became
effective on November 1, 2005.
On October 31, 2005, we completed the acquisition of the customer base of
Integrated Telecommunications, Inc., ("Integrated") an international long
distance carrier providing VoIP services to retail customers in the United
States, and wholesale services to customers worldwide.
On May 5, 2006, we completed the acquisition from APEX of all of the issued
and outstanding shares of capital stock of Telenational. Telenational has
historically serviced a sizable base of both retail and commercial customers
which very closely mirror those customers Rapid Link has served. This
acquisition allows us to take advantage of several significant economies of
scale, both in respect to direct cost reductions, as well as operational
efficiencies.
The telecommunications industry continues to evolve towards an increased
emphasis on IP related products and services. We have focused our business
towards these types of products and services for the last couple of years.
Furthermore, we believe the use of the Internet to provide bundled IP
related services to the end user customer, either as a stand alone solution
or bundled with other IP products, will continue to impact the industry as
large companies like Time Warner, Comcast and AT&T look to capitalize on
their existing cable infrastructures, and smaller companies look to provide
innovative solutions to attract commercial and residential users to their
product offerings.
We are focused on the growth of our VoIP business by adding new products and
services that can be offered to end user customers. We are attempting to
transition our current customers, and attract new customers through the sale
of specialized VoIP Internet Access Devices, or IADs, that allow customers
to connect their phones to their existing high-speed Internet connections.
These IADs allow the user to originate phone calls over the Internet,
thereby bypassing the normal costs associated with originating phone calls
over existing land lines. By reducing these costs, we are able to offer
lower priced services to these customers, which we believe will allow us to
attract additional users. We also believe there will be considerable demand
for this type of product in certain foreign markets where end users pay a
significant premium to their local phone companies to make long distance or
international phone calls. We are targeting business and residential
customers, as well as niche markets, such as the United States military.
While we expect the growth in our customers and suppliers, and the
introduction of innovative product offerings to retail users, specifically
IADs, to have a positive impact on our revenues and earnings, we cannot
predict our ability to significantly grow this line of business. The
revenue and costs associated with the IAD product offerings will depend on
the number of customers and contracts we obtain. In many ways, our ability
to maintain operations in the foreseeable future will be dictated by our
ability to quickly deploy VoIP products into selected markets and to realize
revenues from these products and related telecommunications sources.
We continue to seek opportunities to grow our business through strategic
acquisitions that will complement our retail strategy as well as adding key
personnel that have demonstrated a proven track record in sales, marketing
and operations of retail telecommunications organizations, especially in the
area of retail and wholesale VoIP.
Our common stock currently trades under the symbol "RPID" on the OTC
Bulletin Board.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements include accounts of our Company and
all of our majority-owned subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these financial
statements, we have made our best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to
materiality. We do not believe there is a great likelihood that materially
different amounts would be reported related to estimates associated with
the accounting policies described below. However, application of these
accounting policies involves the exercise of judgment and use of assumptions
as to future uncertainties and, as a result, actual results could differ
from these estimates.
Revenue Recognition
The Securities and Exchange Commission's Staff Accounting Bulletin No. 104,
"Revenue Recognition", provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. For
a majority of our products, our revenues are generated at the time a
customer uses our network to make a phone call. We sell our services to
SMEs and end-users that utilize our network for international origination
and dial thru services, and to other providers of long distance usage who
utilize our network to deliver domestic and international termination of
minutes to their own customers. At times we receive payment from our
customers in advance of their usage, which we record as deferred revenue,
recognizing revenue as calls are made.
For our newer VoIP product offerings, specifically our Rapid Link service,
we are required to recognize revenue in accordance with Emerging Issues Task
Force ("EITF") Consensus No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables" which requires that revenue arrangements with
multiple deliverables be divided into separate units of accounting if the
deliverables in the arrangement meet specific criteria. In addition,
arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values, with certain limitations.
The provisioning of the Rapid Link service with the accompanying desktop
terminal adapter or other customer premise equipment constitutes a revenue
arrangement with multiple deliverables. In accordance with the guidance of
EITF No. 00-21, we allocate Rapid Link revenues, including activation fees,
among the customer premise equipment and subscriber services. Revenues
allocated to the customer premise equipment are recognized as product
revenues at the end of 30 days after order placement, provided the customer
does not cancel their Rapid Link service. All other revenues are recognized
as license and service revenues when the related services are provided. We
defer the cost of goods sold of products sold for which the end customer or
distributor has a right of return. The cost of the products sold is
recognized, contemporaneously with the recognition of revenue, when the
subscriber has accepted the service.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. All of our receivables are due from commercial
enterprises and residential users in both domestic and international
markets. The estimated allowance for uncollectible amounts is based
primarily on our evaluation of the financial condition of the customer, and
our estimation of the customer's willingness to pay amounts due. We review
our credit policies on a regular basis and analyze the risk of each
prospective customer individually in order to minimize our risk.
Goodwill
Effective November 1, 2001, we adopted SFAS No, 141, "Business Combinations"
("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, and also specifies
the criteria for the recognition of intangible assets separately from
goodwill. Under SFAS 142, goodwill is no longer amortized but is subject to
an impairment test at least annually or more frequently if impairment
indicators arise. In accordance with SFAS 142, an annual impairment test of
goodwill was performed by an independent valuation firm in each of the
fourth quarters of fiscal year 2005 and 2004. The valuation process
appraised our assets and liabilities using a combination of present value
and multiple of earnings valuation techniques. The results of both
impairment tests indicated goodwill was not impaired.
We record goodwill when the consideration paid for an acquisition exceeds
the fair value of net tangible and identifiable intangible assets acquired.
We measure and test goodwill for impairment on an annual basis or more
frequently if we believe indicators of impairment exists. Performance of the
impairment test involves a two-step process. The first step compares the
fair value of our single reporting unit to its carrying amount. The fair
value of the reporting unit is determined by calculating the market
capitalization of the reporting unit as derived from quoted market prices,
and further substantiated through the use of other generally accepted
valuation methods. A potential impairment exists if the fair value of the
reporting unit is lower than its carrying amount. Historically, the
impairment test has shown that the carrying value is less than fair value.
The second step of the process is only performed if a potential impairment
exists, as indicated by step one, and involves determining the difference
between the fair values of the reporting unit's net assets, other than
goodwill, as compared to the fair value of the reporting unit. If the
difference is less than the net book value of goodwill, impairment exists
and is recorded. We determine our reporting units, for purposes of testing
for impairment, by determining (i) how we manage our operations, (ii) if a
component of an operating unit constitutes a business for which discrete
financial information is available and our management regularly review such
financial information, and (iii) how the acquired entity is integrated with
our operations. Based on these criteria, we determined that we have a single
reporting unit.
In order to determine the fair value of our reporting unit under SFAS 142,
we consider the following two approaches:
* Market Approach - Under the market approach, recent sales of comparable
companies or securities are analyzed to determine the value for a
particular asset under study. Adjustments are made to the sales data
to account for differences between the subject asset and the
comparables. The market approach is most applicable to assets that are
homogenous in nature and are actively traded. Relative to other
approaches to value, the key strength of the market approach is that it
provides objective indications of value while requiring relatively few
assumptions be made.
* Income Approach - This approach measures the present worth of
anticipated future net cash flows generated by the business. Net cash
flows are forecast for an appropriate period and then discounted to
present value using an appropriate discount rate. Net cash flow
forecasts require analysis of the significant variables influencing
revenues, expenses, working capital, and capital investment. An income
approach methodology is generally useful because it accounts for the
specific contribution of fundamental factors impacting those variables
that affect the value of the business.
According to SFAS 142, quoted market prices in active markets are the best
evidence of fair value and shall be used as the basis for the measurement
of fair value, if available. As of October 31, 2005, our market
capitalization was $3,222,690, determined by taking the shares outstanding
as of that date multiplied by our stock price of $0.11. We added interest
bearing debt and operating liabilities (excluding net current liabilities
of discontinued operations), adjusted downward to a fair value estimate of
25%, resulting in a fair value of assets of approximately $5.3 million.
This amount exceeds the carrying value of our assets (the value of our
assets as reported in our financial statements), including goodwill, of
$3,218,596, excluding assets acquired in the Telenational acquisition.
While our market capitalization renders a minority interest valuation,
because shares of our Company represent minority interests, the fair value
of assets exceeds its carrying value even without the application of a
control premium as recommended by SFAS 142. However, we believe that the
application of the market approach necessitates additional analysis for
three reasons (i) we have generated no analyst coverage to provide
information about our stock to the public, suggesting that the market price
may not reflect available information, (ii) our stock price demonstrated
volatility as of the valuation date, and (iii) our stock is thinly traded
with no organization making an active market in the stock. These factors
suggest that our stock price, when taken in isolation, may not be
sufficient evidence of fair value. In estimating the fair value of a
reporting unit, a valuation technique based on multiples of earnings or
revenues or a similar performance measure may be used if that technique is
consistent with the objective of measuring fair value. As further support
for our market approach, we calculated the Business Enterprise Value
("BEV") for five other telecommunications companies, which provide services
similar to those that we provide. The BEV is determined by taking the
market capitalization of a public enterprise, adding their debt and
subtracting any cash equivalents. The resulting value is divided by annual
revenue in order to determine a reasonable multiple that can be applied to
us. We averaged the multiple of these five companies, trading on average
at 2.6 times their annual revenue obtained from their most recent published
financials, and applied the result to our 2005 fiscal year revenues. The
resulting BEV for our Company was well in excess of the fair value of our
assets calculated above. As a result, we determined that the fair value of
our Company exceeds its carrying amount, and therefore that goodwill is not
impaired. No events have occurred during the none months ended July 31,
2006 that would indicate any impairment.
Financing, Warrants and Amortization of Warrants and Fair Value Determination
We have traditionally financed our operations through the issuance of debt
instruments that are convertible into our common stock, at conversion rates
at or below the fair market value of our common stock at the time of
conversion, and typically include the issuance of warrants. We have
recorded debt discounts in connection with these financing transactions in
accordance with Emerging Issues Task Force Nos. 98-5 and 00-27.
Accordingly, we recognize the beneficial conversion feature imbedded in the
financings and the fair value of the related warrants on the balance sheet
as debt discount. The debt discount is amortized over the life of the
respective debt instrument.
Carrier Disputes
We review our vendor bills on a monthly basis and periodically dispute
amounts invoiced by our carriers. We review our outstanding disputes on a
quarterly basis, as part of the overall review of our accrued carrier costs,
and adjust our liability based on management's estimate of amounts owed.
Purchase Price Allocations
We account for our acquisitions using the purchase method of accounting.
This method requires that the acquisition cost be allocated to the assets
and liabilities we acquired based on their fair values. We make estimates
and judgments in determining the fair value of the acquired assets and
liabilities. We base our determination on independent appraisal reports
as well as our internal judgments based on the existing facts and
circumstances. If we were to use different judgments or assumptions, the
amounts assigned to the individual assets or liabilities could be materially
different.
Impairment of Long Lived Assets other than Goodwill
We review long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the long-lived
assets, the carrying value is reduced to the estimated fair value as
measured by the discounted cash flows. We have not experienced any events or
changes that would indicate that the carrying amounts of any of our assets
may not be
RESULTS OF OPERATIONS
The following table presents our operating results for the three and nine
month periods ended July 31, 2006 and 2005, as well as a comparison of the
percentage change of our operating results from the three and nine month
periods ended July 31, 2006 to the corresponding periods ended July 31,
2005:
% of Revenue % of Revenue
3 months Ended 3 months Ended 9 months Ended 9 months Ended
July 31, July 31, July 31, July 31,
------------------------------------ ------------------------------------
2006 2005 2006 2005 2006 2005 2006 2005
------------------------------------ ------------------------------------
REVENUES $4,842,904 $2,347,374 100% 100% $8,950,034 $ 7,996,586 100% 100%
COSTS AND EXPENSES
Costs of revenues 3,441,046 1,872,577 71% 80% 6,582,121 6,255,156 74% 78%
Sales and marketing 334,836 50,277 7% 2% 577,045 163,156 6% 2%
General and administrative 1,034,036 965,216 21% 41% 2,424,455 2,549,883 27% 32%
Depreciation and amortization 283,620 142,046 6% 6% 487,799 438,695 5% 5%
Loss (gain) on disposal of
property and equipment - - 0% 0% 34,229 (8,800) 0% 0%
Gain on reduction of liabilities (308,879) - -6% 0% (308,879) - -3% 0%
------------------------------------ ------------------------------------
Total costs and expenses 4,784,659 3,030,116 99% 129% 9,796,770 9,398,090 109% 118%
------------------------------------ ------------------------------------
Operating income (loss) 58,245 (682,742) 1% -29% (846,736) (1,401,504) -9% -18%
OTHER INCOME (EXPENSE)
Interest expense and
financing costs (501,703) (261,253) -10% -11% (1,105,454) (369,434) -12% -5%
Related party interest
expense and financing costs (62,088) (39,029) -1% -2% (128,502) (112,573) -1% -1%
Foreign currency exchange
gains (loss) (4,948) (4,118) 0% 0% 18,693 3,241 0% 0%
------------------------------------ ------------------------------------
Total other expense, net (568,739) (304,400) -12% -13% (1,215,263) (478,766) -14% -6%
------------------------------------ -------------------------------------
LOSS FROM CONTINUING OPERATIONS (510,494) (987,142) -11% -42% (2,061,999) (1,880,270) -23% -24%
LOSS FROM DISCONTINUED OPERATIONS,
net of income taxes of $0
for all periods - (62,000) 0% -3% - (62,000) 0% -1%
------------------------------------ -------------------------------------
NET LOSS $ (510,494) $(1,049,142) -11% -45% $(2,061,999) $(1,942,270) -23% -24%
==================================== =====================================
Revenues
For the three months ended July 31, 2006, 38% and 62%, of our revenues were
derived from our wholesale and retail customers, respectively, as compared
to 68% and 32%, respectively, for the three months ended July 31, 2005. Our
wholesale revenues increased by 15% for the three months ended July 31, 2006
as compared to the three months ended July 31, 2005, while our retail
revenues increased by 406% during the three months ended July 31, 2006 as
compared to the same period in fiscal 2005.
For the nine months ended July 31, 2006, 40% and 60%, of our revenues were
derived from our wholesale and retail customers, respectively, as compared
to 63% and 37%, respectively, for the nine months ended July 31 2005. Our
wholesale revenues have decreased by 32% for the nine months ended July 31,
2006 compared to the nine months ended July 31, 2005, while our retail
revenues have increased by 189% during the nine months ended July 31, 2006
as compared to the same period in fiscal 2005.
The increase in wholesale revenues for the three months ended July 31, 2006
as compared to the same period in fiscal 2005 is attributable to the
acquisition of Telenational.
The increase in retail revenues for the three months ended July 31, 2006 as
compared to the same period in fiscal 2005 is attributable to the Company's
changed focus on retail revenue and the acquisition of the customer
bases of Integrated and Telenational. We continue to experience increased
competition in our largest foreign markets, including competition from the
incumbent phone company in each market. Furthermore, a significant portion
of our retail business comes from members of the United States military
stationed in foreign markets. The March 2003 redeployment of troops into
Iraq, where we have not historically provided long distance service,
resulted in a decline in our retail sales to these military customers who
were previously stationed in foreign markets that we serviced. We are
currently able to offer VoIP services into Iraq, with the hope of
recapturing some of our old customers who have been transferred to Iraq. We
are exploring opportunities to grow our retail business, utilizing our in-
house sales group and our outside agents, through the introduction of new
products and services, focusing our efforts principally on the sale of VoIP
services which allow users to make phone calls over an existing broadband
internet connection. Furthermore, we will continue to seek out acquisitions
that will allow us to quickly grow our business in the different niche
markets we are targeting. If we are unable to stabilize our retail revenues
from the U.S. military and grow our retail revenues from VoIP-based
products, our retail revenues may remain flat or decline.
Costs of Revenues
Our costs of revenues as a percentage of revenues decreased 9% to 71% for
the three months ended July 31, 2006 as compared to 80% for the three months
ended July 31, 2005. This decrease was primarily due to a change in the mix
of our revenue with a greater percentage of our revenue coming from our
retail products, which realize a higher margin than our wholesale services.
As a majority of our costs of revenues are variable, based on per minute
transportation costs, costs of revenues as a percentage of revenues will
fluctuate, from period to period, depending on the traffic mix between our
wholesale and retail products and total revenue for each period.
Our costs of revenues as a percentage of revenues decreased 4% to 74% for
the nine months ended July 31, 2006 as compared to 78% for the nine months
ended July 31, 2005. Included in costs of revenues for the nine-month period
ended July 31, 2005 is a reduction of costs in the amount of $283,138
relating to the favorable resolution of a dispute with one of our vendors.
These costs were originally recorded to costs of revenues in prior periods.
Had this dispute resolution not occurred during the nine-month period ended
July 31, 2005, our costs of revenues as a percentage of revenues would have
decreased by 8% for the nine months ended July 31, 2006 as compared to the
nine months ended July 31, 2005.
Sales and Marketing Expenses
A significant component of our revenue is generated by outside agents or
through periodic newspaper advertising, which is managed by a small in-house
sales and marketing organization.
Our sales and marketing costs increased from 2% to 7% and 2% to 6% of
revenues, respectively, for the three and nine months ended July 31, 2006,
respectively, compared to the same periods of the prior fiscal year. The
increase in our sales and marketing costs is primarily due to additional
personnel and commission's incurred as a result of the Integrated and
Telenational acquisitions. During the three months ended July 31, 2006, we
have focused our attention on increasing revenues through the efforts of our
agents and the initiation of advertising on military websites. We will
continue to focus our sales and marketing efforts on periodic newspaper
and internet advertising, the establishment of distribution networks to
facilitate the introduction and growth of new products and services, and
agent related expenses to generate additional revenues.
General and Administrative Expenses
Our general and administrative expenses decreased to 21% and 27% of revenues
for the three and nine months ended July 31, 2006, respectively, as compared
to 41% and 32% for the three and nine months ended July 31, 2005,
respectively. Although general and administrative expenses as a percentage
of revenues have decreased for the three and nine months ended July 31, 2006
as compared to the same periods in the prior fiscal year, general and
administrative expenses increased by approximately $69,000 for the three
months ending July 31, 2006 and decreased by approximately $126,000 for the
nine months ending July 31, 2006 as compared to the same periods in the
prior fiscal year. The increase in general and administrative expenses for
the three months ending July 31, 2006, compared to the same period in fiscal
2005, was primarily due to the added expenses brought in from the
acquisition of Telenational in May 2006, and the decrease in overall
expenses for the nine months ending July 31, 2006, compared to the same
period in fiscal 2005, is primarily due to the elimination of personnel and
personnel-related costs, consulting and professional fees, and a reduction
in bad debt expense.
Depreciation and Amortization Expenses
Depreciation and amortization expenses, as a percentage of revenues, remain
unchanged for the three and nine month periods ending July 31, 2006,
consistent with the same periods in fiscal 2005. Depreciation and
amortization expenses increased in the three and nine month periods ending
July 31, 2006, as compared to the same periods in 2005, by approximately
$147,000 and $49,000, respectively, primarily due to additional fixed assets
and customer list resulting from the Telenational acquisition in May 2006.
Gain on Reduction of Liabilities
The Company has determined based on current correspondence with vendors
that $308,879 of accrued liabilities, including approximately $252,000
previously accrued for estimated carrier costs, are no longer due and
payable. Accordingly, this amount has been recorded as a gain from
reduction of liabilities for the three months ending July 31, 2006.
Interest Expense and Financing Costs
Interest expense and financing costs for the three months ended July 31,
2006 and 2005 consisted primarily of interest expenses of approximately
$62,000 and $39,000, respectively, on our convertible debentures and notes
payable to related parties. In addition, for the three months ended July
31, 2006, interest expense includes approximately $440,000 of amortization
of deferred financing fees and debt discount relating to extensions of the
maturity dates on our debts to GCA, Global and related parties. The
increase in interest expense and financing costs for the three months ended
July 31, 2006 as compared to the three months ended July 31, 2005 primarily
relates to the extension of the maturity dates of our convertible debt
instruments with third-party and related party lenders during the third
quarter of fiscal 2005.
Related party interest expense and financing costs for the nine month period
ended July 31, 2006 and 2005 were due primarily to interest expense of
approximately $129,000 and $113,000, respectively, relating to our
convertible debentures and notes payable to related parties. In addition,
for the nine month period ended July 31, 2006, interest expense includes
approximately $952,000 of amortization of deferred financing fees and debt
discount relating to the extension of the maturity dates on our debts to
GCA, Global and related parties. The increase in interest expense and
financing costs from the nine months ended July 31, 2005 to the nine month
period ended July 31, 2006 primarily relates to the extension of the
maturity dates of our convertible debt instruments with both our third party
and related party lenders during the third quarter of fiscal 2005.
Net loss for the three and nine month periods ending July 31, 2006 were
$510,494 and $2,061,999 respectively, compared to $1,049,142, and $1,942,270
from the same periods ending July 31, 2005. Net loss for the three month
period ending July 31, 2006 is largely attributable to approximately
$569,000 in interest expense, deferred financing costs, and foreign currency
exchange loss, of which approximately $440,000 is related to non-cash
deferred financing costs associated with the amortization of long term notes
payable.
LIQUIDITY AND CAPITAL RESOURCES
Our audit report for the fiscal year ended October 31, 2005 includes an
explanatory paragraph indicating substantial doubt about our ability to
continue as a going concern. We incurred an operating loss of $846,736
during the nine months ended July 31, 2006. However, our operating income
improved to 1% of revenues for the three month period ending July 31, 2006,
primarily as a result of gain on reduction of liabilities, as compared to an
operating loss of 29% of revenues for the same three month period in 2005.
On June 1, 2005, we and our third-party lenders agreed to amendments to our
notes payable and convertible debenture agreements to extend the maturity
dates to various times ranging from November 26, 2006 through February 29,
2008. Approximately $2.9 million of principal and interest is due to two of
our executives and a former director.
On September 13, 2006, the Company entered into a series of agreements which
materially modified its debt structure with Global Capital Funding Group
Ltd. ("Global"), and with GCA Strategic Investment Fund Limited ("GCA").
The agreements call for two outstanding notes due in November of 2006
payable to Global and GCA be extended to November 1, 2007. In addition any
and all defaults incurred prior to September 13, 2006 have been cured or
waived. In addition a conversion floor of $0.10 and a conversion ceiling of
$0.25 were put into place for all convertible debentures outstanding with
both Global and GCA.
In the past there have been times when we were not able to make timely
payments to our trade creditors. As of July 31, 2006, approximately $2.8
million, representing approximately 66% of our trade accounts payable
and accrued liabilities, were past due. A majority of the amounts past
due are to foreign vendors that have supplied us with low margin
wholesale opportunities and we are no longer sending significant, or any,
telecommunications traffic to them. We will continue to work with them to
arrange for a reduction in the amount owed to them through either formal or
informal payment plans. We continue to seek sources of working capital
sufficient to fund delinquent balances and meet ongoing obligations.
On March 8, 2006, the Company completed a private placement of two one-year
10% convertible debentures ("Debentures"), for gross proceeds of $1,000,000.
In connection with the Debentures, the Company agreed to issue the investors
a total of 2,000,000 immediately exercisable five year warrants to purchase
the Company's common stock at an exercise price of $0.14 for 1,000,000
warrants, and $0.25 for an additional 1,000,000 warrants. In addition, the
investors will receive an additional 50,000 warrants that vest and become
exercisable on the last day of each month prior to the Company's
satisfaction in full of the Debentures, or the complete conversion of the
Debentures, at an exercise price of $0.25.
In October 2001, we executed 10% convertible notes (the "Notes") with three
of our executives, which provided financing of $1,945,958. With an original
maturity date of October 24, 2003, these Notes were amended subsequent to
fiscal year 2002 to extend the maturity date to February 24, 2004. These
Notes are secured by selected Company assets and are convertible into our
common stock at the option of the holder at any time. The conversion price
is equal to the closing bid price of our common stock on the last trading
day immediately preceding the conversion. We also issued to the holders of
the Notes warrants to acquire an aggregate of 1,945,958 shares of common
stock at an exercise price of $0.78 per share, which expire on October 24,
2006. For the year ended October 31, 2002, an additional $402,433 was added
to the Notes and an additional 402,433 warrants to acquire our common stock
were issued in connection with the financing. During fiscal year 2004, the
holders of the Notes elected to convert $877,500 of the Notes into 6,750,000
shares of our common stock. On July 21, 2005, the Company and the three
executives agreed to extend the maturity date of the Notes to February 29,
2008. In connection with the extension, the Company issued to the three
executives warrants to acquire 640,000 shares of common stock at an exercise
price of $0.16. The warrants expire in July 2010. The gross outstanding
balance of these Notes at July 31, 2006 totals $1,003,390.
In January 2002, we executed a 6% convertible debenture (the "Debenture")
with GCA Strategic Investment Fund Limited ("GCA"), which provided
financing of $550,000 and had an original maturity date of January 28,
2003. We also issued to the holder of the Debenture warrants to acquire an
aggregate of 50,000 shares of common stock at an exercise price of $0.41
per share, which expire on January 28, 2007. The Debenture was amended in
January 2003 to extend the maturity date to November 8, 2004. In
connection with this January 2003 amendment we adjusted the exercise price
of the previously issued warrants to $0.21 per share and also issued to the
holder of the Debenture warrants to acquire an aggregate of 100,000 shares
of common stock at an exercise price of $0.21 per share, which expire on
February 8, 2008. The Debenture was amended again in June 2005 to extend
the maturity date to November 26, 2005. On March 8, 2006, the debenture was
amended again to extend the maturity date to November 26, 2006. In
connection with this June 2005 amendment of the Debenture, we also issued
to the holder of the Debenture 100,000 shares of our common stock, warrants
to purchase 150,000 shares of our common stock at an exercise price of
$0.38 per share and warrants to purchase 110,000 shares of our common stock
at an exercise price of $0.11 per share, all of which warrants expire on
June 1, 2010. The conversion price of the Debenture is equal to the lesser
of (i) 100% of the volume weighted average of sales price as reported by
the Bloomberg L.P. of the common stock on the last trading day immediately
preceding the closing date and (ii) 85% of the average of the three lowest
volume weighted average sales prices as reported by Bloomberg L.P. during
the 20 trading days immediately preceding but not including the date of the
related notice of conversion (the "Formula Conversion Price"). In an event
of default the amount declared due and payable on the Debenture shall be
automatically converted into shares of our common stock at the Formula
Conversion Price. During fiscal year 2003, GCA converted $50,000 of the
Debenture and $3,463 of accrued interest into approximately 374,000 shares
of common stock. During fiscal year 2004, GCA converted $10,000 of the
Debenture and $730 of accrued interest into approximately 82,000 shares of
our common stock. During fiscal year 2005, GCA converted $35,000 of the
Debenture and $7,770 of accrued interest into approximately 352,000 shares
of our common stock. During fiscal year 2006, GCA converted $25,000 of the
Debenture and $6,150 of accrued interest into approximately 407,000 shares
of common stock. The gross outstanding balance on the Debenture was
$430,000 at July 31, 2006.
In November 2002, we executed a 12% note payable (the "GC-Note") with
Global Capital Funding Group, L.P., ("Global") which provided financing of
$1,250,000. The GC-Note matured on November 8, 2004. We also issued to
the holder of the GC-Note warrants to acquire an aggregate of 500,000
shares of common stock at an exercise price of $0.14 per share, which
expire on November 8, 2007. In June 2005, the GC-Note was replaced by a
convertible note ("GC-Conote"). The GC-Conote matures on February 29,
2008, and the annual interest rate due on this convertible note is 10.08%.
The conversion price is equal to 80% of the average of the three (3) lowest
volume weighted average sales prices as reported by Bloomberg L.P. during
the twenty (20) trading days immediately preceding the date of the related
notice of conversion. In addition, we issued to the holder of the GC-
Conote 100,000 shares of our common stock, warrants to purchase 500,000
shares of our common stock at an exercise price of $0.38 per share and
warrants to purchase 125,000 shares of our common stock at an exercise
price of $0.11 per share, all of which warrants expire on June 1, 2010. In
addition, interest of approximately $350,000 due on the GC-Note at the time
of replacement by the GC-Conote was converted into a $400,000 non-interest
bearing note payable ("GC-Note2"), which matures on March 30, 2007. The
approximate $50,000 difference between the accrued interest at the time of
replacement and the value of this new note was recorded as deferred
financing fees, and is being amortized over the life of the GC-Note2.
During fiscal year 2006 GCA elected to convert $105,000 of the GC-Note2
into 1,277,071 shares of common stock. The gross outstanding balance of the
GC-Note2 was $170,000 at July 31, 2006.
In July 2003, we executed a 10% note payable (the "GCA-Note") with GCA
Strategic Investment Fund Limited, which provided financing of $550,000.
The GCA-Note's maturity date was December 23, 2003. We also issued to the
holder of the GCA-Note warrants to acquire an aggregate of 100,000 shares of
common stock at an exercise price of $0.14 per share, which expire on July
24, 2008. Per the terms of the GCA-Note agreement, in the event the GCA-
Note is not repaid in full within ten days of the maturity date, the terms
of the GCA-Note shall become the same as those of the Debenture. Effective
January 2, 2004, the GCA-Note was replaced by a convertible debenture ("GCA-
Debenture") with the same terms as those of the Debenture, which had a
maturity date of November 8, 2004. The principal balance of the GCA-
Debenture was $574,597, which included $24,597 of interest due on the GCA-
Note at the time it was replaced by the GCA-Debenture. The GCA-Debenture
was amended in June 2005, to extend the maturity date to November 26, 2006.
In connection with this amendment, we also issued to the holder of the GCA-
Debenture 40,000 shares of our common stock, and warrants to purchase
150,000 shares of our common stock at an exercise price of $0.38 per share,
which warrants expire on June 1, 2010. The gross outstanding balance on the
GCA-Debenture was $552,456 at July 31, 2006.
On March 8, 2006, the Company completed a private placement of two one-year
10% convertible debentures ("Debentures"), for gross proceeds of $1,000,000.
In connection with the Debentures, the Company agreed to issue the investors
a total of 2,000,000 immediately exercisable five year warrants to purchase
the Company's common stock at an exercise price of $0.14 for 1,000,000
warrants, and $0.25 for an additional 1,000,000 warrants. The Company paid
$44,150 in financing fees in connection with the debentures which were
recorded as a discount on the debentures. Additionally in connection with
these Debentures the Company recorded a debt discount of $955,850 related to
the fair value of warrants issued and the related beneficial conversion
feature that it will amortize over the life of the loan.
During the nine months ended July 31, 2006, the Company's chief executive
officer and significant shareholder, John Jenkins, advanced funds to the
Company in the aggregate amount of $550,000. During the nine-month period
ended July 31, 2006, the Company repaid this amount in full with proceeds
received from financing activities.
Our future operating success is dependent on our ability to generate
positive cash flow from our existing products and services, and/or
additional acquisitions. Our major growth areas are through the
introduction of new retail VoIP products, both domestically and
internationally. We are not anticipating a cash shortfall from operations
during the next 12 months, however we are nonetheless pursuing retail
opportunities and acquisitions that we believe will improve our cash flow
position. We do not have any capital equipment commitments during the next
12 months. We are actively pursuing debt or equity financing opportunities
to improve our cash and debt positions. At this time, we believe that
our cash position will fund our operations for at least the foreseeable
future. Although various possibilities for obtaining financing have been
discussed from time to time, and we are having ongoing discussions with
several potential financing sources, there are no definitive agreements with
any party to raise money and we cannot assure you that we will be successful
in our search for investors or lenders. The acquisition of Telenational was
consummated May 5, 2006, thus changing the financial position of the
Company. Any additional financing we may obtain may involve material and
substantial dilution to existing stockholders. In such event, the
percentage ownership of our current stockholders may be materially reduced,
and any new equity securities sold by us may have rights, preferences or
privileges senior to our current common stockholders. If we are unable to
obtain additional financing, our growth from operations in the short term
may be materially affected. These circumstances raise doubt as to the
ability of our Company to continue as a going concern.
At July 31, 2006, we had cash and cash equivalents of $289,000, an increase
of $117,000 from the balance at October 31, 2005. We had significant
working capital deficits at both July 31, 2006 and October 31, 2005.
Net cash used in operating activities was $850,000 for the nine months ended
July 31, 2006. Net cash used in operating activities for the nine months
ended July 31, 2006 was primarily due to a net loss of $2,061,999 adjusted
for non-cash interest expense of $952,000, depreciation and amortization
expenses of $488,000, non cash gain from reduction of liabilities of
$308,879 and net changes in operating assets and liabilities net acquisition
of ($59,613). For the nine months ended July 31, 2005, net cash used in
operating activities was due to a net loss from of $1,942,270 adjusted for
depreciation and amortization of $439,000 and net changes in operating
assets and liabilities of ($565,504).
Net cash provided by (used in) investing activities for the nine-month
periods ended July 31, 2006 and 2005 was $10,768 and ($14,000),
respectively, and primarily relates to the purchase of property and
equipment and cash acquired in the Telenational acquisition.
Net cash provided by financing activities for the nine months ended July 31,
2006 was $956,000. This amount represents proceeds received from debenture
financing less financing fees paid. Net cash used by financing activities
was $43,000 for the nine months ended July 31, 2005 which represented
payment on convertible debentures.
We have an accumulated deficit of approximately $50.7 million as of July 31,
2006 as well as a significant working capital deficit. Funding of our
working capital deficit, current and future operating losses, and expansion
will require continuing capital investment which may not be available to us.
Since the beginning of April 2001, we have raised $6.7 million in debt
financing.
Although to date we have been able to arrange debt facilities and equity
financing, there can be no assurance that sufficient debt or equity
financing will continue to be available in the future or that it will be
available on terms acceptable to us. As of July 31, 2006 we have
approximately $1,170,000 of principal balance of convertible debentures
which will mature within the next year as well as a significant amount of
trade payables and accrued liabilities which are past due. We will continue
to explore external financing opportunities in order to fund these past due
amounts. Our management is committed to the success of our Company as is
evidenced by the level of financing it has made available to our Company.
Failure to obtain sufficient capital will materially affect our Company's
operations and financial condition. As a result of the aforementioned
factors and related uncertainties, there is doubt about our ability to
continue as a going concern.
Our current capital expenditure requirements are not significant, primarily
due to the equipment acquired from Rapid Link and Telenational. We do not
anticipate significant spending for the remainder of fiscal year 2006.
RISK FACTORS
Our cash flow may not be sufficient to satisfy our operations.
For the three and nine month periods ended July 31, 2006, we recorded a net
loss of approximately $511,000 and $2,062,000, respectively, and for the
year ended October 31, 2005, we recorded a net loss of approximately
$2,565,000. As a result of these losses, and prior losses, we currently
have a significant working capital deficit. In addition, we have a
significant amount of trade accounts payables and accrued liabilities, of
which approximately 66% is past due. To be able to service our debt
obligations over the remainder of fiscal year 2006, we must generate
significant cash flow, obtain additional financing and/or negotiate term
extensions with our debtors. If we are unable to do so or are otherwise
unable to obtain funds necessary to make required payments on our trade debt
and other indebtedness, it is likely that we will not be able to continue
our operations.
Our independent auditors have included a going concern paragraph in their
audit opinion on our consolidated financial statements for the fiscal year
ended October 31, 2005, which states that "The Company has suffered
recurring losses from continuing operations during each of the last two
fiscal years. Additionally, at October 31, 2005, the Company's current
liabilities (which includes significant amounts of past due payables)
exceeded its current assets by $7.7 million and the Company had a
shareholders' deficit totaling $6.3 million. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern."
Our operating history makes it difficult to accurately assess our general
prospects in the VoIP portion of the telecommunications industry and the
effectiveness of our business strategy. In addition, we have limited
meaningful historical financial data upon which to forecast our future sales
and operating expenses. Our future performance will also be subject to
prevailing economic conditions and to financial, business and other factors.
Accordingly, we cannot assure you that we will successfully implement our
business strategy or that our actual future cash flows from operations will
be sufficient to satisfy our debt obligations and working capital needs.
To implement our business strategy, we will need to seek additional
financing. There is no assurance that adequate levels of additional
financing will be available at all or on acceptable terms. In addition, any
additional financing may result in significant dilution to our existing
stockholders. If we are unable to obtain additional financing on terms that
are acceptable to us, we could be forced to dispose of assets to make up for
any shortfall in the payments due on our debt under circumstances that might
not be favorable to realizing the highest price for those assets. A portion
of our assets consist of intangible assets, the value of which will depend
upon a variety of factors, including the success of our business. As a
result, if we do need to sell any of our assets, we cannot assure you that
our assets could be sold quickly enough, or for amounts sufficient, to meet
our obligations.
We face competition from numerous, mostly well-capitalized sources.
The market for our products and services is highly competitive. We face
competition from multiple sources, virtually all of which have greater
financial resources and a substantial presence in our markets and offer
products or services similar to our services. Therefore, we may not be able
to successfully compete in our markets, which could result in a failure to
implement our business strategy, adversely affecting our ability to attract
and retain new customers. In addition, competition within the industries in
which we operate is characterized by, among other factors, price and the
ability to offer enhanced services. Significant price competition would
reduce the margins realized by us in our telecommunications operations.
Many of our competitors have greater financial resources to devote to
research, development and marketing, and may be able to respond more quickly
to new or merging technologies and changes in customer requirements.
The regulatory environment in our industry is very uncertain.
The legal and regulatory environment pertaining to the Internet is uncertain
and changing rapidly as the use of the Internet increases. For example, in
the United States, the FCC had been considering whether to impose surcharges
or additional regulations upon certain providers of Internet telephony, and
indeed the FCC has confirmed that providers must begin charging Universal
Service access charges of roughly 6.5%.
In addition, the regulatory treatment of Internet telephony outside of the
United States varies from country to country. There can be no assurance
that there will not be legally imposed interruptions in Internet telephony
in these and other foreign countries. Interruptions or restrictions on the
provision of Internet telephony in foreign countries may adversely affect
our ability to continue to offer services in those countries, resulting in a
loss of customers and revenues.
New regulations could increase the cost of doing business over the Internet
or restrict or prohibit the delivery of our products or services using the
Internet. In addition to new regulations being adopted, existing laws may be
applied to the Internet. Newly existing laws may cover issues that include
sales and other taxes, access charges, user privacy, pricing controls,
characteristics and quality of products and services, consumer protection,
contributions to the Universal Service Fund, an FCC-administered fund for
the support of local telephone service in rural and high-cost areas, cross-
border commerce, copyright, trademark and patent infringement, and other
claims based on the nature and content of Internet materials.
Changes in the technology relating to Internet telephony could threaten our
operations.
The industries in which we compete are characterized, in part, by rapid
growth, evolving industry standards, significant technological changes and
frequent product enhancements. These characteristics could render existing
systems and strategies obsolete and require us to continue to develop and
implement new products and services, anticipate changing consumer demands
and respond to emerging industry standards and technological changes. No
assurance can be given that we will be able to keep pace with the rapidly
changing consumer demands, technological trends and evolving industry
standards.
We need to develop and maintain strategic relationships around the world to
be successful.
Our international business, in part, is dependent upon relationships with
distributors, governments or providers of telecommunications services in
foreign markets. The failure to develop or maintain these relationships
could have an adverse impact on our business.
We rely on four key senior executives.
We rely on our senior management team of John Jenkins, David Hess, Chris
Canfield and Michael Prachar, and our future success may depend, in large
part, upon our ability to retain our senior executives.
We may be unable to manage our growth.
We intend to expand our VoIP network and the range of enhanced
telecommunications services that we provide. Our expansion prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets. Our revenues
will suffer if we are unable to manage this expansion properly.
Our OTC Bulletin Board listing negatively affects the liquidity of our
common stock.
Our common stock currently trades on the OTC Bulletin Board. Therefore, no
assurances can be given that a liquid trading market will exist at the time
any stockholder desires to dispose of any shares of our common stock. In
addition, our common stock is subject to the so-called "penny stock" rules
that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and
accredited investors (generally defined as an investor with a net worth in
excess of $1 million or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by the penny stock rules,
a broker-dealer must make a suitability determination for the purchaser and
must have received the purchaser's written consent to the transaction prior
to sale. Consequently, both the ability of a broker-dealer to sell our
common stock and the ability of holders of our common stock to sell
their securities in the secondary market may be adversely affected. The
Securities and Exchange Commission has adopted regulations that define a
"penny stock" to be an equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require the delivery,
prior to the transaction, of a disclosure schedule relating to the penny
stock market. The broker-dealer must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is to sell the securities as a
market maker, the broker-dealer must disclose this fact and the broker-
dealer's presumed control over the market. Finally, monthly statements must
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management
carried out an evaluation, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of the end of the period covered by this report, our
disclosure controls and procedures were effective. Disclosure controls and
procedures mean our controls and other procedures that are designed to
ensure that information required to be disclosed by us in our reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our reports that we file or submit under
the Securities Exchange Act of 1934 is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls. There have been no changes in our
internal control over financial reporting that occurred during the period
covered by this report that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first quarter of fiscal year 2004, the Company determined based
on final written communications with the State of Texas that the Company had
a liability for sales taxes (including penalties and interest) totaling $1.1
million. The Company had previously accrued an estimated settlement amount
of $350,000 during fiscal year 2003. During the first quarter of fiscal
year 2004, the Company accrued an additional $750,000. On August 5, 2005,
the State of Texas filed a lawsuit in the 53rd Judicial District Court of
Travis County, Austin, Texas against the Company. The lawsuit requests
payment of approximately $1.162 million including penalties and interest for
state and local sales tax. During the fiscal year 2005, the Company accrued
an additional $62,000 in amounts due. The sales tax amount due is
attributable to audit findings of the State of Texas for the years 1995 to
1999 associated with Canmax Retail Systems, a current subsidiary of ours,
and former operating subsidiary providing retail automation software and
related services to the retail petroleum and convenience store industries.
The State of Texas determined that Canmax Retail Systems did not properly
remit sales tax on certain transactions. Management believes that it will
be able to negotiate a reduced settlement amount with the state, although
there can be no assurance that the Company will be successful with respect
to such negotiations. These operations were previously classified as
discontinued after the Company sold its retail automation software business
in December 1998 and changed its business model to international wholesale
and retail business, operating as a facilities-based global Internet
protocol communications company providing connectivity to international
markets. Since this sales tax liability represents an adjustment to amounts
previously reported in discontinued operations, the amount was classified as
Discontinued Operations. The amount that the State of Texas assessed of
$1.162 million has been accrued as a liability and is included in the
accompanying balance sheets as net current liabilities from discontinued
operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company granted 1,987,500 options during the three months ended July 31,
2006 to its employees.
On July 19, 2006, Global Capital Funding Group LLC, ("Global") converted
$55,000.00 of the 6% Convertible Debenture originally issued January 28,
2002 into 580,781 shares of common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
Item 6. Exhibits.
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among
Canmax Inc., CNMX MergerSub, Inc. and US Communications Services,
Inc. (filed as Exhibit 2.1 to Form 8-K dated January 30, 1998 (the
"USC 8-K"), and incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated
January 15, 1998 (the "USC Rescission 8-K"), and incorporated
herein by reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3,
1998 (filed as Exhibit 10.1 to the Company's Form 8-K dated
December 7, 1998 and incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS
Telecom & Technologies, Inc., Dial Thru International Corporation,
a Delaware corporation, Dial Thru International Corporation, a
California corporation, and John Jenkins (filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated November 2, 1999 and
incorporated herein by reference)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001,
by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation. (filed as Exhibit 2.1 to the Company's
Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation. (filed as Exhibit
2.2 to the Company's Form 8-K dated October 29, 2001 and
incorporated herein by reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as
of October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation. (filed as Exhibit
2.3 to the Company's Form 8-K dated October 29, 2001 and
incorporated herein by reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as
of October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation. (filed as Exhibit
2.4 to the Company's Form 8-K dated December 28, 2001 and
incorporated herein by reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as
of November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation. (filed as Exhibit
2.5 to the Company's Form 8-K dated December 28, 2001 and
incorporated herein by reference)
2.10 Asset Purchase Agreement, dated as of October 25, 2005, by and
between Integrated Communications, Inc. and Dial Thru International
Corporation (filed as Exhibit 2.5 to the Company's Form 8-K dated
October 31, 2005 and incorporated herein by reference)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999 (the "1999 Form 10-K") and incorporated herein by
reference)
3.2 Amended and Restated Bylaws of Dial Thru International Corporation
(filed as Exhibit 3.2 to the 1999 Form 10-K and incorporated herein
by reference)
3.3 Amendment to Certificate of Incorporation dated January 11, 2005
and filed with the State of Delaware on January 13, 2005 (filed as
Exhibit 3.3 to the 2004 Form 10-K and incorporated herein by
reference)
3.4 *Amendment to Certificate of Incorporation dated October 28, 2005
and filed with the State of Delaware on November 1, 2005
4.1 Securities Purchase Agreement issued January 28, 2002 between Dial
Thru International Corporation and GCA Strategic Investment Fund
Limited (filed as Exhibit 4.1 to the Company's Form S-3, File 333-
82622, filed on February 12, 2002 and incorporated herein by
reference)
4.2 Registration Rights Agreement dated January 28, 2002 between Dial
Thru International Corporation and GCA Strategic Investment Fund
Limited (filed as Exhibit 4.2 to the Company's Form S-3, File 333-
82622, filed on February 12, 2002 and incorporated herein by
reference)
4.3 6% Convertible Debenture of Dial Thru International Corporation and
GCA Strategic Investment Fund Limited (filed as Exhibit 4.3 to the
Company's Form S-3, File 333-82622, filed on February 12, 2002 and
incorporated herein by reference)
4.4 Common Stock Purchase Warrant dated January 28, 2002 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.4 to the Company's Form S-3, File
333-82622, filed on February 12, 2002 and incorporated herein by
reference)
4.5 Securities Purchase Agreement issued November 8, 2002 between Dial
Thru International Corporation and Global Capital Funding Group,
L.P. (filed as Exhibit 4.1 to the Company's Form 8-K filed on
September 23, 2003, and incorporated herein by reference)
4.6 Secured Promissory Note issued November 8, 2002 between Dial Thru
International Corporation and Global Capital Funding Group, L.P.
(filed as Exhibit 4.2 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.7 Common Stock Purchase Warrant issued November 8, 2002 between Dial
Thru International Corporation and Global Capital Funding Group,
L.P. (filed as Exhibit 4.3 to the Company's Form 8-K filed on
September 23, 2003, and incorporated herein by reference)
4.8 Registration Rights Agreement issued November 8, 2002 between Dial
Thru International Corporation and Global Capital Funding Group,
L.P. (filed as Exhibit 4.4 to the Company's Form 8-K filed on
September 23, 2003, and incorporated herein by reference)
4.9 Securities Purchase Agreement issued July 24, 2003 between Dial
Thru International Corporation and GCA Strategic Investment Fund
Limited (filed as Exhibit 4.5 to the Company's Form 8-K filed on
September 23, 2003, and incorporated herein by reference)
4.10 Promissory Note issued July 24, 2003 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited
(filed as Exhibit 4.6 to the Company's Form 8-K filed on September
23, 2003, and incorporated herein by reference)
4.11 Common Stock Purchase Warrant issued July 24, 2003 between Dial
Thru International Corporation and GCA Strategic Investment Fund
Limited (filed as Exhibit 4.6 to the Company's Form 8-K filed on
September 23, 2003, and incorporated herein by reference)
4.12 Secured Promissory Note dated June 1, 2005 between Global Capital
Funding Group, L.P. and Dial Thru International Corporation (filed
as Exhibit 4.1 to the Company's Form 8-K filed on June 7, 2005, and
incorporated herein by reference)
4.13 Common Stock Purchase Warrant dated June 1, 2005 between Global
Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 4.2 to the Company's Form 8-K filed on June 7,
2005, and incorporated herein by reference)
4.14 Common Stock Purchase Warrant dated June 1, 2005 between Global
Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 4.3 to the Company's Form 8-K filed on June 7,
2005, and incorporated herein by reference)
4.15 Common Stock Purchase Warrant dated June 1, 2005 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.5 to the Company's Form 8-K filed
on June 7, 2005, and incorporated herein by reference
4.16 Common Stock Purchase Warrant dated June 1, 2005 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.6 to the Company's Form 8-K filed
on June 7, 2005, and incorporated herein by reference
4.17 Common Stock Purchase Warrant dated June 1, 2005 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.7 to the Company's Form 8-K filed
on June 7, 2005, and incorporated herein by reference
10.1 Employment Agreement, dated June 30, 1997 between Canmax Retail
Systems, Inc. and Roger Bryant (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-3, File No. 333-33523
(the "Form S-3"), and incorporated herein by reference)
10.2 Commercial Lease Agreement between Jackson--Shaw/Jetstar Drive Tri-
star Limited Partnership and the Company (filed as Exhibit 10.20 to
the Company's Annual Report on Form 10-K dated October 31, 1998,
and incorporated herein by reference)
10.3 Employment Agreement, dated November 2, 1999 between ARDIS Telecom
& Technologies, Inc. and John Jenkins (filed as Exhibit 4.3 to the
2000 Form 10-K and incorporated herein by reference)
10.4 Amendment Number 1 to Securities Purchase Agreement dated June 1,
2005 between Global Capital Funding Group, L.P. and Dial Thru
International Corporation (filed as Exhibit 10.1 to the Company's
Form 8-K filed on June 7, 2005, and incorporated herein by
reference)
10.5 Amendment Number 1 to Securities Purchase Agreement dated June 1,
2005 between GCA Strategic Investment Fund Limited and Dial Thru
International Corporation (filed as Exhibit 10.2 to the Company's
Form 8-K filed on June 7, 2005, and incorporated herein by
reference)
10.6 Amendment Number 1 to Securities Purchase Agreement dated June 1,
2005 between GCA Strategic Investment Fund Limited and Dial Thru
International Corporation (filed as Exhibit 10.3 to the Company's
Form 8-K filed on June 7, 2005, and incorporated herein by
reference)
14.1 Code of Business Conduct and Ethics for Employees, Executive
Officers and Directors (filed as Exhibit 14.1 to the 2003 Form 10-K
and incorporated herein by reference)
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934*
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934*
32.1 Certificate of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350*
* Filed herewith.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Rapid Link, Incorporated
By: /s/John A. Jenkins
--------------------------------------------
John Jenkins
Chief Executive Officer (Principal Executive
Officer)
By: /s/Christopher J. Canfield
--------------------------------------------
Chris Canfield
Chief Financial Officer (Principal Financial
and Accounting Officer)
Dated: September 14, 2006