UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 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 April 30, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 0-22636
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RAPID LINK, INCORPORATED
(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, CA 90272
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(Address of principal executive offices)
(310) 566-1700
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(Issuer's telephone number)
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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 check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 31, 2007, there were 51,792,379 shares of registrant's common
stock, par value $.001 per share, 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
April 30, October 31,
2007 2006
---------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 318,871 $ 30,136
Accounts receivable, net of allowances
of $95,493 and $99,666, respectively 1,118,968 1,400,568
Prepaid expenses 89,035 204,335
Other current assets 125,080 16,382
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Total current assets 1,651,954 1,651,421
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Property and equipment, net 281,669 379,027
Customer lists, net 2,836,071 3,222,142
Goodwill 2,868,461 2,868,461
Other assets 89,123 121,286
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Total assets $ 7,727,278 $ 8,242,337
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank overdrafts $ - $ 101,097
Accounts payable 2,429,007 2,203,072
Accrued interest (including $313,709 and
$183,304, respectively, to related parties) 722,023 491,299
Other accrued liabilities 562,065 507,581
Deferred revenue 215,235 183,510
Deposits and other payables 73,180 66,889
Accrued purchase price consideration 500,000 500,000
Convertible notes, current portion, net of debt
discount of $378,788 and $343,333, respectively 2,883,669 716,667
Convertible notes payable to related parties,
current, net of debt discount of $27,574 1,877,504 -
Related party notes, current portion 1,345,101 380,965
Net current liabilities from discontinued operations 1,162,000 1,162,000
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Total current liabilities 11,769,784 6,313,080
---------- ----------
Convertible notes, long-term, net of debt discount
of $610,308 - 1,622,149
Convertible notes payable to related parties,
long-term, net of debt discount of $44,120 - 1,860,958
Related party note, long-term - 1,000,000
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Total liabilities 11,769,784 10,796,187
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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; 51,804,401 and 51,181,994 shares
issued at April 30, 2007 and October 31, 2006,
respectively 51,804 51,182
Additional paid-in capital 47,429,333 47,248,729
Accumulated deficit (51,468,773) (49,798,891)
Treasury stock, at cost; 12,022 shares (54,870) (54,870)
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Total shareholders' deficit (4,042,506) (2,553,850)
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Total liabilities and shareholders' deficit $ 7,727,278 $ 8,242,337
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The accompanying notes are an integral part of these unaudited consolidated
financial statements.
RAPID LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Revenues $ 3,720,098 $ 2,121,018 $ 8,173,075 $ 4,107,130
Costs and expenses:
Costs of revenues 2,561,496 1,612,960 5,950,264 3,141,075
Sales and marketing 307,391 99,827 619,916 242,209
General and administrative 841,677 732,995 1,847,255 1,390,419
Depreciation and amortization 235,619 99,967 478,143 204,179
Loss on disposal of property and
equipment 21 34,229 10,061 34,229
Net reductions of liabilities - - - (809,781)
---------- ---------- ---------- ----------
Total costs and expenses 3,946,204 2,579,978 8,905,639 4,202,330
---------- ---------- ---------- ----------
Operating loss (226,106) (458,960) (732,564) (95,200)
---------- ---------- ---------- ----------
Other income (expense):
Noncash interest expense (284,473) (301,318) (660,630) (510,126)
Interest expense (70,669) (54,052) (141,893) (93,625)
Related party interest expense (58,491) (33,357) (140,848) (66,414)
Foreign currency exchange gains 2,442 1,358 3,950 23,641
Other - - 2,103 -
---------- ---------- ---------- ----------
Total other income (expense), net (411,191) (387,369) (937,318) (646,524)
---------- ---------- ---------- ----------
Net loss $ (637,297) $ (846,329) $(1,669,882) $ (741,724)
========== ========== ========== ==========
Earnings per share information:
Basic and diluted weighted average
shares outstanding 51,750,419 30,237,903 51,455,385 29,759,747
========== ========== ========== ==========
Basic and diluted loss per share $ (0.01) $ (0.03) $ (0.03) $ (0.02)
========== ========== ========== ==========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
RAPID LINK, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
April 30,
----------------------------
2007 2006
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Cash flows from operating activities:
Net loss $ (1,669,882) $ (741,724)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Noncash interest expense 660,630 510,126
Depreciation and amortization 478,143 204,179
Bad debt expense 60,000 (25,010)
Share-based compensation expense 11,850 -
Loss on disposal of property and equipment 10,061 34,229
Gain on reduction/settlement of liabilities - (809,781)
Changes in operating assets and liabilities:
Accounts receivable 221,600 (114,771)
Prepaid expenses and other current assets 125,746 (35,201)
Other assets 30,183 (1,784)
Accounts payable 225,935 10,933
Accrued liabilities 236,208 56,384
Deferred revenue 31,725 25,996
Deposits and other payables 6,291 -
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Net cash provided by (used in)
operating activities 428,490 (886,424)
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Cash flows from investing activities:
Purchases of property and equipment (3,094) (73,749)
Proceeds from sale of property and equipment 300 -
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Net cash used in investing activities (2,794) (73,749)
Cash flows from financing activities:
Reduction of bank overdrafts (101,097) -
Proceeds from convertible debentures - 1,000,000
Payment of financing fees - (44,150)
Proceeds from related party notes and
shareholder advances - 500,000
Payments on related party notes and
shareholder advances (35,864) (500,000)
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Net cash provided by (used in)
financing activities (136,961) 955,850
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Net increase (decrease) in cash and
cash equivalents 288,735 (4,323)
Cash and cash equivalents, beginning of period 30,136 172,164
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Cash and cash equivalents, end of period $ 318,871 $ 167,841
============ ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
RAPID LINK, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - NATURE OF BUSINESS AND CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business
Rapid Link, Incorporated, a Delaware corporation, and its subsidiaries
(collectively referred to as "Rapid Link" or the "Company"), 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. 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. The Company
has added value-added Voice over Internet Protocol ("VoIP") communication
services to customers, both domestically and internationally, to its retail
product focus. VoIP packetized voice technology and other compression
techniques allow the Company to improve both cost and efficiencies of
telecommunication transmissions. Rapid Link utilizes the Public Switched
Telecommunications Network as well as the Internet to transport the
Company's communications services.
Rapid Link focuses on the U.S. 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 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 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. Revenues derived from VoIP communication services do not
represent a majority of the Company's revenues at the present time.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The consolidated financial statements at
April 30, 2007, and for the three and six months ended April 30, 2007 and
2006, are unaudited and reflect all adjustments of a normal recurring
nature, except as otherwise disclosed herein, which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. Certain amounts previously
reported have been reclassified to conform to the current period
presentation.
The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition
and results of operations, contained in the Company's annual report on
Form 10-KSB for the fiscal year ended October 31, 2006. The results of
operations for the three and six months ended April 30, 2007 are not
necessarily indicative of the results that may be achieved for the entire
fiscal year ending October 31, 2007.
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Restatements and Reclassifications
The Company has restated its consolidated financial statements as of and
for the six months ended April 30, 2006 to reflect in the proper quarterly
period certain amounts that were recorded in the consolidated financial
statements during fiscal 2006. The restated quarterly information was
presented in the Company's annual report on Form 10-KSB for the fiscal
year ended October 31, 2006. (See Note 2 - Net Reduction of Liabilities for
further details). Certain balance sheet amounts as of October 31, 2006 have
been reclassified to be properly presented (see Acquisition below for
further details).
Acquisition
On May 5, 2006, the Company acquired 100% of the outstanding stock of
Telenational Communications, Inc. ("Telenational") from Apex Acquisitions,
Inc. ("APEX"). 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
consolidated financial statements at October 31, 2006 and April 30, 2007,
and for the three and six months ended April 30, 2007, include amounts
acquired from, as well as results of operations of, the acquired business.
The Company reclassified certain amounts on its October 31, 2006
consolidated balance sheet to apply a $250,000 payment made to APEX in
October 2006 against a note owed to APEX (at the request of APEX management)
rather than as a reduction of purchase price consideration owed related to
the acquisition of Telenational. Accrued purchase price consideration of
$500,000, which represents the remaining unpaid cash portion of the purchase
consideration, was past due at April 30, 2007 and October 31, 2006.
Financial Condition and 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 limited ability or inability to raise additional capital. The
Company has an accumulated deficit of approximately $51.5 million as of
April 30, 2007, as well as a working capital deficit of approximately $10.1
million. In addition, a significant amount 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 expansion of the Company will require continuing capital
investment. Historically, some of the Company's funding has been provided
by a major shareholder. The Company's strategy is to fund these cash
requirements through debt facilities and additional equity financing.
Although 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 could materially affect the Company's operations in the short term
and hinder expansion strategies. At April 30, 2007, approximately 50% of the
Company's debt is due to a Director of the Company, senior management or an
entity owned by senior management.
As a result of the aforementioned factors and related uncertainties,
there is substantial doubt about 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 2 - NET REDUCTIONS OF LIABILITIES
The Company determined during the fourth quarter of fiscal 2006, based
on a review of applicable statute of limitations regulations and/or current
correspondence with vendors, that approximately $809,781 of liabilities were
no longer due and payable as of April 30, 2006. Accordingly, this amount was
recorded as "net reductions of liabilities" during the first six months of
fiscal 2006. (See Note 1 - Nature of Business and Consolidated Financial
Statements for discussion of restatement of quarterly information).
NOTE 3 - SHARE-BASED COMPENSATION
Accounting for Share-Based Payments Pursuant to Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R")
The Company adopted SFAS No. 123R as of November 1, 2006 applying the
modified prospective transition method. This revised accounting standard
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 Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
requires that the fair value of such share-based payments be recognized in
the consolidated statement of operations using a fair-value-based method.
SFAS No. 123R requires publicly-traded entities to record noncash
compensation expense related to payment for employee services by an equity
award in their financial statements over the requisite service period. In
March 2005, the SEC issued Staff Accounting Bulletin ("SAB") 107, "Share-
Based Payment," which does not modify any of SFAS No. 123R's conclusions or
requirements, but rather includes recognition, measurement and disclosure
guidance for companies as they implement SFAS No. 123R.
All of the Company's existing share-based compensation awards have been
determined to be equity awards. Under the modified prospective transition
method, the Company is required to recognized noncash compensation costs for
the portion of share-based awards that are outstanding as of November 1,
2006 for which the requisite service has not been rendered (i.e. nonvested
awards) as the requisite service is rendered on or after that date. The
compensation cost is based on the grant date fair value of those awards,
with grant date fair value currently being estimated using the Black-Scholes
option-pricing model, a pricing model acceptable under SFAS No. 123R. The
Company will recognize compensation cost relating to the nonvested portion
of those awards in the consolidated financial statements beginning with the
date on which SFAS No. 123R is adopted, through the end of the requisite
service period. SFAS No. 123R requires that forfeitures be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Under the modified prospective
transition method, the consolidated financial statements are unchanged for
periods prior to adoption and the pro forma disclosure previously required
for those prior periods will continue to be required to the extent those
amounts differ from the amounts in the consolidated statement of operations.
Effective November 1, 2006, the Company accounts for equity instruments
issued to non-employees in accordance with the provisions of SFAS No. 123R
and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services." All transactions in which
goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is
more reliably measurable. The measurement date of the fair value of the
equity instrument issued is the earlier of the date on which the
counterparty's performance is complete or the date on which it is probable
that performance will occur.
The adoption of SFAS No. 123R had no effect on cash flows or basic and
diluted loss per share. No share-based compensation costs were capitalized
during the first six months of fiscal 2007. Noncash share-based compensation
costs recorded in general and administrative expenses during the second
quarter and first six months of fiscal 2007 were approximately $6,000 and
$12,000, respectively.
A summary of stock options as of April 30, 2007 and changes during the
six months then ended was as follows:
Weighted-
Average
Weighted Remaining
-Average Contractual Aggregate
Exercise Term Intrinsic
Stock Options Shares Price (in years) Value
------------------------------- --------- -------- ---------- ---------
Outstanding at October 31, 2006 1,242,500 $ 0.36
Granted - -
Exercised - -
Cancellations (10,000) 0.13
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Outstanding at April 30, 2007 1,232,500 $ 0.12 4.7 $ -
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Exercisable at April 30, 2007 290,000 $ 0.13 6.3 $ -
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There were no options issued to employees during the first six months of
fiscal 2007. No options were exercised during the first six months of fiscal
2007. The Company issues new shares of common stock upon option exercise.
As of April 30, 2007, there were unrecognized compensation costs of
$56,000 related to nonvested stock options which the Company expects to
recognize over a weighted-average period of 2.3 years.
Accounting for Share-Based Payments Prior to Adoption of SFAS No. 123R
Prior to November 1, 2006, the Company accounted for its stock-based
employee compensation arrangements under the intrinsic value method in
accordance with APB Opinion No. 25 and followed 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 fair value of the
Company's stock over the exercise price. Accordingly, compensation cost was
not recognized related to stock options in the financial statements as the
fair market value on the grant date approximated the exercise price. Prior
to the adoption of SFAS No. 123R, the Company calculated stock-based
compensation pursuant to the disclosure provisions of SFAS No. 123 using the
straight-line method over the vesting period of the option. 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 second quarter and first six months of
fiscal 2006 would not have been materially different.
The fair value of options for shares of the Company's common stock issued
to employees has been determined using the Black-Scholes option-pricing
model, a pricing model acceptable under SFAS No. 123. There were no options
issued to employees during the first six months of fiscal 2006.
NOTE 4 - DEBENTURES AND NOTES PAYABLE, INCLUDING RELATED PARTY NOTES
The Company has various debt obligations as of April 30, 2007 and October
31, 2006, including amounts due to independent institutions and related
parties. No new debt obligations were incurred during the first six
months of fiscal 2007. The following tables summarize outstanding debt as
of each balance sheet date:
INFORMATION AS OF APRIL 30, 2007
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Description Balance Int. Rate Due Date Discount Net
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Convertible notes, current
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GC-Conote2 $ 30,000 0% on demand $ - $ 30,000
GCA-Debenture 430,000 6% 11/1/2007 - 430,000
GCA-Debenture 552,457 6% 11/1/2007 - 552,457
GC-Conote 1,250,000 10.08% 2/28/2008 378,788 871,212
Debentures 1,000,000 10% 3/8/2008 - 1,000,000
Related party conv. notes, current
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Notes (Executives) 1,905,078 10% 2/28/2008 27,574 1,877,504
Related party notes, current
----------------------------
Exec. Demand Note 300,000 8% on demand - 300,000
APEX Note 1 1,000,000 8% 11/5/2007 - 1,000,000
APEX Note 2 45,101 8% 7/15/2007 - 45,101
INFORMATION AS OF OCTOBER 31, 2006
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Description Balance Int. Rate Due Date Discount Net
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Convertible notes, current
--------------------------
GC-Conote2 $ 60,000 0% 3/31/2007 $ 10,000 $ 50,000
Debentures 1,000,000 10% 3/8/2007 333,333 666,667
Related party notes, current
----------------------------
Exec. Demand Note 300,000 8% on demand - 300,000
APEX Note 2 80,965 8% 7/15/2007 - 80,965
Convertible notes, long-term
----------------------------
GCA-Debenture 430,000 6% 11/1/2007 - 430,000
GCA-Debenture 552,457 6% 11/1/2007 4,247 548,210
GC-Conote 1,250,000 10.08% 2/28/2008 606,061 643,939
Related party conv. notes, long-term
------------------------------------
Notes (Executives) 1,905,078 10% 2/28/2008 44,120 1,860,958
Related party note, long-term
-----------------------------
APEX Note 1 1,000,000 8% 11/5/2007 - 1,000,000
Debentures totaling $1,000,000 with an original March 8, 2007 maturity
date were extended during the second quarter of fiscal 2007 to March 8,
2008. The term of the original 2,000,000 warrants to purchase common stock
at exercise prices of $.14 and $.25 per share issued related to these
Debentures was extended by one year, which had an insignificant financial
impact. In connection with the extension, however, 2,000,000 additional
warrants were issued, resulting in deferred financing fees of $139,000, of
which $20,000 was expensed as noncash interest expense in the second quarter
of fiscal 2007. The fair value of the warrants was determined on the date of
grant using the Black-Scholes pricing model with the following assumptions:
applicable risk-free interest rate based on the current treasury-bill
interest rate of 4.5%; volatility factor of the expected market price of the
Company's common stock of 2.87; and an expected life of the warrants of four
years. Remaining deferred financing fees, classified as other current
assets, will be amortized through March 8, 2008. In connection with these
Debentures, the lenders are entitled to an additional 50,000 warrants
monthly to purchase common stock at an exercise price of $.10 per share,
which vest and are exercisable each fiscal quarter until the Debentures
are paid in full. The fair value of these additional warrants is calculated
on the date earned using the Black-Scholes pricing model using applicable
risk-free interest rates based on current treasury-bill interest rates;
volatility factors of the expected market price of the Company's common
stock over the expected term; and an expected life of the warrants of four
years. The Company records noncash interest expense and a corresponding
accrued liability for the fair value of the shares earned. At the time the
warrants are issued, the accrued liability will be reversed against
additional paid-in capital.
The Company has two 6% convertible debentures totaling $982,457 with
maturity dates of November 1, 2007 (the "GCA-Debentures") with GCA Strategic
Investment Fund Limited ("GCA") that became current liabilities during the
first six months of fiscal 2007. During the second quarter of fiscal 2007,
GCA elected to convert $30,000 of the GC-Conote2 into approximately 622,000
shares of common stock. The remaining $30,000 owed on the GC-Conote2 became
due on March 31, 2007 and is currently due on demand.
An 8% related party note payable to APEX that is due on November 5, 2007
in the amount of $1,000,000 ("Apex Note 1") became a current liability
during the first six months of fiscal 2007. The Company's Chief Financial
Officer, Chris Canfield, is the majority shareholder of APEX. Additionally,
two 10% related party notes that are payable (1) to the Company's CEO and
(2) to a former officer of the Company that are due on February 28, 2008 in
the combined amount of $1,905,078 ("the Executive Notes") became current
liabilities during the first six months of fiscal 2007.
During fiscal 2006, in conjunction with, but unrelated to the total
purchase consideration paid for Telenational, the Company issued an 8% note
payable to APEX in the original amount of $436,560 ("APEX Note 2"). APEX
Note 2 was payable in 12 equal monthly payments of principal and interest
until fully satisfied in July 2007. However, the Company reclassified
certain amounts on its October 31, 2006 consolidated balance sheet to apply
a $250,000 payment made to APEX in October 2006 against APEX Note 2 (at the
request of APEX management) rather than as a reduction of accrued purchase
price consideration owed related to the acquisition of Telenational. The
Company has $45,101 remaining on APEX Note 2 at April 30, 2007.
NOTE 5 - BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit
to virtually all of its customers. Management has provided an allowance for
doubtful accounts, which reflects its estimate of amounts, which may become
uncollectible. In the event of complete non-performance by the Company's
customers, the maximum exposure to the Company is the outstanding accounts
receivable balance at the date of non-performance.
The Company provided services to one customer that accounted for 18% and
24%, respectively, of overall revenues during the second quarter and first
six months of fiscal 2007. During the second quarter and first six months
of fiscal 2007, 18% and 24%, respectively, of the Company's revenues were
generated from customers in the Netherlands. During the second quarter of
fiscal 2007, two of the Company's suppliers accounted for approximately 25%
and 14%, respectively, of the Company's total costs of revenues. During the
first six months of fiscal 2007, two of the Company's suppliers accounted
for approximately 22% and 14%, respectively, of the Company's total costs
of revenues. At April 30, 2007, two customers accounted for 13% and 10%,
respectively, of the Company's trade accounts receivable. At October 31,
2006, one customer accounted for 13% of the Company's trade accounts
receivable.
The Company provided services to one customer who accounted for 13% and
16%, respectively, of overall revenues during the second quarter and first
six months of fiscal 2006. During the second quarter of fiscal 2006, 23% of
the Company's revenues were generated from customers in South Africa. During
the second quarter of fiscal 2006, two of the Company's suppliers accounted
for approximately 14% and 10%, respectively, of the Company's total costs of
revenues. During the first six months of fiscal 2006, one of the Company's
suppliers accounted for approximately 12% of the Company's total costs of
revenues.
Due to the highly competitive nature of the telecommunications business,
the Company believes that the loss of any carrier would not have a long-term
material impact on its business.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company, from time to time, may be subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property of third parties
by the Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Cygnus Telecommunications Technology, LLC. On June 12, 2001, Cygnus
Telecommunications Technology, LLC ("Cygnus"), filed a patent infringement
suit (case no. 01-6052) in the United States District Court, Central
District of California, with respect to the Company's "international re-
origination" technology. On March 29, 2007 the United States District Court
in San Jose, California ruled that all Cygnus "international re-origination"
patents are invalid, and dismissed all cases against Rapid Link (fka Dial
Thru International Corporation) and related parties. Cygnus is appealing
the case.
State of Texas. During fiscal 2004, the Company determined, based on final
written communications with the State of Texas (the "State"), that it had a
liability for sales taxes (including penalties and interest). On August 5,
2005, the State 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 for state
and local sales tax, which has been accrued at April 30, 2007 and October
31, 2006. The sales tax amount due is attributable to audit findings of the
State 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 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
classified as discontinued after the Company sold its retail automation
software business in December 1998 and changed its business model.
The Company will continue to aggressively pursue the collection of unpaid
sales taxes from former customers of Canmax Retail Systems, primarily
Southland Corporation, now 7-Eleven Corporation ("7-Eleven"), as a majority
of the amount owed to the State is the result of uncollected taxes from the
sale of software to 7-Eleven during the period under audit. However, there
can be no assurance that the Company will be successful with respect to such
collections.
On January 12, 2004, the Company filed a suit against 7-Eleven in the 162nd
District Court in Dallas, Texas. The Company's suit claims a breach of
contract on the part of 7-Eleven in failing to reimburse it for taxes paid
to the State as well as related taxes for which the Company is currently
being held responsible by the State. The Company's suit seeks reimbursement
for the taxes paid and a determination by the court that 7-Eleven is
responsible for paying the remaining tax liability to the State.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements
This report includes forward-looking statements, which are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"expects," "will," "anticipates," "estimates," "believes," "plans" and words
of similar meaning. These forward-looking statements relate to business
plans, programs, trends, results of future operations, satisfaction of
future cash requirements, funding of future growth, acquisition plans and
other matters. In light of the risks and uncertainties inherent in all such
projected matters, the inclusion of forward-looking statements in this
report should not be regarded as a representation by us or any other
person that our objectives or plans will be achieved or that our operating
expectations will be realized. Revenues and results of operations are
difficult to forecast and could differ materially from those projected in
forward-looking statements contained herein, including without limitation
statements regarding our belief of the sufficiency of capital resources and
our ability to compete in the telecommunications industry. Actual results
could differ from those projected in any forward-looking statements for,
among others, the following reasons: (a) increased competition from
existing and new competitors using Voice over Internet Protocol ("VoIP") to
provide telecommunications services over the Internet, (b) the relatively
low barriers to entry for start-up companies using VoIP to provide
telecommunications services over the Internet, (c) the price-sensitive
nature of consumer demand, (d) the relative lack of customer loyalty to any
particular provider of services over the Internet, (e) our dependence upon
favorable pricing from our suppliers to compete in the telecommunications
industry, (f) increased consolidation in the telecommunications industry,
which may result in larger competitors being able to compete more
effectively, (g) failure to attract or retain key employees, (h) continuing
changes in governmental regulations affecting the telecommunications
industry and the Internet and (i) changing consumer demand, technological
developments and industry standards that characterize the industry. For a
discussion of these factors and others, please see "Risk Factors" below in
this section of this report. Readers are cautioned not to place undue
reliance on the forward-looking statements made in this report or in any
document or statement referring to this report. In addition, we are not
obligated, and do not intend, to update any forward-looking statements at
any time unless an update is required by applicable securities laws.
Overview
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.
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.
On May 5, 2006, we completed the acquisition of all of the issued and
outstanding shares of capital stock of Telenational Communications, Inc.,
who historically has serviced a sizable base of both retail and commercial
customers which very closely mirror those customers Rapid Link has served
prior to the acquisition. 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 VoIP related products and services. Accordingly, we have
increased our focus on these types of products and services. We believe the
use of the Internet to provide bundled VoIP related services to the end user
customer, either as a stand alone solution or bundled with other VoIP
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.
Critical Accounting Policies
This disclosure is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires that we make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We base our
estimates on historical experience and other assumptions that we believe to
be proper and reasonable under the circumstances. We continually evaluate
the appropriateness of estimates and assumptions used in the preparation of
the consolidated financial statements. Actual results could differ from
those estimates. The following key accounting policies are impacted
significantly by judgments, assumptions and estimates used in the
preparation of the consolidated financial statements.
Revenue Recognition
For a majority of our products, our revenues are generated at the time a
customer uses our network to initiate a phone call. We sell our services to
small and medium sized enterprises and end-users that utilize our network
for international re-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. To
date, our new VoIP product offerings have generated insignificant revenues.
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. We have concluded that our revenue recognition policy is appropriate
and in accordance with generally accepted accounting principles and Staff
Accounting Bulletin No. 104.
Allowance for Uncollectible Accounts Receivable
We regularly monitor credit risk exposures in our accounts receivable
and maintain a general allowance for doubtful accounts based on historical
experience. Our receivables are due from commercial enterprises and
residential users in both domestic and international markets. In estimating
the necessary level of our allowance for doubtful accounts, we consider the
aging of our customers' accounts receivable and our estimation of each
customer's willingness and ability to pay amounts due, among other factors.
Should any of these factors change, the estimates made by management would
also change, which in turn would impact the level of the Company's future
provision for doubtful accounts. Specifically, if the financial condition of
the Company's customers were to deteriorate, affecting their ability to make
payments, additional customer-specific provisions for doubtful accounts may
be required. We review our credit policies on a regular basis and analyze
the risk of each prospective customer individually in order to minimize our
risk.
Purchase Price Allocations and Impairment Testing
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. We record goodwill when the consideration paid for an
acquisition exceeds the fair value of net tangible and identifiable
intangible assets acquired. If we were to use different judgments or
assumptions, the amounts assigned to the individual assets or liabilities
could be materially different.
Long-lived assets, including the Company's customer lists, are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets might not be recoverable. We assess our
goodwill for impairment annually or more frequently if impairment indicators
arise. In order to properly complete these assessments, we rely on a number
of factors, including operating results, business plans and anticipated
future cash flows. Actual results that vary from these factors could have
an impact on the amount of impairment, if any, that actually occurs.
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.
Results of Operations
The following table set forth certain financial data and the percentage
of total revenues of the Company for the periods indicated (amounts in
thousands):
Three Months Ended April 30, Six Months Ended April 30,
----------------------------------- -----------------------------------
2007 2006 2007 2006
---------------- ---------------- ---------------- ----------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
------ ------- ------ ------- ------ ------- ------ -------
Revenues $ 3,720 100.0 $ 2,121 100.0 $ 8,173 100.0 $ 4,107 100.0
Costs and expenses:
Costs of revenues 2,561 68.9 1,613 76.0 5,951 72.8 3,141 76.5
Sales and marketing 307 8.3 100 4.7 620 7.6 242 5.9
General and administrative 842 22.6 733 34.6 1,847 22.6 1,391 33.8
Depreciation and amortization 236 6.3 100 4.7 478 5.9 204 5.0
Loss on disposal of property
and equipment - - 34 1.6 10 0.1 34 0.8
Net reductions of liabilities - - - - - - (810) (19.7)
------ ------- ------ ------- ------ ------- ------ -------
Total costs and expenses 3,946 106.1 2,580 121.6 8,906 109.0 4,202 102.3
------ ------- ------ ------- ------ ------- ------ -------
Operating loss (226) (6.1) (459) (21.6) (733) (9.0) (95) (2.3)
------ ------- ------ ------- ------ ------- ------ -------
Other income (expense):
Noncash interest expense (284) (7.6) (301) (14.2) (660) (8.1) (510) (12.4)
Interest expense (71) (1.9) (54) (2.6) (142) (1.7) (94) (2.3)
Related party interest expense (58) (1.6) (33) (1.6) (141) (1.7) (66) (1.6)
Foreign currency exchange gains 2 0.1 1 0.1 4 0.1 23 0.6
Other - - - - 2 - - -
------ ------- ------ ------- ------ ------- ------ -------
Total other inc. (exp.), net (411) (11.0) (387) (18.3) (937) (11.4) (647) (15.7)
------ ------- ------ ------- ------ ------- ------ -------
Net loss $ (637) (17.1)% $ (846) (39.9)% $(1,670) (20.4)% $ (742) (18.0)%
====== ======= ====== ======= ====== ======= ====== =======
Revenues
Revenues for the second quarter of fiscal 2007 increased $1.6 million, or
75.4%, as compared to the same period of fiscal 2006. Revenues for the first
six months of fiscal 2007 increased $4.1 million, or 99.0%, as compared to
the same period of fiscal 2006. These increases are primarily attributable
to the inclusion of Telenational revenues since the May 2006 acquisition of
Telenational.
Costs of Revenues
Costs of revenues for the second quarter of fiscal 2007 increased
$948,000, or 58.8%, as compared to the same period of fiscal 2006. Costs of
revenues for the first six months of fiscal 2007 increased $2.8 million, or
89.4%, as compared to the same period of fiscal 2006. These increases are
primarily attributable to the inclusion of Telenational costs of revenues
since the May 2006 acquisition of Telenational.
Costs of revenues as a percentage of revenues decreased approximately
7.2% during the second quarter of fiscal 2007 as compared to the same period
of fiscal 2006 due to cost savings derived from the addition of alternative
carrier sources brought to the Company through the Telenational acquisition.
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 quarter to quarter and year to year, depending on the
traffic mix between our wholesale and retail products and total revenue
for each year.
Sales and Marketing Expenses
Sales and marketing expenses for the second quarter of fiscal 2007
increased $207,000, or 207.9%, as compared to the same period of fiscal
2006. Sales and marketing expenses for the first six months of fiscal 2007
increased $378,000, or 155.9%, as compared to the same period of fiscal
2006. These increases are attributable to higher marketing costs and agent
commissions attributed to Telenational during the current fiscal periods,
offset by less spending on web portal and magazine ads in the first six
months of fiscal 2007 and unusually high sales and marketing costs incurred
by Rapid Link during the first quarter of fiscal 2006 due to additional
personnel and other costs resulting from the November 2005 acquisition
of the Integrated Telecommunications, Inc. customer base. A significant
component of our revenue is generated by outside agents, a small in-house
sales force, and marketing through web portals and magazine advertising,
which is managed by a small in-house sales and marketing organization.
General and Administrative Expenses
General and administrative expenses for the second quarter of fiscal 2007
increased $109,000, or 14.8%, as compared to the same period of fiscal 2006.
General and administrative expenses for the first six months of fiscal 2007
increased $456,000, or 32.9%, as compared to the same period of fiscal 2006.
However, year-to-date general and administrative expenses decreased from
33.8% of revenues for fiscal 2006 to 22.6% for the same period of fiscal
2007. General and administrative expenses only increased by 14.8% and 32.9%
during the second quarter and first six months of fiscal 2007, respectively,
as compared to the same periods of fiscal 2006, even with the addition of
personnel and other costs related to the Telenational acquisition, because
the Company was able to quickly eliminate duplicate costs between the
combined entities, primarily related to salaries and corresponding benefits,
as well as rent, telephone and utility cost reductions resulting from the
closure of a couple of office locations. We review our general and
administrative expenses regularly and continue to manage the costs
accordingly to support our current and anticipated future business; however
it may be difficult to achieve significant reductions in future periods due
to the relatively fixed nature of many general and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expenses for the second quarter of fiscal
2007 increased $136,000, or 135.7%, as compared to the same period of fiscal
2006. Depreciation and amortization expenses for the first six months of
fiscal 2007 increased $274,000, or 134.2%, as compared to the same period
of fiscal 2006. Fixed assets have steadily been reaching the end of their
useful lives. Although a large portion of our fixed assets still in use are
fully depreciated, depreciation and amortization costs increased due to (1)
amortization of Telenational customer lists during the first six months of
fiscal 2007 ($175,000 per quarter) with no corresponding expense during the
same period of fiscal 2006 and (2) depreciation of fixed assets acquired
as part of the May 2006 purchase of Telenational. A majority of our
depreciation expense relates to the equipment utilized in our VoIP network.
Net Reductions of Liabilities
The Company determined during the fourth quarter of fiscal 2006, based
on a review of applicable statute of limitations regulations and/or current
correspondence with customers, that approximately $810,000 of liabilities
were no longer due and payable at the end of the first quarter of fiscal
2006. Accordingly, this amount was recorded as net reductions of liabilities
during the first quarter of fiscal 2006.
Noncash Interest Expense, Interest Expense and Related Party Interest
Noncash interest expense results from the amortization of deferred
financing fees and debt discounts on our debts to third party lenders and
related parties. Noncash interest expense and interest expense for the
second quarter of fiscal 2007 was comparable to the same period of fiscal
2006. Noncash interest expense in the second quarter of fiscal 2007
decreased from prior quarter levels as certain debt discounts became fully
amortized during the quarter. Noncash interest expense and interest expense
for the first six months of fiscal 2007 increased $199,000, or 32.9%, as
compared to the same period of fiscal 2006. Related party interest expense
for the second quarter of fiscal 2007 increased $25,000, or 75.3%, as
compared to the same period of fiscal 2006. Related party interest expense
for the first six months of fiscal 2007 increased $74,000, or 111.1%, as
compared to the same period of fiscal 2006. The increases in noncash
interest expense, interest expense and related party interest expense
resulted primarily from the additional financing fees and/or debt discount
recorded related to the extension of the maturity dates of our convertible
debt instruments with our third party and related party lenders during
fiscal 2006 and the second quarter of fiscal 2007, debt issued in connection
with the acquisition of Telenational, and additional borrowings during
fiscal 2006.
Liquidity and Capital Resources
Our major growth areas are anticipated to include the establishment of
additional wholesale points of termination to offer our existing wholesale
and retail customers, and the introduction of new retail VoIP products,
primarily our new Rapid Link products both domestically and internationally.
Our future operating success is dependent on our ability to generate
positive cash flow from our VoIP and other lines of products and services.
We do not have any capital equipment commitments during the next twelve
months. We are actively pursuing debt or equity financing opportunities to
continue our business. Any failure of our business plan, including the risk
and timing involved in rolling out retail products to end users, could
result in a significant cash flow crisis and could force us to seek
alternative sources of financing as discussed, or to greatly reduce or
discontinue operations. Although various possibilities for obtaining
financing or effecting a business combination have been discussed from time
to time, there are no agreements with any party to raise money or for us to
combine with another entity and we cannot assure you that we will be
successful in our search for investors or lenders. 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 will be materially reduced, and any new equity securities sold
by us may have rights, preferences or privileges senior to our current
common stockholders.
Our audit report for the fiscal year ended October 31, 2006 includes an
explanatory paragraph indicating substantial doubt about our ability to
continue as a going concern. At April 30, 2007, we had cash and cash
equivalents of $319,000, a significant increase as compared to cash and cash
equivalents of $30,000 at October 31, 2006. However, we had working capital
deficits at April 30, 2007 and October 31, 2006 of $10.1 million and $4.7
million, respectively.
Net cash provided by operating activities during the first six months of
fiscal 2007 was $428,000 as compared to cash used in operating activities of
$886,000 during the same period of fiscal 2006. During the first six months
of fiscal 2007, to compute operating cash flows, our net loss of $1,670,000
was positively adjusted for noncash interest expense of $661,000,
depreciation and amortization of $478,000, bad debt expense of $60,000,
share-based compensation expense of $12,000, loss on disposal of fixed
assets of $10,000, and net changes in operating assets and liabilities of
$878,000. During the first six months of fiscal 2006, to compute operating
cash flows, our net loss of $742,000 was positively adjusted for noncash
interest expense of $510,000, depreciation and amortization of $204,000, and
loss on disposal of fixed assets of $34,000, offset by the gain on reduction
of liabilities of $810,000, reduction of bad debt expense of $25,000, and
net changes in operating assets and liabilities of $57,000.
Net cash used in investing activities during the first six months of
fiscal 2007 and 2006 resulted from net purchases of property and equipment
of $3,000 and $74,000, respectively.
Net cash used in financing activities during the first six months of
fiscal 2007 was $137,000, resulting from the reduction of bank overdrafts
that existed at October 31, 2006, and payment of $36,000 on a related party
note, as compared to cash provided by financing activities of $956,000
during the same period of fiscal 2006, which represented proceeds received
from convertible debentures, net of financing fees. Also during the first
six months of fiscal 2006, the Company received $500,000 in proceeds from
a temporary loan from our chief executive officer, which was repaid during
that same time period using proceeds from the convertible debentures.
We have an accumulated deficit of approximately $51.5 million as of April
30, 2007 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. Although to date we have been able to arrange the debt facilities and
equity financing described below, 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 April 30, 2007, we
have approximately $2.9 million of convertible debentures (net of debt
discount of $384,000), convertible notes to related parties of $1.9 million
(net of debt discount of $27,000) and notes payable to related parties of
approximately $1.3 million, all of which are scheduled to mature within the
next year, as well as a significant amount of trade payables and accrued
liabilities that are past due. We were current on all but $30,000 of our
debt obligations at April 30, 2007. However, the remaining contingent
purchase consideration of $500,000 owed to Apex Acquisitions, Inc. was
past due at April 30, 2007. We continue to explore external financing
opportunities that will allow us to either convert our outstanding debt
obligations into the new financing and/or pay down a portion or all of the
amounts now due. 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. However, if we are unable to obtain additional financing or extend
the due date on current financing, our operations and financial condition in
the short term may be materially affected, and we likely would not be able
to remain in business during the next twelve months. As a result of the
aforementioned factors and related uncertainties, there is significant doubt
about our Company's ability to continue as a going concern.
Our current capital expenditure requirements are not significant,
primarily due to the equipment acquired from Telenational and the subsequent
consolidation of operating facilities into one operational facility. We
currently do not plan significant capital expenditures during the rest of
fiscal 2007 or in fiscal 2008.
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations. If
not, we must obtain equity or debt instruments.
As a result of historical operating losses, we currently have a
substantial working capital deficit. In addition, a significant amount
of our trade accounts payable and accrued liabilities are past due. Our
independent auditors included a paragraph in their audit opinion on our
consolidated financial statements for the fiscal year ended October 31, 2006
discussing that conditions exist that raise substantial doubt about the
Company's ability to continue as a going concern. To be able to service our
debt obligations over the course of the 2007 fiscal year, we must generate
significant cash flow and obtain additional financing or extend the maturity
date on current obligations. 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 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. As of the date of this report, most
of our revenues are not derived from VoIP communication services. Instead,
we generated most of our revenues from wholesale and retail fixed-line
communication services. 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 additional financing.
There is no assurance that adequate levels of additional financing will
be available at all or on acceptable terms. 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.
Potential for substantial dilution to our existing stockholders exists.
The issuance of shares of common stock upon conversion of secured
convertible notes or upon exercise of outstanding warrants and/or stock
options may cause immediate and substantial dilution to our existing
stockholders. In addition, any restructuring of our notes may cause us
to incur additional dilution. For instance, during the three months ended
April 30, 2007, we issued 2.0 million warrants to purchase our common stock
to certain noteholders in order to extend the maturity date for debentures
totaling $1,000,000 from March 8, 2007 to March 8, 2008. Such noteholders
also receive an additional 50,000 warrants per month until the debentures
are converted or paid in full. In addition, any additional financing may
result in significant dilution to our existing stockholders.
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.
We have pledged our assets to existing creditors.
Our secured convertible notes are secured by a lien on substantially all
of our assets. A default by us under the secured convertible notes would
enable the holders of the notes to take control of substantially all of
our assets. The holders of the secured convertible notes have no operating
experience in our industry and if we were to default and the note holders
were to take over control of our Company, they could force us to
substantially curtail or cease our operations. If this happens, you
could lose your entire investment in our common stock.
In addition, the existence of our asset pledges to the holders of the
secured convertible notes will make it more difficult for us to obtain
additional financing required to repay monies borrowed by us, continue
our business operations and pursue our growth strategy.
The regulatory environment in our industry is very uncertain.
The legal and regulatory environment pertaining to the Internet and
telecommunication services is uncertain and changing rapidly as the use of
the Internet increases. 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 telephony technology 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 three key senior executives.
We rely heavily on our senior management team of John Jenkins,
Christopher Canfield and Michael Prachar, and our future success may depend,
in large part, upon our ability to retain our senior executives. In addition
to the industry experience and technical expertise they provide to the
Company, senior management has been the source of significant amounts of
funding that have helped to allow us to meet our financial obligations.
Any natural disaster or other occurrence that renders our operations center
inoperable could significantly hinder the delivery of our services to our
customers because we lack an off-site back-up communications system.
Currently, our disaster recovery systems focus on internal redundancy and
diverse routing within our operations center. We currently do not have an
off-site communications system that would enable us to continue to provide
communications services to our customers in the event of a natural disaster,
terrorist attack or other occurrence that rendered our operations center
inoperable. Accordingly, our business is subject to the risk that such a
disaster or other occurrence could hinder or prevent us from providing
services to some or all of our customers. The delay in the delivery of our
services could cause some of our customers to discontinue business with us
which could have a material adverse effect financial condition and results
of operations.
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 as compared with other trading boards.
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 (the "SEC") 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.
Evaluation of Disclosure Controls and Procedures
As of the fiscal quarter ended April 30, 2007, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by
this report. Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting
that occurred during the first quarter of fiscal 2007 that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
The Company, from time to time, may be subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property of third parties
by the Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Cygnus Telecommunications Technology, LLC. On June 12, 2001, Cygnus
Telecommunications Technology, LLC ("Cygnus"), filed a patent infringement
suit (case no. 01-6052) in the United States District Court, Central
District of California, with respect to the Company's "international
re-origination" technology. On March 29, 2007 the United States District
Court in San Jose, California ruled that all Cygnus "international
re-origination" patents are invalid, and dismissed all cases against
Rapid Link (fka Dial Thru International Corporation) and related parties.
Cygnus is appealing the case.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On March 8, 2007, we issued warrants to purchase 2.0 million shares of our
common stock to certain noteholders in exchange for extending the maturity
date of their notes. In addition, we agreed to issue such noteholders 50,000
warrants per month for each month that such notes were not paid in full.
All of these noteholders have previously represented that they are
"accredited" investors as defined under Rule 144 of the Securities Act
of 1933, as amended. We relied upon the exemption from registration as set
forth in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D
for the issuance of these securities. The recipient took its securities
for investment purposes without a view to distribution and had access to
information concerning us and our business prospects, as required by the
Securities Act. In addition, there was no general solicitation or
advertising for the acquisition of these securities.
ITEMS 3-5.
Not applicable.
ITEM 6. EXHIBITS.
(a) Exhibits.
No. Description
--- -----------
4.1 Extension Agreement dated March 8, 2007 between Rapid Link,
Incorporated and Trident Growth Fun, LP, including Common Stock
Purchase Warrant No. 2 filed as Exhibit "A"
4.2 Extension Agreement dated March 8, 2007 between Rapid Link,
Incorporated and Charger Investments, LLC, including Common Stock
Purchase Warrant No. 2 filed as Exhibit "A"
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed
herewith)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed
herewith)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 (furnished herewith)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 (furnished herewith)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
RAPID LINK, INCORPORATED
(Registrant)
/s/ John A. Jenkins
---------------------------
John A. Jenkins
Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ Christopher J. Canfield
---------------------------
Christopher J. Canfield
President, Chief Financial Officer,
Treasurer and Director
(Principal Financial and
Accounting Officer)
Date: June 14, 2007
EXHIBIT INDEX
No. Description
--- -----------
4.1 Extension Agreement dated March 8, 2007 between Rapid Link,
Incorporated and Trident Growth Fun, LP, including Common Stock
Purchase Warrant No. 2 filed as Exhibit "A"
4.2 Extension Agreement dated March 8, 2007 between Rapid Link,
Incorporated and Charger Investments, LLC, including Common Stock
Purchase Warrant No. 2 filed as Exhibit "A"
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed
herewith)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed
herewith)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 (furnished herewith)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 (furnished herewith)