Phonetime reports third quarter 2009 results

MISSISSAUGA, ON, Nov. 16 /CNW/ - Phonetime Inc. (TSX: PHD), a leading global supplier of international long distance telecommunication services, today reported its financial results for the three- and nine-month periods ended September 30, 2009. All figures are in Canadian currency.

    
    Financial Highlights

    Income Statement    Three month period ended     Nine month period ended
    metrics                   September 30                September 30
    ----------------       2009          2008          2009          2008
                      -------------------------------------------------------

    Revenue           $ 44,406,164  $ 39,204,183  $128,262,495  $115,010,915
    Gross Margin      $  5,194,888  $  5,551,575  $ 16,092,216  $ 15,646,836
    Operating Income
     (loss)*        $    960,788  $  1,887,539  $  2,823,834  $  5,571,861
    Net Income        $     31,473  $    751,102  $    515,055  $  2,103,906

    Cash flow metrics
    -----------------
    From (Used in)
     Operating
     Activities       $   (421,177) $  1,801,944  $    368,413  $  3,191,400
    From (Used in)
     Investing
     Activities       $   (188,276) $     13,142  $   (454,828) $   (223,528)
    Used in
     Financing
     Activities       $   (274,088) $   (890,475) $ (2,264,764) $ (4,374,689)

    Earnings per
     share
     - fully diluted  $      0.000  $       0.01  $      0.005  $       0.02

    Common shares
     outstanding
    -------------
    Basic              108,908,925   107,988,092   108,298,409   107,548,676
    Fully diluted      109,178,639   123,122,382   108,568,124   131,484,429

    * Operating Income is a non-GAAP financial measure, please see
        reconciliation to Net Income at the end of the press release.
    

Consolidated revenue for the third quarter ended September 30, 2009 was $44.4 million, up 13.2% from $39.2 million for third quarter of 2008. For the nine-month period of 2009, Phonetime's revenue was $128.2 million, an increase of 11% when compared to 2008. The growth is chiefly due to higher sales volumes of the Company's Wholesale Division, which buys and resells telecommunications long-distance services to telephone carriers around the world using Phonetime's proprietary call trading platform. Phonetime also generates revenues through its Consumer Division, which provides pre-paid calling cards and long-distance services to targeted ethnic consumer groups across Canada. Phonetime currently has more 130,000 customers using its long-distance retail services.

Operating income (a non-GAAP measure) was $683,000 for the three months ended September 30, 2009, down from $913,000 in the prior quarter and down from $1,755,000 in the third quarter of 2008. Revenue has grown quarter over quarter and over the comparative quarter from the prior year. Gross margin has declined to 11.7% in the three month period and 12.5% for the year to date versus 12.5% and 13.6% in the year prior corresponding periods. In absolute terms, the decline in contribution from gross margin was $357,000 in the three month period ended September 30, 2009 but contributed an additional $445,000 for the year to date. In the nine month period, operating costs were $3.2 million higher in 2009 than in the prior year. The increase was split between sales and marketing costs which were higher by $1.9 million and general and administrative costs which were higher by $1.5 million. Operating costs in the three month period increased by $715,000 year over year comprised of compensation and commission costs of $500,000, increased marketing costs of $400,000 and higher general and administrative expenses of $815,000. General administrative costs increased in part due to one-time expenses of $300,000, consisting of an additional $50,000 for the Competition Bureau settlement, $250,000 for financing and investor relations costs, $275,000 related network collocation costs and ongoing office costs related to head count increases including office expansions in Vancouver and Florida of approximately $240,000.

Net Income for the three months ended September 30, 2009 was $31,000 or nil per share versus $751,000 or $0.01 per share for the corresponding period in 2008. Net income for the nine months ended September 30, 2009 was $515,000 or $0.005 per share, a decline from net income of $2.1 million, or $0.02 per share, for the same period in the prior year

Cash flow from operating activities was a net outflow of $422,000 in the three-month period ended September 30, 2009 as compared to a contribution of $1.8 million in the prior year. For the nine-month period ended September 30, 2009, the cash contribution from operating activities was $368,000 as compared to $3.2 million for the same period in 2008.

Working Capital deficit was $3.7 million as at September 30, 2009, an improvement from a deficit of $5.4 million as at June 30, 2009 and an improvement from a working capital deficit of $4.6 million at December 31, 2008. Working capital includes $7.7 million of bank and other debt due in the next 12 months, compared to $8.4 million of bank and other debt due as at June 30, 2009 and $7.3 million as at December 31, 2008. The Company has been in breach of its bank loan covenants since December 31, 2008. The bank has tolerated the breach working with Phonetime by amending the credit facility agreement and the covenant ratios therein and by giving management time to source additional financial capital.

In July 2009, the Company closed on an equity financing transaction issuing 3,733,332 units for gross proceeds of $560,000 at $0.15 per common share. Certain officers and employees of the Company subscribed for $260,000 of this amount.

In the quarter ended September 30, 2009, the Company signed a term sheet for a $5,000,000 subordinated debt issue with a tentative closing on or about August 31, 2009. One of the preconditions of the closing was an acceptable Intercreditor Agreement between the anticipated subordinated lender and the senior lender. The Senior Lender and the anticipated Subordinated debt holder were unable to come to terms on the Intercreditor Agreement which has prohibited the subordinated lender from closing the financing.

As a result of the above impasse, the Company has undertaken to seek a replacement to its Senior Lending facility and is also seeking an alternative to the current anticipated Subordinated Lender. The Company expects that it will be able to restructure its debts by the end of the first quarter 2010. There is no certainty that this restructuring can occur or that it can occur on favourable terms.

As at September 30 2009, Phonetime held cash and short-term investments of $0.03 million as well as accounts receivable of $14.4 million.

    
    Operational Highlights

        -  Completed a private placement, generating gross proceeds of
           $560,000.
        -  Renegotiated the terms of its subordinated debentures, in
           particular reducing the payments to US$95,000 per month from US
           $176,667 per month and extending the maturity by twelve months.
        -  The Wholesale Division processed 1.26 billion minutes of
           international long-distance calls, up 23% from 1.02 billion for Q3
           2008.
        -  The number of carriers served by the Wholesale Division increased
           to 800.
        -  The number of Consumer Division customers grew to 130,000.

    Highlights Subsequent to Quarter-end

        -  Announced a number of changes to the Company's Board of Directors
           designed to enhance independent direction and corporate
           governance, including the appointment of Gary Clifford as
           Chairman.

    Company Outlook

    In the coming periods, Phonetime expects to:
        -  Refinance its debt and or raise equity in the near term to
           continue to implement its growth strategy (Phonetime's growth has
           been financed over the past couple of years via debt, much of the
           debt was short to mid-term in nature and has been maturing on the
           Company);
        -  Continue to increase customer and supplier penetration in Asia and
           Eastern Europe;
        -  Continue its organic growth strategy for the Consumer Division;
        -  Educate the capital markets on the business success to date and
           market opportunity available to the Wholesale Division with
           Console;
        -  Continue to execute on revenue and margin growth while containing
           overheads; and
        -  Continue to development and modify internal controls to keep pace
           with the changing business dynamics.
    

Phonetime will host a conference call to discuss its 2009 third quarter financial results on Wednesday, November 18 at 11:00 a.m. (ET).

To access the conference call by telephone, dial 416-644-3422 or 1-877-974-0445. Please connect approximately 15 minutes prior to the beginning of the call to ensure participation. The conference call will be archived for replay until Wednesday, November 25, 2009 at midnight. To access the archived conference call, dial 416-640-1917 or 1-877-289-8525 and enter the reservation number 4182045 followed by the No. sign.

A live audio webcast of the conference call will be available at www.phonetime.com. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. The webcast will be archived at the above web site for 30 days.

Phonetime will file its consolidated financial statements for the third quarter 2009 and related management's discussion and analysis with securities regulatory authorities within the applicable timelines. The material will be available through SEDAR at www.sedar.com and the Company's website, www.phonetime.com.

About Phonetime Inc.

Established in 1994, Phonetime is a leading supplier of international wholesale and retail long distance telecommunications services with network facilities in Canada, the U.S., Europe, Africa and Asia. Through its Wholesale Division, Phonetime buys and resells long-distance services to major telephone carriers around the world using its proprietary call trading platform. Through its Consumer Division, Phonetime competitively markets a range of pre-paid and subscription-based long distance services to targeted ethnic consumers across Canada. Phonetime's common shares trade on the Toronto Stock Exchange under the symbol PHD. More information can be found at the Company's website, www.phonetime.com

Caution Regarding Forward Looking Information:

This press release contains forward-looking statements, which may be identified by words like "expects", "anticipates", "plans", "intends", "indicates" or similar expressions. These statements are not a guarantee of future performance and are inherently subject to risks and uncertainties. Phonetime's actual results could differ materially from those currently anticipated due to a number of factors set forth in reports and other documents filed by the Company with Canadian securities regulatory authorities from time to time.

Readers are cautioned that non-GAAP measures do not have standardized meanings prescribed by GAAP. Operating income has no standardized meaning prescribed by Canadian GAAP and is considered a non-GAAP measure. Operating income is earnings before misappropriation of funds, stock compensation costs, interest, taxes, depreciation and amortization. This measure may not be comparable to similar measures presented by other issuers. This measure is described and presented herein in order to provide shareholders and potential investors with additional information regarding the Company's liquidity and ability to generate funds to finance its operations.

The reconciliation of Operating income (a non-GAAP financial measure) to Net income is as follows:

    
                        Three month period ended     Nine month period ended
                              September 30                September 30
                           2009          2008          2009          2008
                      -------------------------------------------------------

    Operating income  $        961  $      1,883  $      2,824  $      5,572
    Misappropriation
     of funds                    -             -             -           228
    Stock based
     compensation              271           216           552           568
    Amortization               284           242           715           715
    -------------------------------------------------------------------------
    Earnings before
     the undernoted            406         1,425         1,557         4,061
    Financing costs            174           251           481           800
    -------------------------------------------------------------------------
    Income before
     income taxes              232         1,174         1,076         3,261
    Income taxes               201           423           561         1,157
    -------------------------------------------------------------------------
    Net income        $         31  $        751  $        515  $      2,104
    -------------------------------------------------------------------------

     The Consolidated financial results over the past eight quarters are
summarized below. Management believe that reviewing the business on a rolling
quarter basis is an appropriate way of analysing the business.

    -------------------------------------------------------------------------
                                    For the Quarters Ended (unaudited)
                      -------------------------------------------------------
    ($ thousands)          Q3 2009       Q2 2009       Q1 2009       Q4 2008
    -------------------------------------------------------------------------
    Revenue                 44,406  $     41,280  $     42,576  $     42,156
    -------------------------------------------------------------------------
    Cost of sales           39,211        36,218        36,740        37,426
    -------------------------------------------------------------------------
      Gross margin -
       in $s                 5,195         5,062         5,836         4,730
    -------------------------------------------------------------------------
      Gross margin -
       in %                  11.7%         12.3%         13.7%         11.2%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Expenses
    -------------------------------------------------------------------------
      Salaries and
       benefits              2,124         2,163         2,299         2,459
    -------------------------------------------------------------------------
      Sales and marketing      696           713         1,118           832
    -------------------------------------------------------------------------
      General and
       administrative        1,692         1,273         1,381         1,514
    -------------------------------------------------------------------------
    Loss(gain) on foreign
     exchange                 (277)          263          (177)          957
    -------------------------------------------------------------------------
    Total operating costs    4,235         3,886         4,621         5,762
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Operating income(1)        961           650         1,215        (1,032)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Misappropriation of
     funds                       -             -             -             9
    -------------------------------------------------------------------------
    Stock-based
     compensation              271           104           179           148
    -------------------------------------------------------------------------
    Amortization               284           176           254           254
    -------------------------------------------------------------------------
    Financing costs            174           147           160           222
    -------------------------------------------------------------------------
    Income taxes               201           (24)          384            23
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net income (loss) $         31  $        247  $        236  $     (1,688)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                    For the Quarters Ended (unaudited)
                      -------------------------------------------------------
    ($ thousands)          Q3 2008       Q2 2008       Q1 2008       Q4 2007
    -------------------------------------------------------------------------
    Revenue           $     39,204  $     39,311  $     36,496  $     29,643
    -------------------------------------------------------------------------
    Cost of sales           33,652        34,132        31,580        25,169
    -------------------------------------------------------------------------
      Gross margin -
       in $s                 5,552         5,179         4,916         4,474
    -------------------------------------------------------------------------
      Gross margin -
       in %                  14.2%         13.2%         13.5%         15.1%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Expenses
    -------------------------------------------------------------------------
      Salaries and
       benefits              2,668         2,125         1,979         1,981
    -------------------------------------------------------------------------
      Sales and marketing      295           173           179           253
    -------------------------------------------------------------------------
      General and
       administrative          834           996         1,023         1,692
    -------------------------------------------------------------------------
    Loss(gain) on foreign
     exchange                 (128)           29           (99)           15
    -------------------------------------------------------------------------
    Total operating costs    3,669         3,323         3,082         3,941
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Operating income(1)      1,883         1,856         1,834           533
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Misappropriation of
     funds                       -            85           143           260
    -------------------------------------------------------------------------
    Stock-based
     compensation              216           142           210           353
    -------------------------------------------------------------------------
    Amortization               242           244           230           113
    -------------------------------------------------------------------------
    Financing costs            251           267           282            26
    -------------------------------------------------------------------------
    Income taxes               423           384           350          (112)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net income (loss) $        751  $        734  $        619  $       (107)
    -------------------------------------------------------------------------
    (1) Non-GAAP financial measure - see the cautionary statement.



    PHONETIME INC.
    CONSOLIDATE BALANCE SHEETS
    AT SEPTEMBER 30, 2009

                                                  September 30,  December 31,
                                                       2009          2008
                                                   (Unaudited)     (Audited)

                                   ASSETS

    Current assets
      Short-term investment                       $     29,219  $     29,219
      Accounts receivable                           14,289,931    13,881,509
      Inventories                                      121,248        61,707
      Prepaid expenses and deposits                    297,961       376,398
      Future income tax assets                          67,000        67,000
    -------------------------------------------------------------------------

                                                    14,805,359    14,415,833
    Future income tax assets                           834,669       905,423
    Property and equipment                           2,321,917     1,990,611
    Goodwill and other intangible assets            15,550,112    15,525,255
    -------------------------------------------------------------------------
                                                  $ 33,512,057  $ 32,837,122
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                    LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities
      Bank indebtedness                           $  5,065,153  $  2,713,974
      Accounts payable and accrued liabilities       8,815,799    10,062,890
      Customer deposits                                 63,402        75,791
      Income taxes payable                           1,579,636     1,100,983
      Loan from related party                          200,000             -
      Short-term loan                                  250,000             -
      Current portion of long-term debt                477,670     1,530,453
      Current portion of loan payable                  184,745       262,949
      Current portion of capital lease obligations     565,094       454,605
      Current portion of subordinated debentures       978,100     2,322,723
      Deferred items                                   368,666       515,109
    -------------------------------------------------------------------------
                                                    18,548,265    19,039,477
    Long-term portion of deferred items                 27,716        44,345
    Loan payable                                             -       141,888
    Capital lease obligations                          365,942       268,412
    Subordinated debentures                            853,349     1,253,345
    -------------------------------------------------------------------------
                                                    19,795,272    20,747,467
    -------------------------------------------------------------------------

    Commitments and contingencies

    Shareholders' equity
      Share capital                                 15,310,594    14,761,752
      Warrants                                         136,158             -
      Contributed surplus                            2,616,880     2,189,805
      Deficit                                       (4,346,847)   (4,861,902)
                                                    13,716,785    12,089,655

                                                  $ 33,512,057    32,837,122
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    PHONETIME INC.
    Consolidated Statements of Income and
    Comprehensive Income and Deficit

                           Three months ended         Nine months ended
                      September 30  September 30  September 30  September 30
                           2009          2008          2009          2008
    -------------------------------------------------------------------------
                                                               (Not reviewed)

    Sales             $ 44,406,164  $ 39,204,183  $128,262,495  $115,010,915

    Cost of sales       39,211,276    33,652,608   112,170,279    99,364,079
    -------------------------------------------------------------------------
                         5,194,888     5,551,575    16,092,216    15,646,836
    -------------------------------------------------------------------------

    Operating expenses   4,510,731     3,796,237    13,458,993    10,272,855
    Loss (gain) on
     foreign exchange     (276,621)     (128,201)     (190,611)     (197,880)
    Stock based
     compensation          270,457       216,406       552,075       567,851
    Amortization
     of property
     and equipment         248,780       216,170       627,674       638,272
    Amortization of
     intangible assets      35,404        25,669        86,743        77,008
    Interest paid
     financing costs       134,884       149,682       258,868       434,091
    Non-cash
     financing costs        38,460       101,616       222,207       365,907
    -------------------------------------------------------------------------
                         4,962,095     4,377,579    15,015,949    12,158,104
    -------------------------------------------------------------------------

    Income before the
     undernoted and
     income taxes          232,793     1,173,996     1,076,267     3,488,732
    -------------------------------------------------------------------------

    Costs due to
     misappropriation
     of funds                    -             -             -       228,120
    -------------------------------------------------------------------------

    Income before
     income taxes          232,793     1,173,996     1,076,267     3,260,612
    -------------------------------------------------------------------------

    Income tax expense
      Current              176,781       193,623       490,458       339,546
      Future
       income taxes         24,539       229,271        70,754       817,160
    -------------------------------------------------------------------------
                           201,320       422,894       561,212     1,156,706
    -------------------------------------------------------------------------

    Net income and
     comprehensive
     income                 31,473       751,102       515,055     2,103,906

    Deficit, beginning
     of period          (4,378,320)   (3,925,408)   (4,861,902)   (5,278,212)
    -------------------------------------------------------------------------

    Deficit, end
     of period        $ (4,346,847) $ (3,174,306) $ (4,346,847) $ (3,174,306)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings
     per share
    Basic earnings
     per share        $       0.00  $       0.01  $      0.005  $       0.02
    Diluted earnings
     per share        $       0.00  $       0.01  $      0.005  $       0.02
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

SOURCE PHONETIME INC.

For further information: For further information: Wayne Silver, Phonetime, President & CEO, (905) 361-8304, wayne@phonetime.com; Gary M. Clifford, Phonetime, Chairman, (416) 418-9802, gary@phonetime.com; Joe Racanelli, Equicom Group, (416) 815-0700 x 243, jracanelli@equicomgroup.com

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PHONETIME INC.

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